The past few days, I have been taking part in European Utility Week in Barcelona, where I gave a talk on why the future of connected products and services requires that utility firms become connected companies, and how a business-as-a-platform model is the most suitable strategy to achieve this.
Exciting Innovation and New Challenges
At the event, we saw a variety of exciting innovations from new and old firms alike. Whilst new startups are showing off fascinating smart metering and data products, traditional firms like Siemens continue to innovate in technology platforms to manage smart grids and other core aspects of utility management. The pace and extent of change in utilities is hard to overstate. Utility companies that were once seen as natural (often state) monopolies and ran the generation of power, transmission, distribution and retail are having to cope with disruption at every level of scale from sources of energy all the way through to the smart home and Internet of Things.
For example, Innogy (spun off from RWE) provided insights into the various innovation projects they have been running in an attempt to get ahead of the curve. We also heard from other firms about how the rapid rise of electric vehicles (EV) is changing the game for utilities, with projections that widespread EV adoption will increase demand by 3-4% in Europe – the equivalent of seven times the total demand of the Netherlands today.
So much change. So many ideas, from smart grids to the blockchain and household IoT devices. How can the incumbent utility firms respond to this ongoing disruption? Whilst once these big beasts competed only with each other, now they not only face startups creating more value from the same commodity services, but also the fact that they may be competing with their customers, who can now generate, store, use and even re-sell renewable energy thanks to solar power and rapidly improving battery technologies. Some companies, like E.On and RWE have split into heavy generation utilities and more lightweight retail companies that look after distribution and customer-facing roles. This makes sense as they are fundamentally different businesses with very different cultures and goals. But is it enough in the face of declining margins and increased competition, and how can they turn their scale disadvantages into scale advantages?
When the barriers to entry for a traditional generation-to-retail utility were so high in terms of capital expenditure, assets and scale of operations, there was little prospect of disruption, but as Gavin Roberts from E.On mentioned at the event, his firm saw 37 new competitors emerge just this year, and although only a handful are profitable, they clearly see a loss-leader opportunity in the market.
Can Utilities Re-invent Themselves?
I have a real fear for the future of this generation of large utility retail firms, because they still retain too much of their old DNA and have not worked out how to exploit their advantages (customer relationships, experience and scale) in a way that overcomes their vulnerabilities to smaller startups (slow to act, expensive, bureaucratic). Competing with startups in customer facing innovation without reforming their organisations might prove to be an example of ‘boiling frog’ syndrome.
In addition to the many innovations that firms like E.On, Eneco, Innogy and others are trying at the edges of the organisation, I believe there is also an urgent need to de-bureaucratise and develop agility to improve not just their ability to deliver as fast as the new startups, but also to turn scale disadvantages into scale advantages.
In a world of smart grids, distributed networks and data platforms, it cannot make sense that these firms continue to run the old silo model of cascading management hierarchy and approval for action. Committed people can still innovate and succeed, of course, in spite of the organisational structure, as they have always done. There were plenty of good examples of this at the event, such as Fonger Ypma of Eneco’s venture and innovation arm explaining about how they were able to roll our their smart thermostat Toon to 300,000 customers, resulting in lower churn and greater satisfaction. But why compete with one hand tied behind your back? What is preventing the adoption of the best and most professional startup techniques and structures inside these firms?
Sometimes, pushing the envelope of innovation can be just the stimulus needed to connect the organisation better. Gavin from E.On talked about how a roll-out of their PV Battery storage solution led to satisfied customers, but also some wrinkles that needed to be ironed out. But by putting senior managers in call-handling roles and making them do case management for the early adopters solved the issues and made real progress in connecting the organisation better than before. Gavin described this very well as “breaking down silos by aligning on big opportunities.”
Just as utility firms have started to articulate a higher purpose in the market than commodity energy provision, so too they need a new statement of purpose for their organisations. Why do they exist and how can they do something with their scale and experience that new market entrants cannot?
From Bureaucracy to Open Platforms
There is a temptation to answer this by saying “we are not technology companies” and so can only engage in business model innovation or branding. But for any large company with a heavy legacy, business model innovation tends to be incremental. Leading automotive firms had early components of autonomous vehicles in their R&D labs before Elon Musk had made his first fortune with PayPal, but they were doing fine with their existing car platforms, so they did not see it as an immediate game changer. It took an outsider to see that, and one for whom the car was only a means to achieve a Massive Transformative Purpose (MTP), namely mainstreaming renewable energy.
According to a recent piece by Seyi Fabode, even Tesla might be missing the bigger picture with its solar roof and battery storage business, focusing on vertical integration to own the generation and storage before crossing the chasm to mainstream markets, instead of creating a platform focused on the optimisation of energy data, on which others can help accelerate the shift from rich dude early adopters to mainstream consumers. As several industry figures pointed out at #EUW16, customers often say they are adopting smart meters more for the insights and the feeling that they can control their consumption, rather than just to reduce bills.
Utilities talk about partnering with new technology startups, and they are making acquisitions, but these run the risk of crushing fragile startup butterflies between the pages of their old integration playbook. Instead, I believe, they should be turning themselves into platforms where multiple startups can hitch a ride on their scale and networks to provide ever more value and (excuse the irony) utility to energy consumers, and seek lock in and new areas of growth based on the strength of their ecosystem.
But to operate a platform you need to be a platform, internally as well as externally. Leave the polite fiction of 10-20 year planning windows and the supposed reliability and safety of hierarchical management to the generators. In retail, your competition is startups and even sometimes your own customers, and not many of these are burning tens of millions a year on management overheads.
As Gavin from E.On said, a good place to start is with product managers and teams that serve customers. Understand what organisational capabilities they need to do their jobs better, and understand which processes and organisational habits are getting in the way. Connect, automate and iterate. Start baking common services into a shared service platform and do not allow procurement, HR, IT or other bureaucratic functions to stand in the way of value creation and growth. Yes, take real risks and regulatory requirement seriously, and make sure the platform is designed to accommodate them, so compliance is baked in and does not depend on manual management oversight.
Where to Begin?
If Haier can transform from a low-quality Chinese state enterprise into a platform supporting thousands of micro-enterprises with such success in about a decade, why can’t large utility firms achieve something similar?
The irony of companies that talk about smart grids, distributed networks, resilient supply and smart IoT devices , but operate internally using email, powerpoint and endless meetings and conference calls is surely not lost on the young people they are trying to recruit. To succeed in connected markets with connected products, you need to be a connected company. And every step of the journey towards this goal will reduce bureaucracy, take cost out of the business and improve speed to market. What’s not to like about that?
Connect employees using modern social platforms. Activate your human sensor network and let them tell you what needs fixing and contribute to steering the firm, based on their proximity to markets and customers. Decide which services and micro-services should become utilities to support the work they want to do with customers and use these need states to build out your own unique internal business platform. Invite customers to contribute too. Embrace change as an everyday part of business improvement, not an occasional, painful response to unforeseen events.
In terms of organisational structure, there is no single model that suits the whole organisation, nor should there be. Think in terms of pace layering to address different levels of scale and speed, and think in terms of a service-oriented architecture, networks and communities to connect teams and services laterally, rather than vertically through a hierarchical reporting system.
Later, use this platform to attract the startups whose innovative energy can help you create more customer value. Free up your best customer- and market-facing teams to design entirely new customer journeys and value propositions using the functions of the platform, and invent new ones. Become a system centred around energy needs, not just a provider of a margin-squeezed commodity.
This may sound hard given the difficulty of affecting change in large organisations, but with executive support, it is easy to get started by having the conversation with the business about what organisational capabilities it needs to develop and beginning to refactor internal services to become more connected. The former brings employee engagement benefits straight away, and creates the basis for a distributed approach to improvement, whilst the latter will also have the benefit of taking costs out of the business as it progresses. But by turning scale disadvantages into advantages by creating a platform and an ecosystem of energy services, utility firms can embrace startup innovation and become more competitive, whilst creating a more defensible position in the market.
Platforms and ecosystems are the new ‘barriers to entry’.