How the Right Operating Model for Corporate Support Functions Can Drive Savings for Utilities Anne St. Clair, Towers Watson Shankar Raman, Towers Watson Bethany Grant, Towers Watson
Introduction Generation plants, transmission substations, natural gas pipelines, storage and distribution terminals the infrastructure utility companies need to fulfi ll their mission of bringing power to people involves huge investments requiring a great deal of capital, maintenance and planning. And with new technologies for utility generation and distribution constantly coming to market, companies must continue investing in new projects and technologies, or risk falling behind. In this paper, we explore how driving greater effi ciency in corporate functions such as HR, fi nance and IT through a new service delivery model can be a source of funding for future infrastructure improvements. Utility Industry Trends The utility industry is currently facing multiple challenges, some of which are: Slowing demand driven by higher-effi ciency initiatives Pressure from alternative energy sources Aging infrastructure High labor costs New technologies Increasing merger and acquisition (M&A) activity Continued thin margins Knowledge transfer challenges (as a signifi cant portion of the workforce nears retirement age) Many of today s large utility companies have grown through M&A by buying smaller utilities with their own support infrastructure, which is often retained after the acquisition. This has resulted in a very ineffi cient and often ineffective service delivery model with timeconsuming manual processes, outdated systems and tools, systems that are not integrated, complicated workarounds and unreliable data. The lack of effi ciency translates into a higher cost for providing services and potentially a higher rate base for customers. Utility companies are looking for innovative ways to address these challenges. Of utmost importance to leadership is identifying sources of revenue to support infrastructure investments without impacting the cost and quality of services provided to customers. What if utility companies could reduce the cost of providing HR, fi nance and IT services, and then leverage those savings to help fund infrastructure improvements? In the following sections, we explore some answers to the following questions: Can organizations consolidate a number of support function activities? What effi ciencies can be gained through consolidation? How should our service delivery model be reconfi gured to support consolidation, and increase effectiveness and effi ciency? Should strategy and policymaking in HR, fi nance and IT be centralized while the delivery of strategy is decentralized? What activities and resources should remain aligned with the business? Service Delivery Options There are three core design concepts for the structure of HR, fi nance and IT services: centralized, decentralized and hybrid. Defining our terms: What do we mean by centralized, decentralized and hybrid? Centralized support functions Functional staff are centralized or colocated. Reporting lines are through the functional lead. Budgets for head count are owned by the functional lead. Strategy, planning and governance are the responsibilities of a corporate or central team that provides solutions for the entire enterprise. Corporate oversight is strong. Delivery is from the center. A focal point is identifi ed to understand business needs and help navigate through the corporate structure. Decentralized support functions Functional staff are located with the business. Reporting lines are through the business lead. Budgets for head count are owned by the business. Local business units own strategy, planning and governance for their area, and for their own support functions. Corporate oversight is limited; fl exibility is increased across locations or units. Delivery is local. Hybrid approach Functional subject matter experts and service delivery team are centralized or colocated. Strategic functional resources are aligned with the business but may still be part of the functional head count and budget. Corporate oversight is provided for enterprise-wide initiatives. Local business strategy aligns with the corporate or enterprise strategy. How the Right Operating Model for Corporate Support Functions Can Drive Savings for Utilities 2
There are a number of support function activities that lend themselves to being consolidated or centralized. Transactional and repetitive activities are most often consolidated within functions such as payroll, procurement, accounting, reporting and benefi ts administration. Subject matter experts for a particular discipline are often positioned regionally or centrally, such as within centers of expertise for total rewards, learning and development, treasury, IT systems architecture and tax. Business planning, strategic consulting, workforce planning, organization effectiveness and change management activities are most often decentralized and aligned with the business. Business planning, strategic consulting, workforce planning, organization effectiveness and change management activities are most often decentralized and aligned with the business. Considerations Organizations contemplating a change in their service delivery model should consider the following questions: What do our internal customers need? What model does our business strategy support? How are other organizations approaching this? The appropriateness of a centralized, decentralized or hybrid service delivery model may vary from organization to organization. When considering Cost People Process Technology Governance Think about When processes are performed by a central team, there is an opportunity for greater consistency and standardization. Centralization of transactional work may result in economies of scale and the ability to manage variability in workload or volume. Consolidation of resources can translate into lower infrastructure costs such as bricks and mortar. Reinventing the wheel in separate locations or business units may be more costly. Colocation of team members may provide higher levels of collaboration and opportunities for diversity of thought. Colocated support function employees have more access to subject matter experts in their area of expertise, allowing for more effective knowledge management, learning and sharing of best practices. Functional staff embedded in the business have the opportunity to develop a deeper understanding of the business strategy, objectives and challenges. The hybrid option provides greater business alignment. Greater opportunity for consistency and standardization of tools, templates and programs exists with a centralized governance framework. Colocated support functions may be able to deliver greater consistency in customer experience. There is a reduced likelihood of duplication of effort at the business unit level if centers of expertise are working closely together. Technology to enable the effi cient sharing and accessing of information is in place. Social media, videoconferencing and the like must be in place to connect the central offi ce with customers. Implementation of effective enterprise-wide systems will reduce the need for homegrown and businessowned technology solutions. Access to and consolidation of enterprise-wide data and reporting must be available. Need for closer proximity to customers means advanced communication technologies are less critical. All models require a high level of role clarity. All models require clarity of decision making, escalation and prioritization processes. Managing risk, and adhering to regulatory and compliance requirements are critical in all models. How the Right Operating Model for Corporate Support Functions Can Drive Savings for Utilities 3
Question 1: What do our internal customers need? Before making a major change in your service delivery model, ensure you have a strong understanding of what internal customers need and expect from support functions. Speed and efficiency? Centralization tends to provide better-defi ned processes and accountabilities, minimizing lost time. Customized support and deep business expertise? If this is a key expectation, determine whether the level of customized support and business expertise needed by internal stakeholders can be provided through business partners, or whether local transactional or subject matter teams are needed in all or part of the organization. Flexibility? While many needs for fl exibility can be met in centralized models through governance policies that allow tailoring within guidelines, in organizations where additional fl exibility is needed, more decentralization and less corporate oversight may help. When core customer needs are not being met by support functions, pieces of the business often create shadow organizations of support function professionals to circumvent central team processes. This creates the cost of additional head count and makes governance diffi cult. Question 2: What model does our business strategy support? While best practice and prevalence data can help to inform future service delivery model choices, the true basis of the decision should be your organization s business strategy. For example: Support functions are increasingly gathering benchmark data to understand the cost of service delivery today compared to other peer organizations. Question 3: How are other organizations approaching this? HR, fi nance and IT functions are thinking about their service delivery model in a very pragmatic way. First, organizations are completing a thorough current-state assessment to understand what is working well, what can be improved, customers needs and preferences, and where opportunities for greater alignment with the business exist. Support functions are increasingly gathering benchmark data to understand the cost of service delivery today compared to other peer organizations. Following the current-state diagnostic, support functions are thinking through service delivery options, and identifying the pros and cons of each option with respect to the business strategy. This work is informed by the business through challenge sessions, dialogue and engagement. Once a preferred service delivery model is identifi ed, the support functions then develop a detailed implementation plan with robust change management and communication activities to drive leader alignment, employee involvement and organization readiness. Is your business strategy focused on efficiency and cost reduction? If so, highly distributed support functions may be inconsistent with those goals. Increased centralization is much more likely to deliver the economies of scale needed to provide signifi cant cost savings. Are you positioning parts of your business for spinoff? If the answer is yes, decentralization at least for the part of the business considered for spin-off is desirable. Stand-alone support functions with dedicated employees mean that, at the right price, the business can be spun off with minimal impact on the rest of the organization. How the Right Operating Model for Corporate Support Functions Can Drive Savings for Utilities 4
How to Ensure Success Making a shift in a service delivery model can be daunting, and a strong focus on planning and change management will be important. Things to consider before and during such a shift include: Start with a strong understanding of your business strategy and your internal customer needs. Conducting surveys and focus groups with internal customers will help ensure you make the right decisions for the organization, and are able to build support for the transition. Determine key design principles and vet with appropriate stakeholders. How centralized/decentralized do we want to be? Can one central team support the entire organization, or do we want to use regional centers? Where will our centralized team(s) sit? Will these locations provide the desired proximity to internal customers and available talent pools? How broad or deep do we need our support function talent to be? Perform a gap analysis. Where are we now compared to where we want to be? How will we get from here to there? Where do we need to develop or buy additional skill sets? What technology do we need in place to support the change? How will processes and governance change? How will we train employees for these changes? Sell the change. Collect data on the project s return on investment, and clearly communicate to leadership and key stakeholders fi nancial and process gains resulting from realigning support functions. Enlist sponsorship from leaders. Ensure sponsors have a solid understanding of and support for what is changing, when it is changing, why it is changing and how it will impact employees. Information empowers them to advocate for the project. Clarify exactly how employees, managers and leaders will need to be involved in the change, and communicate these expectations clearly. While the shift to a new service delivery model may be diffi cult and time-consuming, many organizations are fi nding that the resulting fi nancial, talent and process gains are worth the effort. This is particularly true in the utility industry, where day-to-day operations are under continual scrutiny, service quality and reliability are paramount, and the investment in the future of the business is critical. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and fi nancial management. With 15,000 associates around the world, we offer consulting, technology and solutions in the areas of benefi ts, talent management, rewards, and risk and capital management. Learn more at. Copyright 2015 Towers Watson. All rights reserved. TW-NA-2014-41242 /company/towerswatson @towerswatson /towerswatson