The need to boost efficiency by optimizing costs has never been more urgent for electricity distribution utilities. In this series of blogs, I will consider with other experts’ cost optimization benefits from multiple perspectives. In future posts, we’ll look at the impacts on assets, operations and shared services. In this first post, I’m going to focus on the implications for the most critical component of any business: people.
To set the context, it almost goes without saying that the power distribution sector is experiencing seismic shifts. But even without the current disruption, the industry would be facing significant challenges around people and talent.
Why? Take two sets of statistics from an Accenture research. First, only 1 percent of new graduate regard utilities as an attractive industry to join. Second, more than 50 percent of today’s utility workers are aged 45 or over—and 24 percent are 55 or over. Such figures raise a pivotal question: As the industry faces up to disruptive change and intensifying cost pressures, can it attract and retain the talent it’ll need to address these issues successfully?
Enabled by digital technologies, the good news is that it can. To explain how, I’d like to start by looking at why cost reduction is now such a front-of-mind issue. And among the many reasons, two stand out. One is the drive by regulators worldwide to shield consumers from rising energy costs. The other is the ongoing shifts in the energy system that could see some network assets become underutilized with implications for existing regulatory revenue models that may no longer be fit for purpose.
Together, these forces mean cost efficiency is now key both to utilities’ commercial viability and license to operate. Against this background, their efforts to reduce their costs have three dimensions—each with significant impacts on their people and talent agendas.
The first is avoiding network spend across both opex and capex—or "totex." Utilities’ overall network expenditure is dominated by replacement, reinforcement and maintenance spend, in that order. Among these, replacement and maintenance costs can be reduced through risk based asset management. And in terms of reinforcement, smart grid can help utilities avoid capex by using alternative and lower cost solutions like demand response.
Once work volumes have been optimized, the second dimension of cost reduction comes into focus: bearing down on unit costs. This requires lean asset design, maximized field utilization and productivity and effective management of the supply chain based upon a stable and optimized plan.
What’s the impact of these cost levers on people? Decisions must be optimized and efficiency opportunities systematically identified and delivered. This requires analytical and digitally-savvy people with teams that blend deep engineering and asset knowledge with experience in data blending, statistics, automation and process excellence. The challenge is that skills such as data science are in high demand - they underpin high performance in most industries. And the job market is allocating them according to the return they can generate. Maximizing return on talent is a critical competency that utilities need to develop, whether that talent is directly employed or provided as-a-service by a third party.
The third dimension of the optimization strategy for utilities is overhead —largely the costs of the people working in the center who are not directly interacting with the asset. The key here is to boost these workers’ efficiency and productivity through approaches such as process excellence, automation and new sourcing strategies. In terms of people, a great way to boost both the cost-effectiveness and quality of delivery is to create transformational third-party partnerships that provide access to Capabilities-as-a-Service.
These collaborations can add substantial value to a utility’s workforce, by combining digital technologies with the scale and cost benefits of offshore and nearshore provision. To pinpoint the best opportunities for such partnerships, utilities should seek out areas of their business—like scheduling and planning or asset analytics—where a third-party could apply leading-edge technology and deep domain skills to do things better and cheaper. Telecoms is one industry that’s already taken this approach extensively, with great success.
Overall, what’s clear is a utility’s people strategy is key to its ability to reduce costs robustly and sustainably. And getting the people component right means taking account of a wider shift in the industry’s drivers of value.
It’s a fine balancing act. But in my view, those that succeed in striking it will lead the industry for decades to come.
In our next posts, we will look at the cost optimization from the asset perspective.