How utilities can build effective digital strategies

In the year since we argued that utilities need a chief digital officer, we’ve seen a marked increase in the number of companies formally establishing the position, or enhancing the roles of chief information officer, chief technology officer, and chief operating officer. Today, most utility executives believe that digitization is a core component of their strategic agenda, whether their current focus is performance improvement, customer enablement, cost reduction, or disruptive growth. But digital transformations can be daunting and risky undertakings in this industry. Unlike digital natives such as Uber, Google, and Facebook, utilities have legacy IT systems and must work with a large, aging asset infrastructure base while meeting challenging regulatory commitments — all of which make changes difficult to scale. But if companies keep the following five imperatives in mind, they’ll be able to overcome many of the obstacles they face as they set out on their digital transformations.

1. Establish a digital position. Utilities need to have a clear view of how digital will fit within the competitive positioning of their business. The industry has historically been a late adopter of new technologies. Now facing a wave of digital products and services, utilities feel a sense of urgency to embark on large programs that are long overdue, such as upgrading work management, warehouse management, or customer billing systems. But embarking upon such a piecemeal rush to execute table-stakes measures creates other risks, such as a lack of coordination or getting stuck with suboptimal short-term technology solutions. Recent denials of rate recovery and concerns about expensive modernization efforts in Massachusetts (pdf), New Mexico (pdf), and North Carolina (pdf) highlight the regulatory obstacles that companies can face in realizing returns on their digital investments. At the same time, many utilities end up engaging in endless analysis-paralysis evaluations, waiting for maturity, and consuming resources in pilots without a pathway for scaling.

Companies that align key stakeholders to craft a digital positioning and own the possible consequences are more likely to succeed. Rather than speculate on the future of technology, utilities must understand the implications of the possible scenarios and pivots they will need to create to meet their digital visions. Industry-leading utilities in both the U.S. and E.U. have developed strategies for continuous improvement and disruptive technologies, and for deciding which efforts are operational and which are customer-centric. Digital positioning must be bespoke to every company and account for differences in the size of the installed base, geography, architecture, and anticipated benefits levels. The goal is to provide a sense of direction to the organization and ensure that the business as a whole can prioritize, focus on, and own the outcomes in a consistent and prudent manner.

2. Develop an enterprise-wide, cross-functional mind-set. Digital transformations affect multiple functions within the organization and shape a range of outcomes, such as the level of free cash flow, enterprise value, and customer services. We find that in most utilities, the IT function is either expected or mandated to be at the forefront of driving the digital transformation. Given the enterprise nature of such an undertaking and the dependence on information and communications technology, it’s a natural assignment. But the advent of smart, connected assets, networks, and workflows means that technology is no longer just an enabler for transactions. Rather, it lies at the very core of how utility assets operate and deliver. Unfortunately, many business units regard their interactions with IT as transactional and tactical rather than strategic. Even if IT steers the process, frontline plant operators, field personnel, and functional managers have to make functional and operational transformations. They must change the way they operate their plants and systems, and use next-generation control systems or grid-management systems to drive value. Century-old practices that dictate inspections, monitoring, and maintenance should be updated so that more data can be obtained remotely and corrective-action decisions can be derived from analytics. To coordinate these activities, any successful transformation must be truly cross-functional, with role definitions and decision rights clearly defined.

3. Pursue multiple levers for value. When developing a digital agenda, utilities need to consider all the value levers they can access and deploy, including:

• Reduced cost of transactions: Technologies such as blockchain, if combined with operational process changes, can fundamentally reduce transactional costs such as payroll processing and benefits administration in human resources, invoice processing in the supply chain, and accounting entries in the finance function.

• Reduced operational costs: Advanced digital grid modernization projects such as advanced network control, automation, energy storage, and microgrids can improve the cost performance of specific power generation and delivery functions.

• Growth opportunities: As utility business models shift away from commodity sales from central plants and toward distributed energy resources, as customers are integrated into the value chain, and as distribution system operators transact energy in real time, utilities must invest in the digital capabilities that enable and abet the emerging ecosystems. Just as investing in a digital thermostat alone does not transform a house into a smart or connected home, merely implementing emerging technologies such as blockchain and AI on a piecemeal basis won’t help a utility become a digitally competitive operation.

4. Evolve an integrated business architecture. Digitizing a utility requires a steady process that integrates marketing and commodity sales, operations, maintenance, supply chain, and the development of new products and services (e.g., electric-vehicle charging and demand response). Digitization has to provide a pathway to a tangible boost in enterprise value through increased free cash flows, reduction of risks, and better levels of service. And digital deployments must rest on a foundational business architecture that is rooted in a solid understanding of the costs, benefits, and maturity of the technology. The business architecture defines the activities that need to be performed, together with their grouping, organization, and interactions. Whether the goal is incremental evolution or a wholesale transformation, a robust business architecture will enable companies to avoid expensive one-off mistakes and offer greater flexibility and optionality to upgrade as technologies evolve. With cybersecurity now a C-suite-level concern, it is all the more important for the business architecture to harmonize with the design of other systems within the company.

5. Develop the capacity for agile deployment. Deploying a digital roadmap is an expensive undertaking that often involves outside talent. And it is not uncommon for actual costs and value pools to deviate sharply from plans — which can lead to some uncomfortable internal conversations. We find that these situations often arise when a traditional deployment model is applied without adequate recognition of the unique properties of digital transformations. For instance, the waterfall model of sequentially gathering requirements, designing, building, and testing has serious limitations when it comes to digital. Industries that are further along in the transformation process have successfully applied agile and DevOps methods that shorten time cycles and follow a “think big, start small, fail cheap, scale fast” approach. The utility industry is still in the early stages of adopting these principles for deploying new operating models and business transformations. Accounting for the intrinsic uncertainty in such efforts requires companies to make a cultural shift, and to educate and coach frontline delivery teams on the risks and advantages of agile deployment.

It is not easy for any organization to make wholesale shifts in strategy and culture. But to compete in the 21st century, utilities must latch on to the capabilities and opportunities that digital technologies present. Those that think through the potential and the pitfalls inherent in the undertaking will be able to tap into the power source of digitization.