Why utilities are slow to adopting digital platforms and ecosystems?
Updated: Nov 20, 2020
Given the unprecedented success of digital platforms and ecosystem based companies - Apple, Amazon, Google, Alibaba, Facebook etc.; and the ongoing digitalization aspirations of the utility businesses, there is a keen interest in platforms and ecosystems based business models. However, companies are experiencing that building and growing ecosystems is incredibly complex. It is not easy to realize network effects and attract third parties to create apps on the platforms rapidly. While many companies have invested in platforms from traditional industrials (GE Predix, ABB Ability, Schneider EcoStructure) to many IT vendors and startups - the scale, adoption and growth of ecosystems in the utility sector is not even close to that in other industries. In this article, I ask four questions to briefly examine why platforms and ecosystems are growing so slowly or not as fast as one would like:
1. Is the technology creating enough business value?
Business value depends on several factors – such as, market and customer adoption, regulatory treatment, and availability of substitutes and alternatives. Platforms and ecosystems do not have historical data to provide a basis for business value quantification within any bounds of accuracy. The current practice of technology valuation in power companies is heavily biased towards quantitative estimates. Most evaluations are fixated on components of technology and use cases – features, functionalities, hardware, software and data. Hence, the value rationalization is largely limited to “lift and shift” applications on cloud infrastructure for instance, that can provide a value comparison on a cost of service basis to a non-platform set up. Exploration into how the platform will allow future scaling and extract value from economics of scale to reduce unit costs or from new applications and services is limited. Questions remain whether the value will be large enough to attract an ecosystem of complementors/participants. For instance, a typical customer engagement programs rarely goes into the depth of the value potential of new business models beyond electricity usage. Or how much value distributed energy resource or the electric vehicle platforms can generate from the building blocks of connectivity (e.g., connected car, connected home) or aggregation/collection (DER aggregation, virtual power plants). The heavy reliance on quantification techniques grounded on historical data combined with a low tolerance for ambiguity, acts as a barrier. A qualitative value assessment embodied in a coherent business narrative backed by business logic can be a basis for decision making. A few companies have been making such bets, but for most of the utility industry a new set of processes, mindset and regulatory alignment is needed.
2. Is the value created attractive for the ecosystem participants?
The complexity, ambiguity, and unpredictability in identifying the total value that the ecosystem can create makes it hard for the prospective participants to make a business case for themselves to invest in the platform. Quantification with acceptable accuracy and precision is not possible for most part and given the heavy reliance on numbers and measures, little effort is spent on crafting the vision of the end state. This leaves much speculation on what the fully scaled ecosystem will look like, who will stand behind it, and how the total value “prize” will be divided among the participants – namely, the utility, customer, OEM vendors, software providers, and grid controller/load balancer. Participants need to justify that the allocation among them will be fair and the rules of the road will be followed. Therefore, trust is necessary in the arrangement. In addition, participants must address the minimum efficient scale question – how big is the opportunity payoff to support how many players? simply put, there is enough for everybody. Most valuation assessments in the utility space take a conservative stance, which diminishes the attractiveness of the ecosystem. The value allocation is not thought through that creates uncertainty on the fundamental question on “where to play” and “how to play”. Strive for precision becomes an enemy of just about accurate. Actions slows down.
3. Are the risks from disruption acceptable in the current business?
Platforms and ecosystem-based business model creates disruption to existing operating models. The full impact to the business is not always known at the onset, which creates additional concerns to the current business. For instance, when a large utility started aggregating plant asset performance data in the cloud, front line plant operators pushed back, not knowing how the detailed data and information from local plants now available to corporate will impact local autonomy and decision rights. While new workflows, processes and procedures stemming from a new platform create new possibilities for efficiency and alignment, these changes to the legacy operating model may be too risky to undertake. Every utility’s situation is different and without understanding the full range of impact, companies are reluctant to adopt new platforms that will create structural changes. Recognizing needs, understanding impacts, and taking a realistic stance is often underestimated when companies are asked to give up what’s known and take up what’s unknown. In such cases, a common stance is to go for the known and support the status quo. Leadership is also caught in protection and preservation mode. Unless there is adequate support to take the risks by plunging into the unknown, there is no real motivation to embrace the disruptions to current business.
4. Do the future business models provide headroom for value scaling?
Utilities have been anticipating for a while now, that digital platforms would allow launching new business models that would serve customers with novel products and services or reduce prices by driving costs down using new operational platforms, such as predictive maintenance. Going beyond the concept, companies are yet to take action on actively shape the market landscape to generate the network effects on the customer side and reduce unit costs from scale economics in the supply side. There is a “build and the benefits would come” mindset without the rigor to flesh out the fully scaled view of the platform and ecosystem. What is missing are - who does what, what value gets created, and who has the right to claim value. Utilities often draw parallels with the telecom industry but unlike telecom that moved from voice and data to entertainment streaming, news, e-commerce - the value scaling journey for utility is not obvious how it would jump from commodity supply to similar multibillion dollar value pools. That will vary from utility to utility – for some it might be demand response, others electric vehicles and DER aggregation. Without a sense of value scaling, it is hard to attract ecosystem players into the business platform. Shaping the market landscape is hard and very few platform companies have successfully done it (Uber in transportation, Airbnb in hotels). Historically, companies have been able to shape the electricity market landscape using policy changes through legislature and regulatory bodies. The question remains on the path to the ecosystem end state: what the upside potential for the ecosystem participants will be?
These barriers will no doubt echo with other legacy industries – such as, asset heavy manufacturing, oil and gas, mining and petrochemicals facing similar barriers to platform and ecosystem adoption and scaling. Platforms and ecosystems challenge the old order of firm boundaries, organizational structure, command and control hierarchies, and the basis of competition and partnerships. Even seasoned practitioners ingrained in legacy models fail to question and address the new norms that are required to make ecosystems work. Utilities need to draw the right talent that can question these mindsets. Frameworks need to be revised to address the questions on “where to play”, “how to play” questions. In face of these challenges and possible opportunities, utilities and their leaders have an obligation to figure this out. The stakes are just too high. Business leaders need to focus on - how ecosystems can drive growth, reduce risks, lower costs and build long term trust with the customers, regulators and suppliers. And it starts with an honest diagnosis of the current situation.
© 2020 by Greenelectrons Consulting, LLC.