New CEOs for the New Utilities Industry

During the past couple of decades, the utility industry has gone through a series of changes, some of them wrenching.

Pennwell web 400 330

by James Hendrickson and Joseph Van den Berg, Booz & Co.

During the past couple of decades, the utility industry has gone through a series of changes, some of them wrenching. Commodity markets, particularly for natural gas and competing fuels, have changed. Deregulation has partially unbundled the industry’s traditionally vertically integrated business model in North America and abroad and created a patchwork of markets. Advances in technology have begun to transform the industry. Highly efficient alternative generation, the smart grid, including new metering systems, and advanced end-use technologies are on the cusp of changing how electricity is generated, delivered, used and paid for. Big choices must be made, and although the data available to help make these decisions is exploding, few companies know how to interpret it all.

Pennwell web 400 330

Given the challenges in this environment—economic, technological and strategic—the profile of the utility CEO in North America and elsewhere must change. The traditional profile of today’s utility executive, politically astute and savvy in finance and regulation, must be expanded. The new utility CEO must have the vision of a longer-term architect who can align the capabilities needed to thrive as these new market and technology realities shape the utility industry of the future.

Pennwell web 400 297

But is the industry making the changes that are needed? Judging from the results of Booz & Co.’s 2012 study of CEO succession, the answer is no. True, the turnover rate among utility CEOs has been high: Nearly 20 percent of CEOs in the North American utility industry were replaced in 2011. This is more than 2 percentage points higher than the average for utilities worldwide and more than 4 percentage points higher than the global cross-industry average. Yet these CEOs’ average age at replacement was 64, and 88 percent of incoming CEOs were recruited from inside their companies. Worldwide, the figures were similar (see figure on Page 30). With such a high proportion of leaders’ coming from within, the industry will face considerable challenges in transition to a fully digitized utility environment.

The Evolving Utility CEO

Utility CEOs have long been seen as careful incrementalists who manage their companies through regulatory, market and political cycles. As a result of such cycles, these CEOs’ traditional operational and engineering focus shifted in the early 1990s to a greater focus on the regulatory and financial side of the business. Those concerns, however, are giving way to a new era in which the old skills still will matter, but sustainable performance will require CEO architects who can redesign their companies to create the business models and distinctive capabilities needed to meet upcoming challenges.

New Challenges

Digitization. The rise of new technologies is rapidly transforming many industries, and the utility business is no exception. Ubiquitous handheld devices, pervasive sensing apparatuses, big data analytics, digital supply chains, search engines, social networks, location tracking, interconnected real-time digital infrastructure—all are coming together to change how utilities handle data and how consumers perceive their utilities. The effect on the utility industry will be profound, and it will be up to the industry’s CEOs to develop the capabilities needed to benefit from this transformation.

The smart grid. The smart grid concept has been around for some time, but the technologies required are only now coming together to become standard to the industry. The use of smart meters and sensors that can monitor the overall grid will multiply in coming years as utilities look to balance generation and distribution with customer demand. Utility CEOs will need technological expertise and customer insight, as well as traditional political intuition, to deploy these technologies efficiently and effectively for the highest operational and customer impact.

The new work force. A key issue for every utility CEO will be finding, training and retaining employees—from line workers and managers to upper-level executives—who can support his or her company’s efforts to meet the challenges of digitization while maintaining the technical know-how to keep the lights on. The utility work force overall is not young, and many utilities risk losing much of their institutional knowledge as older employees retire. At the same time, younger employees often take their experience to other industries. Finding the engineering talent, technological savvy and marketing skills to design and manage the move to digitization likely will become a distinctive capability for utilities. That capability will involve a multilevel response on the part of CEOs and their executive teams. Companies must identify the skills needed and recruit the right people to fulfill those needs—no small task, given that many high-quality applicants might not perceive utilities as the most attractive places to work. That, in turn, will require utility companies to examine their traditional corporate cultures, and perhaps work to transform themselves into workplaces more in keeping with the expectations of younger workers. In light of the changes that are overtaking the industry, utilities also must develop clear career paths for their new employees and craft the training programs needed to enable their employees to reach those career goals.

Customer-centricity. Traditionally, utilities have not been known for their close connection to their customers. Most of the interaction involved customers’ complaining about bills or that the lights were off. With the implementation of the smart grid, however, that relationship will be transformed—a huge opportunity, but a considerable challenge, nevertheless. Customers likely will become increasingly active in the electricity demand equation, potentially with utilities’ actively managing customer demand on behalf of customers, which will require a much deeper understanding of consumer behavior and motivations. Utilities must also develop new channels and lines of communication with customers, which can only help inform key decisions such as how and when to make use of such new innovations as social media. The wealth of data generated will require new capabilities in information management and analytics, and although the potential benefits are clear, CEOs will need a level of marketing savvy that has not traditionally been part of their tool kit.

Megaprojects and risk management. Utilities around the world have many megaprojects in the planning stages or under construction, including more than 75 new nuclear plants. Managing their permitting and construction is a huge undertaking, especially in the case of nuclear projects because of the lingering effects of the 2011 disaster at the Fukushima plant in Japan. The utilities industry must complete these projects successfully if the industry is to maintain its credibility in an increasingly wary world. In such an environment, these megaprojects must be completed on time and within budget. CEOs must ensure that their companies have the right project management capabilities from thorough up-front planning and robust risk management to hands-on project management and strict delivery controls.

Capabilities and the business model. All of these initiatives will cost money—lots of it. And they will introduce further uncertainties in utilities’ business models, with unknown effects on their revenue models. The capital investment required to renew the current infrastructure and meet new mandates for the smart grid and new generation technologies—while building the capabilities needed in the future—likely will challenge even the most solvent utilities. Simply raising rates will not be an option with widespread appeal. Delivering attractive returns to shareholders while keeping delivered energy costs economically reasonable and competitive will require complex, well-informed trade-offs. In this context, CEOs must maintain the ability to ensure a low-cost operating environment even as they plan for investments and capabilities development.

Characteristics and Capabilities of New Utility Executives

The utility industry must move away from its long-standing CEO profile and look for CEOs who can meet the coming challenges head-on. Important characteristics of successful utility CEOs and their direct reports in the future include:

Outside experience. Promoting from within is good practice, but the tradition should not be a constraint when building the executive team.

Grounding in core business operations. CEOs should have broad-based performance and operations management experience, balanced with traditional regulatory and legal expertise.

Technological savvy. Every top manager will need increased expertise in areas such as technology, risk management and the technology demands of customers today.

Increased top-level steering abilities. It is the C-suite’s task to re-architect their companies’ business models. Thus, they must delegate less and manage processes and functions more directly.

Partnering orientation. Senior and line executives must work closely together to develop a more collaborative decision-making process.

Now, more than before, utility CEOs must understand what it means to operate in a competitive marketplace where making money will become even more difficult, especially given the risks involved in every significant capital investment. CEOs of the future also must be able to focus clearly on their customers—all those ratepayers who have far greater transparency into how much they pay and what alternatives exist. And they must be comfortable with the next generation of digital technologies to better understand how high-tech will transform the utility business. Finally, CEOs must re-examine their business models and the capabilities underpinning those models to make sure they are prepared for the future.

Authors

James Hendrickson is a Booz & Co. partner in Washington, D.C. He specializes in competitive and regulatory issues, including strategy, growth architecture, and performance transformation, for electric, gas and energy companies.

Joseph Van den Berg is a Booz & Co. partner in Washington, D.C. He has been involved in the technology aspects of the utility industry and its infrastructure suppliers for 30 years. He also has regulatory experience in support of energy and infrastructure companies throughout the United States.

More Electric Light & Power Current Issue Articles
More Electric Light & Power Archives Issue Articles

More in Home