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UTILITIES’ JOURNEY FROM COVID19 CRISIS TO NEXT NORMAL

Rahul AroraVice President, Utilities, EXL

Aakash GuptaSenior Engagement Manager, Utilities Analytics, EXL

lookdeeper@exlservice.com

Vikas KumarVice President, Utilities Analytics, EXL

Written by

April 20, 2020

Contributors

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At the time of writing this article, reported COVID19 cases across the globe stood at 2.2Mn with 1.5Mn of them being active. In the past few weeks, it has become evident that coronavirus outbreak will continue to unsettle in unusual ways.

Covid19 pandemic is already causing distress and economic suffering to buyers, clients and businesses across the world. Beyond a severe health crisis, the coronavirus is also leading to an imminent restructuring of the global economic order. Market capitalisation has declined across sectors with certain segments bearing the brunt more than what others will.

For Utilities industry, which was already reeling under tough market competition from several new players joining in, COVID19 pandemic poses a more significant challenge due to fall in oil prices. From 3rd Mar’20 to 12th Apr’20, each of the big six in UK registered a drop in their market capitalisation ranging from 18.7% to 54.4%. According to data from EPRI, five to seven days after

Italy’s lockdown began; the country saw an 18% to 21% reduction in both peak demand and energy consumption on a year-over-year basis. In the absence of knowledge of what the new normal will look like post-pandemic era, it will be difficult to peer through the fog of uncertainty and think through positioning once things return to normal.

In this article, we attempt to answer what Utilities should focus on during these times to be able to create opportunity out of adversity.

It is imperative of business leaders to not just focus on the current problem in hand, but also reimagine future and work towards it while dealing with this humanitarian crisis. History is full of examples, how companies have managed to create and strengthen their leadership position by accelerating their strategic overhaul during economic crisis. SARS lead to adoption of e-commerce and rise of Alibaba. Amazon launched Amazon Marketplace, its platform for third-party sellers in 2000 in the midst of dot-com crisis.

Depending on market position and financial strength, individual companies entered 2020 at different starting points. During downturn, challenges for residential customers would be starkly different from that for business customers. For energy, maintaining uninterrupted supply would be as critical as providing quick response to vulnerable service customers during breakdown. However, to raise the odds of survival and subsequent success, each business unit should carefully review their short-term plan to manage cash flow and long-term strategy to address industry demand disruption.

UTILITIES’ JOURNEY FROM COVID19 CRISIS TO NEXT NORMAL

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The first rule to manage through the crisis is ’to ’embrace digital technologies’. It has become imperative for Utilities companies to adopt digital strategies and technologies. Digitally transforming their operations now has become pivotal for operational eff iciency and employee engagement. Leveraging Data Analytics can help build if-then scenarios to identify best areas of intervention and corresponding opportunity cost. While some retrenchment is imperative during recession, it is important to note that historically, companies that have emerged from the crisis in the strongest shape relied less on layoff s to cut costs and leaned more on operational improvements. It is our view that in the current scenario, Utilities companies should try to expedite removal of all non-value add processes from their customer journeys while also fast tracking their digital and automation interventions wherever possible.

During financial recession, Costco rationalized its SKU from 60,000 to 3,700. It helped them with bigger wholesale discount and fine tune supply chain and inventory management. Building cost cubes and optimising cost through vendor consolidation during crisis can help utilities create a win-win proposition with their select vendors across categories. Careful and swift evaluation of rate and contracts basis historic procurement data will be invaluable in current times to identify and act on key levers for cost reduction.

A paper published by McKinsey (bubbles pop, downturn stop) traced the paths of more than 1,000 publicly traded companies during the last downturn. The graph compares performance of top 10% against S&P500 and the rest. These 10% companies called “Resilients” fared materially better than the rest. The finding here is consistent with a separate study conducted by HBR (How to Survive a Recession and Thrive Aft erward) and analysis by Bain (Beyond the Downturn: Recession Strategies to Take the Lead). One of the observations that stand out in this graph is the gap

built by Resilients during the recovery phase is sustained and further widened across years following downturn. This is key to our second point related to the importance of planning around recovery phase.

“Utilities companies should not lose focus of their transformation programs amid this downturn, but instead use this downturn as a catalyst to make these programs more relevant and expedite execution.”

The volatility and flexibility of market, post any economic crisis presents a great opportunity for everyone. However, reaping the benefits of this opportunity requires meticulous planning and methodical execution. It is our advice that Utilities companies should not lose focus of their transformation programs amid this downturn, but instead use this downturn as a catalyst to make these programs more relevant and expedite execution.

1 TRS = total returns to share holders; calculated as average of subsectors’ median performance within resilient and non-resilient categories; n = 1,140 companies; excludes financial companies and real-estate investment trusts.

2 resilient companies defined as top quintile in TRS preformance by sector.

Source: S&P Capital IQ; McKinsey analysis

Cumulative TRS performance1

Economicdownturn Recovery Growth

S&P 500

Resilients2

Non-resilients

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

350

300

250

200

150

100

50

0

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Drop in revenue and EBIDTA during crisis will make several new strategic deals, difficult in normal times, economically viable. Business leaders should carefully evaluate their respective business function P&Ls and forecasts to identify candidates for both acquisition and liquidation. Within energy and gas supply, several new suppliers will struggle to survive past this downturn and some of them will have an attractive portfolio of customers for bigger players. Hence, it is essential to carefully evaluate internal BU’s health as well as competitor’s customer base’s LTV upfront to have an educated negotiation close to recovery.

We believe that reacting to the immediate revenue and cost pressures due to COVID19 is necessary to survive. However, utilizing this time to prepare strategy for recovery phase is equally important to have a sustainable business beyond downturn. While the downturn is a battle for survival, recovery phase would be a battle for leadership. Leaders can grab this opportunity by taking swift action to steer through the crisis, and position their businesses for minimized disruption and productivity in the future.

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