The Paradigm Shift of IT`s Role in the Utility Industry
By Gerald W. Lindsay, CPA
About 16 months ago, a major utility study began with the basic goal of better understanding senior management`s views on information technology (IT) and the role it would have in the “exciting” new world of deregulation. Gerald W. Lindsay & Co. has been in the utility business for many years before conducting this study which alleviates second-guessing senior management`s next move. This research was a real eye-opener because many of the positions taken by management were more pronounced than expected and the polarity of some of the numbers are surprising.
Overview of the Project
A total of 125 utilities were randomly selected from a pool of the 150 largest electric and gas utilities as defined by customer base. Twenty questions were designed which we felt had the most relevance to the current market. The average length of the interview was 1.65 hours and the interviews were done on site at the utility. The type of management responding to the study was as follows : CEOs, 37 percent; Senior VPs, 41 percent; and CFOs, 22 percent.
Chief information officers (CIO) at 72 utilities, or 58 percent of the utilities, were also interviewed. A comparison of CIO and senior management responses proved that there are differences between the two. The principal differences were in perception in some cases and not necessarily in fact. Most senior management (62 percent) did not feel the IT shop had the proper skill sets and abilities to effect desired change timely. However, 71 percent of CIOs felt they had the necessary resources. Therefore, it would seem in those cases where resources and vision were present, the IT shops were doing a poor job of marketing their services to senior management. After all the data was reviewed and analyzed, there were seven perceptions that were predominant throughout this study that are discussed in the following sections.
IT`s Changing Role
Simply put, senior management is looking to IT for leadership relating to technology. A CEO of a large east coast utility stated, “In the past, balance sheet and return on investment were the focus. Now customer base (market share) and expanded services are the focus. Therefore, I must know far more about our customers, not tomorrow but now. We are in the information business as never before and we must have leadership in this area.” This was very representative of the type of comments made by utility CEOs. Study respondents were asked, “On a scale of 1 to 10, rate the importance of IT on the success of your utility in the past, present and future.” The results are: Past, 5.3; Present, 8.7; and Future, 10.3.
As shown, senior management was very positive on the role of IT in the future. As a matter of fact, several CEOs responded with an assessment of “11.” Traditionally the role of IT has been an enabler to the process, however, 53 percent of the executives studied stated that they felt IT could be the catalyst for change rather than just an enabler. There were two points of agreement regarding IT`s changing role. The first was expected, but the second point of agreement was somewhat unexpected.
78 percent of the respondents felt that the proper use and management of IT is essential for the utility to compete in a deregulated world.
65 percent of the respondents felt that marketing/demographics information is the No. 1 need of a utility today. Usable knowledge about the customer base is paramount.
The New Look of IT in the Utility
This section is further verification of the differences that were discussed earlier between senior management and the CIOs` perceptions of the IT organization. Management was asked, “Do you feel your IT staff has the necessary skills to keep your utility ahead technologically?” The results are: Don`t have skills, 62 percent; Don`t know, 21 percent; and Do have skills, 17 percent.
They were also asked, “Are you satisfied that your IT staff is capable of being competitive with 3rd parties?” The results are: Yes, 13 percent; Don`t Know, 16 percent; and No, 71 percent.
Needless to say, the responses to these two questions are shocking. Many times, senior managers said that they would like to see their organization perform more competitively. Management reported that based on the dollars spent, IT should be competitive with virtually any organization. Senior management clearly wants a more dynamic organization and will look at all options to meet the challenge. When asked if these differences had been discussed with the CIO, typically the comment would be, “He/she knows of these opportunities.” However, a detailed discussion did not follow with IT to discuss the relevant issues. There still appears to be a reluctance to discuss the difficult issues with IT, which brings us to the next perception.
IT Reporting Structures Changing
In those organizations where a CIO, or similar position, sits at the executive committee level, the difficult issues are more likely to be discussed and resolved. The reason is apparent in a comment made by a CEO who had implemented this structure, “You cannot learn nor keep abreast of IT issues by osmosis.” By having an IT viewpoint at the table on a regular basis, senior management is less likely to be intimidated by IT and will work through the issues. Without this connection, senior management is more likely to have third parties come in and solve IT issues. Senior management was asked, “What is your IT reporting structure?” The results are: Senior VP, 58 percent; CFO, 27 percent; CEO, 11 percent; and Other, 4 percent.
“Do you feel it is necessary to have a CIO or similar position at the executive committee level?” The results are: Essential, 27 percent; Good idea, 54 percent; and Not necessary, 19 percent.
Many CIOs are coming from Fortune 500 companies, and utility experience, in many cases, is looked at as a disadvantage. Senior management at 11 of the utilities studied have their CIOs at the executive committee level This will continue. But, 11 CIOs represent 8.8 percent of the population and that is not consistent with the response that it is “Essential” or a “Good Idea.” Therefore, there appears to be more lip service than action.
Customer Satisfaction: New Levels of Service Required
Senior management stated that one of the most frequently mentioned areas of discontent was that pressure was being applied by other divisions within the organization to “do something about IT.” Clearly much of this comes from the phenomenon that anyone with a PC is now an expert. However, some of the criticism is deserved, not because of poor management but because of poor marketing on the part of IT. This is the not the case with all IT shops. The question was asked: “How do you rate satisfaction internally with IT services?” The results are: Excellent, 0 percent; Good, 9 percent; Fair, 59 percent; and Poor, 32 percent.
After the first 20 to 25 interviews, the negative responses became a grave concern. Questions were framed in a more positive setting and the same negative responses continued to emerge. These results clearly show the frustration with IT shops and the desire to find a better solution. Whether the issues of internal satisfaction are real or perceived, this is clearly an area that must be addressed and solved. We all recognize that there will never be perfect scores in this area, but there must be improvement.
IT`s Role: Retail Wheeling /Activity-Based Costing
Many may feel that this is an accounting issue, but to overlook the integration of these systems in the overall functionality of related systems is an extremely costly error. This issue was on the minds of 32 of the executives interviewed, and hence, it is worthy of mention.
Senior management was asked: “In the world of retail and wholesale wheeling, what concerns you most about dealing in this environment?” More than three-fourths of senior management (77 percent) stated that their concern was “the ability to know the true cost of production and react to those numbers in a timely manner.” Hence, a delivery system integrating those disciplines is needed. The industry has not had to integrate costing into prior systems, but now it is considered an essential element of any complete system.
Outsourcing: A Force for Change
Of all the topics discussed, outsourcing produced some of the strongest reactions. Here again, there seems to be somewhat of a difference of opinion between senior management and CIOs. Senior management was more likely to embrace a complete outsourcing solution, and CIOs repeatedly referred to selective outsourcing. This comes as no surprise. However, the apparent lack of communication was the troubling issue.
Management was asked, “Describe your current involvement in the outsourcing process.” The results are as follows: Have outsourced some portion of IT, 21 percent; Currently in selection/request for proposal (RFP) process, 23 percent; Reviewing process, 37 percent; and Not considering, 19 percent.
Outsourcing was clearly the answer to many of the utilities. This was the most advantageous method to achieve the performance desired in a timely manner. This study concluded that, of those utilities currently outsourced, 37 percent had the following as a driving force: increased technological capabilities, shortened delivery times and greater staffing flexibility. Senior management sees outsourcing as a tool to make pronounced and rapid changes. This is a significant departure from the past, for cost had always been the predominant driving force. This is not to suggest “cost” lacks importance, for it clearly was a strong second factor, with 34 percent supporting cost as a predominant factor.
Base Line Expectations
This last question was the most interesting and entertaining. Many of the respondents took considerable time in answering this query and seemed to enjoy responding. Their replies compiled their wish list for IT. They were asked, “If you had to pick three areas that needed the most attention in your IT organization what would they be?” Below are the top three responses that were received:
1. Run IT as a professional organization and be competitive with third parties, 27 percent.
2. Improve communications with customers and management, 23 percent.
3. Understand cost/benefit principle and employee the concept, 17 percent.
Many of the respondents took considerable time answering this question, but upon review the three most frequently used responses, all point to simply managing the IT shops professionally, improving communication and understanding cost. This is easy to study and report, but difficult to do.
This study provided an opportunity to see the many forces at work in the utility industry affecting IT and how they will shape our future. The future insures only change. Prepare for the ride.
Gerald Lindsay has 27 years of financial management and systems consulting with utilities in the United States and Europe. He is currently working with several utilities to formulate outsourcing strategy and related RFPs.
If you would like to see more articles on this topic, circle R.S. 113.
For more information on this article, circle R.S. 114.
According to senior management, the future role of IT is very bright.