Ian S Gibson, Andersen Consulting, Australia
It is almost impossible to escape the extravagant stories in the media about the benefits of e-commerce, yet the same few examples are rolled out again and again to illustrate success. There are also many examples of failure, and little evidence of long-term profitability from those companies that claim success in the e-commerce world.
Many traditional asset-intensive businesses, such as utilities, currently face the dilemma of deciding whether e-commerce represents a strategic imperative. Does it really produce tangible business benefits? If the answer to this question is yes, then the issue becomes: how?
As well as having to respond to the e-commerce revolution, utilities are undergoing fundamental and continuing change. These industry changes include deregulation and disaggregation of state-based industries to create national energy markets; progressive privatization and the introduction of retail contestability; vigorous price-based competition from retailers driven by market-share objectives; and increasing regulatory and environmental scrutiny.
As industry change proceeds, utilities are increasingly forced to question their basic assumptions about how they operate and what it will take for future success. Loss of market share and declining margins, increasing demands by owners for commercial returns, and the potential threat of encroachment by non-traditional industry players, are forcing utilities to search for new ways of doing business, new sources of revenue and innovative ways of protecting existing markets.
At the same time, the use of the internet is exploding as individuals and corporations begin to recognise the potential of e-commerce. Already about 250 million personal computers have internet access, and consumers are spending an average of one hour each day on-line. Also, it is projected that by 2003, 20 to 40 per cent of all revenues, depending on industry, will be generated through e-commerce. In the electric utility industry, the key areas of impact of e-commerce lie in its ability to significantly lower co-ordination and transaction costs, which in turn results in a new set of business characteristics. In particular, it:
- dramatically alters business and market economics, in part by providing for greater collaboration and specialization
- provides for a detailed and personalized understanding of and interaction with buyers and sellers
- significantly increases the market power of customers by removing the asymmetry of information between buyers and sellers
- possesses real first-mover advantages due to the economics of increasing returns
- creates new roles not previously thought of or technically possible, such as portals
- substantially accelerates the shift in the value/cost curve: the speed at which value propositions change.
Figure 1. Components of average cost to serve
Utilities need to examine the opportunities and threats that e-commerce creates, and they must act. Deregulation opens up the market and e-commerce allows easier consumer access to pricing information. This results in increased contestability and price-based competition, and means that an energy retailer’s average cost to serve is becoming a critical indicator of its retail performance and likelihood of long-term survival. E-commerce has the potential, through applications such as customer self-service and electronic bill presentment and payment, for a substantial impact on the average cost of serving customers (Figure 1).
The fundamentals of the industry are changing, and this means new opportunities and new threats. For example, the dramatic change in business characteristics represents a real threat to the valuations placed on traditional utility businesses. Start-up New Zealand energy retailer First Electric attracts customers using the internet at a significantly lower cost than the values implied by recent mergers and acquisitions (approximately $100-$250 versus $500-$1000), raising the risk that companies could be overpaying for retail energy businesses.
As utilities are finding out, staying the same is not an option. With the regulatory safeguards removed, value shifts from physical assets to intangible assets, such as brands, customer relationships and intellectual capital. This represents a seismic movement in the electric utility industry, and requires a corresponding rethinking of the utility mindset and approach to value creation.
Figure 2. Prevalence of utilities with an e-commerce strategy. February 1998 figures based on all US utilities
In view of a recent survey of utility executives which indicated that only five per cent of utilities have an e-commerce strategy (Figure 2), it seems that most utilities are committing the most unforgivable of all internet sins – dawdling. In a rapidly changing industry environment, this kind of hesitancy towards exploring new business strategies does not bode well. Action must happen sooner. As technology enables companies to source all the components of the supply chain, it becomes cheaper to act than to examine. The approach utilities should be taking to e-commerce is to think big, start small and scale fast. The wait-and-see approach cannot be an option.
The danger for utilities, and other traditional businesses, lies in overlooking the impact of e-commerce until it is too late. As it is now, few utilities grasp the true potential of the internet and e-commerce, and this lack of understanding soon could become a company’s greatest competitive disadvantage. The internet enables more than real-time, low cost communications; it enables completely new business models that are possible when companies can have high velocity, high content interaction with everyone in their commercial sphere – not just end customers.
Those utilities whose e-commerce strategy consists only of maintaining an informational company Web site are ignoring the bigger picture. There are several factors that make this risk real, including the possibility that utility executives will:
- be swamped by successive waves of change and not devote enough attention to assessing the implications of e-commerce on their business (the perception that e-commerce is important but not urgent)
- have a poor understanding of the implications of e-commerce and/or hold one of several misconceptions, such as that e-commerce is only a retail-business or sales-channel issue
- underestimate the magnitude of change involved, due to the human tendency to be over-confident of one’s depth of knowledge and understanding.
Figure 3. Utility web site penetration (Andersen Consulting analysis)
The proliferation of utility Web sites seemingly indicates a growing recognition by utilities of the importance of e-commerce for their business (Figure 3), but it is relatively easy for a utility to develop a Web site. It is much more difficult to develop and implement an e-commerce strategy. Unfortunately, it is also difficult to assess a utility’s e-commerce strategy directly. Web sites may not be a company’s entire e-commerce strategy – for utilities it should not be – but Web sites can act as a window to a company’s internet soul.
Measures of success
To judge how well utilities are realising the potential opportunities and benefits from e-commerce, Andersen Consulting measured the level of sophistication and quality of execution of utility Web sites. In total, 144 utility and non-utility best practice Web sites in the USA, UK, Australia, New Zealand and Hong Kong were assessed and compared to non-utility Web sites that are generally regarded as best practice. The results showed drastic variations.
The top utility Web site, Utility.com, ranked second among all Web sites assessed, ahead of such companies like Federal Express, CNN and even Amazon.com. Utility.com outperformed the worst utility Web sites by more than nine times on key functionality measures such as the range of interactivity and the ability to conduct on-line transactions.
Other key findings from the evaluation were:
- Incumbent utilities are being overtaken in the on-line environment by new entrants. The top two evaluated utility Web sites were that of the US start-ups Utility.com and New Energy (formerly New Energy Ventures). The message is clear: the biggest threat for incumbents will come from a new entrant prepared to challenge the prevailing view about how business operates, and its performance expectations.
- Significant opportunities exist for utilities to improve their Web sites, based on a comparison with the best overall utility Web sites evaluated. The variation in the quality of utility Web sites is significant – the best-performing site outperformed the worst by a factor of more than nine on functionality – the key source of competitive differentiation.
- Most utility Web sites are not indexed well, which makes it difficult for key stakeholders to access them. Generally, the overall quality of execution of the Web sites was good, the exception being the quality of indexing with search engines. The danger from poor promotion is that it leads to significantly under-estimating the real potential demand for on-line service from customers, and ultimately under-investment which leads to decay of their web site.
- The sophistication of US utility Web sites is increasing at a faster rate than those of Australian utilities, so that in 1999 they are on average 49 per cent more sophisticated, compared with only eight per cent in 1998. US Web sites are 42 per cent more functional than UK sites, even though the UK has made great progress in electric deregulation. In fact, all of the top ten utility Web sites are US sites. While other countries may have a higher penetration of utility Web sites than the US, most are plain and simplistic by comparison.
If the rapid improvement of US utility Web sites continues, they will develop a commanding lead, which could be leveraged across a number of countries as the utility market globalizes. It would be difficult for an incumbent utility to overcome this disadvantage.
Sophistication refers to an evaluation, taking account of quality of content, complexity of transactions and interactions, regularity of site updates and perceived usefulness of the Web site’s information to the company’s customers and other stakeholders. With sophistication goes execution – an assessment of how well the Web site operates technically and its user-friendliness. This involves factors of aesthetics, technical design and navigation around the site.
This failure to seize e-commerce opportunity through utility Web sites supports the conclusion that few utilities grasp the true potential of the internet and e-commerce. This lack of understanding soon could become a company’s greatest competitive disadvantage. Utilities are missing out on an opportunity to dramatically improve the economics of their business by using e-commerce. As a result, they run the risk of being overtaken by new players. Utilities also need to recognise that it takes a lot to create an effective Web site. The results highlight the importance of getting Web strategy right, given the potential impacts from a poorly designed Web site – wasted expense, lost customers, forgone revenue and eroded brand.
Figure 4. E-commerce key success factors
What utilities need to do is think big, start small, evolve quickly and be ready to scale up fast (Figure 4). Most utilities are undertaking e-commerce initiatives that are largely uncoordinated and potentially dysfunctional, instead of developing an initial view about their future direction; undertaking a series of pilots and small projects to build experience; learning by doing proactively; and quickly evolving based on how customers respond and the market develops. They then need to establish a solid and robust infrastructure to enable them to ramp-up quickly when demand increases.
While this might sound straightforward, achieving it is not easy. Some of the key problems include:
- Difficulty in identifying where to position the business in the e-economy; for example, what are the emerging positions and where will value shift over time.
- A tendency to omit the organization infrastructure necessary to properly manage e-commerce activities; for example, responding to e-mails, integrating with customer-service functions, establishing clearly defined roles, responsibilities and management processes. An indication of how far behind some utilities are in establishing basic infrastructure is the length of time it takes to respond to an e-mail message submitted from their Web site. A recent study by Andersen Consulting found an e-mail ‘black hole’, with only 27 per cent of utility companies responding within 24 hours. Moreover, 34 per cent of utilities failed to respond at all, and 11 per cent provided an e-mail facility that did not even work correctly.
- Implementing a poor technology architecture that does not provide the flexibility to scale fast, and provide the functionality and robustness when usage takes off. Unfortunately, some organizations are currently finding this out, to the detriment of their customers and themselves. Some of the major US sites in business-to-consumer transactions have suffered highly visible service interruptions, due to software upgrade malfunctions, turning away many customers.
- Developing the right culture to nurture and thrive in the e-economy. The internet is about ‘learning by doing’, which is not typically associated with traditional business practices. The cultures of many traditional industries are based on detailed planning, meticulous execution and predictable outcomes. However, lessons from the few great e-commerce success stories demonstrate that a winning approach is based on learning by doing and being highly responsive to customers. This may prove to be the key reason why new entrants will ultimately succeed, while most incumbents fail. E-commerce has the potential to dramatically alter business and market economics and render traditional business models obsolete. The issue for traditional industries like utilities is not whether e-commerce applies to them, but rather how best to respond to the opportunities it provides, and to develop the capabilities and culture to realise these opportunities. Traditional utilities should remember that if they do not figure it out, someone else will. A 50 year head start in the physical world means very little in the on-line electricity market.