The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Beyond The Downturn
Today’s challenges are transforming the industry.
how they buy, what they buy, and from which power suppliers they buy. Zeroing in on those valuable customer segments that are likeliest to defect, they will develop individual profiles based on detailed audits of their power-usage patterns, calculate the rates the customer would pay under alternative scenarios, and come up with price-competitive counteroffers that would help boost efficiency while lowering costs. They will apply new demand-side management techniques to reduce or shift load demand during peak generation hours. Through ongoing monitoring of customers’ consumption patterns, they will be able to spot opportunities to bundle services, market new green-energy products, or negotiate fixed-price guarantees that better enable customers to budget their energy outlays.
Leaner and Meaner
Boosting efficiency allows companies to elevate their competitive capabilities. Due to pressure to cut costs in the current downturn, prudence and efficiency will be the operational watchwords. Three areas stand out as leading opportunities for utilities to trim down for recessionary times while building a springboard that will accelerate their performance when the economy rebounds.
• Back-office support services—finance, human resources, legal and other general and administrative (G&A) functions—are inevitably the first and most obvious candidates for deep, sweeping cuts. But many companies wield the ax indiscriminately, chopping G&A costs across the board. A better approach is to weigh effectiveness as well as efficiency. Viewed through that lens, an organization may discover that it makes sense to eliminate some functions entirely and overinvest to consolidate or automate others.
• A Bain & Company analysis of G&A expenditures at 37 companies revealed that leaders view their back office as a potential performance accelerator that helps them manage their businesses in tough times. Taking simple steps to reduce unnecessary functions led to significant savings. But, on average, 75 percent of the benefits came from substantive changes that enhanced support services by redesigning them or restructuring how or where they were done.
• Building efficiency through improved supply-chain management is a second big opportunity to convert cost savings in a downturn into sustainable competitive advantages for the rebound. Downturns are the right time to benchmark supplier performance, strip out complexity from materials forecasting, and streamline decision-making processes. Significant supply-chain efficiencies are achievable through direct material sourcing. Ordering and forecasting can be sharpened to reduce inventory and shave warehousing costs. Bain analysis found that utilities that adopt best practices can bank improvements of between 5 percent and 7 percent on a year-in, year-out basis.
Seizing opportunities to boost workforce productivity offers a third—and perhaps the biggest—opportunity to emerge stronger from a downturn. The dimensions of potential savings can be striking. Reeling back nonproductive work time that tends to creep up during economic expansions can be a major source of cost reductions. For example, stepping up planned preventive maintenance to avoid costly emergency overtime at one utility opened up the potential to lower repair and replacement costs by one-third. Sharper labor utilization disciplines (such as better management of basics like dispatch and scheduling procedures), tighter control of budgets to eliminate overruns, and the systematic application of best demonstrated work practices across