From Opportunity to Realization: An Effective Approach to Commercial and Asset Management Strategy

Charles Tooman, Managing Consultant, Global Energy Practice, PA Consulting Group

A VARIETY OF COMPLEX MARKET DYNAMICS —from volatile commodity prices and new price levels, to the presence of new market entrants, to aging infrastructure and increasing operating costs, to evolving regulatory compliance requirements and standards—have placed renewed focus on utility and merchant energy companies' commercial and asset management strategies. Companies must account for these market dynamics, while seeking truly differentiated commercial strategies around current and prospective portfolios of assets (contractual and physical), and also closely considering factors such as the costs of asset maintenance and the timing of retirements and market recovery (among others).

Given today's challenging environment, companies require strategy management approaches that identify potential commercial and asset management strategies, enable selection of the best strategies to meet broader corporate objectives, and ensure the successful implementation of the selected strategies. The discipline to execute this process—from developing the vision and objectives, to evaluating various stakeholder and compliance requirements, to implementing the required business change—is critical to achieving commercial success in today's dynamic market environment.

The remainder of this article addresses the importance of developing and executing a consistent approach to commercial and asset management strategy development and implementation that considers all phases of an end-to-end process, the benefits of following such a process on long-term flexibility and resiliency of any organization in the face of extreme market challenges, and the potential price to be paid by adopting short-cuts to what is necessarily a complex and multi-stage process.

Strategy processes in today's challenging environment must focus on three important areas—each building on the next:

*Develop the vision and objectives

*Evaluate the stakeholder/compliance requirements

*Implement the infrastructure and business change requirements

Recent thinking on business strategy development and implementation focuses significant attention on implementation. However, to be successful, the strategy evaluation and selection process must also dedicate significant attention to "visioning" and stakeholder management requirements.

Develop the Vision and Objectives

While it is critical to focus on the various aspects of implementation, a comprehensive strategy process begins with a clear and robust definition of the organization's commercial vision from which an explicit set of measurable objectives can be set. In general, this process is focused on:

*Defining a specific vision for the commercial organization involves assessing, at a high-level, the desired revenue requirements/risk tolerance of the organization, the scope of allowable activities, and future potential activities.

*Specifying commercial and asset strategies adds additional detail to the high-level objectives laid out in the visioning exercise, with clear definition of portfolio management activities, revenue and cost estimates, risk limits, and key performance indicators, among others.

*Identifying core and non-core activities helps focus the required business change around functional processes, staffing, analytics and other aspects of infrastructure that need to be in-place to effectuate the selected strategies.

This visioning exercise lays the groundwork and provides the baseline information to complete a business plan for the implementation of necessary infrastructure to deliver on the desired commercial strategy. This exercise helps move the organization's strategy process from "concept" to "practice."

In addition to visioning, asset holders that successfully develop, execute, and deliver strategies focus in great detail on all aspects of strategy delivery. Indeed, an absolutely critical aspect of the entire strategy process is the close consideration of not just what to pursue ("What to do?"), but also how best to meet the demands of external stakeholders ("What to prove?"), and the business change required to successfully deliver the desired strategy ("What is needed?").

Evaluate the Stakeholder/Compliance Requirements

Diverse stakeholders are making increasingly complex demands on energy asset owners and operators. The variety and interaction of stakeholder demands and compliance requirements must be considered in conjunction with asset and commercial strategies, as well as the business infrastructure to deliver. Unfortunately, very often stakeholder management and compliance efforts are managed in a haphazard way, across various functional groups of the organization, resulting in duplication of effort, mismanagement of reporting and other compliance requirements, and (in the worst case) penalties for non-compliance.

The challenge facing asset holders is building a fully integrated compliance framework to adequately manage the variety of compliance items, without incurring excessive or significant, on-going incremental costs. In parallel to the visioning effort described above, companies require an approach to identify the variety of stakeholder and compliance requirements associated with the desired asset and commercial strategies. More generally, companies require stakeholder management and compliance frameworks that continuously assess evolving requirements and the necessary business processes, reporting, and other aspects of business change to deliver. Developing this framework early in any strategy assessment process facilitates proper alignment between strategic objectives and business change requirements.

Implement the Infrastructure and Business Change Requirements

Once the vision, strategic objectives, and stakeholder management requirements are specified, the business infrastructure to properly manage the organization can be identified and implemented. In general, asset owners must consider the business change required to execute the desired strategy and meet stakeholder demands; moving directly into implementation—without the preceding steps to identify the vision, strategic objectives and stakeholder requirements—can result in a misalignment between desired strategic and financial objectives and the organization, processes, and tools to deliver.

Adopting a business strategy that aligns to the overall corporate and commercial vision often requires changes to how the company actually works in three key areas—"People," "Process," and "Technology":

*People: "People" aspects of implementation are critical to ensure proper design of the organization to deliver the desired strategies, realize efficiencies in "ways of working," and properly align functional groups. Specific tasks include specification of the organizational design, definition of the technical competencies of staff required to deliver the desired strategy, development of job descriptions, definition of performance measurement metrics and approaches, etc.

*Process: "Process" refers to the design of the set of "core" business processes that are required to effectively "run the business." Identification, design and documentation of business processes (from the definition of core activities) is key to building a strong business process management culture, focused on continuous improvement in areas such as risk control, business efficiency, and compliance.

*Technology: "Technology"—including required systems, data management tools and protocols, risk and performance measurement and reporting—are critical aspects of building and operating an energy asset business. Determining the most appropriate technology infrastructure to deliver the desired strategies (within a strong risk control environment) is of critical importance.

Efforts to properly identify and implement appropriate "People, Process, and Technology" components pay long-term dividends: Once operational, an asset-based company can leverage its people, processes, and technologies to continuously assess and select strategic alternatives and the associated business requirements to deliver. In this way, the continuous alignment of three core areas—commercial & asset strategy, stakeholder management, and business change—is a key determinant of sustained financial and operating success.

Aligning Commercial Strategies, Stakeholder Management, and Business Infrastructure

The intersection of strategy, stakeholder management, and business change represents a considerable—and on-going—project management challenge. Yet business optimization is achieved when three equally important areas are well-integrated; close coordination of these efforts can eliminate unclear strategy evaluation protocols, business change efforts detached from clear and pragmatic strategic objectives and "silo'd" stakeholder management/compliance frameworks. Indeed continuous alignment of these core areas is a key determinant of sustained financial and operating success, and builds a strong foundation for flexible, resilient, and continuously successful asset and commercial management organizations.

*Flexible companies can quickly reassess strategies given changing market conditions, emerging stakeholder demands, and "People, Process and Technology" issues—and the alignment between all three.

*Resilient companies can withstand unforeseen market shocks—and adjust commercial strategies, stakeholder management requirements, and the business infrastructure required to deliver.

Continuous business alignment in these three areas drives a culture of improvement—and yields revenue enhancement and cost reduction—given strategic objectives.

This is critical, particularly inasmuch as a number of energy companies have executed large scale "business transformation" efforts that aim to dramatically alter key elements of business infrastructure, including organizational design, business process, and tools and data to improve financial performance. However, a large percentage of efforts to increase operating efficiency through process streamlining and the application of innovative technologies fail to meet desired objectives; the general estimate is that between 60 and 80% of all such projects fail to achieve their objectives.

In many cases, transformation projects directly impact key aspects of business infrastructure, but fail to explicitly consider the broader strategic objectives of the organization—and dynamic market environment in which the company operates. In general, large scale business change efforts must consider the commercial and asset management strategies that are being pursued by the company to be successful; that is, the changes to the mix of people, process, and technologies that can yield efficiency gain while also building the foundation for successful strategy execution.