Navigating disruption: Applying cross-industry learnings to the energy sector

by Abhik Sengupta

by Genevieve Marsh

Large energy retailers in Australia have historically enjoyed a dominant position in the local market. Their relatively uncontested foothold has been attributed to loyal, long-term customers that are unlikely to change providers or agitate for any form of discount.

However, the energy sector has been rudely shaken awake by recent publicity on energy prices, threats of a Royal Commission, and an ACCC enquiry that has found electricity prices to place “enormous strain on household budgets and business viability”, calling the current situation simply; “unacceptable and unsustainable”1. If Australian consumers are lucky, this may be the harbinger of greater pricing transparency, competitive intensity and increased customer discernment. In response to this threat, energy companies are starting to show a greater interest in customer-centricity, starting with the creation of the Energy Charter, whose goal is stated as “embedding a customer-centric culture and conduct in energy businesses”2.

The financial services industry has faced similar forces over the last decade, leading to the momentous Royal Commission delivered in February 2019. This culminated in four significant observations of misconduct, two of which were directly customer related; the asymmetry of power and information between financial services entities and their customers, and the effect of conflict between duty and interest3. The pharmaceutical industry, though not under the same government pressure, has been experiencing similar organisational tensions. Large pharma companies that have dominated the market with popular mass-market drugs are constantly under scrutiny for the conflict between customer interest and driving profit4

The situation facing energy companies is not novel. There are lessons to be learnt from these two highly regulated industries. Given Blackdot’s extensive experience across financial services and health science, we have created a set of practical lessons that can guide energy companies to work proactively ahead of inevitable external forces.  

Financial Services

The Australian financial services industry is dominated by an oligopoly of four major players and a second tier of specialists. Complacent in this position, the banks began to take their customers for granted, focussing on protecting their margins rather than providing solutions that proactively meet customer needs. The priority shifted away from customers towards maintaining back book profits and protecting the bank’s balance sheet.   

In the wake of the financial crisis, scandals began to force government and regulators to embark on a series of enquiries and legislative changes. The industry responded by over-investing in compliance whilst continuing to protect back book profit to the letter, leading to stilted innovation and a further divergence from customer-centricity. The consequence has been immense reputational damage for the once trusted institutions, with every detail raked over in full public view during the royal commission. Even before the royal commission, banks realised that a mindset shift towards greater customer-centricity would be necessary if they wanted to remain competitive in a new regulatory environment.  

Health Science

Large and successful pharma companies have also fallen into the trap of complacency at the top of their game. In fact, the challenges faced by the industry, though not perfectly parallel, can provide a useful lesson for the energy sector. The health science sector is often lulled into security by its high regulatory moat, only to face regular organisational shocks that it fails to learn from.  

The unique pharma company conundrum is that most of its revenue is at constant risk over time, with each drug on a maximum patent of ten years. During these ten years, companies enjoy an entirely uncontested stream of revenue from a market that relies solely on their product. The challenge then comes at the end of that ten-year cycle when the company is compelled to reorganise their entire operating approach. At this point they must become more suitable to a market filled with ‘generic’ competitors, who will almost certainly beat them on price.  

Blackdot has recently engaged with a client who had three key products which made up 60% of their revenue. With all three drugs going off patent in the space of 12 months, the company is still working to reorganise their operating model and drive revenue through other channels. Even with a visible deadline for the demise of uncontested revenue, organisations did not adequately reconstruct their approach to set themselves up for future success. The reason is not that they’re stupid or even lazy, it’s that the challenges they face are complex and significant. 

Key Lessons

The energy industry is in the fortunate position of being at the start of the same dynamic faced by banks and pharma companies for a decade or more. They have the unique privilege of learning the lessons from the history of other industries, rather than being condemned to repeat them. From our experience, Blackdot recommends a simple recipe in three stages: 

        1. Understand and get behind the customer journey 
        2. Redefine the business model end-to-end  
        3. Proactively invest in compliant, customer-centric mindset and behaviours  

1. Understand and get behind the customer journey 

The surest way to guard against conduct risk is to make customer experience the number one priority of the organisation. To do that, energy companies should try to understand the customer journey end-to-end from the customer’s perspective – from awareness to advocacy and prioritise the “Moments-that- Matter” or the points the customer truly cares about. By investing in measuring and uplifting the experience at those moments, they can maximise the customer loyalty towards their energy provider and maximise retention and share of wallet without the risk of mis-selling. Like banks before them, the energy companies have focussed disproportionately on acquisition. Understanding and driving greater value across other journey stages can better balance customer, commercial and compliance outcomes.  

2. Redefine your business model end-to-end 

One of the challenges with organisations that have operated in a protected environment is that they get addicted to income streams that prove to be unsustainable when scrutinised or subjected to competition. The “fee for no advice” and grandfathered commissions in wealth is one example of these income streams. Health science organisations face similar challenges as they approach a patent cliff.    

To avoid the complacency and inefficiency that often accompanies incumbency, energy companies need to understand the true economics of their business and strip out unsustainable costs or subsidised activities before they are forcibly stripped by market and regulatory forces.  

3. Proactively invest in compliant, customer-centric mindset and behaviours 

As we work with multiple financial services, and health science organisations, we often see companies burdened by too many layers of compliance. Checkers on checkers are a visible waste of resources and add cost and complexity to the business with no benefit to the customer. Instead, energy companies should invest in customer-centric mindsets, behaviours, and skills amongst frontline staff. Any residual compliance risk should be managed by encoding safeguards in core systems, supported by a prudent number of risk and compliance staff to deal with any exceptions. 

The energy industry can get ahead of the curve with respect to disruption in the sector by heeding the  hard lessons of other organisations. By truly understanding customers, redefining the business model and planning for the future, energy players can be more responsive to customer-centric change than their competitors.  

1 https://www.accc.gov.au/publications/retail-electricity-pricing-inquiry-final-report-executive-summary
2 https://static1.squarespace.com/static/5b20a97b85ede1e56472bc39/t/5c517a501ae6cfdc1a4cf0de/1548843625037/Energy+Charter_Final_web+version.pdf
3 https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf
4 https://www.mja.com.au/journal/2002/176/3/ethical-issues-concerning-relationships-between-medical-practitioners-and

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