Playing digital catch-up

Challenger brands have made headway against the big six, but it is still possible to remain competitive against these digital competitors.

Toto, I’ve a feeling we’re not in Kansas anymore,” said Dorothy in The Wizard of Oz after being transported via tornado from her family’s black-and-white Midwest ranch to the improbable technicolour dreamland of Oz. For traditional energy utilities in the UK, finding themselves in today’s disrupted and increasingly digitalised marketplace must leave them feeling just as displaced.

The world was a very different place when the big six first began. The market was carved up between a fixed number of players, customers were guaranteed, and investments in technology were hardly a priority. Fast-forward 100 years and the market has opened up, digitally savvy challengers like Bulb, Ovo Energy and Octopus have entered the ring, and traditional players are struggling to compete. And if ongoing rumours of Amazon entering the energy market come to fruition, things will only get harder.

The transformed marketplace

Challenger players enjoy a leaner, cloud-native architecture, compared with the ageing, unwieldy IT infrastructure of the more established players. Not only does this help them operate more efficiently, it also sets them up to provide a better customer experience. Their digital backbone allows them to deliver faster, more effective customer service and their robust customer intelligence helps them propose more personalised offers and add-ons.

As if this wasn’t enough, a shifting regulatory environment is setting traditional utilities back even further. Just look at the recently delayed smart meter rollout. Originally slated for completion by the end of 2020, the deadline has now been pushed back to 2024. This is a problem for the traditional players who have invested significant sums in meters that will now be outdated by the time the scheme is fully implemented.

For traditional utilities, the challenge is to retain or grow their customer base and lower their cost-to-serve without disrupting their day-to-day operations. The key lies in transforming their IT backbone – the question is how.

There are many transformation pathways traditional utilities can take, and we’ve seen many different – equally successful – approaches from our own energy clients. The first option is to start again from scratch, building new systems from the ground up. This has delivered mixed results for energy companies, although it is a favoured route by many of the traditional utilities we work with.

However, if utilities decide to take a more staged approach, the question is where to start. Here at Avanade we have contributed to some research that helps to shed light on this topic. Conducted by the Center for Information Systems Research at MIT Sloan School of Management (MIT CISR), the research examines several common transformation pathways, weighing up the pros and cons of each. It provides an interesting basis for utilities to decide how to launch their own programme.

Starting with the customer experience

Most energy utilities choose to start their transformation journey with the customer experience. Usually prioritised by organisations operating in a highly competitive market where differentiation is essential, this approach generally begins with the simulation of an integrated back-end.

Australian energy utility AGL, for example, implemented just such an approach. Looking to reduce customer churn, AGL decided to improve customer experience by consolidating 50 independently managed websites into one cloud-based platform. Not only did the company benefit from a more efficient and scalable IT platform, it also experienced a 47 per cent increase in website traffic, with improved customer acquisition and retention.

Although the MIT CISR research shows this approach typically yields a rise in NPS [net promoter score] metrics, it can also eat away at margins overtime.

A less popular, but perhaps more effective, approach is to tackle operational efficiency first. This typically involves untangling the “spaghetti” of legacy systems, consolidating applications and increasing automation. Centrica Energy Trading recently implemented a transformation programme just like this. By rationalising applications and automating back office processes, it was able to speed up change within the production process by over 90 per cent.

MIT CISR’s research found that this transformation pathway is the most likely to succeed. Shown to deliver significant margin improvements, it does however risk a loss of market share during the long term if competitors are more focused on customer experience.

The “staircase” approach

In some cases utilities decide to take a more blended, staircase-like approach, a combined strategy to improve both customer experience and operational efficiency. However, this is a complex pathway, requiring a strong level of governance to keep the programme from veering off course.

This pathway is not usually one to be recommended for established utilities, and the MIT CISR research backs this up, showing it results in the lowest success rate.

When it comes to transformation, knowing where to start is key. But the important thing to acknowledge is that change never stops – energy utilities can’t transform all aspects of their businesses overnight, but change can’t be one-sided or one-off either.

Utilities need to chip away at transformation gradually, starting with the aspect that will yield the greatest return for them. And as regulatory and other external factors continue to evolve in the background, transformation will remain a steady and ongoing process.