Utility Week Live

UtilityWeek 14 | 16th - 22nD JAnUAry 2015 | UtILIty WEEK Change Adopt a positive mindset Not all businesses suffer during difficult market conditions: while some simply try to weather the storm, those businesses that can identify opportunities to benefit from change will flourish. A s water companies prepare for mar- ket opening and the energy sector nervously awaits the outcome of the election and CMA inquiry, 2015 is set to be a year of seismic change for utili- ties. With many factors outside companies' control, the only certainty is change itself. Fortunately, utilities are in a position to learn from the experience of other companies in managing change, and particularly from those that weathered the global financial cri- sis of 2007/08. PA Consulting's Managing Uncertainty research sets out key approaches that com- panies can take when facing an unknown future, drawn from the experience of nearly 100 companies during and aer the financial meltdown. The research shows that while two-thirds of companies suffered from the pace and scale of change, one-third were able to respond in such a way that they ultimately benefited from it. Understanding how they did so could put utilities at a major advantage in the year ahead (see Viewpoint on facing page). The research showed that the 'losing' two-thirds of companies initially viewed the recession as a normal event, a recession like any other. They thus adopted their usual approach to an economic downturn: batten down the hatches, cut costs and wait for it to end. The winning mindset was diametrically opposed to that. It recognised that this was a different kind of crisis that would create dislocations in many markets, and it sought ways to benefit from that. The difference in mindset manifested in three ways: speed of response; approach to cost reduction; and approach to market position. The results were dramatic: the companies with a winning mindset had a significantly higher shareholder value in the five years aer the crisis. The results were analysed using the framework of the OODA loop (see facing page). This showed that the big difference was not in when companies observed the crisis, but in how quickly they reacted. Some UK companies rushed to respond in 2007, when there was a run on Northern Rock, while others waited for 12 months, until the collapse of Lehman Brothers. They had a year to think about cost reduction and how to do it in a managed way. This had a pro- found impact on how they managed their cost reduction and market position. CA SE STUDY kEEPiNg a COOL HEaD a Uk-based consum- er goods company turned the challenge of the financial crisis into an opportunity to build market share. The company realised that the eco- nomic climate meant its competitors would slash their marketing spend in a quick bid to cut costs. it took a different approach. The company main- tained its marketing spend, but renegoti- ated all its elements. it knew it would be a strong bargaining position because other advertisers were withdrawing their spend. So at the same time as its competi- tors were massively reducing their mar- keting spend, this company doubled its marketing exposure, by maintaining its spend and getting twice as much for its money. This meant that throughout the worst of the crisis, the company more than doubled its share of voice, and it emerged from the recession with a significantly enhanced market share. Research: managing change CUT COSTS iN THE RigHT waY Cost reduction is the tradi- tional response to a reces- sion, so it was no surprise that it was the single most common action taken by the companies that partici- pated in the Pa survey. Some 82 per cent of re- spondents cut costs – but the highest performing companies, as judged by total shareholder return, had a carefully judged ap- proach to cost reduction. MOST COMPAnIES wERE A YEAR TOO LATE In bELIEvIng ThE SITUATIOn wAS SERIOUS Awareness of impact of financial crisis – % of respondents becoming aware over time Number of months to respond vs whether respondents cited a quick response Average TSR relative to sector Companies' agreement that they made decisions quickly Significant staff/cost reduction Moderate staff/cost reduction Little or no staff/cost reduction 1 to 5 (1 = strongly agree, 5 = strongly disagree) 0 1 2 3 4 5 6 7 8 9 10 Average number of months to respond Feb 07 Sep 07 Early 08 Sep 08 Late 08 Early 09 Mid 09 May 10 Late 10 10 5 0 -5 -10 40% 30% 20% 10% 0% Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree COMPAnIES TOOk A fURThER SIx MOnThS On AvERAgE TO REACT Staffing cuts correlate with poor performance Companies that adopted moderate cost reduction performed best Average TSR relative to sector 10 5 0 -5 -10

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