Like many other industries, the energy industry is in the midst of digital transformation. How this disruptive upheaval can be successfully shaped is illustrated in the two-volume specialist publication "Realization Utility 4.0"which now was published by Springer-Verlag. Olaf Terhorst (Partner) and Marcus Warnke (Senior Manager) of mgm consulting partners are authors of the article "The role of IT for Utilities 4.0".
Listen to our mgm podcast episode #03 or read the written interview below.
Editor: Olaf Terhorst and Marcus Warnke from mgm consulting partners have written an article about the reference book "Realization Utilities 4.0" which we'd like to talk about today. "Realization Utility 4.0" is the fourth book published by Oliver Doleski in a series dealing with developments in the energy industry. The latest work deals with what a successful digital transformation of the energy industry can look like in practice. IT is an essential part of this, which you have worked out in your article "The Role of IT for Utilities 4.0" and which is presented separately. May you first introduce yourself in one sentence and tell us how you come to this topic and what your background is?
Olaf Terhorst: My name is Olaf Terhorst, I am one of the four partners at mgm consulting partners. For twenty years I have been advising companies on the optimisation of their IT organisation and the role of IT in companies, and for 14 years I have been working in this capacity for various energy utilities. It starts with topics such as reorganization, strategy development and in recent years very strongly also the topic of digital transformation.
Marcus Warnke: My name is Marcus Warnke, I'm an organizational developer, I'm in change management and I'm more and more moving towards agile cultural development. I've been doing this for over twenty years. Many of my customers are in the energy industry, quite a few are active in IT organizations, often both and, that is, IT organizations in the energy industry, where I then also work a lot with Olaf. This knowledge has led us to the idea of presenting in this book what we have learned over the years, or what we see as future developments and consider necessary.
Editor: What challenges do energy suppliers have to face on the market today?
Marcus Warnke: The value of energy suppliers has become much, much more complex than it was twenty years ago. Part of the complexity is that customer requirements have changed. We live in a digital world. The next generations are digital natives who expect a different form of address when choosing everyday things such as energy, electricity and gas. The second challenge is that the market and technology are changing massively. On the one hand, new technologies are emerging at a great speed in generation, new technologies in IT when it comes to further developing data, network data, consumption data and the like and making them possible for business models. And the third big challenge is that the requirements for IT security and the requirements of regulation for market design, the change in this market design bring with them a constant increase in requirements for energy suppliers, and they must - no matter how large they are, small or large - in future be able to cover all three areas, all three major changes. That's quite a lot.
Editor: In your article you describe very well how the utilities have to change in the future. It covers various areas, in particular the three points of flexibility and adaptation speed, customer- and product-centric action and data centring. Could you describe once again the main changes in this respect, perhaps even with an example from practice?
Marcus Warnke: I'll start with flexibility and adaptation speed. All the things we have just described that are changing are changing with increasing speed. Everything gets faster and faster. It is not only an increase in topics, but also in the speed with which these topics change. You have to be able to picture that. The energy industry comes from the past from a rather calm watershed, which is why it is not as culturally rooted there as, for example, in IT software development. That's the one big challenge. The second challenge in addition to flexibility and adaptation speed is product and customer orientation. Historically, energy has been produced, distributed, sold and invoiced. This will no longer work in the future, or will no longer work now, because A) it is no longer just about energy, but also about services that are marketed differently, sold differently, and B) the customers have different needs. This means you have to learn how to emotionally turn a boring product like power generation or distribution into a customer journey that arouses interest and where people say, "This makes sense to us." And the third area, data centering, we will come to this later even more intensively, because it is about the fact that in the future money will no longer be earned in the energy industry only with the provision and distribution of energy or gas, but with the data that is generated in this process and the business models that follow from it. To do this in a very practical way, that was your second question: In the past, a maintenance technician drove into the power grid, bumped over a dirt road, climbed up a mast, looked at "What does it look like there? Today there are systems where such lines are automatically flown with drones, the geodata, where such a mast stands, are automatically transmitted, the drone takes photos, the photos are digitally evaluated and you have a screen on which on one side the photo of the mast and its condition can be seen, and on the other side you can see in the inventory systems what it is for technology, when it was purchased, what price, what depreciation value and the like it has. That's what makes the difference.
Editors: You are particularly concerned with the role of IT in Utilities 4.0. To understand the current situation, it makes sense to take a brief look at the past: What role did IT play in the past, and how has IT developed in recent years?
Olaf Terhorst: I would like to say something about that. In my perception and how I got to know IT when I was an intern in companies as a pupil or student in the eighties and nineties, IT had its origin in the individual business areas. In other words, individual business processes were looking for mass processing possibilities and information technology was used to do this. The more IT or information technology was purchased, the more they looked for specialists to take care of this issue, so that over time their own information technology organisations were formed to support, develop and operate this technology. And the longer this took and the more this information technology matured and was defined, the more professional this IT organization became. In other words, it moved further and further away from the business process and from the business, and then in most companies it came into its own IT organization, was partially spun off into its own limited liability company, or was passed on to a third-party service provider. Examples are T-Systems, HP, today DXC, which take over the operation of information technology for the customer. This has led to economies of scale, to professionalisation on the IT side, and also to so-called distance effects. This means that we have moved further and further away from the business areas. And today, I think you can see that very clearly, where the topic of digitization is a great hope factor for the business units to develop new, innovative business ideas again. Marcus had just mentioned that, it can't be done without information technology. And to bring back together that information technology and business are no longer on two different sides, but that they start to develop a new business model together, that's the big challenge at the moment.
Editor: How would you describe the role of IT in the future?
Olaf Terhorst: As a result, I no longer see it as an outsourced IT function - except when it comes to operating basic technologies or infrastructures - but rather as an essential part of the business or even the backbone of the business in the future. The topic of data centering was mentioned earlier. Nowadays, data is generally digital and no longer available in analogue form. There is still enough information, especially when it comes to assets that are still available in analog form, but we are trying to digitize it more and more. There will have to be greater cooperation in order to move forward. An important part of the energy supply comes from the so-called convergence of IT and OT, information technology and operational technology. This means that the control of energy systems used to be very strongly separated from each other, but nowadays they are increasingly based on a common technological basis and converge with each other. In order to collect and use this data, it is necessary for these systems to communicate with each other. Therefore, in the future we will need an information technology that stands in the middle and provides a data hub in the center from which the various areas of the company can make use of. This means that, in my view, information technology will play a very central role in the future. Just as in the past it was a building that was entered together, in the future information technology will be a common core. What do you think, Marcus?
Marcus Warnke: I would do it practically: We are all talking about Smart Energy and Smart Markets in the future. At the moment we are rightly talking about a transformation of our energy system towards renewable energies. Renewable energy always means volatile generation, which means that what is available goes up and down. At the same time, consumption on the other side has to be adapted, also known as demand-side management. And these things only work practically if the information "What is generated where and what is consumed where" is on the one hand available according to the situation - that's where we are with the network control technology - and on the other hand available in the time series so that forecasts can be made "What is needed when and how", because that's what you need for price formation afterwards. That's where things come together today. The more we move towards renewable energy and volatile generation, the more important that becomes. And this changes the relationships on the markets and the value chains on the markets. The ability to make adjustments here and offer network services will be a major business model in the future. And that only works if I have the data that comes from operational technology, from network management.
Olaf Terhorst: Plus the customer data - you mustn't forget it. You mentioned customer journey at the beginning: How does the customer use this energy? Nowadays, the energy service provider sees this on the basis of the consumption curve, but he only knows approximately where he really uses it, i.e. which machines or devices consume the electricity. The materials or devices at home are becoming more and more consumption-intensive and mature. I get a washing machine delivered tomorrow, which I can connect to the Internet and control with it. Devices communicate with you and deliver data. And this is interesting data that can help to move the consumption curves into a line type...
Marcus Warnke: ...so that the large power plants could pass through.
Olaf Terhorst: Exactly. That didn't really work before. And the new technologies offer an opportunity to intervene by accessing data that is available everywhere and trying to make it usable. This is not possible without information technology. It will take a lot of AI, artificial intelligence, to recognize patterns and react accordingly.
Marcus Warnke: And this leads - now I'm going to go back to the role of IT - to a changed understanding of business, i.e. specialist areas and IT in relation to the customer. In the past, business used to say, "We know how the customer works, what the contracts are like, and we sell that to him." And IT was the service provider who made this possible internally. Today, this is changing to the point where they stand next to each other, look at the customer, and say, "What can we do together to offer services and benefits, offer business models, optimize our processes to make them more attractive to the customer, and earn good money in a more complex marketplace? This is an integrated role that both sides are currently further developing - as can already be seen with some utilities.
Editor: What you emphasized at the end can certainly be transferred to other companies in general. But what specific recommendations for action would you give to energy providers? What do they have to do to get ready for the future? Where should they start?
Marcus Warnke: I think you have to take a closer look: What does energy supplier mean? We move in the world of scales from very, very, very small municipal utilities with a few thousand customers and cell points to huge suppliers. For example, the merger of e.on and Innogy is creating a particularly large supplier. Therefore, one must pay attention to who one is talking about in the answer. When talking about small and medium-sized municipal utilities and utilities, it will be a challenge for them to position themselves in such a way that they can make the IT decision "Where do we differ or how can we differ from the market so that our regional orientation makes us attractive to our customers? What are our special local conditions where IT can make a difference? And which of these very complex challenges that we mentioned earlier can and do we want to master ourselves in the future and which ones do we outsource to service providers that can scale accordingly? That is the big strategic question for them at the moment. And derived from this are the requirements for what IT must be able to do and what employees must be able to do. Olaf, maybe you can say something to the big players again.
Olaf Terhorst: I would say that - and this is perhaps, if you look at the really big ones, but rather in general terms - it will only go forward if business and IT work together, and from my point of view this applies to big and small. In my opinion, it is important to understand that digitisation is not a project, but something you have to tackle concertedly over the long term. This is a change in the way you work and how society works. Then I think it's very important - following on from what Marcus just said - to focus on "What do I need to be able to do in business in order to be successful" and then look at "What kind of information technology do I need? Here neither information technology nor business alone can find a solution, this must be worked out in dialogue. And then, as we have already noticed, there is a very tough competition for employees, which I would call the 'Battle for Competencies'. The shortage of skilled workers is blatant. It's a matter of reacting. I think that changing the way you work or will work together in the future through the VUCA world of utilities will lead to a change that everyone has to adapt to. I would like to describe this with the catchword Leadership on all Levels. In other words, we have to ensure that all employees in departments such as IT are empowered to take on management tasks instead of working in a strict hierarchy, otherwise the whole thing becomes much too slow. A topic that is very close to my heart from an IT point of view: A few years ago, the so-called Two-Speed IT rolled through the world, saying, "We need a highly secure, slow IT, and a fast, agile, for the many different modern, hip skills." I think that's a mistake. I am in favour of focusing on being both fast and safe. Amazone and Google demonstrate and show that it works to build a one-speed IT that is highly secure and scalable, but still very agile. I think that's where we're going.
Marcus Warnke: In my opinion, what you say can be formulated as a cultural change in the organizations. They must learn to work differently. This has to do with this Battle for Competencies and with the minds. The people in the next generations who are now entering the labour market are used to working differently, and they expect this from an attractive employer. That's one side. There is no other way to cope with these rapid changes. You have to learn to bring things to market faster, to try them out, to discard them again, to try something new. This is a different mindset, a different culture of cooperation. You asked for the recommendations: The recommendation is to bring together this strategic component and this "How do IT and Business Organize?" with the theme of cultural change. These are topics that belong together when talking about digital transformation.
Olaf Terhorst: Right, that's a good cue. For 15 years, I have been observing the upheavals in the energy supply in IT organizations. A great deal of change has taken place there. In the case of various conversions, not all employees were taken along in some cases. It is close to my heart that the employees, the people in this system are taken with them. It is important to take the customer with you when I change my services as a company, so that he knows what I want to offer him tomorrow, as well as to take the employees in the company with him, so that the company will be successful tomorrow and employees will stay and not internally quit. Because the change that lies ahead for energy suppliers will be blatant. For some more, for others less, but it is a strong change. And this component, i.e. the cultural way in which one wants to work together, leads to the urgent appeal or recommendation for action to take the employees with you in all the changes one intends to make. This is the only way to be successful and to make these changes effective.
Marcus Warnke: I can only agree with that.
Editor: Thank you for the explanation. It seems to be important that energy suppliers radically change immediately. You have stressed several times that this is an urgent appeal.
Marcus Warnke: Yes, but "immediately" and "radically" makes many people a little afraid. But it's a serious issue and I wouldn't give energy suppliers who don't face it a good forecast for the future. In other words, no matter how they are positioned today, they must face these questions and find their own answers. And yes, the window is not open forever.
Editor: This means you can say that the reference book "Realization Utilities 4.0" comes out at exactly the right time. Why should I read it? Can you sum this up for once?
Marcus Warnke: It is currently the most up-to-date and comprehensive compendium available on the market and shows what is important in implementation. We're not in theory anymore, we're in practice. There are many suggestions on every topic as to how things can be put into practice.
Olaf Terhorst: I can only join him. I could add to who I'd recommend this to: These are all the people who are on the move in energy supply. In my opinion, decision-makers in particular will find many interesting points of discussion or friction through which they can develop further. I can only warmly recommend this book to you. During the reading I felt a lot of movement in me, partly contradiction, partly happy agreement. And that's what's important about a book like this: that you can rub against it, that clear points of view are represented in it, and that strong recommendations for action are made from which you can take something with you.
Editing: Then it only remains for me to say in conclusion that the book has been available since last week as a e-book and will be available in printed form at the end of the month. Take a look directly at Springer Verlag or in the trade, the book is available everywhere and is looking forward to being read by you. Thank you Olaf, thank you Marcus.
The reference book "Realization Utilities 4.0" is here available.