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Making the Cut: Navigating Cost Saving Strategies in the Utility Industry

By Dr. Vanessa AkhtarAugust 15, 2023No Comments8 min read

While inflation finally seems to be cooling down, businesses across all industries are still facing perpetual challenges during continued economic uncertainty. In the utility space, a plethora of variables are driving the need to reimagine cost management – and in many cases, an urgent need for immediate cost cutting efforts. Inflation (and associated sky rocketing interest rates), high fuel costs (a double whammy for utilities that depend on fuel to operate their fleet and to power the electric grid), lingering Covid impacts (which saw pauses on collections for overdue bills and holds on increasing rates), unpredictable weather patterns, and the need to invest in major infrastructure projects to hit net zero goals are all adding to current cost pressures.

On top of these challenges, most utilities pride themselves on a commitment to provide reliable and affordable energy to their customers – something that has become increasingly difficult. Across the United States, customer bills are increasing at staggering rates. Traditionally, rate cases have been a dependable tool to offset operating costs. But customers can’t withstand any more significant increases. And, as utilities seek to advance their infrastructure to achieve net zero targets, they also need to ensure they can continue to provide energy to the communities they serve. This dynamic is only adding to the affordability challenge. In addition, more competitors than ever are entering the energy space and opening alternative solutions for customers who previously had no option other than their local utility.

All this context is requiring utilities to address cost pressure now. The key to success – today and for the long-term – is to approach these efforts in a way that doesn’t just drive short-term results. It’s critical to build a strategy that also looks toward future growth and sustainable outcomes. This requires a non-traditional approach to cost cutting and cost management.

Principles-based decision making.

When focused solely on immediate Operations & Maintenance (O&M) cost savings, it’s easy to generate short-term results through traditional headcount reduction efforts and tightening the belt on unnecessary travel and other similar expenses. While these efforts may be one important piece of the puzzle, they can also be shortsighted – creating the risk that utilities will have to engage in cost cutting efforts again within the next five years. To help mitigate against this risk, begin by defining core principles around cost management – with a lens that balances what’s needed today and what you believe the business will need in the future in order to quickly pivot back to a growth focus.

For example, one guiding principle may be that you are going to focus on finding efficiencies in parts of the business that can be centralized (e.g. HR or finance) or automated (e.g. IT systems or mapping technologies) while continuing to meaningfully invest in future-growth areas (e.g. renewable and sustainable energy solutions, like nuclear or hydrogen). Another guiding principle may be a commitment to think broadly about the word “efficiency” – considering both cost efficiencies and removing waste or non-value add time investments so you can deploy your employees against highest impact, revenue-generating activities.

When facing significant economic headwinds, headcount reduction is likely an inevitable part of the solution. To ensure the disruption caused by reduction in force doesn’t just create a temporary release valve, leaders should assess headcount and talent needs based on what is needed for the future rather than what has worked for the business in the past.

Future proofing talent.

In an industry known for loyal, long tenured employees, it can be quite challenging to take a new view on talent strategy. However, with the disruption across the energy sector, it’s clear that new skills, talents, and ways of working will be required for utilities to thrive in the years to come. As leaders, consider what the future workforce needs to look like, take the time to get very clear on what technical expertise will be truly needed and where – and where having only a handful of subject matter experts may actually be creating additional risk.

In addition, begin identifying and investing in skills that are transferrable across roles and will enable employees to respond to future disruptions. Invest now in building adaptability, agility, and problem-solving skills, tapping into the passion of that loyal employee base, and it will pay dividends down the line. Developing these types of skillsets, and new expectations around ways of working, will create a workforce that’s more attuned to market dynamics and better able to proactively pivot as the environment changes.

Engaging employees across the business in new ways.

Traditional cost cutting efforts are driven top-down. While an element of this is necessary, hitting ambitious savings goals will require the efforts of many, many people across the business looking for opportunities and implementing new ideas. First, help your employee base understand what needs to be accomplished and why, and what effective cost management efforts will enable the future – such as increased revenue, decreased duplication of efforts and wasted time, and increased affordability for customers. Then, provide meaningful opportunities for those closest to contribute to the path forward. In traditionally command and control organizations, this can be a massive culture shift – but it’s sure to pay off.

For example, one large utility pulled together multiple cross-functional, cross-level teams, targeted at specific areas of the business where they knew they were losing money but hadn’t found viable, lasting solutions. They were supported by senior executives, but given space to explore the problem, come up with new solutions, and test them out. This resulted in significant annual cost savings. Through an invoice validation exercise, one team realized that several of their Gas contractors were mischarging work to O&M rather than Capital – anywhere from $12M – $13M each year. Another team found creative ways to decrease unable to complete jobs, saving $1.4M. Another utility was able to save on consultant fees by enabling volunteers to complete a data clean-up effort, in advance of an SAP implementation, in 90 days – something every consulting firm they spoke to said would take at least six to twelve months. Imagine the impact of inspiring action from employees across the business. Even small savings will start to add up if you get hundreds or thousands of people catalyzed in this way.

Managing inevitable fear and anxiety.  

With any cost management effort, there will be natural fear and anxiety. No matter how hard leaders may try to avoid it, people’s natural Survive response will inevitably kick in. Reduction in force, centralization of functions, automation, and accelerated timelines all raise a lot of difficult questions – many of which may not be answerable at the outset of the cost cutting push. However, it is possible to mitigate how extreme this Survive response may be across the company.

To help quell some of this natural apprehension amongst employees, leaders should continue to balance communication – acknowledging the reality of the current situation that’s driving the need to save, while also highlighting what future opportunities a more stable cost structure will enable for the business, employees, and customers in the future. Furthermore, strive to be as transparent as possible throughout the process. Let people know what is known and what isn’t, what anticipated timelines are, and who they can reach out to if they have questions or concerns. Find opportunities to reinforce and celebrate progress along the way, including putting a spotlight on new ways of working that are enabling these positive outcomes. Lastly, leaders need to communicate much more than they think they need to. For messages to stick, and to break down cultural and mindset barriers (e.g. “the next rate case will help us close the gap” or “we just need a hot summer / cold winter, and we’ll be back on track”), leaders need to reinforce messaging on a regular basis – leveraging various modalities, like 1:1 conversations, townhalls, emails, videos, and more. 

Utilities are, undeniably, facing very real economic challenges. All while striving to reliably and affordably deliver energy to customers who depend on their services. Those that can approach these cost cutting efforts in a way that balances short-term need and future growth aspirations – capitalizing on the strategies outlined in this article – are much more likely to set the business up to thrive in the years to come.