Highlights
- Utility companies have to revisit their strategies to ride on the next wave of growth in the sector.
- Utility providers can embrace change by leveraging the ecosystem model to deliver customer-centric services through digitally integrated platforms that combine offerings of multiple partners, and benefit from the economies of scale.
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Abstract
Operating in highly commoditized markets, utility players the world over are undergoing a massive fundamental transformation.
Faced with ever-increasing regulations, shrinking margins, and evolving consumer requirements, utility companies are constantly exploring newer avenues to gain a competitive advantage and stay ahead of the curve. Market consolidation, entry of players from adjacent industries, and consumer churn are other challenges utility operators face.
We believe that utility companies have to revisit their strategies to ride on the next wave of growth in the sector. They must think beyond working and selling in silos. Market players need to explore and build on cross-industry partnerships to embrace a service-based approach, with the consumer at the center and positive customer experience as the focus. This purpose-driven model prioritizes customers, their expectations, and convenience. This paper delves into how utility providers can embrace change by leveraging the ecosystem model to deliver customer-centric services through digitally integrated platforms that combine offerings of multiple partners, and benefit from the economies of scale.
Marketplace evolution
While COVID-19 has altered the dynamics of the utility sector, the market started showing signs of transformation well before the pandemic.
With market consolidation and regulatory restrictions at one end and the entry of newer players from adjacent industries at the other, competition has been intensifying over the past few years in developed markets like Europe and Australia. Though countries like USA have a regulated jurisdiction, these utility companies are also impacted by tightening regulations and changing consumer expectations.
A case in point is the UK market, where the number of active players in the utility segment has been consistently falling over the past four years. From a record high of 70 active domestic suppliers of gas and electricity in March 2018 (in Great Britain), the number decreased to 49 in March 2021 (Figure 1). Six large legacy suppliers hold nearly 70% of the market, while other large, medium, and small players account for the rest. However, the combined gas and electricity pre-tax domestic supply margin for the large legacy players remained negative by the end of 2020. Moreover, customers continue to switch in relatively small but consistent numbers from legacy players in favor of smaller, newer companies. Nearly 600,000 gas and electricity customers switched suppliers in June 2021, although recent months witnessed many of these smaller companies collapse.
Suppliers offer the same commodities and the scope for differentiation is limited to pricing, reliability, and customer care. Consumers hence switch to providers with lower tariffs and reliable support. Most market regulators cap prices, which further reduces the profitability of players. Customer experience, therefore, has become a strong differentiator.
Figure 1: Number of active domestic suppliers by fuel type in Great Britain
Embracing the ecosystem model
To stand out among the various players and gain competitive advantage, suppliers must move away from selling products and begin to market services and customer experience.
Offering utilities in a service model and bringing in adjacent services under the umbrella is a reliable method to be sustainable in this constantly evolving segment. Working closely with partners across industries is imperative to build ecosystems.
Most global companies are actively considering the ecosystem business model given its potential to generate business value. Consider the example of Airbnb, which sells vacation stay as a service and bundles indoor and outdoor activities and experiences by partnering with various players. The revenue potential (Figure 2) is amplified for all players in the value chain as they present themselves as one unified entity to the consumer, who appreciates the convenience.
Figure 2: Various players in the ecosystem model and the amplified revenue potential
The integrated network economy presents a revenue opportunity of $60 trillion by 2025, states McKinsey. Ecosystems also have the potential to constitute about 70% of the total economy share, adds the report. Ecosystem strategies can generate significant value both by growing the core business as well as expanding the portfolio into new products and services.
Adapting to changes in the utility sector
In this highly connected age, business value is created through horizontal linkages across traditional industry verticals by leveraging network facilities and distributed platforms.
Replicating the ecosystem model in the utility sector (Figure 3), incumbent players can realize business value in one of three ways:
- Leverage service adjacencies through acquisitions or collaborations. Add additional services such as telecom, home, or EV insurance to the offering and provide an easily accessible platform for consumers to transact in a frictionless way. This reduces the numbers of players consumers need to interact with and brings in the necessary loyalty as customers get many of the services from a single provider through a shared user interface.
- Build a shared data platform with diverse market participants to create a crowdsourced and cost-effective solution. The utility provider will lead the ecosystem and be the one touchpoint that customers interact with. Revenue and profits will be divided among the various players based on agreed terms. All the players involved in the ecosystem stand to gain because this model reduces upfront investment and expedites time-to-market.
- Analyze the entire value chain and determine opportunities to reduce the number of intermediaries in the participant network.
Figure 3: A sample ecosystem mapping of the utility sector
Reenergizing the businesses of utility players
Tens to hundreds of utility players contend for market shares in similar consumer segments in highly competitive global markets, such as the UK, Canada, and Australia.
Energy and telecom companies have now begun to embrace the ecosystem model to further strengthen their market position and future-proof their businesses. For instance, several players are partnering with property builders to offer move-in services as a bundled offering with electricity, gas, mobile, and internet connections. They are also offering allied services, including solar installation, appliance services, insurance, mortgage, and banking. These offerings would easily fit into their portfolios because all the necessary information about the customers is already with the companies; consumers can get quotes and offers through a simple, straightforward process.
Overcoming challenges in the new paradigm
Despite all the benefits, ecosystems come with their own set of challenges.
Having been around in their respective markets for several decades, legacy utility providers are reluctant to change. Fitting into the ecosystem mould among new and emerging players and shifting out of the product mindset takes considerable effort. There are strategic choices to be made between entering new revenue streams organically vis-à-vis leveraging partnerships. Moreover, legacy IT infrastructure of incumbent customers may have to be refreshed to make them ready for ecosystem play. Lastly, the highly regulated utility sector may face hurdles in complying with various protocols and guidelines across service offerings. Despite these challenges that stand in the way of growth, utility providers will need to make a leap of faith and effort and embrace change to stay relevant alongside newer players who are more agile, nimble, and financially sound.
