Germany’s transition to a new energy economy is changing the rules of the game for many business areas of the energy industry at an unprecedented rate – and metering is no exception. To develop innovations in an environment rife with uncertainty requires special innovation strategies. That’s because innovation strategies for new or transforming markets are fundamentally different from those for established markets.
In established markets, customers, business models, competitors, and competing products are already known to a large extent. Technical innovations improve the efficiency or performance of a facility, for example, while process innovations optimize the cost structure or scalability of a service. However, the structures underpinning the business area or model remain unchanged. Players in these markets would benefit especially from more “performance-based” strategies, such as the Stage-Gate process. Already well-established at energy providers and utilities, these innovation strategies are characterized by linear process phases, relatively resilient business plans, measureable project progress, and milestones that can be scheduled.
In contrast, younger markets or those in the midst of transformation have fundamentally different requirements. Customers, business models, products, partners, and processes in these markets are still very much unknown quantities. Players can pose hypotheses or assumptions about these factors all they want, but there are generally no market-based facts to back them up. Companies in this environment have to take action despite a high degree of uncertainty. In such an environment, however, the top priority is not to perform as efficiently as possible, but rather to learn as efficiently as possible. This means finding out quickly and at minimum cost which of the innovation’s theses are feasible – meaning, which can be translated into facts – and which ones have to be adjusted.
Learning processes follow fundamentally different rules than performance processes do. In the former, results are virtually impossible to forecast, the time and resources needed are difficult to predict, and learning progress cannot be measured with the usual performance indicators. So in business areas marked by high uncertainty, the management of efficient learning processes needs to be at the focus of innovation strategies. Sufficient factual data has to be gathered first before an innovation can be scaled with the usual performance-based strategies and processes.
Which innovation strategy does metering call for? Some decision makers assume that the processes and tools they have worked with for many years are essentially adequate to the task, perhaps with a little tweaking. After all, only one segment of metering equipment will be affected by the new regulations, and with several years planned for the rollout, what’s the rush? There’s plenty of time to deal with that topic if and when it becomes absolutely necessary.
Yet managers who have already delved into these challenges more deeply recognize that the smart meter rollout will require the development and implementation of complex new processes and business models. The planning of a cost-effective rollout alone is a highly complex task, one that did not previously need to be mastered in this form. It involves coordinating a host of different factors – age distribution and geographical positioning of the meters, the customer classes organized by the consumption thresholds defined in the law, preferred manufacturers’ delivery capacity, installation technicians’ availability and assembly capacity, and possible sources of revenue – such that costs can be planned and kept to a minimum over several years. If the processes and players are not perfectly coordinated with each other, or if deviations from the plan cannot be adequately taken into account, costs can skyrocket. These enormous additional costs place a burden on companies, which are prevented from passing them on by cost caps. In addition, interfaces to countless IT systems have to be connected to each other and tested, both now for the planning and later as part of implementation.
Summary: attempting to handle the smart meter rollout with established tools and processes is very risky. To avoid this risk, companies need to combine two innovation strategies:
In other words, “learning before doing.” If you don’t “learn” first, the “doing” later on will be very risky and very expensive.
Dr. Harald Schäffler, managing director schäffler innogy