Today, monumental change is happening in and around the utility. Utilities, regulators and stakeholders are hard at work defining new business models for the electric utility industry. It’s an exciting process and one that mirrors the efforts to create the existing utility franchise model over 100 years ago (a revolutionary development for its time).
Although exciting, this process has become extremely necessary, given that the original business model is misaligned for today’s world, as energy demand stagnates, and customers demand more from companies. Beyond just financial approaches, it is the DNA of the utility itself that must be changed to re-activate the innovative culture that revolutionized our world a century ago.
Learning to Emerge from A Risk-Averse Culture
Even today, the image of a light turning on is associated with brilliant ideas. Yet now, what is considered innovation within the utility isn’t nearly as straight forward. In 2016, electric utility average outage time across the U.S. was 138 minutes per customer. While from a consumer point of view this seems like a lot, that is nearly 5 sigma performance…for the entire industry! When you look at the data closer, the top quartile averages about 40 minutes which is solidly in the 5 sigma space. Utilities do this through operational excellence and clearly some innovation.
How are utilities able to maintain this operational excellence? One answer is the culture. The culture at utilities is often self-described as “risk-averse.” This aversion plays well into the outage management and system reliability results discussed above. The utility business model rewards a robust and well-performing distribution system and encourages capital investment to further improvements. There is not much risk in trying to improve this metric as it is well understood, and the drivers of grid stability can be managed and engineered for improvement over time. But on the rare moment when there is failure it can be exceptionally dangerous and/or publicly embarrassing, so utilities generally wrap their risk aversion with a maniacal focus on safety. If anyone believes regulators don’t have power over utilities, go look at how the best utilities manage commission complaints. Every leader in the company does all they can do to avoid these complaints coming in from customers.
When looking at growing revenue, especially non-traditional services, utilities are far from the same level of breakthrough. Here, the deeply embedded risk-averse culture that protects the system reliability is in direct conflict with any budding sub-culture that is focused on innovation. Innovation has the risk of failure, and because of the steep penalties that the traditional model inflicts on failure, utility leaders want nothing to do with efforts that distract from the core business. Employees are rewarded for aligning with the traditional model and are scoffed at when they look at incubating new ideas. And to complicate things more, the risks of new business can easily be tied to the core revenue stream through the ratemaking process, and any stakeholder can intervene in a rate case to disrupt the financial needs of the company. Thus, any innovation that is organically developed around revenue generation has little chance of succeeding as the corporate culture is built to protect the core business model, even if the core model is not producing the needed results.
It isn’t surprising then, that leadership at utilities have responded to revenue needs largely by working within the bounds of existing regulation and traditional culture, focusing on stretching the existing business model and doing “more of the same.” These leaders organize around this culture of protection, separating energy efficiency and demand response efforts from other incremental revenue generating efforts. Hence, they further silo their work, confounding brand presence for the customer. This culture drives executives to push economic development efforts that attract new businesses to the territory, concentrating on “big elephants” such as new buildings or new manufacturing facilities. These kinds of efforts are often run through different marketing organizations separated from energy efficiency and demand response programs, creating conflict. So how can this issue be solved and how can the silos start to fall away? The answer – by changing the culture to one that encourages innovation.
Establishing a Culture to Fuel Innovation
According to a recent McKinsey study, “regardless of the growth path, culture and branding are common strengths among top-growing companies.” So, if revenue growth is a real top-level goal for a utility, there are necessary attributes utilities need to adopt to nurture this innovative culture. Some of the key attributes that may be required are:
- Leadership role modeling & trusting the front lines
- Deliberate hiring from the outside
- Partner/acquire for new skills
- Failing fast and enforcing learning extraction
- Employee empowerment
- Agile resource allocation
- Customer focus
- Performance management
There is plenty of reading material on each of the above, but two of the problematic issues when trying to adopt these attributes are a result of the regulatory process itself. The first is that the outcome is largely dictated by how a regulator responds to a utility that is trying something new and attempting to expand on its ability to serve its customers. The second focuses on how the transparency of the regulatory process exposes failure very publicly. This poses a problem with developing a safe culture to experiment and try new things, even if the risk is low.
While the regulatory conflict continues to work itself out (stay tuned for part 4), there are four ways utilities can help a culture of innovation develop.
- Set a goal for revenue growth and make it very public inside the company. The establishment of this goal and the communication of it must be understood by the employees of the company. Having executives stand up in front of the masses and speak about revenue growth will be vital for the culture to become aware of the desire. This will make the employees who are energized by this kind of work aware and raise their hand to help.
- Create cross a functional team sponsored (and protected) by a C-level executive or steering committee within the company. This new space cannot be ad hoc and must have a set goal (as stated above) that are governed accordingly. Employees who join the group need to have the freedom to question the status quo, to experiment and to build. They also need to see a clear career path. Placing them in these spaces when the rest of the culture will see this new space as a fruitless attempt to change the course of a 100+ year model can be a career ender.
- Assess risk honestly and focus on learning. The steering team or sponsoring executive will need to have a clear understanding of risk and teach the team how to manage risk effectively. The executive must be able to assess true risk vs. perceived risk. By understanding true risk it can be mitigated through effective decision making which can cut through risk aversion and also can be used to kill languishing efforts. The introduction of methodologies from extracting lessons learned during each phase of different growth attempts is important. These executives need to understand the power of exponential growth and how that can be an asset in growing new business, but also that it can be a force of disruption if they wait to jump into a new business model.
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Acquire the right resources for research and experimentation. This will require cross-functional talent and the right kind of people to execute. If utilities plan to populate the team with top internal talent, they are possibly setting themselves up for failure. An honest assessment of the key skills required must be considered. Cultivating from within the company can be done, but creating new positions and hiring the right mix of external talent will be required as well. Leverage partnerships with local technology companies to supplement skills as required.
The difficulty that utilities face in innovation is not unique to the industry, it is just magnified given the way the industry has been run for many decades. Take John Sviokla and Mitch Cohen’sth book, The Self-Made Billionaire Effect, a study of 120 self-made billionaires and the characteristics that made them successful. Ultimately, they defined these two types of characters, a Producers and Performers. Producers have a mentality that enables vision and idea generation, the ability to multi-task and activate an idea, to honestly weigh the risk relative to the potential upside, and the willingness to take a risk on it and potentially loose (while learning from the experience). On the contrary, Performers are reliable, highly skilled experts that have deep knowledge of the functions and processes of the core business machine. Like many industries, utilities often model their career ladders to elevate Performers into leadership positions because these individuals align with the culture of risk aversion and safety very well.
But as an addition, they need to find Producers within the utility or hire some from the outside. These are the people who are always attracted to the newest thing and don’t like to play by the rules, who are imagining the future but don’t have an outlet in their current role. Incentives for these hires will need to compete with a startup culture so compensation models will need a thorough design. Building a mix of Producers and Performers and the right functional skills is critical in creating viable new ideas for revenue growth.
Some evidence is emerging of these kinds of investments in recent months. New utility innovation centers are popping up. New titles (for the industry) such as Product Manager and Innovation Consultant are now used. Efforts to emphasize and partner with local technology startups are growing. These are all good steps, but will it be enough?
As new innovation centers pop up it creates the image of innovation, helping the utility brand. However, one of the greatest skills a Performer has is their ability to create an image of success without necessarily having the engine behind it to execute. A true test of these centers will be the commercialization of the ideas that are incubated. Well known innovation companies like Xerox and Eastman Kodak’s have demonstrated the consequences of failing to succeed. At the top of the utility, there must be some leaders that understand or are Producers in order to facilitate successful integration of these ideas in the core business. Unlike other industries, the core function of the utility may not be cannibalized away with newly commercialized ideas since electricity is a fundamental element of a functioning economy, so integrating these ideas must be a key focus. Once we can do this, it will open the door to an abundance of new opportunities.
Nurturing Innovation Doesn’t Stop Here
As an innovative culture spurred the birth of the utilities, so it now bears exciting new business opportunities. But the changes necessary to make this happen must come from the top, especially in the event that a utility sees revenue growth as a core need for future success. Opening innovation centers are a good start, but setting them too far from the core of operations, while necessary for some in the beginning, can cause issues. It is paramount to have a way to bring the takeaways from these efforts into the core operation and prioritize commercializing successful pilots.
The effects of culture are critical, but the pathway must not only be open to enable new customer markets to be developed, but also sync with the organizational structure and purpose of regulation. It’s the reimagining of the organizational structure that will play a big part in the successful development of an innovative culture and overall top line revenue growth. Tune in as we explore the next step to achieving top line growth, with the reinventing of utilities’ organizational structure in part 3, coming soon.