Jim Hayward, Baringa Partners, UK
The energy industry is changing faster than you can say ‘decarbonization’. As governments target significant carbon dioxide reductions, the energy market has been propelled into a period of transition and upheaval. Driven by a growing consensus on the impact of climate change, the industry is now facing an urgent imperative to re-shape policy in order to reduce energy use, increase energy efficiency and deliver low-carbon energy sources.
Killingholme is a 652 MW combined-cycle gas fired plant in north-east Lincolnshire, UK Source:Centrica plc
So change is coming. The challenge is not only change itself, but the sheer pace of that change. What is more, we are talking about unprecedented, externally imposed change. So how can energy companies keep up with the speed and scale of this? This is where change management comes in.
The concept of change management has been known to raise a cynical eyebrow among sceptics. Indeed, a haziness surrounding the definition is one of the reasons that change management is often sidelined as a soft option, an afterthought, or as only being needed where good leadership is lacking. Put simply, change management is the process by which an organization manages its ability to adapt to succeed in tomorrow’s business environment. In the energy market this is critical, as it will be very different businesses that succeed in the new energy economy.
Effective change management ensures new ways of working and all the systems, processes and infrastructure that support become permanently embedded within an organization. Executed properly, change management delivers concrete results that can be measured and quantified. For instance, an employee’s ability to resolve customer’s issues first time may be improved, or the customer may take more valuable products as a result of the employee’s interaction with them. Tangible, measurable outcomes can be delivered by effective change management.
Change management is not an alternative to good leadership, but rather the way by which good leadership is delivered in a rapidly moving environment. Successful leaders know how to use effective change management to think ahead and anticipate resistance. In today’s climate of fear and uncertainty, this is more important than ever. Strong leaders deploy the right combination of political skills, motivational style and psychological insights, and back them up with effective communication, involvement and engagement with staff. It is essential that people feel part of the process, rather than mere recipients of change that has been foisted upon them.
The objective is to manage individuals and groups of people through the ‘change curve’. After all, it is as a collection of individuals that a company functions and puts its ideas and value into practice so people need to be ready, willing and able to adopt new behaviour, processes and technology.
The essential people factor
And this is where it gets complicated. Most people do not like change. The majority of us are conservative at heart, and will go out of our way to skirt around it, preferring the security of our comfort zone. People need to understand what is in it for them on a personal level, rather than on an abstract business level. If they are required to alter their way of working, often dramatically, then their buy-in to this change is crucial.
Overcoming these natural psychological barriers is critical to change management. Leadership teams which fail to cater for the human side of change often find themselves looking at the end result of their careful planning and wondering where it all went wrong. The people factor is not incidental to change management it is change management. The success of any such programme hinges on putting individuals right at the centre of any proposed changes and understanding the impact on people at every level.
That is why there is no one-size-fits-all solution to change management. Instead the tools, techniques, models and methodologies deployed will depend as much on the existing culture, values, people and behaviours within the organization as on those to be developed.
What is more, there is no easy way to change an existing process. If a process cannot be stopped, either change will need to implemented alongside the process as it runs, or dual processes will need to run simultaneously. Neither of these scenarios is straightforward, and each requires considerable planning, communication and organization.
Baringa Partners worked with Centrica on a transformation programme called Atlas, which included the delivery of a new ETRM system designed to help Centrica Energy meet its strategic goals Source: Centrica plc
Any change management programme therefore needs to keep a firm eye on where it is going and what it is trying to achieve. Losing sight of the desired outcome, adding incidental tasks or confusing the potential benefits will muddy the waters and minimize the possibility of the project delivering its original objectives.
As the programme progresses, those people who have been successfully engaged throughout the process will give their feedback into it. And if these people are to be kept on board, it’s vital that this feedback is incorporated into the project.
For any major energy supplier, sourcing electricity or gas for delivery to customers is an essential function. At Centrica plc, one of the UK’s leading integrated power and gas suppliers, that task falls to business division, Centrica Energy. Although Centrica Energy has a significant upstream business, which includes a number of power stations and a gas exploration and production arm, one of its important sources of energy is trading in the wholesale markets.
The company actively trades UK and European power and gas, via its market trading arm, Accord. This is done both speculatively and in order to hedge against the price risks inherent in the increasingly volatile energy markets.
The challenge ahead
Centrica Energy’s trading function enabled it to secure demand for supply of gas and electricity in the UK market. The company was using home-grown technology solutions that had been developed on an ad-hoc basis over the years. By 2005, these systems could no longer keep up with the pace at which Centrica Energy was operating or deliver the risk management and trading capability the company required. What is more, the existing solutions were not able to offer the kind of flexibility necessary to deliver Centrica Energy’s strategic goals of entering new markets and new commodities.
This was identified as a key area to address. Centrica Energy needed flexibility, automation, consolidated portfolio positions and risk reporting, as well as process control to mitigate exposure to both price and operational risk. Centrica Energy recognized the need to look at trading and risk management capability not only from a technology perspective, but also in terms of business processes, organizational redesign, and the application of financial and operational controls. All these components needed to come together to ensure that they could achieve their strategic vision.
Centrica Energy worked together with Baringa Partners on a transformation programme known as Atlas. The Atlas transformation programme included the delivery of a new energy trading and risk management (ETRM) system, which could help Centrica Energy meet its strategic goals. Both Baringa and Centrica were aware of the leading products available in the market place, but rather than head straight for a beauty parade of top vendors, the groundwork was laid internally to ensure the right product was selected.
David Edwards, director at Baringa Partners said: “I think it is fair to say that, initially at least, there was some scepticism within the organization around moving to a new ETRM capability, whatever the technology was going to be. So we did a lot of work around the planning requirements, defining the business case and organizing demonstrations of key products. Our team played a key role in driving and facilitating that whole system selection and evaluation process.”
The product chosen was Endur from OpenLink, a functionally rich and highly configurable solution, for front, middle and back office processes. Leading a team of more than 30 individuals from Centrica, OpenLink, Logica and independent contractors, the Baringa team began the process of implementing the application. Edwards said: “Rather than going for a big-bang implementation across the entire portfolio, we chose a specific geography and commodity to prove the solution. There were always going to be challenges around testing the solution and nailing down the final design in such a configurable solution.
“Once we had a successful implementation that embedded the capability in the business, and demonstrated the value to Centrica Energy we could extend the footprint across the wider portfolio. We obviously worked very closely with OpenLink around the implementation, and extracting information and understanding from them about how Endur could best deliver against Centrica Energy’s strategic and tactical requirements.”
However, after 400 man-days of system implementation and configuration, more than 70 000 lines of custom code, and interfaces with 11 new and legacy systems, one of the most successful OpenLink Endur implementations in the industry was completed. The Endur system was delivered to 63 users across seven business areas, and in the process a world-class resilient technical infrastructure has been created to provide a solid foundation for future releases.
The project also delivered world-class financial and operational controls, conducted a successful information security review to ensure Centrica Energy’s essential data was protected, and made sure all processes were updated so the company could derive maximum benefit from the Endur system. The work included reviewing Centrica Energy’s processes and establishing a rigorous, bottom-up segregation of duties in line with industry best practice.
To support the implementation of the Endur system, Baringa Partners also trained all business users and, by ensuring service delivery was central to the project from the outset, created an effective Endur in-house support capability within Centrica. Baringa also created detailed premier support agreements with OpenLink.
Tandgible and intangible benefits
Trading profits have grown by scaling-up trading activity in existing markets, and having the right support to expand trading operations into new markets. Increased automation in processing has led to staff efficiencies, and because common processes have been adopted throughout the organization, people can move more easily between different tasks within a department. Centrica Energy has also gained savings in its audit fees, as the system now provides assurances over activities that previously had to be validated manually.
In addition to these hard, quantifiable benefits, Centrica Energy has seen improvements that are harder to measure, but are no less significant. The new systems and processes have greatly enhanced Centrica Energy’s professional image with its counterparties, partners and other market participants notably with regards to margining, confirms, invoicing and broker interactions.
There is a real feeling that the back office automation in particular has created a stronger, more professional image of Centrica Energy. Edwards explains: “Margin confirmation and invoicing have improved but they are also on much stronger ground in terms of knowing what is accurate and being able to have credible discussions with counterparties around those.”
Staff morale within Centrica itself has also gone up. According to Edwards: “These are the kinds of benefits that are much harder to define in the business case, but with greater functionality Centrica’s people can trade new products much faster than they could before. And because they have a system that automates many of the previously manual, repetitive processes, people spend less time worrying about manual transactional elements and have more time to focus on high value-add services.”
He concludes: “OpenLink deserves its place as a market leader, but it is not the easiest solution to get right. We were insistent that Centrica Energy did not turn into an implementation casualty, and thanks to the rigorous approach and deep business and technical knowledge applied by Centrica Energy and Baringa on this project, we have achieved a highly successful implementation of a strategically imperative trading and risk management solution.”
Now that the first release of Endur has delivered a solid functional foundation for future implementations, the end goal is to have all ETRM processes and data for all commodities in Endur. The next immediate steps are to progress the design work for the delivery of UK and European gas functionality.
Endur OpenLink: Benefits summary
- Industry-leading automation and STP, including dynamic curve building, auto trade capture for trayport & ICE screens, and electronic confirmation matching
- Near real-time position reporting for the front office
- Reliable and efficient workflows and overnight batch: ‘Lights-Off P&L’ and ‘Risk Reporting Shop’
- Accurate capture of Futures across the whole trade life cycle
- Covers markets including EEX, Powernext, Nordpool, OMEL & ENDEX.
- Enhanced flexible position and risk reporting
- Quicker and accurate decision support for traders and risk managers
- System-enforced business controls
- Automated audit support