Where are you going CIS?
The Utilities Customer Information System (CIS) industry appeared to be in a funk at The Metering Billing CRM/CIS Americas 2004 Conference. In many ways, this industry is tracking with that of the CRM and ERP industry cohorts.
Worrisome Market Prospects
Even during the Pre-conference Executive Workshop presented by Warren B. Causey, Ltd, it became suspect that things were not going well for this industry. Well over half of the attendees were representatives of the press, information systems builders, and other supporting industries. Mr. Causey repeated his bullish stance in favor of the “Best-of-Breed” solutions versus integrated solutions that form a module within an overall ERP package, but few potential purchasers were in the room to hear his endorsement.
The challenge to this industry is in making a business case for replacing a functional system and business process when the industry environment has decreased the pressure to drive forth progress. For instance, CIS sales boomed in the late 90’s in response to accelerated system replacement in preparation for Y2K and in preparation for competing in a newly deregulated and competitive industry. Today, Y2K has passed into a footnote in history and deregulation discussions are only beginning to reoccur.
Also, the potential for making new sales of IT systems to utilities has declined due to mergers and acquisitions within the industry. Since 1997, the number of large investor owned electric utilities in the states has shrunk by over 50% from above 170 to below 80. Many in the conference reported their expectations of further consolidation. With fewer large utilities, there are significantly fewer potential deals to close.
The systems that are being replaced are not young. Unlike the short economically useful lifetime of desktop software in the 2 to 5 year time frame, utilities estimate the economically useful lifetime of CIS systems in the 15 year time frame. Moreover this estimate is actually abbreviated. Many of the systems being replaced are not 15 years old, but rather much older. Nicor is replacing their CIS system after nearly 30 years of service and the City of Tacoma held onto their legacy system for roughly 28 years.
If we estimate the steady-state market potential for CIS systems sold only to US electric utilities using the economically useful lifetime of 30 years, we would expect fewer than 3 new systems sales per year, which is still higher than the actual number of new large deals that surfaced last year.
Given these challenges, where should the CIS systems companies go to find a sustainable number of sales, much less growth?
Incentive for Invention
Outside of the repeated call to make a strong business case, two directions for change were brought forth during this conference. In one direction, companies are developing solutions for specific operational challenges within the billing and CRM/CIS business process. In the other direction, companies are developing advanced analytics for mining the data within the CIS system to provide executive insight.
Lodestar is pressing forward the first option, creating solutions for specific operational challenges to managing the most valuable and complex customers of a utility, the large commercial and industrial customers. Their rating and billing engine often forms an integral component within other CIS systems, solving a strategically important challenge to managing complexity, forecasting demand, and developing profitable offers.
Peace is pressing forward the second option, developing advanced analytics for mining the data and creating executive level insights. Paul Grey, VP of Product and Market Strategy at Peace, presented the case for using the data within a CIS system to perform a customer profitability analysis on each individual customer. Using “Whale Charts” on residential customers, Mr. Grey demonstrated that the leading 20% of the customers provide 300% of the profits while the trailing 20% of the customer’s take 200% of the profits, leaving the middle 60% portion at break even. While customer profitability analysis has not yet caught on within the utilities industry, Peace’s move and others like it are directed at creating executive dashboards for deep business insights discussed in most other industry verticals.
Both of these directions for improving the CIS value proposition can coexist, and even compliment one another. The direction that Lodestar is taking improves the management of large commercial and industrial customers and penetrates the business functions surrounding capacity planning and energy trading. The direction Peace is taking improves the management of the millions of residential customers and provides the necessary insights for performing customer segmentation and differentiated power offerings to attract the best customers and convert troublesome customers into valuable assets.
Separating the Wheat from the Chaff
The current market is highly unforgiving. CIS product companies that fail to close a major deal two years in a row will become ripe for acquisition, or worse closure. Those that are leading the way by continuing to improve their value offering are more likely to succeed.
In many ways, the CIS industry dynamics are similar to those of the ERP or CRM industry. Each has had declining prospects for closing new sales, each has begun to reconfigure around executive dashboards, and each has become splintered between the full systems providers and those who address specific business challenges. Only the most optimistic minority of players expects a full recovery of the ERP and CRM industries, the same would go for the CIS industry.