THE DIGITAL UTILITY: NEW CHALLENGES, CAPABILITIES, AND OPPORTUNITIES - JUNE 2018 - MCKINSEY
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The Digital Utility:
New challenges, capabilities, and opportunities
June 2018
McKinsey’s Digital Utility Project Managers: Copyright © 2018 McKinsey &
Compendium is written Dionne Abramson, Company. All rights reserved.
by experts and practitioners in Jessica Adams
the Digital Utility service This publication is not
line, McKinsey & Company’s Editorial Board: intended to be used as
Electric Power & Natural Dionne Abramson, Jessica the basis for trading in the
Gas practice. Adams, Adrian Booth, Eelco shares of any company
de Jong, Peter Peters or for undertaking any other
To send comments complex or significant
or request copies, email us: Editors:
financial transaction with-
McKinsey_on_Digital_ Josh Rosenfield, Barr Seitz,
out consulting appropriate
Utility@mckinsey.com David Wigan, Jill Wilder
professional advisers.
Art Direction and Design: No part of this publication may
Leff Communications be copied or redistributed
in any form without the prior
Cover Illustration: written consent of McKinsey
Wenjie Dong/Getty Images & Company.
The Digital Utility:
New challenges, capabilities, and opportunities
June 2018
Table of contents 5 6
Foreword Accelerating digital
transformations:
A playbook for utilities
Utilities trying to reinvent
themselves as digital
enterprises have found it hard
to scale up from digital pilots.
Adopting digital ways of
working, adding talent, and
modernizing IT will hasten
transformation.
40 48 57
Why utility boards should What every utility Cloud adoption to
care about IT architecture CEO should know about accelerate IT
Many utilities struggle to blockchain modernization
match the customer Blockchain technology can The cloud is a means, not
and commercial expectations streamline transactions an end. Success in
set by digital leaders. along the utility value chain. modernizing IT through the
Investing in faster, more Here is a look at six cloud is driven by a com-
flexible IT architecture emerging applications. plete standardization and
can accelerate their digital automation strategy.
modernization.
15 24 33
Fueling utility innovation Harnessing the power The revival of customer
through analytics of advanced analytics loyalty: How regulated
Utilities around the world are in transmission utilities can reshape customer
making big investments in and distribution asset engagement
advanced analytics. Getting management Improving the customer
the full value, however, Advanced analytics experience is imperative for
requires rethinking their is helping T&D operators utilities facing rising
strategy, culture, and improve performance, customer expectations, new
organization. reduce asset-management competitive threats, and
costs, and capture value. mounting cost pressures.
Here’s how success- Adopting an agile, digitally
ful utilities approach the informed, and design-
transition. based approach to reshaping
customer journeys will
help them thrive in the coming
era of energy choice.
65
Digital-experience design
for the field workforce
By focusing on valuable
and meaningful workforce
experiences, utilities
can move from incremental
improvements to
transformative ones.
4 The Digital Utility: New challenges, capabilities, and opportunities
Foreword
In 2010, the largest five companies in the world were Exxon, Apple, PetroChina, Shell, and ICBC. Today,
it is Apple, Google, Microsoft, Amazon, and Facebook. There is no doubt that digital is fundamentally
changing the world and reshaping how companies and society operate.
Every sector is affected—but some faster than others. Many utilities are initiating their journey, while
others have accelerated, launching a myriad of agile or digital factories, attracting new profiles,
and building in-house applications to tap into the potential of automation, analytics, and mobile to
transform their core business processes.
In this compendium, we draw on the experience of these companies. In a series of articles, we discuss
the opportunities and obstacles to digital transformation typically faced by utilities, and ways to
overcome them. And they explain why digital transformations must trigger true cultural change, if their
benefits are to be captured and sustained over the long run.
The first set of articles look at the context of the digital utility, the value at stake if you get it
right, illuminating what a transformation at scale really looks like, explaining the traits of a successful
transformation and walking you through the common steps of a such journey.
In the second set of articles, we highlight the important ingredients for such a transformation.
Put simply, we explore analytics, the importance of modernizing IT architecture, the value of customer
experience for regulated utilities, and we look at Blockchain—one of the “next horizon” technologies—
and describe its impact on the sector.
In the final set of articles, we take a deeper look at some foundational capabilities that are needed
to enable the digital transformation, such as cloud computing and design thinking. Both were foreign
concepts for most utilities just a few years ago, and yet today this is changing at a rapid pace.
Digital has helped many companies generate greater efficiencies across their operational business units,
significantly improve customer experience, and accelerate innovation to allow companies to stay
ahead of the competition in rapidly changing markets. We believe the time is ripe for utilities to reap the
benefits of this approach with a clearer understanding of the challenges that await and their solutions.
We hope that you find this compendium insightful and helpful in accelerating the use of digital across our
sector. Should you have comments or questions, or if you would like to visit a company that has is using
digital innovations at scale, please contact us at McKinsey_on_Digital_Utility@mckinsey.com.
Adrian Booth Eelco de Jong Peter Peters
Senior Partner Partner Partner
San Francisco office Charlotte office Düsseldorf office
Adrian_Booth@mckinsey.com Eelco_de_Jong@mckinsey.com Peter_Peters@mckinsey.com
5
Accelerating digital transformations:
A playbook for utilities
Utilities trying to reinvent themselves as digital enterprises have found it hard to scale
up from digital pilots. Adopting digital ways of working, adding talent, and modernizing IT will
hasten transformation.
Adrian Booth, Eelco de Jong, and Peter Peters
© Kinwun/Getty Images
6 The Digital Utility: New challenges, capabilities, and opportunities
For utility companies, transforming operations and embracing digital ways of working that involve
systems with digital technologies can create constant experimentation and could have
substantial value: a reduction in operating expenses unintended consequences. Second, the popular per-
of up to 25 percent, which can translate into lower ception of utilities as analog-era companies
revenue requirements or higher profits. Performance makes it hard for them to attract people to fill digital-
gains of 20 to 40 percent in such areas as safety, economy roles, such as data scientists. Third,
reliability, customer satisfaction, and regulatory utilities typically have complex legacy operations
compliance are also achievable. These prospects and IT environments that inhibit rapid innovation.
have led utilities to launch all sorts of efforts to use
digital technologies: reimagining customer None of these conditions is easy to remove, but some
journeys, adding digital leak detectors to gas grids, utilities are showing that this can be done. Here,
using predictive models to schedule mainte- we offer a closer look at the issues, along with insights
nance and other asset-management activities, and into how leading companies have resolved
equipping field workers with mobile devices them (exhibit).
that let them access technical instructions while
in the field, to name a few (see sidebar, “Digital Adopting digital ways of working
opportunities in the utility sector”).1 The conventional wisdom in the sector is that
utilities need to be stable, reliable, and secure above
Many utilities initiate these efforts with larger all. We agree that these are important virtues.
ambitions, like establishing a new way of operating However, utilities face fresh competitive threats and
based on agile management methods and other heightened customer expectations because
practices, and incorporating digital technologies advances in digital technology have enabled compa-
across the enterprise, including interactions nies in all sectors to operate in a more agile,
with customers, employees, suppliers, regulators, innovative manner. Digital-native and digitally
and partners.2 Yet few of the digital pilot proj- transformed businesses take risks with their
ects we’ve seen at utilities have created momentum innovations because fast-moving processes and
for comprehensive digital transformations. flexible systems let them correct mistakes
Research by the McKinsey Global Institute bears before serious harm occurs. These companies use
this out: a study of US companies showed that design thinking to understand customer needs,
utilities have achieved only a moderate level of conceive suitable products and services quickly,
digitization—well below that of other indus- launch them as soon as they are viable, and
tries. Significant potential to digitize the assets of make improvements in short cycles of testing and
utilities further and to deepen their digital engage- collecting feedback.
ment with customers remains.3
To thrive in the digital economy, utilities need
That’s understandable. In our experience working to increase their agility—their capacity for sensing
with utilities and speaking with their executives, challenges and opportunities and for quickly
we have learned that three issues appear to inhibit mobilizing the organization in response. Agility
their digital transformation. First, the working need not destabilize a utility’s assets or opera-
methods of the typical utility company are built tions. Indeed, greater agility can actually make assets
around safeguarding large, long-lived assets safer and more reliable by enabling utilities to
and minimizing operational risks. Because of this anticipate, detect, and resolve problems faster than
mind-set, utilities are typically cautious about they can today. Making that happen, though,
Accelerating digital transformations: A playbook for utilities 7Digital Compendium 2018
Accelerating digital transformations: A playbook for utilities
Exhibit 1 of 2
Exhibit Utilities can accelerate digital transformation by focusing on changes in
three main areas.
Focus area Adopting digital ways Attracting and retaining Modernizing the IT architecture
of working digital talent and environment
Key tasks • Gain the support of senior • Highlight the intellectual • Simplify the utility’s product
leaders so a digital challenge and social value of portfolio and business processes
transformation has high priority the utility’s work
• Build a digital factory to produce • Tap into a broad pool of digital • Shift from all-in-one,
new applications and insights specialists who value the monolithic IT systems to modular
using digital-native methods balance and stability that a IT architectures
utility offers
Source: McKinsey analysis
requires support from senior leaders and, ultimately, Seeing digital technologies and ways of working,
from the entire company. and hearing firsthand about digital transformations,
can assuage the concerns of utility executives
Getting senior leaders on board that digitization will throw off their companies’ fine-
One challenge for many utilities will be persuading tuned processes and systems. And learning from
senior leaders, many of whom have spent almost fellow executives about the pressure they face from
all of their careers in the sector’s more predictable digital competitors should remove any doubts about
former environment, to adopt digital ways of whether utilities ought to go digital.
working. Another challenge is prioritizing a digital
transformation over other important endeavors. Even in the best situations, with executives who fully
Digital opportunities are evolving quickly: McKinsey support the digital-transformation agenda, it
research suggests that digital first movers and fast can take years for an entire utility—with thousands
followers capture more value within their industries of employees, a vast asset base, and extensive
than slower-moving companies. In our experi- regulatory requirements—to embrace the methods
ence, utilities that take the lead on digital technologies of digital-native businesses. One utility executive
generally got a fast start after concluding that the we know lamented that it took his company several
potential downside of investing too little was greater years just to establish an in-house digital
than the downside of investing significantly and start-up. So how can a utility start to transform
gaining little in return. its working style?
Executives who are unsure about the need to digitize Building a digital factory
would do well to spend time at digital-native Some utilities have acquired or partnered with
companies and digitally transformed incumbents— smaller digital businesses to develop new products
not just in the utility sector but in others as well. and services. Several large European utilities
8 The Digital Utility: New challenges, capabilities, and opportunitieshave opened Silicon Valley offices that participate that would otherwise be made in other parts of the
in the start-up scene and invest in relevant digital company.) Most digital factories will conduct
enterprises. Such arrangements do help utility those activities on their own—for instance, by using
companies to augment their capabilities, but we have recruiters who specialize in hiring for digital
rarely seen them exert much influence on the roles. In other cases, a utility might need to establish
utilities’ own ways of working. separate processes, like quarterly planning-and-
budgeting cycles and performance reviews that let
A more effective approach is to set up an in-house executives track the contributions of digital
digital factory devoted to producing digital factories more closely.
applications and advanced analytic insights by using
the latest technologies and ways of working, such The exceptions that a utility makes to accommodate
as agile and DevOps. While such a digital factory can a digital factory should come with the expectation
be modest in size at the outset—20 to 50 people—it that it will have a transformative impact. Leading
should have a strong, well-positioned leader who can utilities hold their digital factories accountable for
marshal resources and ensure its direct visibility staggering performance gains, like reducing
to the CEO and executive team. The factory’s staff inbound-call volumes by 30 percent within a year or
should include business leaders who can act as reducing maintenance costs by $50 million within
product owners, along with designers and a range of 18 months. When utilities call for big changes, their
technical specialists, including software architects, digital factories think big and discover more
scrum masters, data scientists, and developers. opportunities as their efforts progress. One utility
Some can be internal transfers, while others will began by digitizing a paper-based compliance
need to be new hires or outside contractors process and ended up identifying a much greater
(as we discuss in the following section). opportunity to improve overall asset utilization.
Within the company, a digital factory can occupy any Attracting and retaining digital talent
number of positions—at the corporate level, within As a digital factory proves that it can successfully
a business unit, inside the IT department, or adjacent deliver new products, it should continue to add
to it. Some utilities might choose to set up more staff and tackle more assignments, with the aim of
than one digital factory, each serving a different part working on all the value pools the utility wishes
of the company. To help a digital factory forge to address. Tripling the group’s headcount within a
a distinct identity, it can be physically located in a year (or adding more factories) while gradually
space that reflects its ways of working, away replacing external contractors with internally trained
from the utility’s main office. or newly hired colleagues is the norm rather than
the exception because most utilities have a major
The offsite location of a digital factory speaks to digital-talent gap to close. For a full digital transfor-
a critical feature: it needs to be as autonomous and mation, many utilities will need to hire hundreds
self-contained as possible so it can operate at of product owners, experience designers, front-end/
a faster speed. Achieving a high level of autonomy full-stack developers, DevOps engineers, analytics
might mean liberating a digital factory from and machine-learning engineers, and other digital
dependencies on some enterprise-level processes, specialists—few of whom work at utilities today.
like hiring, planning, and budgeting. (In this
respect, too, a strong digital-factory leader can help This type of scale-up requires utilities to enter the
a great deal by taking responsibility for decisions competitive market for digital talent with a sense of
Accelerating digital transformations: A playbook for utilities 9Digital opportunities in the utility sector
Digital-transformation programs in the utility sector must meet requirements that don’t always apply to
others. A significant proportion of utility assets and operations have zero tolerance for safety and
performance deviations beyond a specific range. Plant-control and grid-management systems, for example,
need to be risk proof and predictable. For these reasons, utilities should pay special attention to safety
and performance expectations when they digitize, particularly in their high-sensitivity business functions. With
those expectations in mind, utilities can benefit greatly from implementing digital technologies and adopting
digital ways of working all along their value chains (exhibit).
Digital Compendium 2018
Accelerating
Opportunities willdigital
vary fortransformations: A playbook
different types of utilities; for utilities
for example, fully integrated ones in regulated markets
Exhibit 2 of 2
tend to seek operational-expense savings, as well as higher productivity and network reliability. Many utility
operations, such as asset management, can be streamlined through automation. Utility executives and
managers can make better decisions when they get insights from artificial-intelligence (AI) applications that
Exhibit Digitization can create value across the utility value chain.
Potential operating and Transmission
maintenance cost savings, and distribution Customer
% of operations and maintenance and retail
3.3 Corporate
spending for each business area 2.7
center
10.3
8.9
12.7
Generation
Process automation 2.1 3.5
Digital enablement 3.4
12.4
9.1 8.9
Advanced analytics 5.5
• Predictive and • Predictive • Customer- • Employee-
condition-based maintenance and satisfaction analytics performance
maintenance outage prevention • Customer-journey analytics
• Plant optimization • Crew-productivity optimization • Intelligent process
(eg, heat rate, analytics • Collection-risk and automation
auxiliary load) • Vegetation bad-debt reduction • Crew-productivity and
• Fuel- and management • Grid-defection and equipment-demand
chemical-usage • Efficiency and churn-risk prediction forecasts
optimization line-loss reduction • Product development
and pricing
Source: McKinsey analysis
10 The Digital Utility: New challenges, capabilities, and opportunitiescrunch large data sets. Safety and regulatory-compliance programs can be reinforced with advanced
systems for directing employees and collecting their observations.
Additional opportunities can be found in customer operations. Digital-native companies and digitally
transformed incumbents outside the utility sector have taught their residential and commercial customers
to expect more seamless, flexible, and personalized customer service. Utilities that fall short of those
expectations stand to lose business—which is already happening in Europe, where deregulation has pushed
customer-churn rates as high as 25 percent. And digital-native companies have begun to disrupt the utility
sector by offering lower-cost, higher-value services, as they have in the telecom and cable industries.
To counter these pressures, some utilities are replicating the sophisticated customer-service practices
of digital-native companies. The most ambitious are looking at how to use virtual agents, AI, and “one-click”
mobile experiences to help customers resolve their concerns quickly and easily.
urgency, especially because they are seldom seen with real-time information. The solution was so
as innovative, cutting-edge businesses. We’ve seen innovative that the company won a cross-
several tactics help utilities vie successfully industry award from InformationWeek.4 Showcasing
for digital hires. One is to play up the intellectual achievements like these can demonstrate
challenge and reward of the utility’s digital to prospective digital hires that utilities provide
agenda. Utilities can appeal to the hearts of digital genuine opportunities to improve the lives
specialists, as well, in ways that many other of customers and colleagues.
enterprises can’t. For one thing, they can highlight
their socially valuable mission of providing Another digital-recruiting tactic that utilities
a community with reliable energy. They can also have used successfully is to go after a broad, diverse
show that their digital jobs have more meaning pool of digital professionals. While there’s some
for the people who hold them than jobs at a lot of truth to the stereotype of the young, single-minded
other companies. software developer who thrives on energy
drinks, 16-hour workdays, and a high-pressure start-
For instance, one European utility presents its up environment, that stereotype tends to limit
approach to digital technology as an important part the imagination of incumbent-company recruiters
of its efforts to lower its environmental impact— seeking digital talent. Plenty of digital specialists
and it has success stories and a generation portfolio value a reasonable work–life balance and the
to back up its claims. Another utility, PG&E, set stability of a large, established company. Utilities
up a digital center of excellence, which it called Digital can typically provide both. PG&E’s Digital
Catalyst. This group, for example, sent digital Catalyst, for example, has a mission to deploy
specialists to shadow electricity and gas field workers innovative digital solutions “for our people,
for hundreds of hours to uncover ways of aiding by our people,” in the words of CIO Karen Austin.5
their work. That method, based on design thinking, That has required PG&E to hire digital special-
led the Digital Catalyst team to create a mobile ists in California’s San Francisco Bay Area, perhaps
app to help field crews complete asset inspections the world’s hottest market for digital talent.
more efficiently and safely by furnishing them Utilities with headquarters outside pricey metro-
Accelerating digital transformations: A playbook for utilities 11politan areas, where many digital-native companies bigger, more cumbersome, and harder to maintain,
are based, can also offer prospective hires the with millions of lines of custom code written
chance to live in places where their salaries go further in obsolescent programming languages, such as
than they might in high-cost cities. COBOL, by developers who have long since
retired or moved on to other jobs.
Finally, some utilities have chosen to form partner-
ships with nearby universities as a way of sourcing This state of affairs severely limits the ability
digital talent as well as fresh ideas. To attract of utilities to adopt the modern technologies and
graduates in digital fields, one European utility has flexible IT-management practices of digital
taken practical measures such as sponsoring businesses. Digital-native companies base their
sector-relevant courses and research, providing decisions on real-time data from many sources. They
students with internships, and allowing deploy new software functions every few weeks
managers to take sabbaticals from their utility and make updates even more frequently, sometimes
jobs to teach. daily. Their processes are easy to reconfigure
when they identify new customer or employee needs.
Modernizing the IT architecture and environment Complex, monolithic IT systems are poorly
Most utilities have managed their IT architectures suited to these operational demands, but replacing
and environments much as they have their physical such systems can take five years or more and
assets. Utilities were early adopters of large-scale cost hundreds of millions of dollars. Instead, utilities
software packages such as customer-information should modernize their IT architectures and
systems, distribution-management systems, environments progressively.
asset-management systems, and outage-management
systems. They invested in solutions that offer A necessary first step is to simplify the utility’s
maximum stability and performance and then cus- product portfolio and business processes. Many
tomized them as their requirements outgrew utilities have seen their offerings, and the
the systems’ standard features. corresponding operational requirements, proliferate
in response to changing customer needs and
Many of those large-scale software systems have regulations. One European utility’s portfolio com-
now been in place for decades. Some utilities prises thousands of products and services,
are running several systems of the same type side by ranging from traditional energy products with
side, after merging with or acquiring companies different rate structures to new offerings for
that had their own legacy systems. As a result, the IT energy efficiency and distributed generation. Each
architectures of utilities have become steadily product or service puts unique demands on the
One challenge for many utilities will be persuading senior
leaders, many of whom have spent almost all of their careers in
the sector’s more predictable former environment, to adopt
digital ways of working.
12 The Digital Utility: New challenges, capabilities, and opportunitiesutility’s IT architecture. After the company decided master huge systems. It also allows a utility to
to allow only offerings that can be supported by draw on a diverse ecosystem of partners: traditional
one of four variants of standard back-office processes, vendors offering standard applications, start-ups
it reduced its portfolio to 150 offerings that still and crowd-sourcing forums that help develop
met 95 percent of its customers’ needs. By reducing homegrown applications, and system integrators
the number of functions software must under- to make all the pieces work together.
take, winnowing down a bloated portfolio obviously
makes it easier for a utility to modernize its How utilities can jump-start their
IT architecture. Simplifying lineups of offerings digital transformations
also allows utilities to streamline their According to McKinsey research, the opportunity
operations, which shrinks their demand for new for incumbents to get ahead of the pack on digiti-
technology solutions. zation can be narrow: by the time industries near the
40 percent digitization mark, digital leaders have
A core tenet of efforts to modernize IT is the need to already secured large market shares. For utilities,
shift from all-in-one, monolithic systems to these dynamics make it imperative to get digital
a modular IT architecture. In such an architecture, transformation under way as soon as possible. Three
currently used or off-the-shelf software pack- steps can help utilities set a fast pace.
ages provide a stable backbone for business functions
with standardized requirements, such as billing, Build an executive-led digital mind-set
customer-relationship management, or work and When utility executives adopt digitally savvy
asset management. Companies should select behavior, that has a constructive influence on the
standard software packages that meet their essential rest of the organization. Some utility execu-
needs rather than opting for best-of-breed solutions tives we know hold regular meetings with technology
that cost extra and have superfluous features. executives, venture capitalists, and entrepreneurs
so they can keep up with developments in the digital
With a stable backbone in place, utilities can develop economy and collect ideas to share with their
custom applications for functions such as cus- teams. Other key moves are to put a single executive,
tomer service, product development, analytics, or with a direct reporting line to the CEO, in charge
mobile-enabled field operations, where unique of technology and to encourage the board to devote
capabilities can provide competitive advantages that some of its agenda to technology and the strategic
software from outside vendors often lacks. This implications of digitization.
way, companies can benefit from the economy and
reliability of standard software packages, as well Start small, but with big ambitions in mind
as the sophisticated, leading-edge features that add a Since a digital transformation should ultimately
great deal of value. cover the entire organization, utility executives
sometimes find it hard to decide where to begin. In
Economy and rich features aren’t the only our experience, it helps to identify a single business
advantages of modular IT architectures. Ease of domain (such as customer experience, asset
managing the entire IT environment is another. operations, or the execution of large projects) where
A modular architecture helps a utility’s IT depart- a digital transformation could provide ample
ment deliver more services more quickly because value and to begin the transformation there. The
smaller teams can focus on specific software choice of domain should thus determine where
packages or end-to-end processes, without having to the digital unit is placed in the organization and what
Accelerating digital transformations: A playbook for utilities 13it does first. Most utilities have 15 to 20 customer
journeys and business processes that will be strong
candidates for digital transformation, including Even in the most optimistic scenario, it takes years
maximizing the efficiency of plants, conducting pre- to transform a utility so that it can take full
dictive maintenance, assisting field crews, and advantage of digital technologies and methods. We
onboarding customers. Within the starting domain, believe the ultimate outcome is worthwhile:
utilities should prioritize one or two high-value, an organization that can deliver greater value in the
highly feasible digital applications and gradually near term, as well as the infrastructure to identify
move toward the end-to-end transformation and pursue growth opportunities while adapting to
of journeys and business processes. economic and regulatory developments in the
long term. To achieve that end state, a utility first
Ideally, the initial digitization effort will generate needs to adopt digital ways of working, build up
enough cost savings to offset any necessary spending its digital workforce, and modernize its IT environ-
in the first year. Subsequent cost savings can be ment. Companies that can make these enabling
reinvested in later waves of digitization. In addition, changes quickly will stand a better chance of securing
the initial effort should produce other impressive market share against digital attackers and trans-
outcomes, such as enthusiastic employee feedback, formed incumbents.
higher customer satisfaction, or notable perfor-
mance gains. (These early successes can also help 1
For more, see Adrian Booth, Niko Mohr, and Peter Peters, “The
convince naysayers that the digital transfor- digital utility: New opportunities and challenges,” May 2016,
mation is worth the effort and doesn’t compromise McKinsey.com.
safety, reliability, or the customer experience.) For more on digital transformation, see Peter Dahlström,
2
Driek Desmet, and Marc Singer, “The seven decisions that
Once the transformation of the initial domain is well matter in a digital transformation: A CEO’s guide to
under way, executives can lay out a long-term reinvention,” February 2017, McKinsey.com, as well as “ING’s
agile transformation,” McKinsey Quarterly, January 2017,
road map for transforming other business domains
McKinsey.com.
and for building the capabilities to do so. 3
For more, see James Manyika, Sree Ramaswamy, Somesh
Khanna, Hugo Sarrazin, Gary Pinkus, Guru Sethupathy,
Make anchor hires to attract digital talent and Andrew Yaffe, “Digital America: A tale of the haves and
have-mores,” McKinsey Global Institute, December
Digital specialists want to work with and learn 2015, McKinsey.com.
from people who have a track record of leading teams 4
Sara Castellanos, “How PG&E’s CIO sped up mobile app
that envision, develop, and deliver innovative deployment,” Wall Street Journal, April 11, 2017, wsj.com, and
“Innovative app for PG&E field crews earns InformationWeek IT
solutions to major business problems. When a utility
Excellence Award,” PG&E, May 22, 2017, pge.com.
hires high-caliber digital leaders, this sends 5
“Innovative app for PG&E field crews earns InformationWeek IT
a signal to prospective employees that the company Excellence Award,” PG&E, May 22, 2017, pge.com.
recognizes the value of digital technology and
appreciates the need for quality people. Anchor hires Adrian Booth is a senior partner in McKinsey’s San
Francisco office, Eelco de Jong is a partner in
can also provide digital recruits with compelling
the Charlotte office, and Peter Peters is a partner in the
reasons to come and work on the utility’s digital trans-
Düsseldorf office.
formation. The senior head of design at one utility,
for example, has helped attract new hires by sharing
Copyright © 2018 McKinsey & Company.
the story of how her team developed a mobile app All rights reserved.
that made it easier for thousands of line workers to
do their jobs well.
14 The Digital Utility: New challenges, capabilities, and opportunitiesFueling utility innovation
through analytics
Utilities around the world are making big investments in advanced analytics. Getting the full
value, however, requires rethinking their strategy, culture, and organization.
Marcus Braun, Eelco de Jong, Alfonso Encinas, and Tim Kniker
© Getty Images
Fueling utility innovation through analytics 15Advanced analytics (AA) can deliver enormous value operations and support processes. Utilities often
for utilities and drive organizations to new frontiers focus on customer or operational applications
of efficiency—but only with the right approach. There’s first, but smart companies place equal emphasis on
little to be gained from just bolting on a software support functions such as human resources,
solution. The real value comes from embedding data procurement, safety, and internal audit—all of which
analytics as a core capability in the organization can drive just as much bottom-line value.
and using it to detect pain points, design solutions,
and enable decision making. Conservative esti- Structure your use-case inventory into groups of
mates supported by rigorous use-case analysis suggest applications that resolve similar pain points or
that AA can boost profitability by 5 to 10 percent, address the same business processes. Applications
while increasing satisfaction for customers and focused on areas such as asset maintenance,
improving health and safety for employees. But cap- contractor productivity, employee safety, or reporting
turing impact on this scale is no easy feat, and are likely to span multiple business units and
utilities often struggle with the same few challenges, deliver value across the entire enterprise, rather
which undermines the success of an analytics than within a single silo.
transformation. Below, we look at these challenges
and show how they can be overcome. Using simple valuation methods, quickly estimate
the potential business impact for each application
Challenge 1: Developing an analytics strategy across all applicable dimensions, including cost,
that’s clear about what to prioritize and why revenue, safety, reliability, and employee engagement.
As new applications proliferate across the energy This requires close collaboration between business
value chain (see sidebar, “Applying advanced owners, analytics specialists, and the financial
analytics at utilities”), advanced analytics poses planning and analysis team to ensure consistency in
a strategic challenge. How do utilities prioritize quantification and overall approach.
use cases and set appropriate aspirations for business
impact? Without clarity on these matters, com- Prioritize the applications using multiple criteria,
panies can easily lay themselves open to excessive including value, feasibility, alignment with
influence from external vendors or get caught corporate strategy, and business engagement. How
up in chasing the latest viral use case. One US utility much weight to give each factor depends on the
partnered with a technology supplier and invested stage a utility has reached in its AA journey. When it
millions in wind-forecasting software only to is starting out, business excitement and engagement
discover that the effort wouldn’t yield any returns. are critical to achieving buy-in. At later stages,
Another large utility spent years building value and feasibility become more important. By the
in-house analytics capabilities and developing more end of the journey, analytics is so critical that
than a dozen use cases before realizing it had priorities are dictated by overall corporate strategy.
yet to make any headway on the biggest and most
valuable opportunities. Working through these steps need not take long. One
utility took just a few weeks to develop a list of nearly
We advise analytics leaders to work through four 200 use cases, prioritize them based on feasibility
steps to establish their business priorities: and business impact, and select a handful of products
to start building immediately. In mature digital
Develop a comprehensive inventory of use cases organizations, the list of potential applications can be
spanning the whole value chain, including integrated into product strategies and constantly
16 The Digital Utility: New challenges, capabilities, and opportunitiesApplying advanced analytics at utilities
The energy industry has already developed hundreds of uses for advanced analytics, and use
cases will continue to proliferate as data availability, computing power, and analytical techniques improve
(see exhibit).
Industry
Digital leaders are using2018
Compendium advanced analytics in increasingly innovative and unconventional ways, including:
Fueling utility innovation through analytics
Automatic
Exhibit 1 of inspection
1 of power lines and vegetation management using drones, image processing, and
LIDAR (light detection and ranging—a remote-sensing method using pulsed lasers)
Voice analytics applied to call-center recordings to gain deeper insight into customer interactions
and behaviors
Exhibit Analytics has multiple applications along the utility value chain.
Examples: not exhaustive
Generation Transmission Distribution Customer Corporate
Data-driven Fault and status Predictive asset Field-force Improving People analytics:
supply/demand detection using maintenance enablement and customer data-driven decision
matching, sensors and based on asset optimization interactions making on hiring,
enabling high-frequency condition and (including through insight, training, performance
distributed energy data criticality contractor segmentation, management, and
resources (DER) management) and choice retention
Optimizing heat Optimizing grid Vegetation Optimizing Data-driven tools Health and safety
rate and plant planning (e.g., management (e.g., emergency to decrease grid analytics (e.g.,
availability incorporating DER optimizing trim response to load by DR/DSM1 investigation of
and evaluating cycle, route outages and (e.g., peak root causes of
non-wires analytics, storms shaving), including common
alternatives) contractor smart operation of accidents)
management) electric vehicles
1 Demand response/demand-side management
Fueling utility innovation through analytics 17 Machine learning for predictive maintenance (for instance, anticipating the likelihood of breaker failures)
HR analytics that raise employee productivity, reduce attrition, optimize training spend, and provide a fact
base for succession planning
Health and safety predictive models that identify which assets, teams, or individuals are most vulnerable
to incidents and suggest levers to reduce risk
The value derived from these efforts includes:
Operational benefits in the form of lower operating expenditures, greater capital efficiency, extended asset
lifetimes, and safer operations
Improved customer service with a better understanding of customer needs, a superior customer
experience, and increased reliability
Better employee engagement, since less time is wasted in lower-value tasks, and travel and schedules
are optimized
The creation of new businesses in areas such as home energy management, smart energy efficiency,
advanced demand response, and microgrid optimization
updated and reprioritized against other ideas. Challenge 2: Converting hype into measurable
Relative newcomers often start with a simple yearly bottom-line impact
process to evaluate, update, and reprioritize Many utilities launch use cases but struggle to capture
the list. tangible value. Success requires the coordination
of a complex series of steps, and the collective impact
Do is only as good as the weakest link. Common facets
Build a prioritized roadmap of use cases to pursue, of this challenge include:
based on vetted value estimates and alignment
with the organizational strategy Not understanding the impact at stake and the
process changes needed to capture it. We’ve seen
Don’t several companies make large investments
Chase after viral use cases without assessing the in analytics projects without a clear business case
value at stake or a monetization plan. Other utilities have
developed promising predictive models but failed to
Leave it entirely to business teams and implement the associated process changes needed
departments to prioritize use cases to foster adoption.
18 The Digital Utility: New challenges, capabilities, and opportunitiesStruggling to get access to data or use all the data Leaders in analytics avoid these pitfalls by:
available. Many energy companies have observations
and maintenance tickets that could yield valuable Involving actual users in the solution design, not
data for predictive maintenance, safety, and other only during pilots but from the planning stage
use cases, yet all too often this data is wasted because through to implementation. This is the easiest, most
digital observation tools and text-mining capa- cost-effective way to capture valuable feedback,
bilities are lacking. Another great source of data is build engagement, and ensure adoption.
utilities’ vast archives of recorded calls from
call centers, which can be used—but seldom are—to Following a business-centric approach that starts
create insights using voice-mining analytics. with developing a solid understanding of the
External data sets such as social-media and weather performance of an entire work flow, such as plant
data are also commonly overlooked. outage management, asset maintenance, or
record-to-report in the back office. From this under-
Being unable to deliver an analytics solution that standing, an organization can identify all the levers
works well. Adoption often suffers because of available to drive a faster, safer, and more productive
a lack of collaboration with business users during way to do business. Rather than focusing only on
the development phase. Too often, organizations pain points in the current process, utilities should
rely on senior managers or subject-matter instead map out a fully reimagined three- to
experts from the business, but fail to involve the five-year vision for the whole work flow as well as
front-line crew members who will use the tool a prioritized set of the technical solutions required
on a day-to-day basis. to realize the vision.
Moving on to the next use case before value has Building a strong product-management capability
been captured. We’ve seen utilities have success that is structured around business processes
with an initial pilot but then be too quick to rather than technical solutions. Product managers
redeploy resources and funding before the effort have full visibility and ownership of an end-to-
has properly bedded in. The result is lackluster end business process, drive the development of the
front-line engagement, limited adoption, and for- future vision for it, identify which data sources and
feited value. technology solutions are needed to achieve
the vision, and manage rollout and the training
Not having the necessary capabilities and talent. of end users.
That doesn’t just mean data scientists, but all
the roles involved in capturing business value, such Developing a set of key performance indicators (KPI)
as the designers and product managers who that measure progress at every stage from model
act as “translators” between data engineers, data development and testing to user adoption and value
scientists, and the core business. Other roles capture. This ensures that lessons are learned
often overlooked include DevOps experts and from experience and errors are quickly corrected.
the data architects who enable access to clean data.
Though expensive, these capabilities can save Developing an inventory of required capabilities by
money in the long run by simplifying data curation translating planned use cases into a roadmap for
and processing needs in future. talent that includes all the skills—technical and non-
Fueling utility innovation through analytics 19technical—needed to deliver an analytics project. Challenge 3: Making data enable productivity,
This effort should also include defining a framework not inhibit it
for assessing “make or buy” decisions based on In our experience, analytics organizations often
technology complexity, use-case criticality, the scale struggle to develop the data-governance and
and pace of the use-case rollout, and the utility’s platform practices they need to deliver value. When a
long-term analytics strategy. For example, a utility clear data strategy is lacking, the data ecosystem
aspiring to become a leader in renewables may will be underdeveloped, making the development of
prefer to develop an asset-maintenance solution inter- new use cases costly and slow. Key aspects of this
nally to create a competitive advantage over com- challenge include:
petitors that use off-the-shelf products from vendors.
Undocumented data sources and multiple sources
Do of truth. Alarmingly, organizational surveys often
Involve users in solution design from the plan- report that data users don’t believe their company
ning stage onward, not just during pilots has a clear data-ownership structure or feel
confident that data objects are precisely defined
Follow a business-centric approach linking or accurate, particularly when it comes to
analytics solutions to a clear plan for process similar objects from different sources. In many
optimization and monetization cases, organizations have trouble simply estab-
lishing whether data exists. It’s also common for the
Create a standard framework to measure, track, business to have little trust in new data systems,
and report on impact until full run-rate value has and little comfort in using them.
been captured
Unclear access rights and privileges. It’s not
Allocate time in project schedules for change unusual for some parts of an organization to limit or
management and end-user training block access to data that’s critical for decision
making or analytics, often citing data confidentiality
Build a strong product-management capability or cybersecurity as the reason.
with end-to-end responsibility for work
processes, not technologies Insufficient tools and capabilities for preparing data
for analysis. Many utilities struggle to ingest and
Look for talent beyond data scientists and hire curate data efficiently, which increases the time and
translators, DevOps experts, cloud specialists, difficulty of developing new digital tools. When
and data engineers as well building an analytics product, industry leaders spend
no more than 20 to 30 percent of the development
Don’t time on data cleaning, preparation, and blending—
Deliver a solution to end users and tasks that may take 60 to 80 percent of the time
then immediately switch all resources to for laggards.
the next project
A “build it and they will come” mind-set. Some
Think analytics talent = data scientists utilities commit to major projects in building data
platforms or data-storage infrastructure in the
belief that once data is available, the business will
want to use it. But they can end up investing tens
20 The Digital Utility: New challenges, capabilities, and opportunitiesConservative estimates supported by rigorous use-case
analysis suggest that AA can boost profitability by 5 to
10 percent, while increasing satisfaction for customers and
improving health and safety for employees.
of millions of dollars in new systems without any real Develop a data strategy that supports the wider
business benefits to show for it. analytics strategy
Best-in-class data-governance practices allow Don’t
industry leaders to fast-track value capture by: Have unclear data rights and governance
Defining a target data structure that is aligned with Skimp on investments in data-cleansing,
the organization’s needs, enforces standardization, processing, and visualization capabilities
and serves as a catalog providing a sound basis
for key use cases. To manage this data structure, Invest heavily in collecting and cleaning
organizations need to align on clear data-ownership data before starting to develop individual
and governance policies—who has access to use cases
what data—that are respected and enforced across
the organization. Challenge 4: Embedding analytics
transformation in your culture and organization
Using an agile approach to build the data platform A successful AA transformation depends on the right
and defining a minimum viable product (MVP) that culture and organization. That means cross-
delivers just enough functionality to allow the first functional teams working through short, iterative,
few products to be developed. An MVP often relies on test-and-learn cycles—an unfamiliar prospect
quickly deployable open-source technologies, easily for utilities accustomed to long development time-
obtained data, and tools such as Tableau and Alteryx lines. Navigating this transition will involve:
that speed up the production of a proof of concept.
More advanced or specialized components and data Creating an environment conducive to
are often added iteratively in future releases. experimentation and learning while taking care not
to jeopardize strategic pillars such as reliability
Do and customer satisfaction. Adopting agile practices
Define organization-wide processes and rules and launching short sprints to test new ideas in
for data curation, documentation, sharing, the real world (rather than debating them in theory)
and ownership can often feel uncomfortable at first—but falling
back on rigid waterfall processes will result in endless
Develop and maintain a central catalog planning iterations, blown deadlines, persisting
of data pain points, and a failure to create value.
Fueling utility innovation through analytics 21Working out what kind of structure will best cases in a short time but also role modeled the intel-
support the analytics transformation: centralized, lectual curiosity and bias toward business impact
decentralized, or hybrid. Many utilities are that he expected from his leaders.
too decentralized, leaving them unable to reap the
benefits of standardization and best-practice Shape a digital and analytics organization that
sharing. All too often, a utility deploys different fits the company’s governance model, maturity, and
solutions from different vendors to build what potential for standardization and best-practice
is essentially the same product in different business sharing. This includes ensuring that the executive
units. Lessons learned aren’t shared, and scale driving the analytics transformation has direct lines
benefits aren’t captured. On the other hand, a fully of communication to the CEO, even if the role
centralized model is seldom the answer. We’ve doesn’t always report there. Most analytics teams
seen utilities where the analytics organization and adopt a hybrid model, with data governance,
the business work at arm’s length, at the cost of tools, and standards defined centrally; a close-knit
misaligned priorities and—worse—the development community of data scientists working both
of products that disappoint the end user. centrally and within the business; and clear roles
for product owners, who form cross-functional
Securing senior management commitment and teams to drive the day-to-day execution of use cases
appointing the right leader to act as a bridge and have direct ties to business executives.
between the CEO, the analytics team, and other
parts of the organization. In some utilities, Do
senior executives in charge of analytics are hidden Align your analytics organizational structure
three or four levels down in the organization, with your overall business strategy, governance
leaving them powerless to remove any roadblocks model, and level of maturity
that arise. In other companies, their responsi-
bilities are too broad and unfocused. Develop a structure that ensures best
practices are shared enterprise-wide yet enables
In our experience, most analytics leaders have a business units to be closely involved in
good grasp of the organizational model best suited to solution development
their company. This enables them to:
Embed critical analytics capabilities across
Establish the right culture, starting with top the whole organization, not just in an analytics
executives who are curious to explore new analytics center of excellence
solutions, have a bias to action, and strike a good
balance between delegation and control. This starts Don’t
at the top, with the CEO and senior team empha- Limit your analytics transformation to new
sizing the importance of analytics, providing the right software development and overlook culture and
incentives, and role modeling desired behavior. project management
One CEO asked his top 50 senior managers to come
up with at least three ideas each on how machine Expect the analytics teams to develop
learning could be used to improve the business. In their own mandate for driving change across
doing so, he not only created a vast array of use the organization
22 The Digital Utility: New challenges, capabilities, and opportunitiesAdvanced analytics is transforming industries Marcus Braun is a consultant in McKinsey’s
worldwide and enabling organizations to achieve Minneapolis office, Eelco de Jong is a partner in the
unprecedented levels of productivity. For Charlotte office, Alfonso Encinas is an associate
utilities, which lag other industries in digital partner in the Washington, DC, office, and Tim Kniker
maturity, the value at stake from such a is a senior expert in the Boston office.
transformation is substantial. However, making
The authors wish to thank Adrian Booth and Prasoon
the leap is far from easy, and many utilities place
Sharma for their contributions to this article.
big bets only to fall short of their objectives. By
adopting best practices and defining the strategy,
Copyright © 2018 McKinsey & Company.
culture, and organization they need to achieve All rights reserved.
their analytics aspirations, utilities can maximize
their odds of capturing the step-change improve-
ments that industry leaders already enjoy.
Fueling utility innovation through analytics 23You can also read
