Five Value Levers I Learned From Pacesetters
The shared traits of high-performing operations and asset management organizations
I was a guest on a podcast recently where the host asked me about top performers in asset management. I wasn’t prepared for the question because it wasn’t our prepared talking points. Unfortunately, I wasn’t happy with my answer, which was to suggest most organizations haven’t put it all together to achieve operational excellence. While mostly true, it is also true there are top performers I’ve learned share some common characteristics. This story is my attempt to right my wrong from the podcast.
First, let’s define what I mean by a “pacesetter.” I learned the term from operational benchmarking. The pacesetter was defined as one or more organizations that had consistently high performance in cost of service, scoring high over several dimensions. From an asset management perspective, they manage asset cost, performance and risk better than most organizations.
My utility company’s benchmarking results taught me we were below average compared to pacesetters in our selected peer group. We had the second-quartile operational performance and the third-quartile cost performance. Put those dimensions together as a measure of productivity metric (cost per unit produced), and we were about average.
The difference in value delivered between average and top performers was massive. As someone responsible for providing data for the benchmarking service and interpreting the results, I dug into the gory details to determine what was going on to characterize my organization’s operational risks and opportunities in our value leakage, the controllable difference between our results and the pacesetters. I picked the consultants' brains to understand what was driving the results we were seeing. I learned a ton. Unfortunately, I discovered my operational leadership wasn’t keen on rocking the boat by doing things differently to achieve a better result. After all, they were doing well for themselves; the company was generally profitable under current market conditions, so the leaders remained committed to the status quo despite suffering significant continual value leakage.
For a decade, we performed the operational benchmarking. And for a decade, it said the same thing: operational performance was okay, costs to achieve that production were too high, and we had too many people. To that point, I had been unsuccessful in leading the organization to want and achieve more.
Then something interesting happened.
My company bought some assets in the US, with the commercial agreements having a unique twist. Instead of operating and maintaining the new (to us) assets we owned, the previous owner would continue to operate and maintain those assets under a service agreement. Why? They could do it for a lower cost of service. This piqued the interest of our operational leadership. They wanted to discover how this company could manage the assets at a lower cost. Two colleagues and I were flown to the company’s headquarters to find out.
The five lessons we learned were a first-hand case study in great operations and asset management. It served as an inflection point in my career as an asset management professional.
We met with the managing director of their western US region, who previously had profit and loss accountability over our new assets and would continue to manage them on our behalf. He was a supremely confident fellow, obviously very proud of his organization and how they conducted business.
One of my first questions was whether his company performed operational benchmarking. He looked at me squarely and said, “No, we are the benchmark; there’s little value in that service for us.” It occurred to me that if true, there’s a pacesetter not included in our peer group, which would set the bar higher between average and top performers.
In a wide-ranging conversation, these are the five lessons we learned that serve as value drivers for their organization:
1. Economy of Scale
Scale is structural; you either have it or you don’t. The organization's size determines how much it can benefit from economies of scale. Generally, the larger the organization, the lower the unit cost of production. This is why there are ‘synergies’ when mergers and acquisitions occur. Scale is the least controllable of the five value drivers but significant nonetheless.
This company was the largest utility by assets under management in the US. This scale afforded them many opportunities smaller organizations would not have. Economies of scale are particularly pronounced in supply chains, significantly influencing strategic supplier relationships and category buying.
I’ve seen this elsewhere, too. A VP of Operations at a utility owned by Berkshire Hathaway Energy shared with me that they are largely free to manage their own business, with a notable exception being the supply chain, which utilized the entire scale of the holding company to find efficiencies.
There are economics of scale opportunities with operations, although generally more modest in size. As one example, this large utility insourced a centralized wind generator gearbox repair facility. Gearboxes are notoriously high maintenance cost items in wind farm operations. This isn’t something most asset owners would or could do, as they would outsource those repairs to original equipment manufacturers or qualified third-party repair shops. In fairness, the managing director shared he wasn’t confident that the return on this particular investment was stellar, but the increased control of their asset repairs was seen as a benefit to their operations.
My company was a large Canadian but medium-sized utility on a global scale. The organization often struggled with strategic suppliers and bounced back and forth between centralized and decentralized purchasing. While being Canada's largest wind renewables operator, this apparently didn’t provide the same operational economies of scale the US organization enjoyed.
2. Leadership Development
Every operational leader in their organization had gone through the same leadership development training program. In their case, each leader had achieved their blackbelt in Lean Six Sigma. According to Wikipedia, “Lean Six Sigma is a process improvement approach that uses a collaborative team effort to improve performance by systematically removing operational waste and reducing process variation. It combines Lean Management and Six Sigma to increase the velocity of value creation in business processes.”
It was clear from the managing director that this management philosophy and practice formed a common language and working methods that effectively guided the operations function. I learned that it wasn’t necessarily the specific Lean Six Sigma set of practices (there are other suitable methodologies) that made the difference, but the fact that all leaders had developed skills and competencies that helped them with their specific role, operations leadership.
In my utility, the operational leaders received good to excellent finance and business leadership development and fair to good human resources people leadership development. None of them had formal operations or asset management leadership skills or competencies. They brought their experience, which served them well, but also had significant holes and blind spots. As they were promoted, they inevitably became accountable for job functions beyond their direct experience. They relied on other people’s skills to complement their gaps, but those people had their own holes and blind spots, too. Nowhere were they exposed to a holistic and strategic methodology that would help them develop the skills and competencies to lead an operations organization effectively.
3. Management Systems
Our Operations are complex adaptive systems; there’s no escaping it. Because of this, we try to break things down into small bite-sized parts that we can more easily understand. While this approach can help immature organizations improve their average performance, I’ve learned it actually impedes reaching consistently high performance. Pacesetters have systems that allow them to manage better.
What are systems? Systems can be people, business processes, and technology solutions all working together. Operations should have its own system of management that is distinct from financial management or human resources management. Formal asset management, consistent with the ISO 55000 suite of standards, encourages organizations to develop a system of management for managing assets or an “asset management system,” which, if done well, can serve as the Operations’ own business model.
This pacesetter clearly had its own operations management system but didn’t have a name. Through the conversation, it became clear that operations had their own collective way of directing their organization’s activities to manage their assets effectively through their people, processes, and technology. One specific item I recall was their insistence on performing two up-tower annual inspections, which bucked an industry trend towards only one up-tower annual inspection. The first inspection performed all the inspections and testing to discover the corrective scope for the second up-tower inspection. As a result, they had very little reactive work. Their maintenance work was well-optimized.
By contrast, my utility did not really have its own defined Operations management system. Sure, they had policies and procedures, but those served mainly for safe operations. They didn’t have strong, dedicated systems to drive maximum value delivery from its assets cost, performance, and risk. Like many organizations, their business processes were mixed with quality, not bad but not great, which aligned with the organization’s mediocre benchmark performance. Like many others, my organization had moved to one up-tower inspection per year. That saved some inspection and testing time, but those savings and more were lost when our techs were constantly called out to address urgent reactive maintenance work. Our maintenance work was not well optimized.
I’ve often heard that you don’t need to be best practice in everything. I believe this is true. At the same time, it’s also true that pacesetters are good at the many things that significantly impact the organization’s overall performance.
The management systems these organizations undertake should help direct the organization to take on more high-value activities and decrease low-value ones. Of course, the trick is understanding which activities are low or high-value. I’m always up for that conversation. Systems can be huge enablers for organizational capability.
4. Asset Planning Horizon
We did discuss the pacesetter’s operational business planning practice in depth. One of the most intriguing things I learned about this pacesetter was that its asset planning horizon was five years. They planned to go from their current state of productivity, defined as cost per megawatt-hour (MWh) produced, to an improved productivity state with a significantly lower $/MWh target.
Remember that this pacesetter’s productivity was already superior to my company’s! Still, they keep raising the bar. The managing director said that he had a series of initiatives to help them improve and sustain productivity to meet the business objectives. Some were corporate initiatives, while others were local initiatives. Together, they had high confidence their plans would close the cost and performance gap presented by the aggressive business plan.
The key feature here, though, was the five-year window. They had a long enough runway to plan, schedule and execute the new work and enough time for the improved results to start rolling in.
While developing a five-year forecast, my organization always replanned the annual budget and managed the monthly and quarterly earnings as directed by finance. This resulted in short-term thinking, causing significant plan churn from activities we never executed. Because leadership was incentivized for short-term gains, we never gave ourselves a long enough runway to do the things that would create higher long-term value.
This kept us from exceeding our average performance relative to the benchmark pacesetters. We had inquired with our benchmarking service, asking for any increase or decrease in investment (asset spend), whether there was a noticeable change in productivity performance, and over what timeframe. The answer came back “yes.” Unsurprisingly, there was a corresponding change in performance with spend, and the timeframe averaged 2.4 years. I later began referring to this 2.4 number as the “speed of business” in an operations asset management context.
The lesson here is that if your organization manages month-to-month, quarter-to-quarter or even for the current year, it is likely suboptimizing its value delivery. Three time horizons must be managed simultaneously: short, medium and long-term. You need an asset planning mission period of about three years to allow your organization to execute the activities that will deliver more optimal cost, performance and risk. Focusing too much on one suboptimizes value delivery.
5. Improvement & Innovation
Many organizations talk a good game about improvement and innovation. Every organization is constantly undertaking many changes, sometimes an overwhelming amount. But is this collection of initiatives actually moving the dial on operational performance? Is it moving from third or second-quartile performance to first or top-decile performance? Rarely. Instead, the benefits of all this change are analogous to shuffling the deck chairs. Even organizations that have invested heavily in digital transformations claiming to bring value from data and analytics have seen disappointing returns on those investments, according to McKinsey & Co. and other consultancies and researchers. Unfortunately, these organizations aren’t much better at using that technology to improve their organizational decision-making on where and how to deploy their vast and scarce resources.
However, this pacesetter continues to raise the bar on their productivity through well-thought-out improvement and innovation strategies, objectives and plans. Their selected change initiatives actually increase the capability of their organization to get more utility from their people, business processes and technologies to drive increased value delivery.
One innovation was building their Enterprise Asset Management (EAM) system. This homegrown system served its purpose but had become outdated and difficult to maintain. The company realized it couldn’t achieve its future goals without a new state-of-the-art system, so a vast undertaking was underway to implement a new EAM from a leading solution provider armed with a strong implementation strategy and clear expectations for how it would be used and what benefits it would bring. Other improvements and innovations already mentioned included the gearbox repair facility and a variety of operations practice frameworks encouraging them to test, adjust and improve constantly.
On a large scale, the pacesetter wasn’t afraid to adopt new and bold improvements and innovations, but they were very selective and deliberate, undertaking only those change initiatives they were confident would deliver the expected results and that the organization could execute and manage the pace of change successfully into sustainment. On a smaller scale, they continuously experimented to improve their practices and use existing resources without needing discrete improvement projects with additional people and budgets.
On the other hand, my organization had too many sanctioned change initiatives on the go at any one time and too many unsanctioned skunkworks, all of which had weak links to operational strategy and organizational objectives. There was no way to measure if they were getting bang for their buck, except when the business outcomes rolled in, which by then was too late. It was both the selection and execution of these large and small change initiatives that failed to move the dial to improve performance, assuring middling operational performance.
The Five Value Levers
It is no coincidence the ton I learned from the operational benchmarking services, replete with a knowledge base of hundreds of operating units gathered over decades, were the same lessons I learned from a case study of one large utility with superior performance.
It is interesting and useful to benchmark yourselves against your peers. But ultimately, our organizations only compete with themselves to find sustainable ways to improve value delivery. Organizations should seek to achieve pacesetter performance to deliver maximum value to their stakeholders. It has little to do with the relative performance of others.
The common traits of consistently high-performing pacesetters are competent leadership with distinct operations asset management skills, strong systems of management for people, processes and technology to support their choices on the best allocation of their vast and scarce resources, and a sufficient time horizon to capitalize on not just short-term but also medium and long-term risks and opportunities, all within a culture of true improvement and innovation. Scale can also help if it’s available.
These are the five levers progressive organizations can utilize to become consistent pacesetters: providing a low cost of production (or services) at acceptable risk and delivering more value with fewer resources.
Lessons Learned?
I’m sure you’re wondering what my utility did with the fresh knowledge we returned with after we visited with the pacesetter. The answer is, well, nothing. The EVP listened and nodded their head but didn’t do anything of import, I’m sad to report.
Maybe they didn’t see the contrast between the two organizations’ ways of doing things like I did. Or maybe they didn’t like our answers because they were hoping for something else? I don’t know, but choosing to do nothing was a curious choice given they were the ones who sent us away to find out how this other company could manage the same operations and maintenance service for less cost.
I guess that’s why our unspectacular operational performance continued. Same as it ever was. We were never willing or able to punch above, to break free from the gravity well of mediocrity and into the realm of high-performing pacesetters. This failure to learn was just more evidence my company wasn’t applying the five value levers.
