Getting race-fit

This meeting of the Utility Week Digital Utilities Think Tank in partnership with Wipro emphasised the continuing struggles of energy and water players to strike the right relationship with digital risk taking and large-scale deployment of successful digital experimentation.

There was also agreement that a commonly appreciated need to see through system changes with sustainable and high-quality change management is being disregarded or side-stepped in the interests of cost saving or counterintuitive drives for resource efficiency.

In a highly regulated sector, it was also inevitable that the relationship between regulation and the pace and ambition of digital transformation was a lively topic of discussion. Often blamed by companies as a blocker to nimble innovation and bold decision-making, regulation was in safe hands among our group. Leaders were very ready to acknowledge that utilities need clear guidelines for the way they approach and implement changes which will impact critical services and national infrastructure.

As one Formula One fan in the group explained, “if you want your car to go fast around the track, you need brakes as well as acceleration”. They went on to argue that regulators and companies need to find a better balance to ensure the sector as a whole can “complete the race”.

Here is a range of key recommendations from the group’s animated discussion that are essential for getting utilities race-fit for digital transformation.

Plan for success and fail faster

The energy sector is working towards a culture of digitalisation. But while innovation and experimentation through major government-backed initiatives are reasons for excitement and optimism, our group agreed that adoption of new digital tools and ways of working within organisations has not made enough progress.

An experienced leader in the space observed that hundreds of millions of pounds have been spent on digital innovations, through initiatives like Ofgem’s Network Innovation Allowances and the Strategic Innovation Fund, yet many have not been pulled through into deployment.

This lack of progress can’t be blamed on a lack of funding, he said, it is “much more about appetite for risk and poorly aligned incentives”.

“You've just got to see the course out, because failing is part of the mechanism to get to the final outcome…helping iteratively understand what it means for the organisation.”

One thought leader said companies often get constrained on innovation by a build-up of technical debt, legacy systems, and issues with “outdated ways of working, and digital illiteracy across the organisation”.

These words echoed those of another Think Tank member who suggested that organisations are not properly preparing for the success of digital pilots or thinking ahead on how these will be rolled out.

How do we break this cycle and unlock the potential to scale up? A head of innovation at a gas distribution operator said they had recently changed how innovation projects are assessed, with backing now only given to projects where “productionisation” is factored in (that is, demonstrating it can be optimised for mass production; grounding it in reality).

“If this hasn't been taken into account, a project is literally blue-sky thinking, and rather than getting this on the ground by 2030, you're in a 2075 conversation,” they said.

Others around the table rallied behind the belief that innovation teams working in isolation can become too focused on chasing the next round of funding, rather than pursuing valuable business or higher-level drivers. One head of function at an energy network said that part of the problem is that innovation teams don’t get enough time at the table with business leaders “to convince them that implementing innovation is the right thing to do”.

Scaling up innovation in the real world is a particular challenge for critical services like energy and water where organisations have an inherent aversion to risk. For this reason, one authority on the topic said it is necessary to have a budget for failure when projects get to the rollout stage. “If there is no ability to set aside a certain amount of money to fail, then automatically, risk aversion is your first step because if you fail, you might get fired,” he said.

A head of digital at a large energy company underlined the need for a nuanced approach for different scenarios. In the innovation space he said “fail fast, learn quick” should sometimes be the mantra. But in other situations “you've just got to see the course out, because failing is part of the mechanism to get to the final outcome…helping iteratively understand what it means for the organisation.”

Target outcomes and respect change management

The ability to identify and quantify the benefits that a digital project would deliver to a business needs greater attention and method, our group agreed. A keener focus on this would help firms more clearly see ROI and justify follow-up spending in complementary digital initiatives. It would also make it clearer where projects have not delivered anticipated gains and why, allowing for course rectification.

Many Think Tank participants commented that, when building investment business cases, the process for forecasting business benefits is insufficiently robust. Furthermore, tracking realisation of benefits – whether forecasted or otherwise – generally lacks focus.

“In most investment cases, the measurement of benefit is an afterthought,” said one authority on the topic. “It goes back to data, not just data for data’s sake, but repeatable data that ties back to the use cases for benefit measurement.”

A chief data officer at a large energy company blamed this on leadership teams failing to consider the longer-term impact of investments and to grasp things at a “macro level”.

Elaborating, they said leadership teams are typically focused on narrow targets and performance objectives, often operational ones, and “fewer and fewer people sit at a group level to discuss the bigger picture and realise this is actually not working”.

In a related discussion, there was consensus among participants that high-quality and sustained change management is key to unlocking value from digital investments. There was much talk of the challenges posed by the “last mile” of implementation – meaning the effective adoption of new technologies and ways of working by front-line employees.

However, in the same discussion there was also a commonly expressed feeling that many companies have displayed a “lack of respect” for change management as a critical business function in recent years. One leader said it is “always the first thing to be cut” when firms are looking for resource efficiencies and that this has undermined the realisation of value from digital investments.

In most investment cases, the measurement of benefit is an afterthought. It goes back to data, not just data for data’s sake, but repeatable data that ties back to the use cases for benefit measurement.”

Focusing on why technology and digitalised process adoption can make many transformation programmes fail, one energy sector data leader commented: “It goes back to this question of the daily grind the workforce must deal with…it creates a cognitive load. You can put the investment lines in, make the big system changes, but on a day-to-day basis, in the last mile these improvements are not being made.”

Building a clear change management programme, which will handhold employees and reinforce the message that digitalisation will “attack the daily friction everyone has to deal with” would help tackle this, they added.

Ofwat has approved

of total expenditure from companies to be delivered between 2025-2030

Regulation for innovation

Regulation sets out the rules and frameworks within which organisations can experiment and operate. This needs to be carefully balanced against the need to allow companies to be agile, ambitious, and able to seize the benefits of fast-paced technology advances. This is especially the case when traditionally stable industries like energy and water are tasked with achieving urgent and societally critical goals like decarbonisation, addressing water scarcity, and more.

One regulatory expert observed that the risk of regulators straying into the territory of dictating how the sector does its job can be averted by ensuring an open dialogue “between the regulator and regulated entities on when that happens” and where the regulator’s actions should be reigned in, or “pushed further quicker” – for example – through mandating adoption of key standards.

The same leader went on to say that RIIO-ED2 price controls acknowledge the pace of digital innovation and include mechanisms to translate it into baseline funding as programmes mature, rather than forcing organisations to wait for the next price control and risk losing the funding. The same approach is expected to be adopted for ED3, he added, and similar mechanisms are included in Ofgem’s Strategic Innovation Fund.

Over in water, the AMP8 framework has built-in mechanisms that should prevent a traditional “back-ending” of delivery – a welcome step given the monumental scale of investment put forward for the period. Ofwat has approved £104 billion of total expenditure from companies to be delivered between 2025-2030. A water company Think Tank member said new requirements “to deliver consistently every six months against our objectives” should encourage a more methodical but agile approach to project delivery, including embedding digital capability across the asset base.

Notwithstanding these developments in regulation, there was a common feeling that more could be done to ensure frameworks send the right signals to companies about the need for ambition on digitalisation and to allow for change at pace. One senior energy sector representative suggested there may be scope to expand Ofgem’s regulatory sandbox concept, which enables innovators to test news products, services and business models in a controlled environment and with temporarily relaxed industry rules.

A broader application of this thinking could offer “an interesting approach to [addressing] our risk aversion”, by enabling testing “with no harm done”.

Take opportunities to upgrade

Building on the theme of risk appetite, the group’s attention turned to the sector’s ability to speed up deployment of new technologies – especially smart assets with embedded intelligence.

One experienced digital leader noted the “follower” mentality of utilities which makes them heavily dependent on seeing successful case studies of technology applications before they will move in the direction of digital progress. “A few years ago, people were still denying that cloud should be adopted. Now it's becoming de facto, and there are sufficient examples in the industry showing that AI works, IoT works, blockchain works, and digital twins work.”

There was an acknowledgement that this attitude is symptomatic of the low-risk appetite of utilities when it comes to changing and updating technologies which underpin core operations, including infrastructure and customer service operations. To keep pace with digital opportunity, companies need to become more comfortable with change in these spaces and competent and managing the change process, it was agreed.

In a similar vein, several Think Tank members pointed out that efforts to replace ageing assets with smart, digitally future-proofed solutions are sometimes being undermined by outdated product specification and procurement processes.

Furthermore, there seemed to be some confusion over the degree to which companies are at liberty to augment the digital capabilities in the case of unplanned asset replacements – for example because of storm damage. In some quarters at least, attendees said there is a perception that regulatory rules require “like for like” replacement, which limits “how smart we can go” with replacement products.

There are sufficient examples in the industry showing that AI works, IoT works, blockchain works, and digital twins work.”

Others felt this is a misinterpretation of regulatory guidelines. One energy network leader said their own understanding is that assets need to be replaced with similar products, but these can include enhanced capabilities: “As long as it does the ‘minimum viable’ and it's better [than before ] then what's the problem?”

While further debate along these lines did raise notes of caution on modelling for unintended consequences from making piecemeal digital upgrades, it was agreed that utilities need to take opportunities as they arise to upgrade the intelligence of their assets.

Building on the theme of risk appetite, the group’s attention turned to the sector’s ability to speed up deployment of new technologies – especially smart assets with embedded intelligence.

One experienced digital leader noted the “follower” mentality of utilities which makes them heavily dependent on seeing successful case studies of technology applications before they will move in the direction of digital progress. “A few years ago, people were still denying that cloud should be adopted. Now it's becoming de facto, and there are sufficient examples in the industry showing that AI works, IoT works, blockchain works, and digital twins work.”

There was an acknowledgement that this attitude is symptomatic of the low-risk appetite of utilities when it comes to changing and updating technologies which underpin core operations, including infrastructure and customer service operations. To keep pace with digital opportunity, companies need to become more comfortable with change in these spaces and competent and managing the change process, it was agreed.

In a similar vein, several Think Tank members pointed out that efforts to replace ageing assets with smart, digitally future-proofed solutions are sometimes being undermined by outdated product specification and procurement processes.

Furthermore, there seemed to be some confusion over the degree to which companies are at liberty to augment the digital capabilities in the case of unplanned asset replacements – for example because of storm damage. In some quarters at least, attendees said there is a perception that regulatory rules require “like for like” replacement, which limits “how smart we can go” with replacement products.

"There are sufficient examples in the industry showing that AI works, IoT works, blockchain works, and digital twins work.”

Rethink digital investment

Turning away from questions of culture and regulation, another key strand of conversation focused on the efficacy of existing financial structures when it comes to funding digital investments.

A digital leader at a large water company expressed concern that, despite major spending plans outlined under AMP8, a lack of clarity on capital investment lines for digitalisation means some projects stand to lose out.

“In subsequent AMPs, I'd like to see very clear investment lines into digitalisation, as we already have with cyber security,” he said, “so digitalisation isn’t just associated with a physical asset, but also widescale organisational transformation, and investment available through capital funding. Otherwise, we are at a risk of doing the bare minimum.”

The new paradigm for digital innovation is also forcing some utilities to rethink the traditional definition of, and balance between, Capex costs – one-off purchases for long-term value – and Opex spend associated with recurring operating costs.

They went on to explain that these types of costs have instead started to hit in-year Opex budgets, forcing the organisation to curtail its overall digital spend in the short term. “It’s a challenge if you want to invest in digital,” they stated.

“We’ve had to really radically rethink our finance model in the non-physical digital space,” said the chief data officer at a large energy company. “Financially accounting for cloud is becoming quite meaningless, there's no capitalisation or revenue expenditure, it's just not a differentiator anymore to have a capital programme for cloud.”

They went on to explain that these types of costs have instead started to hit in-year Opex budgets, forcing the organisation to curtail its overall digital spend in the short term. “It’s a challenge if you want to invest in digital,” they stated.

In subsequent AMPs, I'd like to see very clear investment lines into digitalisation, as we already have with cyber security,”

Turning away from questions of culture and regulation, another key strand of conversation focussed on the efficacy of existing financial structures when it comes to funding digital investments.

A digital leader at a large water company expressed concern that, despite major spending plans outlined under AMP8, a lack of clarity on capital investment lines for digitalisation means some projects stand to lose out.

“In subsequent AMPs, I'd like to see very clear investment lines into digitalisation, as we already have with cyber security,” he said, “so digitalisation isn’t just associated with a physical asset, but also widescale organisational transformation, and investment available through capital funding. Otherwise, we are at a risk of doing the bare minimum.”

The new paradigm for digital innovation is also forcing some utilities to rethink the traditional definition of, and balance between, Capex costs – one-off purchases for long-term value – and Opex spend associated with recurring operating costs.

They went on to explain that these types of costs have instead started to hit in-year Opex budgets, forcing the organisation to curtail its overall digital spend in the short term. “It’s a challenge if you want to invest in digital,” they stated.

“We’ve had to really radically rethink our finance model in the non-physical digital space,” said the chief data officer at a large energy company. “Financially accounting for Cloud is becoming quite meaningless, there's no capitalisation or revenue expenditure, it's just not a differentiator anymore to have a capital program for Cloud.”

They went on to explain that these types of costs have instead started to hit in-year Opex budgets, forcing the organisation to curtail its overall digital spend in the short term. “It’s a challenge if you want to invest in digital,” they stated.

In subsequent AMPs, I'd like to see very clear investment lines into digitalisation, as we already have with cyber security,”

Action points

Rebakah Docherty, VP energy and utilities at Wipro, boils down the key action points digital leaders should be taking in line with our Think Tank discussion.

This gathering of industry leaders candidly explored the critical role of digitalisation in meeting sector challenges and sparked an exciting, detailed discussion. At Wipro we think these are the key areas that CIOs and CTOs should pay attention to, based on the challenges and insights shared:

Be prepared for success and budget for failure

Foster a risk appetite culture: Encourage a culture that embraces risk-taking and innovation within the organisation.
Prepare for successful deployment: Ensure organisations properly prepare for the success of digital pilots and have a clear plan for scaling up successful innovations.
Integrate "productionisation": Emphasise the importance of optimising innovation projects for mass production and grounding them.
Budget for failure: Allocate a budget for failure when projects reach the rollout stage to encourage an experimental approach to innovation.

Action points

Xxxxxxxxxxxxxx at Wipro boils down the key action points digital leaders should be taking in line with our Think Tank discussion.

This gathering of industry leaders candidly explored the critical role of digitalisation in meeting sector challenges and sparked an exciting, detailed discussion. At Wipro we think these are the key areas that CIOs and CTOs should pay attention to, based on the challenges and insights shared:

Be prepared for success and budget for failure:

Foster a risk appetite culture: Encourage a culture that embraces risk-taking and innovation within the organization.
Prepare for successful deployment: Ensure organizations properly prepare for the success of digital pilots and have a clear plan for scaling up successful innovations.
Integrate "productionisation": Emphasise the importance of optimising innovation projects for mass production and grounding them.
Budget for failure: Allocate a budget for failure when projects reach the rollout stage to encourage an experimental approach to innovation.

Target outcomes and respect change management

Strengthen business benefit forecasting and measurement: Develop a robust process for forecasting and measuring business benefits in investment cases.
Foster leadership understanding of long-term impact: Encourage a macro-level perspective on the longer-term impacts and benefits of investments into digital initiatives.
Elevate and develop change management programmes: Highlight the importance of change management in driving successful digital transformation.
Breaking silos: Ensure seamless integration of data and processes across different sectors.

Regulation for innovation

Engage in open dialogue with regulators: Ensure experimentation with emerging technologies, financial incentives for new solutions, and a balanced approach for pushing the boundaries of innovation while complying.
Embrace mechanisms for funding and innovation translation: Acknowledge the pace of digital innovation and provide mechanisms to translate it into baseline funding as programmes mature.
Data sharing and open access: Increasingly regulators are encouraging partnerships and sharing data with third-party innovators to create new business models.
Collaborate with external service and consulting organisations: Leverage the heavy investment they make in digital and AI technologies.
Foster collaboration with other water, electricity, and gas companies: Whole system planning and innovation, emphasising the importance of open data and transparency in driving digital transformation initiatives.

Target outcomes and respect change management::

Strengthen business benefit forecasting and measurement: Develop a robust process for forecasting and measuring business benefits in investment cases.
Foster leadership understanding of long-term impact: Encourage a macro-level perspective on the longer-term impacts and benefits of investments into digital initiatives.
Elevate and develop change management programs: Highlight the importance of change management in driving successful digital transformation.
Breaking silos: Ensure seamless integration of data and processes across different sectors.

Regulation for innovation

Engage in open dialogue with regulators: Ensure experimentation with emerging technologies, financial incentives for new solutions, and a balanced approach for pushing the boundaries of innovation while complying.
Embrace mechanisms for funding and innovation translation: Acknowledge the pace of digital innovation and provide mechanisms to translate it into baseline funding as programs mature.
Data sharing and open access: Increasingly regulators are encouraging partnerships and sharing data with third party innovators to create new business models.
Collaborate with external service and consulting organizations: Leverage the heavy investment they make in digital and AI technologies.
Foster collaboration with other water, electricity, and gas companies: Whole system planning and innovation, emphasizing the importance of open data and transparency in driving digital transformation initiatives.

Take opportunities to upgrade

Foster a culture of innovation and change management: Encourage a proactive approach towards adopting new technologies and promote a culture of innovation and risk-taking.
Update product specification and procurement processes: Update outdated processes to ensure alignment with replacing ageing assets with digitally future-proofed solutions.
Seize opportunities to upgrade asset intelligence: Encourage utilities to upgrade the intelligence of their assets, even in cases of unplanned replacements.

Rethink financing for digital investments

Advocate for clear investment lines for digitalisation: Engage with regulatory bodies and industry stakeholders to advocate for clear investment lines within future financial plans.
Rethink financial models for digital innovation: Collaborate with industry peers and financial experts to address the challenges associated with accounting for digital investments.
Explore alternative financing mechanisms: Investigate alternative financing mechanisms to support digital innovation initiatives that may not fit within traditional categorisations.
Develop business cases for digital investments: Develop robust business cases that clearly articulate the long-term value and strategic importance of digital investments.
Budget for failure: Allocate a budget for failure when projects reach the rollout stage to encourage an experimental approach to innovation.

Take opportunities to upgrade:

Foster a culture of innovation and change management: Encourage a proactive approach towards adopting new technologies and promote a culture of innovation and risk-taking.
Update product specification and procurement processes: Update outdated processes to ensure alignment with replacing ageing assets with digitally future-proofed solutions.
· Seize opportunities to upgrade asset intelligence: Encourage utilities to upgrade the intelligence of their assets, even in cases of unplanned replacements.

Rethink financing for digital investments:

Advocate for clear investment lines for digitalization: Engage with regulatory bodies and industry stakeholders to advocate for clear investment lines within future financial plans.
Rethink financial models for digital innovation: Collaborate with industry peers and financial experts to address the challenges associated with accounting for digital investments.
Explore alternative financing mechanisms: Investigate alternative financing mechanisms to support digital innovation initiatives that may not fit within traditional categorisations.
Develop business cases for digital investments: Develop robust business cases that clearly articulate the long-term value and strategic importance of digital investments.
Budget for failure: Allocate a budget for failure when projects reach the rollout stage to encourage an experimental approach to innovation.

Embracing risk, targeting benefits, engaging in open dialogue with regulators, seizing upgrade opportunities, and rethinking financing are crucial steps to unlock the sector's potential for innovation and growth.

Wipro is a leading technology services and consulting company focused on building innovative solutions that address clients’ most complex digital transformation needs. Leveraging our holistic portfolio of capabilities in consulting, design, engineering, cybersecurity and operations, we help clients realise their boldest ambitions and build future-ready, sustainable businesses. With over 230,000 employees and business partners across 65 countries, we deliver on the promise of helping our customers, colleagues, and communities thrive in an ever-changing world. www.wipro.com.

Learn more at: www.wipro.com/utilities/

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