Infrastructure investors have had their share of pain over the past few years, particularly in developing countries. Aside from worries about the safety and stability of the investment itself,...
High Performance? Your Strategy Matters
Leadership requires alignment between performance measurement and strategic priorities.
diversified parts of the value chain to provide natural hedges and reduce earnings volatility.
• Capital Management
High performers yield significant value relative to the capital employed. They consistently have positive ROIC spreads. They also have strong balance sheets providing significant financial flexibility for investment and they are increasingly taking advantage of selective opportunities to lever up to reduce their cost of capital.
• Regulatory Management
High performers have solid regulatory strategies and good relationships with regulators and other stakeholders. They develop operating strategies that support stakeholder priorities. They often tradeoff cost efficiency for higher service levels or “gold-plated” capabilities. Customer satisfaction is one area where higher customer service capabilities and costs, and hence satisfaction, is often leveraged into higher rates of return. A positive link can be found between customer satisfaction and rate decisions.
• Focused Operations Excellence
High performers are above average operators, but not necessarily top decile performers. High performers focus on a few key market capabilities—those that most directly create value and can be differentiated. They attempt to maximize differentiation in these key areas and out execute their peers by paying particular attention to performance management and the people side of the equation.
Let’s examine the value and growth groups specifically.
Value-focused companies are challenged by four primary trends: 1) Exhaustion of traditional cost-reduction programs; 2) high capital spend requirements on aging infrastructure and new generation; 3) regulatory overhang and increasing expectations; and 4) few “lower”-risk growth options.
Value-focused companies will look to improve performance by redefining their cost structures and targeting capital spending programs on low marginal cost supply assets and recoverable capital upgrades:
• New operating models and productivity enabling capabilities and operational excellence;
• Process versus functional orientation; standardization;
• Selective application of real-time data and decision-making tools; and
• Increasing use of third-parties to fulfill non-core, low differentiated processes at fixed, predictable prices.
• Selective acquisitions to leverage leading operating models/capabilities, and nascent scale; and
• Balanced supply portfolios with low negative supply and fuel exposures.
Value leaders over the long term will be excellent consolidators operationally. The majority of acquisitions today fall in this category, e.g., Mid-American, and National Grid. These acquirers can be expected to build acquisition platforms that leverage transferable best practices and scale, where available, to create advantage. Translating this advantage to shareholder value will require focusing on the highest impact capabilities for stakeholders and innovative regulatory constructs. Operational due diligence also will be vital to ensure achievable/ exceedable price premiums.
On the other hand, growth-focused companies will focus on three trends: 1) growing presence of financial institutions; 2) increasing appetite for energy project exposure by non-traditional investors; and 3) escalating exposure to international market forces influencing domestic commodity prices.
Growth utilities will look to build value along the value chain by reintegrating the disaggregated value chain. They increasingly will redefine their positions in the market to concentrate on higher-growth value opportunities, such as multi-commodity wholesale supply, unregulated generation, or innovative financial structures around infrastructure, such as ITCs. They will play in multiple markets with different asset portfolios. They