By Dennis Howlett
ScottishPower is currently investing in integration software and has moved to a real-time trading environment to ensure customer loyalty and improve profit margins.
ScottishPower is a global energy provider reaching seven million homes and businesses across the UK and northwest America. Its reported revenues in 2000-1 were £6.3 billion ($9 billion) and it considers that high quality customer relationship management lies at the heart of its ongoing success. But like many others in the energy business, there are many competing challenges.
The European energy market has been undergoing intense and unprecedented change that from the outside at least, looks little short of chaos. Deregulation has created conditions where entrepreneurial companies involved in marketing energy services to both business and consumer markets can expect to reap massive rewards as demand growth increases.
FT Energy for example predicts that demand growth for electricity could require an additional 69 000 MW of generating capacity over the next four years. But while there are many opportunities, structural changes around deregulation are forcing many in the industry to create new ways of working to capitalize on change inside the industry. Regulatory price pressure, for example, is estimated to have had a negative effect equivalent to £176 million on ScottishPower’s revenues last year.
In the UK, effective customer management is critical because of the impact of customer switching following deregulation. A recent UK National Audit Office report noted that since deregulation of the consumer market, £143 million was saved from competition of which £83 million was attributed to switching activities. The same report noted that some 6.5 million customers, around a quarter of all domestic users, had switched from at least one provider to another. This suggests that customers behave in a promiscuous manner in a market where price dominates customer motivation to switch.
The speed at which customers are switching suppliers is placing a strain on energy service providers’ ability to effect the switch. It is estimated that the process of switching costs an average of £35 per customer and can take up to eight weeks. So any way in which an energy provider can improve service effectiveness has to be regarded as critical to success.
Responding to demand
In common with others in the energy market, ScottishPower is responding in a number of ways. A key strategic element is offering dual gas and electricity services. Theory suggests that customers who are well served in one market are more likely to become more interested in cross and up-sell opportunities. In ScottishPower’s case, it is also emphasizing wholesale energy trading which it sees as a key market. In addition, ScottishPower is seeking to achieve synergies between its UK and US operations.
But there are important stumbling blocks to executing these strategies. The processes involved in effecting a customer switch are cumbersome. Switching costs are high because the administrative effort required is complex, demanding and lengthy. The new supplier has to notify the incumbent that a customer is about to move. The energy service provider (ESP) also has to notify the local distribution company so that billing is matched between distributor, ESP and the end customer. Meter reading agencies or owners must also be informed. The process takes between four and six weeks.
Many of these processes are conducted manually. The transition period gives incumbent suppliers time to counter attack by making individual offers. If successful, this has a disruptive effect on the process and may lead to the customer reversing their switching decision. Equally, the customer may become frustrated with the amount of time it takes to switch over and simply give up.
Lessons can be learned from other markets like telecommunications and financial services where competition is equally intense and frequently price driven. In both these markets, it became increasingly difficult for retail customers to differentiate one offer from another.
The key to success is integrating an energy service provider’s IT infrastructure to deliver customer benefits.
This was especially true in telecoms where the single voice service came at a price that was almost identical from one company to another. The mobile market showed how this could change by customizing offers. When mobile data services became available, service providers could differentiate themselves by offering new services, again customized but this time for target audiences.
In financial services, loyalty was difficult to maintain as institutions attempted to rationalize operations by reducing costs in the customer-facing organization. This happened through the increased use of call centres and more recently by the introduction of internet banking. Although each of these industries has unique characteristics, they demonstrate characteristics that are shared with the energy business:
- The existence of large networks that need to operate at full capacity
- Erosion of loyalty in the face of price competition
- An increase in awareness that customers have genuine choices
- A requirement to diversify and introduce novel, complementary services
- Profit margin pressure but with an upside potential for those customers that can be won and retained
- A requirement to turn commodities into customer driven value.
Understanding the market
A failure to understand the impact of not delivering or solving any of these problems has an immediate effect on profitability and both telecommunications and financial services found solution that exhibit common concepts.
For instance, as customers become more aware of what technology can deliver, they become increasingly intolerant of poor service delivery. As the market develops, ESPs need to scale up their operations very quickly. Handling large volumes of data is de rigeur in the energy industry but when a new service generates more data, the company must be in a position to smoothly integrate the new volumes. Any disruption to billing services can have a devastating effect not just on cash flow but the perception of efficiency.
In dynamic markets, business processes require enhancement as new services are introduced, market conditions change and as acquisitions and mergers take place. ESPs therefore need to model new processes and work flows in such a way that existing processes are not disrupted or halted altogether.
This is especially important for handling exceptions or out of tolerance transactions. For example, if a credit check fails, then ESPs need a process to follow this up that ensures the customer is correctly managed and not simply lost.
Finally, all this has to take place in a real-time environment. The speed at which markets change and the ability to bring on new customers early sets up conditions that demand time critical responses. Real-time processing that is driven by events that occur dynamically in the marketplace has a profoundly positive impact on an ESP’s ability to compete effectively. If an ESP chooses to embark on an internet marketing strategy, then potential customers will require a personalized experience. This is a lesson drawn from the telecommunications and financial services industries.
Implementing the technology
Taken together, this is a tall order and a challenge that becomes more complex over time. We believe this has to be seen as an integral part of a service strategy that is delivered incrementally. We believe the key to success comes in recognizing the need to bring an ESP’s information technology (IT) infrastructure together in such a way that delivers measurable customer benefit rapidly and with control. This means building a framework that allows the ESP to integrate its existing systems, extend these to the outside world and then connect to anyone that has a place in the value chain.
Until recently this has been very difficult because the multiplicity of billing, accounting, customer management, call centre and other systems that exist means that enterprises had to expend a lot of time and effort in getting those systems to ‘talk’ to each other. This could not often be achieved in-real time because the basic framework for pushing information to where it is needed and executing business processes in real-time did not exist. Advances in technology have changed that.
Companies like ScottishPower operate many systems and given the business requirements, it was necessary for them to create an integration strategy that is both flexible and readily adapted to business change. This is because in the past, systems were delivered on a need basis but without the requirement to integrate. The company already had an ongoing relationship with Tibco but last year took the decision to make Tibco its strategic integration partner.
“In common with others, we had to take a hard look at our IT investments. It was clear that the mainframe infrastructure we had in place in 1995 severely limited our choice of business applications,” says David Jones, ScottishPower’s chief information officer.
Its approach was to take the infrastructure out of the IT budget and present it as one open and flexible shared corporate asset that would allow each of the businesses of ScottishPower complete choice of application, along with a standard set of integration tools, allowing ScottishPower to adopt a best in class application strategy. This gave the company the freedom to develop a flexible framework as the foundation into which any application was inserted.
This new approach was delivered from 1996 onwards and Jones is ‘very comfortable’ with estimates that his organization has delivered the integration infrastructure for around 50 per cent of the cost it would have consumed if this major change in IT had been handled as a series of projects conducted under the auspices of business unit managers.
Back in 1996, ScottishPower developed a bespoke, batch-based integration facility. However, with the UK wide introduction of New Energy Trading Agreements (NETA) in the last year, energy suppliers have been placed in a fresh trading environment. This fuelled the need to move to a real-time framework, while not abandoning their existing investment because batch retains its place and value to the enterprise. The new project mirrors the earlier approach.
“We have proven the value of defining the framework as a corporate asset. Taking that principle as the basis for the work we are currently undertaking means we will make the same sort of cost savings as we did back in 1996,” says Jones.
“The depth and breadth of applications we need mean we will both develop applications and acquire packages. The trading experts will tell us what we need, so we have to be prepared for anything they decide upon,” explains Jones.
However, for this new integration framework, Jones is clear he needed a strategic business partner relationship rather than the more traditional client/vendor relationship. The technology must be capable of extensions in a variety of ways, but also kept simple. “I would not feel comfortable if we had to reintegrate our already integrated systems,” he says.
Selling these ideas into the business is not a trivial matter. Each business group has to be convinced that new technology will deliver the stated benefits. Recently, ScottishPower chose to demonstrate the benefit of integration by creating a portal application that handles exceptional and special situations. This was done because exceptions have a significant impact on both the customer and the business.
There are for example many cases where it is easier for customers to self-serve themselves. A good example is that of a handicapped person. Blind people for instance need Braille or large-text fonts to manage their own account. From the business perspective, exceptions place the greatest strains on existing systems because they invariably require information to be presented in a personalized manner. In turn, that information is frequently stored in discrete applications that may reside anywhere.
The portal project gave both Tibco and ScottishPower the opportunity to demonstrate how the use of an integration suite could successfully bring many systems together, managing multiple business processes in real-time. In this case, Tibco brought its full suite or ActiveEnterprise and ActivePortal applications to bear on the problem.
Tibco’s products all use the Tibco Rendezvous distributed messaging architecture as their foundation. This means that potential bottlenecks inside the systems is efficiently managed. It operates on a publish/subscribe and request/reply basis that handles information on a needed basis. Applications can select from a variety of service qualities that include reliable, certified and transactional, depending on the type of transaction being executed.
Rendezvous messages are self-describing and platform independent, with a user-extensible type system that provides support for data formats such as XML. Tibco has established a reputation for delivering massively scalable messaging. In environments like ScottishPower, where scaling demand for self-service applications are unpredictable, this provides huge advantages because it means applications are unlikely to be impacted by demand spikes. From the customer perspective, it means that regardless of when they need to access ScottishPower systems their experience is consistent.
The underpinning message broker performs seamless and automated message transformation and business object mapping. Tibco application adapters allow ScottishPower to readily plug-in off-the-shelf applications as well as any database that needs to return information to the portal.
A key component is the ability to graphically map and modify business processes. This means that as ScottishPower tweaks its portal applications, behind the scenes so that application engineers can try out new business scenarios to discover the best way of delivering services to the customer without impacting existing operations. The ActivePortal suite allows ScottishPower to both readily develop and deploy applications.
The portal builder component provides core services like customization, aggregation of content and services, personalization, presentation, security, access control and delivery. Pre-built interfaces to standard applications make development quicker and inbuilt alerts ensure that the latest information relevant to the user is available on demand.
Using this suite of tools and integration applications, ScottishPower has successfully abstracted information from a variety of back end applications into a single portal and demonstrated that significant savings can be achieved in handling exceptions. Apart from limited advice and training in the use of Tibco products, ScottishPower has not needed to spend a great deal of time on implementation services because the Tibco suite provides a lot of pre-built functionality aimed directly at the energy sector.
ScottishPower is betting its business on Tibco products and the customer portal is just the first step in what Jones expects will be a succession of projects that over time will deliver incremental return on investment. In the past, ScottishPower has publicly stated that messaging middleware has delivered a return of around 400 per cent on the original investment. The strategic adoption of Tibco could see that figure increase dramatically over the next few years as more projects are brought on stream. “This is a long term investment and it is one we made after very careful consideration,” concludes Jones.