Digital Transformation requires a new way of working

11 January 2016 Consultancy.uk

It is evident that today’s energy companies will have to turn their businesses towards a data-driven business to survive. It is data that determines whether energy will be sold or bought, produced or consumed, delivered or stored. There seems to be a sense of urgency for energy companies to go through a digital transformation. But what does this transformation entail?

Digital Transformation asks for a New Way of Working 
Most companies in the Dutch energy sector are aware that digital transformation will help them to reposition/reshape themselves in order to survive and stay relevant to their customers. ‘Old school’ commodities selling for the right price is no longer sustainable. It is evident that companies like RWE and Vattenfall will have to turn their business much more towards a data management driven business. It is data that determines whether energy will be sold or bought, produced or consumed, delivered or stored.

Energy suppliers now use data to predict customer behaviour (on energy consumption and production) and power generation (from wind and solar) to anticipate changes in supply and demand and to keep them in balance. Balancing services will become important for energy suppliers, as well as optimising energy consumption at the customer side. For both, data and data management are very important.

Digital Transformation
Figure: Three key areas of Digital Transformation*

Customers already can profit from digital platforms on which they could make their individual choices to buy or sell, to produce or to consume. Therefore there seems to be a sense of urgency for energy companies to go through a digital transformation. But what does this transformation entail?

What is digital transformation?
Digital transformation can be seen as a strategic initiative, a wave companies can surf on, with the intention to improve customer experience, excel in operations or even change their positioning or business model (see figure 1).

However, this wave is more than a nice list of technologic and innovative ideas that result in ICT project initiatives or technical improvements. It is more than making use of the latest technological innovations like Cloud computing, Social Media, Mobile and Big Data (see our previous article ‘Digital transformation: Towards the Energy Company 2020’ for more information about these domains of innovation).

A recent management science book from George Westerman, on Leading Digital, distinguishes two types of capabilities (represented on the axes of figure 2) in order to become a digital (surf) master:

1.      The ability to translate mentioned technological innovations into digital capabilities within the company

2.      Leadership capabilities. How well is the company able to lead those transformations to ensure the right embedding in the organisation? How well is the company able to design an organisation structure and digital culture to enable the ‘digital seeds to thrive well’?

Digital Maturity
Figure: Four types of Digital Maturity*

Westerman has done thorough research within 500 large corporations to be able to distinguish them based on these capabilities, which gives his findings statistical relevance. He claims that companies that have a clear digital strategy, on average have a 26% higher profit and 9% higher revenues. Digital masters are those companies that are able to excel in their digital capabilities as well as the organisation and leadership aspect.

Digital transformation and the Dutch energy sector
What is actually happening in the energy sector on the topic of digital transformation, and in specific, in the Netherlands? It appears that most energy companies follow all developments related to digital transformation closely. At the latest exhibitions like European Utility Week (Austria) and the Metering and Billing conference (this year in Barcelona) much attention was paid to the subject of digital transformation.

For years already, utilities manage IT projects in order to improve their business performance. This is not different from any other industry/sector. However, digital transformation implies a complete and fundamentally different way of looking at your business. This mind shift is not present yet in the Dutch energy sector. In our view, some companies take a head start by turning their IT projects into digital initiatives that are better argued, with a better underlying business case. An example is Eneco – their digital hub at home called ‘Toon’ is a good example of a digital initiative that improves the customer experience. Though leverage for improving operational performance is still not explored. Even though all Dutch energy suppliers introduced a device like this for at home, interestingly enough only the one from Eneco seems to appeal well enough in the market. The question is whether this is a result of a better product or better marketing.

On the side of improving operations, for years all energy companies have made use of digital initiatives to a certain extent. However, are they coordinated and aligned in a digital strategy or data strategy? We doubt that this is the case. On the side of the DSO (grid operator) many initiatives have taken place already. The website of Netbeheer Nederland (the association of energy network operators in the Netherlands) presents many of these initiatives.

Initiatives that will profoundly change the business model have been piloted more on the DSO side, for example propositions for differentiated tariffs for the residential market, which requires a huge data management effort in the back office of the company. On the side of the energy supplier the initiatives are still in an experimental stage.

Recently, during our annual client (Energy) Event on November 26 (see figure 3 for an impression), we created a platform in which Energy companies could share their ambitions and views on digital transformation and as well learn from cross sectorial best practices. This edition, these ‘inside views were from the front running telecommunications sector company KPN, and from Wundershift (a young technology integrator). The Dutch energy supplier Eneco also shared their experiences from their Digital Innovation Lab. A Sia Partners credential was also presented on the application of digital transformation in the operations of a large French DSO, which has to deal with processing, analysing and reporting on huge amounts of meter data, coming from the smart meters that are currently rolled out in France for the residential market. Finally, in a Q&A, we touched on topics like: 1) the future of the energy company as an information and data provider, 2) will digital initiatives be led by IT or business or should they be led by joint teams, 3) how digitally mature are our employees.

Digital Transformation Seminar hosted by Sia Partners
Figure: Digital Transformation Seminar hosted by Sia Partners Netherlands

We at Sia Partners think that information and data will become an important element in the business models, and furthermore that the world is changing for the DSO and TSO where they need to smartly surf on the digital wave. Moreover, we expect to be only at the start of digitally transforming in our industry. If one looks at the efforts in other sectors like Telecommunications (for example KPN), but also Banking (for example ING), the adoption of new digital capabilities appears to be more advanced and some digital mastery can be seen (see figure 1 for the characteristics of a digital master). We expect that mainly on the customer experience side, the digital breakthroughs will come soon.

How about those leadership capabilities?
The title of this article reminded me of a question posed by my teacher for Organisation Theory, during the first year of business university (back in the Eighties): should Strategy follow Structure, or should Structure follow Strategy? According to historian Alfred Chandler, the latter should be the case, as he described in his famous book Structure follows Strategy. Henri Mintzberg, a well-known management scientist still to date, came in 1990 with a balanced view and argued that there is a reciprocal relation between Structure and Strategy.

So, how do we manage digital initiatives at this moment and what kind of people are present in our company? Can they lead the initiatives, adopt latest technologies, or better, have a vision on how this can transform the company? Martin Gill from Forrester Research compares the leadership challenge with an air filled hamburger. One sees the sense of urgency at the top (on board-level), and at the work-floor different digital initiatives are ongoing, yet uncoordinated. So what happens in the middle? Alignment between board-level intent and actual execution is mandatory. How can the air in the middle of the hamburger be replaced by meat?

Digital Transformation - Sia Partners

New Way of Working
In large digital transformation projects we see that companies like ING and KPN install New Ways of Working. These are similar to changes made by the corporates Vattenfall and RWE in the energy sector. Those new ways of working have different names, but for us it comes down to design the organisation and teams in an agile way. Nothing new, but it means that the organisation shows the following characteristics:

1. Work in cross functional and self-organising teams, with transparency being key in all communication, a culture of continuous improvement and encouragement instead of fear of making mistakes, people have creative freedom, team performance above individual performance, collective ownership, and decisions made by the content responsible and not the hierarchy, all with small steps at a time.

2. A shift of mindset (DNA), where people will be stretched as opposed to constrained, (self)discipline is encouraged as opposed to compliance, a basis of trust instead of by contract and a supportive and coaching working climate.

In environments with these characteristics, digital capabilities can thrive and will be embedded into the organisation in a smooth way. We see multiple companies developing themselves to this Way of Working, but the energy sector is still lagging behind. In our view the key to becoming a digital master is to well embrace the leadership capabilities, introduce them and experiment with the characteristics as described above.

So, in our view, (said with the words of Henry Mintzberg) reciprocity between the way of working and the successful adoption of a digital transformation strategy is clear.

* Edited from: George Westerman - Leading Digital: Turning Technology into Business Transformation.

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Brexit will have major impact on UK-EU electricity flows

22 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”