The Strategic Asset Management (SAM) framework has been widely adopted by network utilities across the globe and its principles are largely applied in the design of their operating models.
The electricity industry is currently facing a number of significant trends including a wider availability of more economic electricity supply alternatives (e.g. PV), falling electricity demand and growing end-user engagement in asset decisions. Network utilities need to respond to these trends and reassess their value proposition so that they are more customer focused as well as asset focused.
In this article, we consider if network utility leaders need to rethink their operating models, and if they do, is the SAM operating model dead?
The birth of SAM
Network utilities are, on the whole, asset focused. The AER sets revenue ceilings for regulated network utilities that are in proportion to the value of their assets. SAM is therefore a logical point of reference for asset-intensive utilities as it focuses on optimising the performance of their assets.
It is therefore not surprising that utilities have generally adopted SAM principles in the design of their operating models which, in practice, requires the separation and mutual exclusion of three key SAM roles at the Executive level:
A simple SAM Model
- The Asset Owner, who sets the investment objectives for the asset including financial aspirations, risk appetite and legal, and manages regulatory compliance and political, corporate and social responsibilities;
- The Asset Manager, who manages risk and makes the decisions to satisfy all of the objectives set by the Asset Owner; and
- The Asset Services Provider, who provides services to satisfy the decisions made by the Asset Manager, and reports on the progress of these services against time, budget and standards.
An operating model built on SAM principles offers clear, relevant and achievable organisational outcomes. These include:
- An optimised return on investment and / or growth. A SAM model ensures efficient stewardship of assets, and the ability to demonstrate best value for money within a constrained legal, regulatory and statutory compliance regime;
- Clarity of accountability and constructive tension. Organising the executive roles of a utility in alignment with a SAM model enables a business to more easily achieve its objectives through clarity of organisational accountability. This clarity helps to build a constructive organisational ‘tension’ between the three key asset management roles;
- Increased attention to the long term. A focused Asset Manager function ensures the utility deals with long-term asset decisions without being distracted by day-to-day asset operations and services;
- Flexible Workforce Management. A SAM model is flexible and equally applicable with internal workforces, or a combination of external and internal workforces, with minor amendments; and
- Improved corporate image. A SAM model improves stakeholder confidence – the benefits of which may include enhanced shareholder value, improved marketability of product/service, and greater staff satisfaction.
Is the death of SAM imminent?
It only takes a quick glance through our list of potential outcomes of a SAM operating model to realise that the word ‘customer’ is not mentioned. Advocates of SAM may argue that SAM models enhance customer satisfaction through improved performance and control of product or service delivery to required ‘asset’ standards, but MHC feels this is a tenuous link to the customer.
The fact is, through its core principle, SAM is asset focused, not customer focused and it ignores the customer and customer needs as drivers of business requirements. The traditional SAM operating model enables the utility (or more specifically the Asset Owner and Asset Manager) to invest customers’ capital on their behalf. There are now more economic alternatives for the end-user who is increasingly price conscious, and more engaged with seeking out these alternatives.
More customers are actively looking to reduce their electricity bills by installing solar PVs and replacing their appliances with energy efficient appliances; this has contributed to the reduction in demand evident in the market today. In essence, customers are making their own asset management decisions for the first time, and relying less and less on the traditional utility. This is changing the dynamics of the electricity industry and raising the prospect of significant value at risk for utilities.
Historically, the utilities have recognised their regulator as their proxy customer but are now realising they need to redefine their value proposition to maintain their relevance. Strategically, the utilities have an option to respond to the value leakage by offering a range of products and services beyond the meter, either directly or indirectly to customers. To do this, they must reposition and get closer to their end-users, to better understand and meet their needs.
The AER has already recognised and responded to this industry shift and published their expectations in the “Customer Engagement Guideline for Network Service Providers” (http://www.aer.gov.au/sites/default/files/AER – Consumer engagement guideline for network service providers – November 202013.pdf) in November 2013. It is clear from this publication, that the AER expects networks to demonstrate more direct customer engagement and also be more accountable to their customers with regard to asset ownership and management decisions.
This raises the question: can a SAM operating model help network utilities respond to these AER expectations and emerging industry trends, or is the SAM operating model dead?
The reincarnation of SAM
Having reflected on this industry shift within Marchment Hill Consulting, we believe the SAM operating model is not dead, but certainly needs to evolve if network utilities are to maintain relevant in the new market place. Utilities should consider upgrading their SAM model to one that is more contemporary, one that recognises the reduced role of the regulator and facilitates direct involvement with customers. We call it the CASAM (Customer and Strategic Asset Management) model.
An organisation structure built on CASAM principles would continue to have the three SAM roles of Asset Owner, Asset Manager and Asset Service Provider, but would also include three additional customer-focused roles:
A simple CASAM Model
- A Customer Owner, who establishes the customer needs and defines the expected return, risk and service levels from customer-focused investment “beyond the meter”;
- A Customer Manager, who develops a strategy, plan and program of works to meet the customer and shareholder needs (as defined by the Customer Owner); and
- A Customer Service Provider, who (as a strategic option) implements the non-traditional “beyond the meter” program of works – this includes new customer (‘end-user’) focused services e.g. energy efficiency, installation of PVs, storage, demand response technology.
By adopting these additional roles within their operating models, we believe network utilities would be better placed and more focused to address the changing customer and demand trends of the industry without reducing the emphasis on strategic asset management.
Over the course of the last 18 months, Marchment Hill Consulting has supported a number of Australian utilities to identify, design and implement improvements to their operating models. Our consultants have increasingly noticed that utilities are considering one or more of these additional roles within their organisation structures. So of course, SAM is not dead, but we believe it is being reincarnated.