ISG Provider Lens™ Utilities Industry - Services and Solutions - North America 2021 - Intelligent Business Process Management Services
Covid-19 Pandemic is Pressing Utilities to Extend Resilience Across the Value Chain
Utilities were traditionally focused on evolving their infrastructure to deal with extreme weather events and natural disasters. However, the COVID-19 pandemic has exposed personnel related risk across the entire value chain, from wholesale, generation, transmission and distribution to retail, vulnerable and subsequently compelled to address resiliency in operations, supply chain, workforce, cybersecurity, finance and capital planning. ISG, as an advisor that has helped several of the world’s leading utilities navigate their digital transformations, believes that to build a successful, competitive and future-proof utility requires a focus on strengthening the technical/digital foundation, transforming grid operations, continually improvement of cyber security, digitally enabling the workforce, and improving customer experience through digital channels. It sees the following trends in the global utilities industry:
Renewables driving M&A
Companies are rebalancing and rationalizing their portfolios in accordance with environmental, social and governance (ESG) efforts and commitments towards net-zero targets; governments also are offering incentives and directives. As a result, more mergers and acquisitions (M&As) and other consolidations are expected to take place in the energy and utilities industry across the transmission and distribution and retail value chain in 2021 and beyond.
Growing penetration of distributed energy
Utilities are moving rapidly towards wind, solar and other green sources of energy and are reducing their dependence on coal and fossil fuels. The rapid penetration of renewables, storage and distributed energy resources (DER) is impacting the traditional operating patterns of transmission and distribution companies and system operators. These companies now require more flexible and advanced capabilities for supply and demand forecasting as well as grid inertia assessments, network modelling and optimization, fluid market messaging and collaboration, automated demand response, situational awareness and advanced training tools. Providers of next-generation IT and digital transformation services in this space are deploying data management and data science capabilities to develop the aforementioned operational competencies for electric utility operators.
Grid modernization in focus
Basic infrastructure upgrades, smart metering, automated outage prediction, resilience under natural calamity and grid modernization are high on the agenda of every utilities company. The growing reliance on renewables and the impacts of climate change are driving substantial investments towards grid modernization and maintenance, more sensor use in power and water networks, and the development of more sophisticated analytics, forecasting, modelling and optimization capabilities. The industry is investing in grid resiliency programs that will allow for more robust responses to tail events.
Competition from niche players, particularly in deregulated markets
Large utilities players are under pressure from regulators to keep energy prices low and are losing market share to nimble, asset-light competitors, thus impacting their profitability. Providers of next-generation IT and digital transformation services in this space are helping utilities companies to virtualize their infrastructure, redistribute work locations and use bot-based automation to eliminate costs and remain competitive.
Increased competition from other industry and new revenue streams
With the advent of renewables generation and electric vehicles (EVs), the lines of operations between utilities and adjoining sectors such as oil and gas are blurring. Over the last few years, some of the large oil and gas companies have made bold investments in the utilities sector as part of long-term plans to decarbonize their energy portfolios. This trend is likely to persist due to the reduced demand caused by the pandemic and as oil companies move past the immediate impact of the oil price drop. As a result, utilities companies may increasingly work together or compete with oil companies. Furthermore, as the demand from traditional sectors matures, the massive shift towards electric vehicles (EVs) and charging infrastructure will provide a new revenue stream for utilities.
Legacy landscape and resistance to change hindering digital adoption
The utilities industry faces steep challenges in modernizing the customer service infrastructure. Given the sheer size and scale of utility customer information systems (CIS), replacing them requires significant time, capital and organizational energy. As a result, many companies in this space tend to delay modernizing their CIS until the legacy system is on its last legs. Moreover, as it is a highly conservative sector, insufficient attention to organizational change management (OCM) has been hindering the acceptance of new technologies by utilities stakeholders. Providers are helping companies address these challenges through: reusable and reliable execution frameworks to de-risk CIS transformation; tools and accelerators to minimize the CIS replacement cost, timeline and risks; and investments in training and persona-based organizational change management initiatives to drive stakeholder acceptance and unlock the true potential of digital transformation.
Digital customer experience
With investments starting to gain pace, utilities are investing in digital customer service platforms to facilitate a more seamless and multi-channel customer experience. It is no longer just about service orders and making payments; this sector is expected to interact with customers across a variety of channels such as voice, text, social media and in person. To meet this demand, many companies in this space are investing in 360º customer platforms, chatbots and other self-service technologies that enable a digital customer experience. Providers are helping them deploy advanced analytics to anticipate customer needs, reduce customer call volumes, improve efficacy of outbound calling, reduce high debt and enhance the customer experience while also redesigning the digital customer experience and call center performance.
Strong demand for digital workplace services and cloud-based solutions
The top priority of utilities in the new normal is to protect employee health and safety while enhancing both field and office productivity. This calls for rapid and well-informed decision making for adopting remote digital workplace technologies, including digital collaboration tools and automation of repetitive tasks, in a secure manner. Providers in this space have built agile work-from-anywhere models with enhanced cybersecurity, enterprise digitization and data transparency for enterprise clients. Additionally, there is a growing trend towards the use of cloud-based solutions that enable greater continuity of operations and enhance customer service. However, the industry is facing challenges in availing these solutions. Subscription costs, specifically from cloud service providers, have traditionally been categorized as operations and maintenance (O&M) expenses, for which on-premises software licenses can be capitalized. Given the incentives for minimizing O&M and maximizing capital, utilities face financial disincentives to leverage some of the most advanced, cloud-based solutions. Several leading next-generation IT service providers are addressing this challenge by building assets that the industry can use to capitalize on cloud technologies.
More digital transformation deals and lead system integrator capability
With the rapid digitization and increased investments in modernizing grid and IT-OT systems, the utilities industry is seeing more digital transformation sourcing engagements compared to traditional IT managed services and business process management (BPM) deals. Agile and hybrid-agile approaches are beginning to dominate. Furthermore, digital transformation deals are leaning on single system integrator as the main providers of end-to-end services, unlike in the past where there were multiple vendors engaged in different kinds of services for the same program. Utilities are usually looking for a single point of accountability with the system integrator, with the SI even taking the lead bringing in consortium of partners (as needed) to deliver end-to-end services.
Business outcome-based services/pricing getting traction: BPM and IT managed services have been used for many years, but newer deals are seeking more business outcome-based services and service-level agreements (SLAs) compared to traditional IT SLAs. Concurrently, providers are confident about promising higher productivity/outcomes while negotiating sourcing engagements. Outcome-based pricing is particularly gaining favor among these companies, specifically for the mature stage of digital transformation.
Preparing the utilities workforce of the future: The utilities industry is facing a major crunch in digital skills. There is a shortage of qualified talent for new jobs, many of which require competencies in artificial intelligence (AI), machine learning (ML), robotics and advanced analytics. With the growing importance of digital technologies, the industry is pushed to enable technologists across their organizations, put tools in the hands of business users, and reshape the traditional role and approach to IT. Therefore, training and upskilling existing workers on emerging technologies is crucial. Several of the world’s leading utilities companies are collaborating with providers to upskill the affected workforce on such digital skills that enable and empower them to focus on higher-value tasks and activities.
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