Powering the Energy Sector

But there's also new pressure for energy and utility companies to transform themselves from Old Economy entities into bigger, smarter, faster global competitors.
"By 2007, energy and utilities companies will find themselves in a more disaggregated, multinational industry. The demands of this marketplace — and the increasing expectations of the capital markets — will drive companies to transform themselves into larger, more dynamic, better-focused players," says Michael Valocchi, partner, strategy for energy and utilities, at IBM Business Consulting Services in New York, a business unit of IBM Global Services formed in October 2002 when IBM acquired PwC Consulting and its 30,000 professionals.
Valocchi says that the most successful energy companies will take one of two paths. Many energy companies will pare down offerings and focus on specialized services in merchant energy, long-distance transportation, local distribution, or retail services.
A few global players will emerge as global "super majors" — companies that integrate all of those specialties — and will leverage the economies of scale to maximize shareholder value. "We don't see many companies doing that, because it takes an immense amount of credit and capital and a very disciplined approach to running a global company," Valocchi adds.

Likewise, changes in the energy sector are forcing consulting firms to reassess their offerings. Regardless of the scenario that plays out, reinventing the energy industry will require the help of management and financial consultants, outsourcers, and IT professionals — although the current pace is slow.
At Accenture, for instance, revenues from its Resources unit, which includes energy, petroleum, and utilities, represented 17 percent of its consulting business in 2002, up slightly from 16 percent in 2001.
BearingPoint Inc. saw its energy and chemicals client roster grow 78 percent in fiscal 2001 — from 40 global 2000 companies to 71 — yet the group hasn't garnered a significant enough share of the business to stand alone as one of BearingPoint's five industry units.
Nonetheless, some specialty firms and larger players with deep roots in the energy sector are growing business in this fast-changing sector.

Turning Around Troubled Companies

The electricity and natural gas sectors saw tremendous growth in 2000. With easy access to capital, companies made tremendous investments in new infrastructure. Those same companies now face oversupply, falling profits, and a low credit market. Many are now forced to sell off assets, shop for capital, and lay off employees.

Those forces created the perfect storm for Huron Consulting Group, a Houston-based firm that specializes in restructuring and turnaround services. In April, the firm created a national energy consulting practice.
"It seemed like a pretty natural step to take some of our core competencies to an industry that's going through pretty massive levels of change and are likely to continue to go through change over the next three to five years," says Stephen Schaefer, managing director of Huron's national energy consulting practice.
Schaefer says that Huron currently has "several" energy clients, but he expects to grow the business in two key areas. "There's tremendous activity on the merchant power side, so that will be a focus. There's also a tremendous amount of activity in some of the E&P areas with ownership changes taking place," he adds. The energy practice plans to hire five to 10 professionals during the next six months.
Business is also booming for Irvine, CA–based Crossroads LLC. The valuation and restructuring firm saw its energy practice business increase by about 50 percent over the past year.

Holly Felder Etlin, principal in the corporate restructuring practice, says that bankruptcy filings and business restructuring work has come from "all across the board. They're everything from pipeline companies to oil and gas, to services — all of that."
Etlin doesn't see business slowing down anytime soon. "Most of the people who follow the industry anticipate that the restructuring in the industry will continue for the next couple of years," she adds.

The Next Step in Outsourcing

In 2003, energy companies are focusing on efficiency of scale as well as cost efficiency. "It's back to the basics, at least for the short term," says IBM's Valocchi. "We see companies that are looking for shorter payback periods on their projects — those that will help in efficiency, effectiveness, and optimization of workforce" — primarily through outsourcing.

Most of the largest energy companies already outsource some portion of their IT operations, and new outsourcing activity has been slow.
So far this year, energy companies have signed just 6 percent of all outsourcing contracts, according to International Data Corp.'s outsourcing contract database.

But some energy companies are now warming to the idea of outsourcing business processes as a way to lower costs, cut staff, and streamline operations.

For TPI Inc., a Houston-based consultancy that helps companies determine what part of their business to outsource, energy industry clients are the third largest group of clients, behind manufacturing and financial services companies — and they will stay at number three for the foreseeable future, says TPI spokesman Jack Benton. He does add, though, that existing clients are expanding their outsourcing needs.
"Typically, if someone has outsourced IT they're much more likely to do some business process outsourcing as a natural progression," Benton explains.
During the next few years, IBM's Valocchi expects enabling technologies such as the Internet and middleware to elevate outsourcing to a significant role in driving the industry. "Utility companies have avoided outsourcing some functions because of pure control issues, but enabling technologies have helped to alleviate this concern by making outsourced processes transparent to the end user."
Customer data management and call centers also are likely outsourcing candidates.

Managing Assets and Lowering Costs

The oil and gas portion of the industry hasn't suffered the same fallout as most others in the energy sector. For behemoths like Exxon Mobil and ChevronTexaco, the biggest challenge is managing global growth.

ChevronTexaco, created by the 2001 merger of Chevron and Texaco, recently emerged from accounting rules that prohibited the combined company from changing its asset base for two years. The company is now selling pieces of its business that don't suit its asset mix — a strategy praised by analysts. The company has between $3 billion and $5 billion in additional asset sales planned for the next several months, and should wrap up by the middle of next year, according to a report by Lehman Brothers.
For Exxon Mobil, the product of a 1999 merger, the elimination of redundancies and implementation of other cost inefficiencies contributed nearly $6 billion to its bottom line in 2001.

A.T. Kearney views the oil and gas sector as a hot growth area for helping integrated companies like these manage their assets and lower costs.
"While people may lament that consulting work has slowed down, we've seen real growth in the energy sector. This is one of our hottest areas for growth right now," says Paul Weissgarber, vice president and managing director, energy, for  A.T. Kearney in Dallas. Today, energy clients represent 20 percent of the firm's business. The company plans to grow the business by resurrecting old relationships with former energy clients.

Regaining Trust

With corporate accounting scandals plaguing energy and other sectors, financial integrity issues top executives' lists of concerns.  Many companies are looking for ways to regain the trust of bankers, Wall Street, and the public.

Deloitte Consulting recognized this trend last year and began planning a financial integrity offering for its utility clients, which would help companies evaluate their financial processes and their executives' personal liability.
But with the passage of the Sarbanes-Oxley Act of 2002, which cracks down on corporate malfeasance by requiring corporate accountability, Deloitte decided to combine reviews and compliance services of its accounting arm with its consulting offerings.
"On one hand we saw an opportunity separately, but now we see a greater opportunity combined," says Dave Fornari, Deloitte Consulting's energy global practice leader.

The Act, which requires companies to ensure compliance by the end of 2003, has requirements in unexpected areas, such as compensation, executive relocation, and overseas operations. It also covers such disparate corporate functions as information technology, human resources, compensation, and environmental compliance because these areas also affect a company's financials.
Fornari says that Deloitte will leverage its accounting and consulting expertise to offer one-stop shopping for these compliance issues. But he acknowledges that the work will be a 12- to 18-month phenomenon that will translate into "a blip" in new business.
Deloitte's energy sector business historically represented 8–10 percent of the firm's revenues. This year that share dipped slightly to 6–8 percent due to the economy in the U.S., Fornari says.

The Energy Forecast

To succeed in the transforming the energy sector, IBM's Valocchi says that traditional companies must analyze their business propositions and determine the strategies most likely to bring them success in the long run. That means a refocus on the core.
"Companies need to reevaluate their strengths in the new industry model and focus business strategies and tactics to capitalize on those strengths," he adds. "This evaluation will lead the enterprise to a focus on one of the business models or the global super majors."
Overall, enterprises need to have a business model focus rather than a regulatory one, he advises. Over the past decade, utilities have begun to operate as competitive enterprises. Moving these operations to the next level remains a challenge. Companies will need to manage a balanced set of regulated and unregulated assets on a competitive basis. Companies that embrace these challenges and opportunities will be well positioned to reap the rewards of competition.

That may spell opportunity for energy consulting practices down the road. But in the meantime, Weissgarber predicts that firms will continue to struggle as energy companies remain "leery of the rash use of consultants."
"I don't see that many projects out there where somebody says, 'Why don't you guys come in and help me study something for a while?'" Weissgarber explains. "However, if you can say, 'We can work with you on a supply chain upgrade effort that can drop as much as a billion dollars' worth of improvements,' that has a meaningful impact on a cents-per-share basis and every other type of metric that these guys are chasing."