The utility industry is in turmoil. Ongoing revelations about “abuses” of market power and “misguided” employees executing “round-trip” trades are “front-page news” known not only to regular readers of this magazine but to the general public as well. These revelations have led to embarrassing consequences for several CEO’s and have created an atmosphere of mistrust and uncertainty. Past actions, such as various growth strategies, have failed to deliver. Utilities have struggled to achieve expected merger benefits and, in many cases, market value has been destroyed. New business ventures, such as telecom, security services, HVAC services and others have not produced any spectacular successes – while consuming enormous amounts of management time and energy. On top of all of this, there is tremendous uncertainty as to the direction and timing of regulatory actions – from restructuring to Performance Based Ratemaking (PBR) to the establishment of Regional Transmission Organizations (RTO’s). And, investors are demanding more. They are looking for companies that can provide stabile, predictable earnings growth, and “truth” in financial reporting. Industry forces and events, coupled with future uncertainties about the economy, regulatory policy, and investor demands create an environment of great uncertainty for utilities. IT has had a role to play - from attempting to “make the merger numbers work” to supporting the launch of new businesses. But, it’s been difficult, as the uncertain business environment has had an enormous impact on IT. Even well executed IT projects have “failed” to deliver sustainable value due to “unforeseen” events and market place changes. How much has been invested in various initiatives – only to have industry forces and business events invalidate their usefulness? These initiatives did everything “right” – but ultimately failed to deliver the expected business value due to changing market place conditions. How can a CIO develop an IT strategy that will survive in the face of market place uncertainty? How should IT be positioned to support the changing business environment? Where does IT go from here? These are the compelling “cross-roads” questions that inextricably link industry forces and business responses to IT strategy. The question for utility executives and CIO’s is how to meet the expectations of key constituents today while taking action to meet their needs in the future. The key to answering this question is through scenario planning. Scenario planning provides the CIO a very effective way to bring “resilience and flexibility” to the IT strategy. Rather than being “frozen” in time, scenario planning provides a “structure” for considering the future and produces a road map of leading indicators, choices, and potential consequences. Done properly, scenario planning provides a way for IT to “hedge its’ bets” and evolve with the needs of the business in an environment of change and uncertainty. Traditional Thinking
Traditional approaches to IT strategy have been designed to align IT with the business. The various approaches share a number of similar characteristics. Most consider the business from a “top-down” perspective. They begin with a rigorous analysis of the business strategy to organize, analyze, and understand key business drivers and business needs. Next, they produce a set of architectures or “blue-prints”. These architectures are used to describe the “characteristics” of the IT environment – from business application areas to the technology infrastructure. These architectures come in a variety of shapes and sizes with some being more detailed than others. Most approaches to IT strategy also develop a governance model. The governance model includes a variety of decision-making principles and policy positions along with a definition of the internal operating structure and practices. This is intended to promote a better understanding between IT and the business, provide greater transparency around technology investments and decisions, and improve IT operating performance. Finally, most approaches develop a plan intended to put the strategy in motion. In some cases, the plan is very detailed and identifies specific, application-oriented initiatives. Traditional approaches to IT strategy are usually satisfactory when applied in a “more-or-less” predictable business environment. But, they often fail to consider the potential impact of business uncertainty in a meaningful way. Thus, when the business must respond to unforeseen market place conditions or events, the IT strategy is “frozen” to a particular business strategy and, as a consequence, IT is unable to satisfactorily respond to changing business conditions. At this point, the IT strategy begins to loose alignment with the real needs of the business. The IT strategy is necessary, but not sufficient, in meeting business uncertainty. The promise of IT as a “value catalyst and synergy enabler” – especially in the face of growing complexity and uncertainty – is difficult to fulfill. It’s hard enough to manage IT in a relatively stable environment let alone manage it when the “rules of the game” change overnight. As a consequence, many technology initiatives have failed to deliver real results. For example, consider a scenario whereby the PUC enacts a rigorous PBR program with a 90-day implementation time frame in your state. What would your answers be to the following questions?
- Would the current architectures support access to and usage of data to support the necessary monitoring, reporting, and decision-making requirements?
- How would new business processes be supported? What impact would they have on the current architectures, if any?
- How would this affect other programs and initiatives? Which ones should be put on hold? Which ones should be accelerated?
- Would current IT initiatives provide “value” – or would the work have to be “redone” or “scrapped”?
- How prepared is your organization to support the new business needs? Do you have (or will you have) the right mix of staff or access to the appropriate resources?
Most utilities don’t need to completely “rethink” their entire IT strategy – this simply does not make sense. Substantial time and effort has gone into formulation of the strategy and, in most cases, various tactical programs are underway. However, developing business scenarios and determining the likely business responses to the scenarios will help augment the IT strategy. These business responses will inevitably lead to a series of IT actions – and, ideally, these actions should be sustainable over a variety of business conditions. This will lead to the development of an IT strategy that is both robust and viable under different conditions. Time should be spent considering key question such as:
- What work could be done that positions IT for a different environment tomorrow while simultaneously providing value today?
- Where could IT place some small bets that would help keep its’ options open in the face of a changing market?
- What are the leading indicators that “signal” a change in the market place?
- What choices, or paths, would IT have in response to those signals?
Let’s set the record straight. Scenarios don’t predict the future. You can’t choose a scenario and have it come true. Rather, scenarios are a way to engage in creative thinking and to begin developing robust alternatives. Scenarios are intended to represent one possible outcome given a number of uncertainties. In addition, it’s important to consider the “right” approach for scenario planning. The scenarios should be relevant, internally consistent, and not far-fetched. We use our “Utility Industry Scenario Templates” as a means of developing scenarios specific to an organization. This helps to focus the discussions, reduce discovery time and allows the process to move quickly. It is also important to achieve a proper balance between the effort and the results. Again, this is not about rethinking the entire IT strategy; it’s about considering the impact of future events and identifying ways to be prepared. Finally, scenario planning must be viewed as a planning tool – not a predictive tool. A scenario-based strategy helps position the IT organization for success, as uncertainties about the future become present realities.
IT scenario planning is not a simple process. A number of elements are required to ensure its’ success. There must be a broad level of organization support with participation from each major business area. It is essential to have organization wide participation in the development and assessment of scenarios.
Ideally, a senior level executive or the CEO should sponsor the process, and the CIO and his or her direct reports must also be involved. The time to complete the process should be consistent with the scale of the organization. Thus, it should account for factors such as physical locations, jurisdictions, operating subsidiaries, and others. The process should move at a rapid pace – it’s important not to agonize over being “precise”. Finally, 3rd party facilitation must be used to provide an unbiased point of view, to provide insights about industry trends and issues, and to “tee-up” and address “unpopular” topics and issues.
Nearly every major business decision has significant IT implications. IT needs to consider and pursue investments that are stable in uncertain business environments or provide ways to bridge from one business environment to another. Done properly, scenario planning will lead to the development of an IT strategy that is both robust and viable under different business conditions. Scenario planning yields an analysis of the options available to support a broad, and robust set of strategies and tactics. Thus, scenario planning provides real value by identifying the strategic responses across scenarios and the similarities (“platforms”) and differences (“bridges”) in response to those future conditions. It also highlights “gaps” in the current IT strategy that may, under certain conditions, leave IT exposed, and identifies the leading indicators (“signals”), key events, and likely course of actions under different conditions. This provides a way to “hedge” IT investments in the near term with clear line-of-sight to potential future decisions. This way of thinking is consistent when operating in a marketplace of uncertainty. Key Conclusions
The pace of change in the industry is going to continue; and this change will take place in a market place full of uncertainty. Over time, the rate of IT investments will begin to rise as utilities seek ways to achieve operating efficiencies and improve performance through systems and technology. To be prepared, IT can no longer rely on past practices – they are insufficient for the needs of the future. IT scenario planning provides a window to the future that helps prepare IT for future uncertainties.