Lingchi; How Nike, Shell & Co Are Slowly Killing The Incumbent Utility.
Lingchi, a form of torture and execution used in China from 900 CE until it was banned in 1905, means death by a thousand cuts. It was a slow and lingering death, administered by slicing and cutting parts of the body of anyone accused of treason, while the accused was tied to a pole. While it’s no longer happening (I hope), it was considered one of the most painful forms of execution.
As you can imagine, while the first few cuts were painful, these cuts were not by themselves decisively fatal. It was the continuous and subsequent cuts that ensured bleeding didn’t stop. That’s what eventually, slowly, killed the victim.
Industry incumbents, especially monopolies, don’t change their ways or business models of their own free will. It takes near collapse or actual disasters. Or just many cuts that, while seemingly unrelated, will leave the incumbents wondering how it all eventually ended considering the bleeding didn’t seem so bad…
Cutting The Incumbent Utility
Nike, Shell and other companies are performing Lingchi on the traditional utility industry with decisions that are seemingly unrelated but all part of the cut-cut-cut that’s bleeding the traditional utility to a slow death. The cuts are happening all around in the three core areas of what makes up a utility; people (customers and employees), products and processes.
- Grid Defection by Large Commercial Clients: Nike just signed a contract with Avangrid Renewables. It’s the second contract these companies have signed. The first contract sees Avangrid providing 100% renewable energy to Nike’s worldwide headquarters near Beaverton, Oregon and all of its Oregon based facilities. And Nike isn’t the first large corporation to do this. Apple, Walmart and a host of other companies are going renewable either as an act of defiance or a business decision. Whatever the reasoning, this has the effect of reducing reliance on the traditional utility which needs the business of the incumbent utility. It’s this fear of losing large commercial clients, and the effect it has on the bottom line for a utility, that is making CPS Energy in San Antonio dance to whatever song Walmart, it’s largest customer, decides to sing. Cut.
- New Competition For The Traditional Utility: while Tesla might not scare utilities just yet, and they should, companies like Shell getting into the renewable game should definitely scare the utilities in the regions where Shell acquired close to 50% of a Nashville based renewable energy company. This after acquiring the second largest electric vehicle charging station company in Europe and investing in a peer-to-peer blockchain startup along with TEPCO. Shell seems to be stealthily, and overtly at the same time, making its intentions known as it regards the electric power industry. Shell has the financial wherewithal and the capabilities to get into the game and truly test out the possibilities with these new technologies at a level that few other global organizations, except maybe the top tech firms, can match. This should worry the incumbents. Cut.Cut.
- Technology: Much has been written about the technologies around us today and I touch on the impact of the blockchain, AI, electric vehicles, and energy storage. Cut. Cut. Cut.
- And Next Will Be The People (customers): While the story of deregulation hasn’t been fully told, when customers could start to buy electricity from other sources but their utility (in several states in the US), the first set of customers that transitioned off the utility were Commercial customers with clout. The retail electricity switching stats from Illinois, in 2008, was at 89.1% for large commercial clients of the utility while it was still 0% for residential customers (see table below). And the ability to switch was there. It just took user-friendly experiences and a desire to educate the customers, by nimble competitors, to open the markets up. The same is already happening with smart thermostats, solar energy and other forms of utility that look different from what the incumbent provided but eat into the incumbents share of the market. First the larger companies will buy renewable energy from whoever can offer them the best prices, then the other large commercial companies will purchase electric vehicles to offset the high cost of their transportation and logistics fleets and, after a few rules are changed and the technology becomes more accessible, the rest of the market will leave the utility. Some won’t. But the discerning customers will. And the utility’s lingchi will continue to its inevitable conclusion…
5. And yet more people (employees): 2017 research study from out of Michigan State University shows that the utility industry is not even in the top 15 of industries hiring new college graduates and this is in a growing economy. Combine the college graduate dearth data with data showing ~50% of utility employees will be retiring over the next 3–4 years and the changing skills required to manage in the new economy are not being developed within the utility industry like other industries. You do not have to be a systems thinker to calculate that the inputs of talent to replenish the output will soon lead to a huge shortfall of enough skilled and motivated employees to manage this most critical of industries. Cut. Self-inflicted cut. Cut. Cut.
So What Should The Industry Do?
Unless the industry is willing to adopt true customer centricity, experimentation and the willingness to make non-catastrophic mistakes, shifting from ‘this is how we’ve always done it’ organizations to learning organizations are steps necessary for the Utility sector to maintain relevance as service providers. The shift to learning organizations is important, it will start to enable the industry to focus on higher leverage points to turn the Titanic-type entities, that these utilities are, before they bleed to death. Points of leverage within a system/problem are the places where you intervene to have the highest impact.
In its attempt to innovate, the industry currently focuses on pilots that are shorter than the time it takes to sign the contracts and on projects that do not touch the current business model, charging for assets deployed, but these are low leverage points. While these projects have some impact, the extent of change required for the utilities to compete will require a focus on the highest point of leverage, which is to transcend the current paradigm of waiting for things to happen in the hope that the effects of new technology or changing mindsets are not as consequential to the business model. To maintain this approach is to bleed to death. Slowly but surely.
Lingchi might only have happened to treasonous people in days long gone by, but now it’s happening to companies that fail to transcend their prevailing industry paradigms. There is a lot of work to be done to stem the bleeding.
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