Energy companies are closing the gap between their digital investments and what is ultimately delivered with a product-centric approach, providing an iterative solution that delivers incremental business value.
Determining the value of digital investments is an ongoing challenge for most energy clients. Many organizations are well on their way toward embracing agile principles and philosophies, but we find there is still a misalignment between what the business expects and needs from their digital investments and what is delivered. Leading digital organizations are taking action to close this gap by auditing their digital investments and asking, “how did this solution deliver value to the company?”
Traditional Value Attribution in Energy Sector
In asset-intensive industries such as oil and gas and utilities, business leaders are well-versed in establishing detailed business cases to seek funding approval for both business and IT-related capital projects. For investor-owned regulated gas and electric utilities, this is especially true given their cost-of-service rate model allowing capex expenditures to be rate-based, resulting in increased earnings. In most large energy companies, detailed cost/benefit analysis is conducted using financial metrics such as net present value (NPV) and internal rate of return (IRR) calculations to forecast the total value of a capital investment opportunity.
The analysis typically includes problem/opportunity identification, which outlines the benefits and risks of various scenarios, including the option of doing nothing at all. Capital investment requirements and ongoing O&M budget considerations for various stakeholders impacted by the project would also be included to determine whether the total project benefits and paybacks justify the proposed investment. There are usually several sources of value in this return on investment (ROI) analysis that should be considered such as hard, soft, and avoided costs benefits. Hard benefits, such as solutions that allow for reduced headcount or improved employee productivity, are easier to calculate and map to revenue growth or cost savings targets. Soft benefits, such as improved customer experience or product quality are more qualitative and harder to measure their value to the business.
One significant downside we have seen with this traditional business case analysis within the energy sector is that it relies on a multitude of assumptions related to the business benefits. These benefits assumptions often are incomplete or completely off target, and the project never delivers the intended benefits outlined in the original analysis. Another major downside is the extensive time and effort it takes to engage with all impacted business stakeholders to fully capture all detailed IT requirements, conduct an in-depth analysis and, because of the level of rigor involved in this process, the requestor is incentivized to seek funding approval in one large lump sum. This often leads to multi-year efforts that are much larger in scope and complexity than the business requires, with limited flexibility to deviate from the project plan and experiment and learn based on customer feedback.
Product-centric organizations and delivery models emphasize continuous value by prioritizing the most impactful features for the user first, rather than meeting detailed project requirements established up-front.
Rather than focusing on estimating the exact fixed-scope technical solution up-front, product-centric models take an iterative approach to incremental delivery of business value. Product-centric organizations and delivery models emphasize continuous value by prioritizing the most impactful features for the user, rather than meeting detailed project requirements established up-front. This product-centric method often involves experimenting through a Proof of Concept (POC) approach first, which can be rapidly validated by the customer to determine whether benefits are achieved. This approach immediately measures progress toward business objectives as a demonstration of ROI and can help leaders make significant, insight-driven funding decisions and ultimately lead to approval for a Minimum Viable Product (MVP).
One recent example of an Apex engagement at a large utility customer following this approach is a custom test automation solution we created for a wholesale energy market use case related to the ISO energy imbalance market (EIM) and bid process. Due to higher levels of renewables being integrated into the grid, data-driven insights and automation solutions were needed to help utilities maintain the reliability of the high-voltage transmission system to properly balance supply and demand. Rather than applying a traditional waterfall method to this project, the client chose to go with a custom test automation POC instead to ensure their specific needs were directly met.
Once the initial POC product was established, stakeholders were able to quickly compare values between several internal and external portals, quickly detect wrong values and data between dashboards, and quickly measure the productivity gains the automation solution delivered. The product-centric POC approach allowed the client to quickly measure the ‘hard’ benefits of the solution for the business problem, which in this case was a reduction in plant engineering hours of highly compensated employees due to less time spent on manual data validation. Additional unexpected benefits also emerged around greater visibility and data insights related to critical equipment outages across power generation units.
Following the successful POC in a test environment, it was determined the custom solution met the needs of the business and the team quickly gained funding approval to scale the solution to an MVP that would be moved into production and maintained by enterprise IT. This approach was highly effective because it proved value quickly to business users and helped gain the support of stakeholders who are influential in the success of the project. The business could tangibly see how the solution positively impacts their role and have a vested interest in the outcome of the engagement by experiencing the benefits themselves. This high level of engagement established the confidence that there would be enough ROI in moving forward with a custom digital solution for this use case, and the solution quickly gained leadership commitment to fund an MVP.
Taking a product-centric approach and injecting agile methodologies into the business case process for energy projects can result in stronger, more precise value realization. While a detailed business case will remain a vital part of funding digital investments, energy companies that embrace a product-centric approach and use POCs and MVPs to solve problems for industry-specific use cases will have greater confidence that the final solution will meet expectations.