Should the services business of a utility be run by a subsidiary?

All energy suppliers (electricity, gas, heat) have, in recent years, developed services offers and activities.

The first services offered were aimed at improving the customer-supplier relationship, the customer’s “experience” with the energy supplier. Internet portals, customer areas, digitized and explained invoices, consumption histories have been progressively available.

Very quickly, facing organized competitors that were beginning to contact customers, energy suppliers added “high value added” services to their catalog. The term “high value added” is meaningless and tends to imply that other services have little added value (which is contrary to the notion of service).

For example, without being exhaustive, these services include consulting or engineering services (for the installation of heating systems or generation from renewable sources) or energy efficiency (audit, energy performance contract).

These “high value added” services immediately confronted the energy sector with operational challenges:

– Often, for the first time, utilities operate in a highly competitive market, coveted by many actors, seeing it as a means of extending the market that was accessible to them (historical service providers), a way of differentiating, a tactics to avoid their offer becoming a commodity (providers of building automation).

All the decision-making processes and the teams of the historical utilities do not spontaneously have the characteristics necessary to be performing in such environments. The sales development of these services is often limited.

– The very high labor costs of the historical utilities do not allow them to be competitive.

Specialized service providers have long developed their competitiveness in services with a high labor force proportion.

– The “judge and jury” type position of utilities, selling both energy fluids and services to reduce sales of fluids, is often used by competitors to highlight an ambiguous attitude and generate suspicion on the ” honesty ” of utilities’ offers.

Entities managing these services at utilities therefore frequently have lower and insufficient profitability and growth than expected. Moreover, on a strategic level, it seems difficult for utilities not to occupy this battleground in the markets.

This dilemma often leads the concerned utilities to search better conditions for developing their services activities: the track that is often investigated is setting up a subsidiary to run the services business. Utilities see it as a means to create a structure that is free from the “cumbersome” nature of the parent company, to adapt labor costs to the requirements of the services and to gain a more independent and therefore possibly more credible image.

Thus many utilities run their services business or developed some services within subsidiaries: EDF through Netsenergy or Edelia, RWE through Innogy, while others, such as British Gas, proclaim themselves primarily service providers.

Is this “outsourcing” of services a miracle solution? Why have not all utilities taken this option?

In reality, each option presents, as always, advantages and disadvantages.

– Maintaining the “value added services” business within the historical structure, for both business and residential customers, requires profound changes in organization, culture, decision-making processes and management to be effective.

These changes are long, complex. This does not mean that they are unrealistic. They are often scary, especially in organizations protected from such changes in the past.

– “Outsource” the services business requires to harmonize and make consistent (seen from the customers’ perspective) the business activities of two separate entities: the parent company in charge of selling the fluids and the services subsidiary.

It is not for utilities to create autonomous services businesses, comparable to specialized service providers. To achieve the strategic objectives that lead to the creation of these activities, the client must perceive a continuum of offer encompassing fluids and services, must be offered a multi-year perspective in terms of energy management and accompaniment. Being able to package fluid offers and associated services is an advantage from which utilities should benefit fully. The coordination of separate entities, with their own growth and profitability challenges, is difficult because teams tend to compete, to oppose, to focus on their objectives rather than on the overall optimum.

Finding the right structure to develop services within utilities is not easy. My experience does not lead to a better option than another. In any case, a major disadvantage is to be overcome. Focused on the operational stakes, the utility is rarely focused on the solution necessary to limit the impact of this disadvantage. Thus few providers are in a situation of success in their services strategy.