Utilities, Internet: The importance of being well connected

Tom Brunetto & Tom Yacko
Ernst & Young

Today’s world economy is undergoing fundamental changes. Exhilarating to some, challenging to many, these changes are forever altering the ways every enterprise acquires wealth and creates shareholder value. The Internet, with its capabilities to connect every enterprise with its customers and suppliers, and to blur distinctions between content delivery and business transactions, is accelerating the pace and the scale of economic change. In order for utilities to thrive in an interconnected, information-rich, and highly competitive global economy, they too must undergo fundamental changes. Utilities, facing both deregulation and the slow expansion of markets for commodity products and services, are beginning to adopt new business models and practices that will promote their growth. And ensure their survival.

In recent decades, major shifts have occurred in the world economy in general and the U.S. economy in particular. The creation of wealth is shifting from an industrial base to enterprises that blend traditional products and services with technology and information. (see Figure 1)

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The current economic transformation to the “Information Age” is every bit as revolutionary as the historical evolution from an agrarian to an industrial economy. Though the economic transformation itself is well documented and well understood, some of today’s financial realities can be perplexing, especially to executives accustomed to traditional methods of assessing a company’s net worth. Traditionally, industrial companies-including utilities-measured success by their operational excellence in managing their large asset base. Metrics, like revenue and profitability, were tightly linked to shareholder value. A lot has changed during the last 10 years. Today, companies with the highest market capitalization are no longer predominantly energy/industrial companies, but mostly technology/information-based enterprises.

Financial markets have embraced information and technology-based companies to such an extent that they seem almost exempt from traditional metrics of financial performance. Today’s “successful” companies (measured by their performance on the Dow Jones and NASDAQ) have high market capitalization with comparatively modest assets. A large asset base no longer correlates to high market value.

New measures of value

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What’s going on? Financial markets have collectively decided that a corporation’s physical assets are less valuable than confidence in how those assets will be used. Today’s profitability is complemented by future profit expectations. “Intangibles” are another dimension of revenue. In short, investors are rewarding companies that are focused on customer service and satisfaction, blur their commodity products with value-added services, and demonstrate agility in their markets. Slow-growing companies or asset-based companies that fail to innovate will decline in value in the financial markets.

Wall Street is sending a clear message to the utilities industry: streamline your cost structures and develop new business opportunities. Innovate. Embrace the Internet to earn financial success. Implement e-business, e-commerce and e-procurement solutions that deliver new business and old-fashioned efficiency.

For decades, utilities could increase shareholder value by building up cost structures and assets for an authorized return on capital investment. Today, financial markets shun-and de-value-such a marginal rate of return. Utilities must take major steps to reduce their operational costs. The connectivity of the Internet, in concert with streamlined business practices and integrated e-business solutions, can help utilities operate more efficiently and more cost-effectively. Well- connected utilities collaborate better with customers and vendors throughout the supply chain. They build strong, loyal customer relationships and retain informed, productive employees. E-procurement solutions can reduce the total cost of purchased supplies and materials from five to fifteen percent, and the cost of the procurement process itself by 90 percent. Warehouse inventories can be reduced up to 30 percent. These are numbers the financial markets like to see.

As utilities reduce operating costs to produce a more attractive bottom line, they must simultaneously create new top line revenue opportunities. As markets become deregulated, new business models must be employed. Utilities need to develop new business initiatives and service offerings that are responsive to the needs of the market and tailored to the needs of each customer. Web-enabled e-business solutions are a cost-effective way to provide better customer service and new growth opportunities, such as trading exchanges, auctions and new business entities.

E-business maturity

The capabilities of Internet-based electronic business practices are vast. Some of these functions or practices serve to increase business efficiency and productivity. Others deliver opportunities for growth. (see Figure 2)

In spite of the demonstrable success of e-business initiatives, most utility companies are not taking the swift, decisive actions necessary to capitalize on new business opportunities. Overall, the utilities industry has been a late adopter of Internet functionality. Recent market pressures brought about by deregulation are making e-business transformation an urgent priority.

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Each quarter, Ernst & Young conducts a quarterly survey of the top utilities in North America and analyzes their public Web sites to measure their progress in adopting e-business capabilities.

The latest quarterly study of Internet functionality shows that every major North American utility has a corporate Web site that provides customers with reasonably effective and reliable information. (see Figure 3)

1999 was a pivotal year for the utilities industry, and for their adoption of e-business solutions. By year’s end:

  • payment options via the Internet were offered by more than 50 percent of the utilities;
  • new service applications were offered by one in three utilities;
  • e-bill presentation and payment (EBPP) was offered by 29 percent of the utilities;
  • one in four utilities offered customer self-service for changing billing address and phone number;
  • approximately 25 percent of the utilities surveyed provided applications for service connects and disconnects via the Internet; and
  • seven percent of all utilities in the survey allowed for customer meter reading entries.

The scope and sophistication of Internet functionality is expanding rapidly. Significant, occasionally ambitious e-business initiatives are under way at nearly every utility. Yet, few utilities have significantly progressed beyond “brochureware” to provide operational improvements or top-line revenue generation. For example:

  • Relatively few customers interact with utilities via the Internet. Florida Power & Light’s EBPP capability, in place for nearly four years, is used by less than 10 percent of their residential customers.
  • Many e-business initiatives have not progressed beyond the pilot stage.
  • Many Web sites are poorly designed, and suffer from dead-end navigation paths, inoperable hyperlinks, and lengthy graphics downloads.
  • Most e-business functionality is merely an unmodified extension of existing processes, functions, or systems, such as porting call center screens to the Internet.
  • Though nearly every utility allows customers to submit inquiries by e-mail, only one in four utilities could respond in less than one hour. Some (15 percent) took more than three weeks to respond to routine inquiries.

In short, nearly all utilities are making use of Internet connectivity to protect their core business. Few are using the Internet to fundamentally change their business practices, and fewer still are going after new markets.

Near-term predictions

What developments can we expect in the near term as utilities work to become better connected to business opportunity? Here are some specific predictions and probabilities (0 = impossible; 1 = certain):

Deregulation in the U.S. will drive successful utilities to focus on e-business opportunities. (.9)

  • Utilities will rapidly expand e-commerce functionality. Seventy-five percent of North American utilities will provide broad customer service offerings on their Web sites. (.8)
  • Existing Web sites will undergo extensive revision to incorporate more intelligence gathering, improved performance, and better functionality to customers. (.9)
  • Individual e-procurement portals will proliferate, but year’s end will see the beginning of a massive convergence to only two or three vertical e-procurement portals by 2001. (.6)
  • Horizontal and other “affinity” e-procurement portals will emerge, focused on regional and political jurisdictions and commodity categories by 2001. (.8)
  • The adoption rate of e-procurement portals by all of the announced participants will be slower than planned. (.7)
  • The use of effective, packaged software for Customer Relationship Management (provided by Siebel, Clarify, Oracle, and SAP) will augment traditional CIS architectures to improve customer retention, reduce transaction processing costs, and provide cross-selling opportunities. (.8)
  • By 2001, employee self-service capabilities will expand to help retain skilled employees. E-portals will increase to meet cost-reduction mandates of deregulation. (.7)
  • A technology company with high market capitalization will acquire a utility with depressed price/earnings ratios in order to use it as a lab for developing new Internet-based software for the utilities industry. (.5)

Deregulation of the utilities marketplace, combined with global economic trends, challenges utilities with new business value propositions that compel innovative business practices. Market pressures are forcing traditional utilities to move beyond incremental change to e-business solutions that provide breakthrough results. E-business practices and solutions enable utilities to simultaneously protect their core business, change the game to their competitive advantage and capture new markets. To thrive as independent business entities, they can do no less.

Tom Brunetto is a partner at Ernst & Young and the co-director of E&Y’s e-business strategy services to the utility industry. He has over 25 years of industry experience in developing business strategy, business transformation, and implementing CRM solutions. Tom Yacko is a partner at Ernst & Young and has over 25 years’ experience assisting clients in the effective deployment of IT by conducting feasibility studies, business requirement analysis, hardware and software selection, systems design, software development, package implementation, and information systems plans.

At press time, Ernst & Young Consulting was undergoing a merger with Cap Gemini to form a new consulting firm, expected to be named Cap Gemini Ernst & Young.

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