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Should U.S. Utilities Become Like Nike?

Matt Chwalowski's picture
Energy and Utilities Expert PA Consulting

Matt Chwalowski, Ph.D., is an energy and utilities expert with 20 years of combined management consulting in the energy and IT areas. He is with the Energy Business Transformation Practice at PA...

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  • Aug 10, 2005
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Nike is an example of a company that has evolved over the past few decades to something that is a radical departure from what it used to be. Once, Nike’s own employees covered the whole supply chain from manufacturing to marketing and sales. Today, Nike concentrates on marketing and sales and provides only high-level oversight of other activities.

Nike is not alone; from car companies to baked goods and paper products, companies have moved away from direct involvement in all parts of the supply chain to only selected parts of that chain. What explains this significant transformation? There are two key factors that are driving this transformation – the headache factor and the connectivity factor.

The headache factor – companies realized that in order to manage their marketplace positions they need to focus on customer-facing components of their activities – and within them on market trends, customer segments, their needs and meeting them in a timely fashion. So instead of having large organizations performing everything internally, they transformed themselves into operations focused on strategic and control activities that reflect their market advantages. At the same time, they do not have to waste their efforts and resources on managing other parts of the value chain; they leave them to those who can perform them more effectively.

The connectivity factor – today the value chain does not have to be restricted to a single company because it is so much easier to communicate not only across companies but also across countries. Companies have grown comfortable about outsourcing because there are ways to measure performance and to quickly communicate any issues. It is not only about technical communication and access to data, but also the human communication. With fewer countries driven by rigid ideological orthodoxies and less government intervention, there are fewer barriers to communication and cooperation.

Could Nike have remained a full service manufacturing to marketing and sales company and have been as successful as it is? It is unlikely. Nike is a very nimble competitor and it meets customer needs because it relies on manufacturing specialists all over the world. It is someone else’s problem to worry about manufacturing and delivery.

So, could Nike’s model apply to the US distribution utilities that are insulated from competition? Yes, because utilities are increasingly looking like an odd man out by delivering many services internally as if headaches and good connectivity do not exist. The cost of repeatable activities performed internally is often higher than market prices due to inflexible labor rules. While some utilities do outsource some of their operations, most do not – as if what has been happening in the outside world for the past 20 years did not matter much. But it does.

We no longer live in a vertical world where goods and services are developed completely internally – companies buy more services just as households do, and they are better off for that. A vertical configuration represented a workable and efficient model in simple markets; in complex, multi-dimensional markets, it amounts to underperformance. We now live in a horizontal world – where specialists perform their best and provide input to other participants across in the value chain. A company that supplies 20 other clients develops new competencies and economies of scale that are not possible when being an internal department of one company. Some utility managers still claim that they need to keep some operations internally (we are unique, this activity is too important for us, we can do it better, we need to control it or we cannot let some foreign company do this important work for us and so on). Such rationales do not bear scrutiny and, under more rigorous examination, seem more like job saving tactics.

Arguments of “this activity is too important for us to be provided by outsiders” are particularly weak, especially when utilities have little understanding of costs of their operations. More often than not, responding to a question about the unit cost of this or that operation will entail much research before one can reach what is often an inexact answer. The delivery quality of an activity can leave a lot to be desired as well – there are often no service level agreements with other departments. On the other hand, outsourcers have this information at the tip of their fingers as contractual performance metrics. The reluctance to outsource to horizontal providers also ignores that the outside world has changed and competition forces companies to provide high quality services. Outsourcing firms have become experts in the delivery of the services they offer and it should not matter if they are originating in Tijuana or a utility’s home state.

The regulated environment is not particularly well suited to providing certain repeatable operations at low cost and high quality – including many customer service, meter service or distribution functions. These functions are routine, require little tenure and there is no reason for employees to make a career out of them. In unregulated markets, these are transition jobs that employees undertake for a few years and then move on. At regulated utilities, the combination of uncomplicated jobs and employees with a tenure of 20 plus years does not constitute best working environment – which becomes staid, lacks challenges and serves neither employees, shareholders nor customers.

Therefore, the Nike approach seems attractive to all players in the value chain – it retains internal management, strategy, regulatory, oversight functions in house, but moves out repeatable operating functions to companies that specialize in performing them. In return a utility gets more flexibility, higher quality services and fewer management headaches.

Ultimately, the Nike model could benefit employees and customers as well as meet regulatory requirements. It is also a model that is similar to the guiding operating approaches that are becoming prevalent across other industries. The only applicable excuse for US distribution utilities to maintain their historical operating structure is that “we have always done it like that.”

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Bruce Oliver's picture
Bruce Oliver on Aug 15, 2005
Anyone who seriously attempts to compare Nike to electric distribution utilities in the U.S. has little understanding of the differences in the characteristics of the industries in which they operate.

Get out of your Ivory Tower, talk with utility customers, and get your hands dirty in the industry. Then see what you think of the strength of analogies between Nike and U.S. electric distribution utilities.

Many believed that competition in generation markets was a cure all for all the industry's ills, and boldly proffered that deregulation would yield reductions in electricity supply costs. Yet today, costs to consumers for marginally priced electricity are spiraling out of control.

WAKE UP and smell the manure that has already been spread!

Bruce R. Oliver

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