Challenge
A leading European energy company faced a sharp decline in profitability, with earnings set to halve within the next two to three years. In the wake of the economic crisis, demand for electricity had plummeted, and healthy growth had given way to stagnation. Generation assets were starting to lose money as renewables grew and cheap coal threatened the viability of gas-fired plants, while price rises were limited by regulatory pressures.
The organization of the business was also giving cause for concern. Cross-border acquisitions of local utilities had created considerable complexity and duplication within functions. Past efforts to address internal structures and leadership had failed to make a lasting impact on operational processes and performance. McKinsey was asked to help our client turn around their financial and operational performance in the wake of new economic realities within the power sector.
Discovery
We worked closely with the client team to understand what factors were driving performance in generation, trading, and marketing; how overlapping functional activities could be streamlined; and how the company could shift its focus from financial targets to the success of the business as a whole.
In examining generation, we used our proprietary Power Gauge and wind benchmarking tools to understand the nature and scope of potential improvements such as making operations leaner to increase plant availability. We also helped the client develop granular key performance indicators linked to operational as well as budgetary priorities, and conduct a comprehensive analysis of the value of the portfolio to define which assets to retain and which to close.
In our review of trading, we found opportunities to boost revenues by optimizing bidding and dispatch to make the business more responsive to rapid market changes. In marketing, we helped the client turn around a country's business unit that had lost half its client base in two years by undertaking a full review of brand, offers, and price positioning.
To create a shared view of organizational challenges, we traced the overlaps in support functions between geographic units and captured them on a map that served as a valuable visual aid in leadership discussions. The client decided to consolidate some functions in shared-service centers to reduce duplication and capture economies of scale.
Using our overhead benchmarking tool to pinpoint savings opportunities in administrative activities, we discovered there was exceptionally high demand for tailored financial reports throughout the company, swamping reporting teams with so many requests that their productivity suffered. We helped the client identify the most frequently requested reports and improve its standard reports, thus reducing the volume of time-consuming ad hoc requests and improving the efficiency of the whole process.
The company understood from previous reorganizations that it needed to deepen the transformation by addressing culture, mind-sets, and behaviors if it was to achieve lasting improvements and not just a temporary fix. We interviewed employees at all levels of the company to understand the changes that would be needed to support new ways of working. We found the company had a tendency toward administrative and process complexity and needed to focus more on innovation and performance improvement. Incentives, review processes, and consequence management were revised to reflect business targets, and leaders were equipped with a clear sense of the metrics that had the biggest impact on performance.
Impact
By the end of the project we had identified value-creation opportunities worth well over €1 billion, almost twice the original target. Cost savings accounted for about three-quarters of the total, with the rest coming from revenue enhancements. Half of the value was captured during the 18 months we were working with the client.
Revenue increases came largely through commercial optimization (including a doubling of EBITDA in some countries as a result of better bidding strategy), improvements in marketing activities, and increases in the availability of thermal generation assets.
Evidence of the impact of eliminating duplication came in IT procurement, where the company found it could save €100 million by canceling a major development project that one country had initiated without realizing that a similar system was already under development in a neighboring country. Greater transparency and better coordination would prevent this kind of waste in future.
A vital part of the transformation was building the client’s internal capabilities so that it could continue to pursue long-term improvements after our involvement ended. To ensure that the program stays on track, we set up a series of check-ins to monitor progress against targets and allow for rapid adjustments when market conditions change.