20060630 Paving the Path to Change

8/7/2019 20060630 Paving the Path to Change

http://slidepdf.com/reader/full/20060630-paving-the-path-to-change 1/10

Paving the Path to Change: Asset Optimization in the Utility M&A Era

By Paul Halpin and Amin Bishara, Capgemini

Although mergers and acquisitions are forged in the boardroom and fueled by Wall Streetinvestors, their successes are driven at the plant level, where the ultimate outcome

depends largely on how willingly plant managers embrace and implement the inevitable

changes.

With M&A activity heating up in the industry, most power companies are launching or

planning M&As to achieve one or more of the following major business objectives:

1. Risk management – With the goal of expanding the corporate / generation

footprint and removing the potential threat of acquisition, this objective is

very closely linked to „survival‟.

2. Survival – M&A activity tends to create a “musical chairs” environment in

which no company wants to be the last one standing. To avoid that fate,

smaller companies without funds to invest are realizing that their time is

limited and are evaluating potential acquisition as a strategy to survive.

3. Economies of Scale – The most common M&A objective, this goal

focuses on reducing costs by leveraging the enhanced corporate footprint

and reducing ancillary costs related to front-, middle- and back-office

operations, along with common systems and business practices.

Wall Street analysts project that the 100 or so investor-owned utilities will probably

consolidate into five to 20 large companies over the next five to 10 years, in much the

same way that the integrated oil companies have consolidated to five super companies.

Clearly, change lies ahead for utility plant managers, who are understandably anxious

because M&As will require them to adopt new ideas and new approaches to doing

business. All of the internal “smooth-running” processes that they have implemented over

the years to drive efficiency in their systems will be closely re-evaluated for how well



they fit into new corporate operating models. As companies seek to define new strategies

to maximize efficiency, reduce cost and leverage the economies of scale from generating

fleets with a broader and potentially more diverse footprint , some of the “tried and true”

processes of the past will be phased out. M&As will also require plant managers to

accept a corporate vision that may run counter to many of the beliefs, practices and

accepted wisdom that served them well in the past. Some plant managers may view this

as a loss of status, power and esteem, even though it is clearly not the intent or objective.

Although these and other changes will create tremendous challenges for plant managers,

they will also provide exciting opportunities. Just as they have successfully driven the

operation of their facilities over the years, plant managers can – and should – be the

drivers of success within their new companies. Not only will success be achieved when

plant managers accept that they are on the front lines for implementing innovative new

business practices -- such as enterprise wide asset optimization, integrated supply chain

optimization and business process outsourcing -- but M&As can provide plant managers

with a wealth of resources and benefits that they never had before.

The Current Landscape

Plant managers have played a critical and pivotal role in the coming wave of

M&As. Their consistent efforts to improve plant efficiencies and the profitability of the

sector over the years have made electric utilities attractive to a broad group of investors

seeking to leverage recent changes in utility sector laws.

In 2005, the U.S. Congress passed the Energy Policy Act, effectively repealing

the Public Utilities Holding Company Act (PUHCA), a depression-era law that severely

limited the types of ownership structures in this asset-heavy industry. Many market

observers anticipate the repeal will make it easier for a broader range of financial

institutions and foreign buyers to invest in the U.S. utility sector. The repeal of PUHCA

opens the door to new players by eliminating geographic and operational restrictions that

previously required a public utility holding company system to constitute a single,

integrated system. As a result, we‟ve seen companies such as FPL, a Florida-based,



generation company, attempt to merge with Constellation Energy, a Maryland-based

expert in energy trading, in their first ostensible steps towards a national integrated

strategy. While the acquisition is currently in question because of local political issues in

Maryland, the move represents the type of corporate M&A activity that the U.S. power

industry can expect over the next several years.

At another level, the Energy Policy Act is also likely to accelerate companies‟

desires to create diversity within their generation portfolios to minimize their risk

profiles. It can be argued that Duke Energy acquired Cinergy to diversify its generation

base and achieve economies of scale within their competitive markets.

Obviously, large utilities find themselves at an advantage in this environment. No

longer constrained to a geographic region, -- and with the help of their Wall Street

advisors – they have new degrees of freedom to make strategic decisions on how to

achieve rapid growth, something that is difficult to achieve organically.

Smaller utilities should also consider themselves luckier now than they were at

the beginning of 2005. Instead of facing possible irrelevance and formidable competition

from larger companies, they can now position themselves for acquisition – and survival.

With a few notable exceptions (TXU in particular), utilities are adding new generation

much less frequently than they did in the past. In this new world, asset optimization has

become an increasingly critical component in the drive to generate more power and

reduce costs in an environment of increasing competition and ever higher fuel costs. . A

recent Edison Electric Institute report found that most of the more than 8,600 megawatts

of new generating capacity that came on line in 2005 resulted from the expansion of

existing plants, rather than construction of new facilities. Strategies to maximize M&A

benefits are expected to strengthen this trend.

What Plant Managers Need to Know…and Do!

In an environment dominated by continual change, whatever the business

scenario, plant managers will be among the vital drivers of success of any merger or

acquisition. Their willingness and ability to accept new realities will define the success of



the new operating models, as merged entities continue to develop and deploy lean

operating strategies and strive to increase reliability while wringing costs out of the

operation.

According to a recent study, many M&A deals come up short on delivering

anticipated revenues, expected cost savings and successful integration of information

technology and operational paradigms. In fact, the survey found that the majority of past

mergers have not worked as envisaged. The much sought “synergies” between companies

with like business missions has all too often failed to deliver the promised benefits.

Why then, should plant managers be excited about change that is potentially

questionable?

Simply put: it‟s going to happen. The investment gurus of Wall Street are not

afraid of missing out on the perfect by foregoing a chance at the good. They embrace

risk, especially the types they can control. They would like nothing better than to

replicate the rewards that shareholders reaped in the mega-mergers of the integrated oil

companies like Exxon and Mobile, Chevron and Texaco, Conoco and Phillips.

Change will be challenge….

Because M&As are inevitable, plant managers need to prepare for them. In our

view, the plant manager will face key management challenges that will test skill sets that

were entirely appropriate in the past, but may not be best-suited for the future. The

following key issues may serve as road maps for plant managers considering their role in

a changing business environment, over which they have little control or influence:

Deployment of an effective Asset Optimization Management (AOM)capability will enable plants to realize significant value and drive cost outof the operation, together with providing the operational and functional

basis to enable the increased efficiency and effectiveness in the operation,

including; reliability, heat rates etc.

AOM combined with a predictive maintenance capability will provide

forward predictive failure analysis capabilities that enable the earlydetection of potential plant, unit and equipment failures before they

actually cause plant outages. When integrated with effective EnterpriseAsset Management (EAM) and Integrated Supply Chain Management

(ISCM) systems, this functionality will provide additional capabilities to



reduce operational and maintenance costs and drive inefficiencies out of the operation and the current supply chain. This capability can, and will,

enable cost reductions in the operation of the plant and the overall fleettogether with providing increased reliability

Managing the enterprise will be a holistic exercise. As consolidation

grows within the power industry, fewer plants will operate independently.

Currently maintenance and operational decisions are heavily influenced by

the plant manager, engineers and on-site planners, who typically enjoy

large degrees of freedom, provided that financial targets are met. This

operational philosophy will no longer be the case in the merged or

acquired entity. All assets will become part of a strategic managementequation for the most profitable operation possible. Maintenance and

run/no-run decisions will be made amidst a whole new paradigm of factors

decided at a corporate level. This will be a major cultural challenge for

many of today‟s plant managers.

This paradigm shift may be perceived as a loss of control or „downsizing‟

of influence by some plant managers. This is a perception that would be

undesirable, and it is not the objective or intent.

Supply chains will be closely scrutinized after any merger or

acquisition. Large organizations now realize that there are tremendous

savings to be realized from integrated and rationalized supply chains. A

prime example is Wal-Mart. Any new mega-utility must view an

integrated supply chain as a key component to its success.

Warehouses and stock supplies will be re-evaluated across a much

larger organization. Does every plant in a fleet need to have a readily

available back-up for a part that rarely breaks? Wouldn‟t one such part

need only be in a location that‟s central to several plants, instead of at each

plant‟s warehouse? The implementation of an integrated supply chain



management (ISCM) functionality will fundamentally change the

operational landscape that plants today take as the norm.

Front-, mid- and back- office operations will be scrutinized even more

for value. Many industries have widely accepted outsourcing as a key

factor of corporate life today. Utility companies, on the advice of their

Wall Street partners, will adopt Business Process Outsourcing (BPO) as a

vehicle to enable them to meet many of their fiscal goals, and will send

non-core – but necessary – functions such as billing, customer service, IT

infrastructure and human resources to BPO providers with the most-up-to-

date technology platforms available and the ability to leverage delivery

center technologies to reduce costs.

Retaining and retraining personnel will take on a life of its own in

terms of absolute importance to the success of the new company. The

energy industry is already beginning to feel the impact of an aging

workforce, and seeing the effect associated with knowledge retiring and

walking-out for the last time. Throw uncertainty and radical change into

the mix and plant managers will find themselves continually scrambling to

retain or find the right skill sets needed just to keep things running,especially in an environment of cost reduction, expected efficiency gains

and constant change.

….But Also Rewards

Make no doubt, M&As will require that plant managers tackle a number of

daunting challenges. They‟ll be asked tomaintain the operational effectiveness of their

fleets while managing rapid and fundamental organizational change during a period of

prolonged uncertainty. At the same time, they will be addressing equally far reaching

cultural and operational changes that may impact their employees and redefine the

organizational landscape. Within this turbulent environment, tomorrow‟s plant managers



will be required to produce near real-time reports on metrics that may be entirely foreign

to them but vital to the decision-making for the larger organization.

Managing this balancing act will present a major challenge for organizations in

this post merger environment. Retention of key managers will be one of the major keys to

success. To that end, articulation and delivery of rewards for the successful managers will

be a paramount objective for the new organizations.

However, some managers will inevitably choose to get out of the game. But for those

plant managers who decide to embrace the new business landscape, a host of challenges

and rewards await. To name just a few:

A fresh start: Being part of a newer, larger company gives plant managers an

opportunity to become excited again about an operational environment, that

previously may have become bounded by fiscal constraints and lack of

investment and opportunity. The new company will seek out and reward leaders

who step forward and become change agents and advocates for the new order of

business.

New knowledge: New learning opportunities will enable plant managers and

their staffs access to best practice knowledge, systems and technology, together

with resources and appropriate levels of support through BPO organizations and

hosted service (APS applications) capabilities. New technology needs willstimulate innovative thought processes in a way that few previous technology /

business advancements have.

World-class resources: Smaller utilities typically lack the resources and/or cannot

justify the costs to purchase the types of technology and systems that give larger

companies a competitive advantage. Being a part of a larger company, will

provide plant managers access to world-class resources that were previously

unattainable, or not justifiable in terms of costs, ROI, IRR payback, etc. that are

now available via the expanded organizational footprint.

A more focused role: Integrating computer systems across organizations

shouldn‟t be a plant manager‟s job. Because most successful M&As incorporate

business process outsourcing, non-core functions such as IT integration become

the responsibility of BPO providers. This allows plant managers to focus their



resources on core skills and competencies, and to operate plants and generate

energy.

Reliability Centers: Technologies to support plant and fleet wide monitoring of

equipment, prediction of performance and potential failure will become „standard‟

operational tools within the new entities, as they strive for reduced costs and

increased operational effectiveness.

The mission of these centers of excellence is to deliver actionable information to

business decision makers and plant operations, related to the operation and

maintenance of their critical assets. -- assets that drive the cost, availability and

profitability of the business.

These reliability centers of excellence provide a platform that enables companies

and operating plants to move from a reactive maintenance mode to a truly

predictive operational mode where plant failure is minimized.

What’s Ahead

It‟s entirely likely that the same investment bankers who forged deals among the

integrated oils will be the same folks who craft the next wave of utility mergers andacquisitions. While they may not have any skin in the game after the deal is complete,

they will have to validate that M&A activity is actually good for shareholders, and they

will likely point to the models that the integrated oil companies are using to achieve their

successes. Plant managers will become very familiar with management and information

technology consultants who will deliver state-of-the-art technology and outsourcing

platforms to their organizations, and provide the platform and access to other industries

as a means of leveraging learning and best practice from a wider resource base.

Outsourcing removes questions of whose back-, mid- and front- office

solutions are best. Few utility companies can compete with BPO providers

in terms of having the most up-to-date technology platforms available for

enterprise resource planning, billing, customer care, information technology

management and supply chain management. Taking these functions from both



an acquired and an acquiring company and moving it to a BPO outsource

provider keeps the operations running until they are ready to move to neutral

ground. The inevitable clashes of culture are minimized between the

acquiring/acquired companies. The focus becomes efficient migration to a

best-in-class platform.

Asset optimization will be the new language of merged entities. Investors

in the new utility landscape will want to know that all investment is necessary

for the operation within a fleet environment, where leveraging an Integrated

Supply Chain (ISCM) capability to optimize shared resources and services to

realize significant cost savings will be the order of the day. These business

processes and technologies will be integrated with predictive asset

optimization technologies, to remove the artificial barriers that exist in the

information silos that are prevalent today in many organizations.

Retaining and retraining employees is not a job for plant managers. This

is an expertise that is best gained by experience.

Innovation Unleashed

In the utility industry, plant managers have traditionally represented the point where “therubber meets the road,” in operating plants, generating energy and creating revenue. In

fact, plant managers have been the drivers of many of the innovations that have shaped

the history of the industry.

Yet, the intense regulatory environment in which the utility industry has traditionally

operated has frequently restricted the ability of plant managers to bring innovative ideas

to the table. Bound by PUCHA and other legislative handcuffs, utility companies and

plant managers have been forced to play on what is frequently an uneven playing field,

where the resources enjoyed by one company are either denied or unattainable to another.



Those days appear to be numbered. The new regulatory environment– one that is

expected to bring about an unprecedented level of M&A activity -- promises to unleash

an equally unprecedented level of innovation in the industry.

It‟s easy to predict who‟ll be leading the way.

Documents

20060630 Paving the Path to Change