Financial models within the utility industry are changing rapidly. Driven by competition, deregulation, and shareholder concern ov er profitability, North America's intermediate and larger-sized electric and gas companies are looking more closely at information technology (IT) investments. Regulators and the financial community are, or should be, watching such actions with equal interest.
Cost-benefit analysis has been applied to Geographic Information Systems (GIS) and Automated Mapping/Facilities Management (AM/FM) systems since the first commercial project was initiated by Public Service Co. of Colorado in the early 1970s. Since then, many of the thousands of analyses completed for such projects have used tools and techniques employed by utilities for other large capital-asset investments, especially computer systems. In many cases, utility GIS has not been viewed as mission-critical. Occasionally, some utilities have viewed GIS as a discretionary investment.
GIS is no longer just maps and records, it's about effectively operating transmission and distribution facilities, assisting in major capital-asset investment decisions, determining equipment replacement schedules, improving customer service, supporting a new wave of sales and marketing initiatives, and providing information about competitors, customer trends, economic development activity, and other strategic issues.
Statists vs. Dynamists
The utility industry can be divided into statists and dynamists. The dynamist group, though small, contains newer, more aggressive management teams that respond quickly and decisively to market threats and opportunities. The statist group is more conservative, slower to act, does business traditionally, and shows less interest in future positioning for a fiercely competitive energy environment.
Not surprisingly, the two camps pursue entirely different approaches to analyzing the costs and benefits of IT investments, particularly GIS. Static utility management teams typically require exhaustive cost-benefit analyses; construct slow, cautious implementation schedules; and rely on more conservative return-on-investment models. Dynamic utility management teams, recognizing that competitive position is linked to modern and effective IT, more readily embrace that technology for bold marketing and sales initiatives. They also recognize that GIS offers strategic support for competitive customer service, marketing strategies, and improved operations effectiveness. While they still complete due-diligence financial analyses, they also embrace strategic benefits-planning initiatives, comparative information requirements, thoughts of strategic acquisitions, and tools for more aggressive marketing and sales support.
Comparing cost-benefit analyses and results between utilities is difficult. A "benefit" at one company may be a "liability" at another. An allowable, tangible quantification at one utility may be eliminated at another as soft or intangible. Benefits in one part of the country may be nonexistent in another. Regulatory mandates in one state may be of no consequence elsewhere. What's more, with the full-scale shift from traditional rate base analysis toward market-based decisionmaking, comparisons of financial indicators resulting from cost-benefit analyses vary widely among companies. Nevertheless, we have evaluated several costs and benefits associated with AM/FM and GIS projects.
Figure 1 displays cost breakouts for investor-owned electric and gas utility GIS initiatives of moderate size. The big-ticket item is clearly data conversion (em that is, taking paper-based information, including map graphics, and loading it on computer databases. More reasonable are software applications and interface development, which offer the most tangible benefits in terms of putting systems to work and linking them with other existing computer systems.
Figure 2 shows how benefits are allocated at a typical electric or gas company. Labor savings typically account for only 30 to 40 percent of projected benefits over the typical 15- to 20-year life of a project study. Considerable upside potential also resides in strategic benefits, business geographics applications, asset-related benefits, the asset value of databases, and issues associated with growth and change in the utilities. On the other hand, industry trends assign only minor benefit to utility sales of GIS products to the marketplace or reductions in external costs.
Strategic benefits clearly drive most projects: attracting new customers based on "lifestyles" and demographics, developing and supporting new customer-specific programs and services, better understanding a competitor's capabilities. In many assessments, they literally make the financial difference in presenting a project to senior executives. Yet the fast-changing business environment all but ensures that the strategic benefits of a GIS will shift between the time a project is begun and the time it is fully implemented, which can take two to seven years. "A lion's share of the benefits being created today were not originally quantified in the cost/benefit analysis simply because times have changed," says Chuck Wormann, manager of facilities information systems, Citizens Gas & Coke Utility. "Fortunately, AM/FM/GIS provides a flexible tool to help stay ahead of change."
AM/FM/GIS can be thought of as "enabling" technologies that help a corporation achieve customer satisfaction, safe operational performance, and profitability more quickly and economically. The companywide integration of a GIS provides a common database for a wide variety of users, permits single-point updating, avoids redundant data capture, and helps improve the accuracy and responsiveness of decisions. Many progressive executives now consider GIS a critical tool for differentiating a utility's products or services, particularly those related to marketing, sales, customer outage management, and DSM initiatives.
GIS also offers a wide range of intangible benefits, depending on the type of cost-benefit analysis being performed:
s Improved customer service and responsiveness
s Improved corporate image
s Improved data management
s Faster or more uniform responses to regulatory agencies
s Improved management decisionmaking
s Integration with other corporate databases
s Improved revenue-producing potential.
The big operational benefits of a GIS, however, do not lie in reducing labor associated with map and record creation and maintenance activities. GIS works its real magic by integrating data and applications. Customer information systems, trouble outage entry/ analysis, work management systems, and related operations systems can be fully integrated using AM/FM/GIS as a backbone technology. Adding business geographics applications to a GIS may increase overall project cost 6 to
10 percent, but can also boost a project's return on investment toward 30 percent.
Translating IT Benefits
Increasingly, senior managers seek the means to gauge the effectiveness of IT investments like GIS, which they consider critical to their business missions for the 1990s. Many cost-benefit analyses today focus on the relationship between critical success factors, business missions, and the component of a utility's geographic data embraced by GIS. Executives evaluate cost-benefit analyses by forecasting available cash, and then comparing GIS projects to other investments over comparable periods of time.
Most executives understand that customer satisfaction will eventually displace regulation as the main focus of the electric and gas industries. Companies unable to satisfy customer needs effectively may no longer be in business. More than ever, the oft-quoted statement, "the best defense against regulators is outrageously satisfied customers," rings true. Cost-benefit analyses for GIS or related technologies should focus on benefits to customers, regulators, and the utility itself.
In today's utility environment, roughly nine out of every 10 GIS projects require detailed cost-benefit analyses. The remaining project requires considerably less formal analysis and typically enjoys an extraordinarily high level of support from executive management or has a single specific financial driver that's clear and unquestionably positive. The strategic and financial benefits of IT projects (em integration of corporate data, improved information access, reduced labor costs, improved marketing capabilities, improved customer responsiveness, and better decisionmaking capabilities (em are the dynamic, driving forces that capture funding and guarantee success. In today's fiscal environment, no AM/FM/GIS project gets off the ground until its benefits are made clear. Nor will it be sustained without evidence. t
Glenn E. Montgomery is co-chairman and CEO of Englewood, CO-based Convergent Group, a holding company whose affiliates include UGC Consulting, EDS Corporation, Graphic Data Systems Corporation, and others. UGC Consulting provides cost-benefit analysis, GIS project design, and systems integration services to hundreds of utility clients across North America. Montgomery earned an MS and a BA from Indiana University.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.