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Finding the diamond in the rough of long-term cost containment

This article first appeared in Utility Dive.

Achieving sustainable cost reductions has been a focus of utility managers in the “current generation utility” and will remain a focus in achieving “Next Generation Utility” operational excellence.  While the driving force behind sustainable cost reductions remains a robust and disciplined culture of continuous improvement, the Next Generation Utility will take advantage of the digital transformation, while also adding new tools to the continuous improvement toolkit in planning for and achieving sustained cost reductions. There are a number of practical and tangible ways utilities can achieve sustained cost savings and create long-term value for both customers and investors.

Develop and/or maintain a culture focused on performance improvement

A constant focus on performance improvement is at the core of sustained cost reduction. An ongoing expectation of increased efficiency, quality, cycle time, and customer service must be embedded in all management and business processes.  It is important for incremental improvements of any type and degree to be encouraged and welcomed, not just the internal newsletter headline-grabbing ones.

Fundamental to the concept of operational excellence is Performance Management and the understanding that “you cannot manage what you cannot measure.”  Performance measurement coupled with statistical analysis, trend analysis, and benchmarking helps identify performance gaps and focus limited resources.

Employees must understand how their work impacts business process performance. Well-run organizations ensure there is a clear connection between employees’ responsibilities and the strategic or operational objectives of the enterprise. When employees understand the bigger picture, they can see how their individual performance contributes to achieving department, division, and corporate objectives.

It is critical for managers to ensure that all employees have the training and tools needed to support continuous improvement.  This includes foundational problem-solving skills such as Root Cause Analysis, 5 Whys, and Cause and Effect Analysis.  Skills such as Six Sigma and Lean typically reside in the organization and support improvement efforts as needed, but they are not always embedded in each and every function.

A cultural shift is essential to talking about providing the freedom needed to encourage employee (or team) creativity. Next Generation Utility can bring creativity to another level through innovation and allowing the development of an innovative culture, which pushes the current norms to a place where new ways/non-traditional ways of approaching performance improvement are encouraged and rewarded.

Creativity must be balanced with discipline and accountability. All utilities take up projects to lighten their cost burdens, but utilities that track the benefits in a formal and structured way have, once the opportunity is implemented, a much higher probability of realizing those benefits. Only when the benefits are fully realized should the project be marked “completed” and not until then.

The last key aspect of performance improvement is the ability to reward success and innovative thinking from individuals and groups. These are often the core ingredients to success because they see and understand the day-to-day business processes and culture. Rewarding creativity – through personal recognition – can go a long way to shaping performance management outcomes.

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Develop capabilities and supporting structures

The current generation utility is focused on achieving cost reductions through economies of scale and selective outsourcing, as well as technology-enabled efficiencies. However, the Next Generation Utility anticipates customers’ needs using digital capabilities and data analytics, and better process alignment to goal achievement, proactively providing customers with the information they need and eliminating calls to the contact center. Digital capabilities have transformed performance throughout the organization, in part by allowing utilities to measure performance in ways not previously imagined.  This also includes enhanced strategic asset management as predictive analytics are providing new tools and techniques to anticipate failures and make better informed repair / replacement decisions.

In response to the aging workforce issue, rather than simply hiring replacement workers, the Next Generation Utility assesses the capabilities needed to get both front and back-office work done at a granular level and whether those capabilities are best provided by humans or robotics.  “Bots” are here and they are driving operational excellence.

Generally speaking, business capabilities are an expression of what a company does to achieve success. Capabilities are the combination of people and organization, processes and policies, data and technology that an enterprise uses to generate business outcomes. If utilities are to sustain cost reductions, it will be necessary for them to develop and enable capabilities across the enterprise. Developing these capabilities will help develop in-house experience and expertise required to support new cost structure as well as continuously improve in the future. It is not sufficient to develop required capabilities – utilities need to develop supporting structures, new processes and procedures to help maintain and improve business capabilities.

Beyond building capabilities, successful utilities create an enabling environment – supporting organizational structure, governance structure – that helps maintain and improve these business capabilities.

Ensure employees are aligned as to the ‘why’ it needs to get done

It is critical for the employees and stakeholders to understand, and believe in, the need to cut costs while the utility is trying to invest in technology and infrastructure to improve the grid. Starting at the top, it is critical for executives, to deliver a common message that explains the reasons behind the cost savings initiative. A well-defined and comprehensive change management approach ensures alignment, both with internal and external stakeholders, leading to sustained benefits.

A large U.S. utility is running an enterprise-wide “Customer Affordability” program where customer centricity has been tied to cost reduction goals. Clear program objectives shared by the CEO, and trickled down to the employees via leadership, helped clarify the reason for the company to take a serious look at its costs while modernizing its grid. This clarity has a trickle-down effect and ensures costs remain on the forefront of any activity of the utility. Additionally, it ensures all groups across the enterprise remain focused as the utility goes through a variety of changes for a better future. Applying an effective line of sight vision so each employee understands their individual contribution to corporate success is another way to help ensure sustainable operational excellence.

The Next Generation Utility will continue to focus on sustainable cost reductions to achieve operational excellence.  A successful Next Generation Utility will ensure that management and business processes create a consistent organizational culture which reinforces that focus, from the CEO to the front-line worker.  New tools and techniques enabled by the digital transformation will provide solutions not imagined by the current generation utility.

Amar Chhatwal, Scott Sidney, and Joel Jeanson are energy and utility experts at PA Consulting Group

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