Between 2010 and 2015, supply-and-demand dynamics in the EU-28 energy markets followed divergent trends. In power, the number of new retailers increased, while net generation decreased. Similarly, gas consumption dropped while the number of gas retailers rose.
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This proliferation of retailers led to record figures in 2015, with an average of greater than 130 power retailers and more than 80 gas retailers per country.1 However, very few of these retailers (approximately four, on average, in each market) reached a scale greater than 5 percent of sales, even in a context where regulatory focus had been evolving toward more liberalization.2 Furthermore, these market conditions triggered an inevitable loop: fragmented supply led to more intense competition, which generated thinner margins for most players and urged them to act in order to recover profitability.
The picture for the United States looks relatively similar with respect to competitive pressure, although with different nuances across two clusters: around 20 states allow some form of retail competition and all other states operate under a utility monopoly. In the former cluster, the increase in the number of retailers, sometimes coupled with declining demand, drives competition. Two examples of this group are Texas, where the number of retailers moved from around 40 to around 60 between 2010 and 2017, and Pennsylvania, where load declined at a 1 percent compound annual growth rate from 2010 to 2016.3 In the latter cluster, regulators who act on behalf of customers enforce competition to demand better customer-service performance. An example of this group is a regulator who acted directly to reduce the allowed return on equity by 50 basis points for utilities underperforming on customer-satisfaction (CSAT) metrics.
Australia’s east-coast electricity market tells a similar story. Since the implementation of contestability in most areas of eastern Australia between 2007 and 2016, new entrants have flooded the market. There are about 70 energy retailers authorized to operate in each of the major states, and every quarter, more than 5 percent of electricity customers change suppliers.
For competitive retailers in Australia, Europe, and the United States, the battle for profitability continues on several fronts: focusing on increasing and maintaining the customer base, increasing the margin or share of wallet from existing customers, and minimizing both the cost to acquire (CTA) and the cost to serve (CTS). Tried and tested methods often satisfy one goal at the expense of another; for example, offering customer discounts or increasing branding efforts across the board can help maintain and acquire customers but lowers margins and increases costs.
One area of opportunity for successful players to improve their competitive positioning across all fronts is the digital realm. Digital technology has allowed successful players to manage thousands of individual-specific customer-rate plans custom designed to maintain or attract customers. It has allowed them to improve margin by using advanced analytics to identify higher margin customer segments or opportunities to deploy new products and services based on pooled data on customers’ usage patterns, segmentation, and preferences; recent customer-service interactions; and other useful insights.
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We see most retailers begin their digital journeys with an obsessive focus on the bottom line—minimizing CTA and CTS without sacrificing customer experience. Today’s level of pressure on margins requires CTA and CTS to reach record lows; emerging attackers might manage to operate at or below a €10 CTS per customer to keep a profitable footprint while targeting a CTA below €50 per customer. These targets represent a real stretch versus today’s standards that see most large energy incumbents operating at two times, often at three times, the cost base due to legacy systems and operations. It is possible that achieving such levels of cost effectiveness is possible only through substantial and disruptive digital transformations. And, with continued competitive pressure, if incumbents want to continue operating in the (very large) price-sensitive customer segment, the use of digital tools is no longer a choice—it is an imperative.
This article synthesizes our findings from observing digital transformations across utilities of all sizes, focusing on the cost-reduction approach taken by many retailers. Digital transformations feature a massive, often disruptive, change in the way traditional retail and utility businesses are run. Most times, such transformation journeys do not entail technology development. With the nascent digitization of energy touchpoints, most of the technology needed is available and already fully deployable. These journeys have much more to do with shifting a company mind-set toward a digital-attacker approach, which means not only using different technologies but also using technology differently.
According to our research, more than 80 percent of utility leaders declared digital technologies relevant or very relevant to their businesses. However, more than 50 percent acknowledged that they were facing significant challenges in setting up such technologies. This explains why few utilities have launched a comprehensive digital transformation despite many having announced their intent years ago.
Our recent work reveals that digital transformations are often associated with the digitization of just a few internal processes to reduce work. However, a digital-attacker journey is much more extensive. We highlight six outcomes that should guide each such transformation.
Commitment from the top
There is a common misconception that a digital transformation is nothing more than an IT turnaround, though nothing could be farther from reality. However, many attempted digital transformations are led exclusively by the IT function. This often results in failure. In fact, a successful digital transformation requires the involvement of the entire organization; it is not a single-handed effort from a specific corporate or business area. A clear mandate from the top management team is necessary. Often in successful transformations, the CEO is the core promoter of the change and the one who personally oversees the progress of the program. However, journeys of this type and magnitude require the full commitment of the entire management team, with all incentives and rewards aligned toward meeting these targets.
Customer-centric culture and capabilities
As customers become more sophisticated and impatient, energy retailers’ businesses and operations must become more user oriented and tailored to customer journeys. Based on our recent work with leading energy companies, we have defined a set of five to eight high-impact customer journeys for making the digital transition, among which include “I join,” “I need help,” “I complain,” “I move,” “I pay,” and “I leave.” In the end, well-defined customer journeys drive an excellent customer experience, which is a fundamental element of a digital company culture. However, a few nontraditional competencies are also required to instill a full-fledged customer-oriented culture: design thinking and user-experience design are two core skills deployed initially in the front redesign (shaping what a customer will face) as well as in internal operations (defining how the company will execute each customer’s actions).
The adoption of a customer-centric culture will allow energy retailers to improve CSAT up to 30 percent and achieve more cost-efficient operations as usage of more efficient channels (for example, self-care) will increase, thus lowering CTS. Depending on the starting point, CTS can benefit up to 50 percent, with some processes experiencing a much more drastic improvement, as observed at large incumbents, where process-time reductions exceeded 90 percent.
Agile ways of working
Agile organizations combine a stable backbone with dynamic capabilities. From a resource perspective, agile work implies the creation of cross-functional teams that cooperate on high-priority activities and have a direct, short-term commitment to identifying a solution. From a delivery perspective, being agile means having regular deliverables—minimum viable products—and frequent update releases rather than following the traditional waterfall approach.
A fully agile approach requires that an assessment of “make versus buy” choices is conducted and that most professional agreements with third-party providers are revalidated. A partially agile company culture, which does not align vendors and providers with the company’s commitment and way of working, might limit benefits. Agile methodology proves to be distinctive in all business functions; however, support functions do not necessarily require an agile approach and can follow a more traditional setup. A European player recently drove an agile transformation of its retail business, moving over 12 months from a functional organization to a fully agile organization structured as a tribe with different squads working on customer-journey innovation.
Flexible IT landscape
In a digital-transformation model, IT is a core element of the customer-experience proposition, fully integrated with the agile way of working. There are two strategies. In one case, small and medium-size retailers, often starting businesses from scratch, fully exploit a digital-native IT infrastructure that is lean, modular, and flexible. In the other strategy, larger players, typically former incumbents with heavy legacy systems, balance their traditional waterfall model with an agile approach, which allows them to be flexible and faster in selected processes. In both cases, a change toward a more flexible IT infrastructure is necessary, as energy retailers are not only now facing customers that have increasingly sophisticated needs and require faster actions but also battling competition that is moving quickly in the market.
No matter what the infrastructure looks like, hardware is not the only variable in digital transformations. New capabilities and components, such as product ownership, design, scrum masters, modular application-programming interfaces, and cloud interfaces, are necessary.
Advanced-analytics infrastructure and competencies
Big data is a precious asset for digital players. Data are everywhere, and they are particularly abundant in the energy space. The ability to interpret data is becoming increasingly important. As a result, new skills and capabilities (such as data science and business translation) are emerging and becoming differentiating factors for success, with companies fighting to attract and retain these talents.
Beyond the discussed set of capabilities, fully leveraging advanced analytics will require having sound data governance in place that can provide regular and reliable data sets to feed the algorithms. Our research has identified more than 70 use cases of advanced analytics in energy retail with clear benefits, from the top line (for example, a two- to threefold increase in cross-selling) to the bottom line (for example, a 20 to 30 percent lower churn) and even employee satisfaction (for example, additional motivation from advanced-analytics-led recruiting processes). In a fully advanced-analytics-based world, algorithms, accuracy, and first-mover advantage will determine the winners and losers.
The digital utility: New opportunities and challenges
From a CTS perspective, applications like artificial intelligence-based chat bots, dynamic interactive-voice-response systems, and behavioral pairing are of primary relevance for driving down the cost of contact centers. From a CTA angle, margin management and antichurn initiatives have created sizeable value in a relatively short time. As an example, an energy retailer optimized cash costs through the deployment of credit-risk prevention and collection models, which lowered bad-debt provisioning by up to 25 percent.
Fully scalable, automatable business model
Successful digital transformations drastically reduce processing times and manual rework on core processes. Process digitization and automation are levers typically used to achieve these goals—for example, through the deployment of robotics that replace repetitive human work. However, it is also a lever that is often underestimated with respect to the time and resources required. A digital process does not just mean a digitally accessible rule or online procedure; it also involves the redesign of a given activity with the aim of making it lean and scalable at little or no marginal cost.
We have noticed that the trade-off between up-front cost and scalability is a theme in digital transformations. Digital transformations come at a material cost, particularly when attackers have not yet reached critical mass. Materiality should be what drives prioritization and full-process coverage. For this to happen, a phased approach is essential.
Modularization of IT features can allow for the activation of new features once the organization is ready to capture their benefits without overloading operational complexity until scale is reached. A few energy retailers are already moving quickly in this area. As an example of possible results, we have identified the potential to automate up to 70 percent of the activities in a call center, most of which have been found to either improve or maintain the customer experience, which will allow for 30 to 50 percent reduction in CTS through these channels.
In conclusion, energy-retail markets are at a turning point. Consumer behaviors, supply dynamics, regulatory frameworks, and technology disruptions are simultaneously changing. Many retailers are looking into digital transformations as a way to create value. From a cost standpoint, we believe such transformations can yield efficiency levels from 20 to 30 percent of the cost base. These levels of cost improvement are comparable to, and sometimes even exceed, the potential observed at other retail industries. As an example, telecommunication incumbents experienced a 20 to 25 percent reduction in customer care costs while retail banking achieved a 20 to 40 percent improvement in efficiency/time to service.
It is important, however, that any retailer planning a transformative journey applies learnings gleaned from similar past situations to expand the solution scope as well as to consider new, disruptive business models. Even from a systems perspective, a huge number of fragmented digital players, each with their own platforms, looking to succeed at the expense of others, is neither efficient nor in the interests of industry health. Partnerships with existing digital giants might become viable alternative options that can help establish a platform at scale and deliver real CTS benefits, particularly for smaller players.
