Better management in a competitive environment.

Bernie Reznicek, former CEO of Boston Edison and the Omaha Public Power District, identifies six keys for better managing cooperatives in an increasingly competitive environment and his thoughts for understanding and embracing competition in an interview with Tom Lewis. Tom also adds his thoughts to these topics based on his 13 years of teaching for NRECA.

I have been teaching courses for the NRECA for over 13 years. I have served as an instructor in the Management Internship Program [MIP] and in the Advanced Financial and Analysis Program, both conducted in Lincoln, Nebraska. I have also been a speaker at the last six or seven National Accounting and Finance Conferences. Before I began working with the NRECA, I had no experience in the utility industry.

In July of 1994, the Creighton University College of Business hired a new Dean, Bernie Reznicek. Most business deans come from an academic background. Reznicek's background, interestingly enough, was in the electric utility industry.

Prior to becoming Dean at Creighton, Reznicek served from 1987 to 1994 as Chairman, President, and Chief Executive Officer of Boston Edison Company, Boston Edison provides electrical service to Boston and 40 other communities in eastern Massachusetts. The company, which is traded on the New York Stock Exchange, has over 650,000 customers with over $1.6 billion in sales.

Reznicek earlier served from 1981 to 1987 as President and Chief Executive Officer of the Omaha Public Power District [OPPD]. He held several managerial and executive positions during his almost 30 years with the company. OPPD provides electrical service to Omaha and over 50 communities in eastern Nebraska.

Reznicek, who received his undergraduate degree from Creighton University and his MBA degree from the University of Nebraska-Lincoln, serves on the boards of State Street Bank & Trust Co., Guarantee Life Insurance Company, and Stone & Webster, Inc. He has kept active in the utility industry, serving on the Board of Directors of CalEnergy Company, Inc., and on the advisory council of the Electric Power Research Institute in Palo Alto, California.

It seemed silly to me to have such a unique resource as Reznicek working in my college and not trying to "pick his brain"on what he thinks is happening - and is going to happen - in the electric utility industry. This article is the result of several sessions I had with Reznicek where we discussed the electric utility industry. The article is not limited to statements that Reznicek has made to me. I have expanded on some of the things Reznicek has said; and, of course, I have added my own thoughts on certain of the topics.

The article first discusses six keys to better management in a competitive environment and then discusses what is necessary when facing this new, more competitive environment in which generation and transmission companies [G&Ts] and rural electric cooperatives are operating.

SIX KEYS FOR BETTER MANAGEMENT

There is no "secret grail" for effective management. Effective management, whether it is managing the entire organization or managing a small department within the organization, is "an art, not a science." There are six keys, however, that are outlined here that should make everyone within a company do a better job of managing in a new, more competitive environment.

Pay attention to the strategic direction

When Reznicek came to Creighton as Dean, the first thing he did was have the college go through an extensive strategic planning process. Like many managers, Reznicek feels you can't plan for the short run unless you know where you are headed in the long run. Reznicek also placed great emphasis on strategic planning when he served as CEO at Boston Edison and OPPD.

Strategic planning is not a simple process of stating where you would like to be in five to seven years. It involves assessing environmental factors, analyzing the strengths and weaknesses of the organization, setting long-term objectives, then setting short-term goals based on the long-term objectives, and finally setting short-term strategies to achieve the short-term goals.

Reznicek feels that it is in this strategic planning area where a cooperative's board can be very helpful. "It is essential," Reznicek says, "that a board makes certain there is a strategic plan for the organization and an annual plan that supports the strategic plan." Reznicek also feels that the board should have confidence in the cooperative leadership, but monitor it. "A board should stay out of the day-to-day planning and decision making, but monitor what the leadership is doing. If management does not meet expectations, the enterprise could be at risk.

"If the leadership is meeting expectations, the best thing the board can do is deal directly with the CEO to make sure he or she implements that annual plan. The board should do board governance and board oversight, not management and not operations.

Get control of your costs

In the past, cooperatives faced little competition because cooperative members had few places to go for alternative power. "With no competition," Reznicek says, "cost was not an issue. Today, you must understand your costs, get control of them, and then reduce them."

This is where the concepts and tools of activity-based costing [ABC] should be helpful. ABC allows an entity to determine the activities that are involved in a product, a service, or a job; and then compute the cost of each of those activities. Then, by controlling those activities - which in some cases means changing the process of delivering the product or completing the job requirement - costs will automatically be controlled.

With greater competition, it is essential to understand what it takes to be successful in a competitive environment. "You must be cost competitive," Reznicek says, "not necessarily the lowest. The customer must perceive that it is getting the value of the money it is paying. This means you must offer high levels of service. You really have to think and act like your customers so you are able to work with them so that they perceive you as a 'value' supplier."

Again, this is compatible with the concepts of ABC. Activity-based costing does not propose to merely cut costs. What it instead proposes to do is to control costs by controlling the activities that cause those costs to be incurred. In controlling these activities, which-as was stated previously-sometimes means changing the processes involved, it is essential that the value of the product, the service, or the job not be diminished. That is, you can change the process of producing the product, performing the service, or completing the task, but you can not do so by lowering the quality or value of the output.

Know your customers

"There's a phrase I like to use," Reznicek says, "which is 'get on the other side of the meter.' For years, we saw our mission as just being a reliable supplier of power. We had a supply-side mentality. With the new [more competitive] environment, we have to be on both sides of the meter. We need to understand how our customers use their energy, we need to understand what times they use it, we need to understand what processes they use it for, and we'd like to understand how they could use it more effectively and efficiently. In many cases, we need to try to integrate their consumption patterns with our capability patterns."

In a meeting with Reznicek, he told a story of how Boston Edison had gone to one its customers who was using very large gas-powered dryers in its business. Boston Edison showed the customer how by using electrically-powered microwave dryers, the customer could not only dramatically lower its power costs, but could also save a great deal of space in its production facilities. Without having known its customer and how the customer worked and what the customer wanted, Boston Edison would not had the foresight to make this proposal - a proposal that was profitable both for the customer and for Boston Edison.

This "other side of the meter" approach should not be a process of going to one customer, seeing how that customer works, determining what is important for that customer, and then forgetting everything that was learned. The "other side of the meter" approach is really a mentality that needs to be integrated throughout the cooperative.

"We wanted our customer reps to understand certain segments of our market." Reznicek said, "so that we could go out and effectively service those industries. Our reps soon discovered that the lessons learned at one customer sometimes had applications for another customer."

As cooperatives face greater competition in the future, the need for better service is an absolute necessity. To provide that service most effectively, the cooperative must understand its customers and to truly understand them, it must make certain that it "gets on the other side of the meter."

Be responsive to your customers' needs

"Besides needing to understand a customer's needs and a customer's future," Reznicek says, "we also must be very responsive to a customer's needs. By that, I mean, when the customer needs service, we need to be almost anticipatory rather than reactive in the way we service those customers. You know them, you understand them, and you're responsive to their needs.

"Obviously, you've got to have your costs under control, but, again, I'm not saying you have to be the cheapest. You know, we all buy different clothing and sometimes we want to go to a higher-priced store because we know the service is there - the ability to return is there - and we pay a little higher price as opposed to going to a discount store. But to pay this extra price, there has to be a value - a consistency of service. This value, however, in many cases, is only a 'perceived' value. With the clothing store, the customer may want to return an item only once out of a hundred purchases, but if we make it easier to return it, we satisfy that customer, and that 'perceived' value will influence other purchasing decisions. If we are there when that customer needs a new service hookup, if we are there at the time when an outage occurs, that reputation, that event carries for a long period of time in the customer's mind."

With greater competition, the cooperative must make certain that it is cost competitive. Once it is cost competitive, then it will be the level of service that determines who will be the customer's power supplier. To provide the greatest service, the cooperative must know the customer, and then must use that knowledge to provide the most responsive service available for the customer.

Make better decisions with the use of better information

What does it take for the general manager, and the other employees of a cooperative or a G&T, to make better decisions? It takes the right information, of course. But what makes the information "right"? For information to be what is needed for better decision making, three criteria are probably necessary of that information.

Accurate Information. "You have to have good information to make your decisions," Reznicek says. "You need effective information systems, and you must have confidence in those systems so that you know the information is good and has credibility."

In a meeting with Reznicek, he told a story of how Boston Edison had negotiated with a major customer that was demanding a price reduction in its power costs. The customer was being very hard-line and was threatening to choose another company as its power source if Boston Edison would not lower its price. The accounting system of Boston Edison showed that it could not lower the power cost for this customer and still make a profit. Because Boston Edison had this information and also because it had confidence that the information was accurate, it told the customer that if the customer could find a better price somewhere else, it should go ahead and take it. The result of the negotiations was that the customer stayed with Boston Edison at the non-reduced power cost.

Have Management as well as Financial Information. "We ought to have good financial and managerial information," Reznicek says. "And I say financial and managerial information because many organizations are geared to the end-of-the-month financial information. But it's management-oriented information, often times, that assists you in your daily operations. Your financial reporting system is often inadequate for this daily decision making. However good the financial accounting system might be, it more records what happens. What you need to know is what is happening."

Managerial information can also be information that is not needed for financial accounting purposes, but that can be helpful in making management decisions. For example, technology has historically only allowed a utility company to know how much power a customer used. The utility was not able to determine what the power was being used for and when it was being used. With technology available today, the utility can know how much power the customer used for each appliance or for each application base and when the customer used the power. Better information, such as this, can only lead to better decision making on the part of the utility.

Timely Information. "Not only does the information have to be good," Reznicek says, "but it also has to be quick. Given that today we have that capability - in this information age - we ought to have good, timely financial and managerial information.

"In many cases, as you interact with the customer, you are not talking about weeks or days, but many times you're talking about hours or minutes. This is one of the key areas of change in a competitive environment. Being 'customer sensitive' means, among other things, being instantly responsive to the customer.

"This, I think, can best be illustrated if we just put ourselves in any situation, such as going to our hardware store, our drug store, or our automotive store. If you have to stand in line and you're not being serviced - if the clerk does not have the information right on the part you want to buy or the prescription you want to get or if they tell you it's going to get here in three days, not when you want it - you become very frustrated with the service and you seek other suppliers for what you want.

"In today's environment, people expect good, timely service; and they want the service to satisfy their needs. That's a totally different orientation than the supply-side mentality we've had in the industry. This is not to say we've been wrong; in fact, we've been quite right because that was our mission: 'To be a reliable supplier of energy to our customers.' Today, however, we go far beyond just being a supplier of power."

Better decisions come from better information. Today, and in the future, cooperative employees will have to ensure that they have access to accurate, current, and timely information.

Maximize all values for the enterprise

"An asset," Reznicek says, "that's carried on your balance sheet and that is not producing adequate revenues for you is not a good investment." These assets that are not producing an adequate return might be invested assets or they might be the investment in the utility plant. Either way, better utilization of assets is required.

Managing Invested Funds. "Managing invested funds effectively," Reznicek says, "gets down to knowing and understanding your business. It means really understanding your needs. If your cash needs allow you to invest excess funds for a longer period of time at higher yield - and you have a potential draw with the bank - then you should use it.

"There ought to be a requirement of your chief financial person to maximize all values of the enterprise and certainly excess funds that are not receiving maximum interest is inappropriate. There is no excuse for not being able to know the business and the cash flow requirements of the business-I mean there are a hundred different packages you can get on the PC today that will project out your cash flows."

For a cooperative to consider different, riskier investments with significantly higher returns is something new. But in this more competitive environment, it is essential. In fact, Reznicek argues, "In the new environment, we have to look at every way we run our business and we have to question every process and every practice to see if there is potential for more value to be received. In the case of invested funds, it's more interest income."

Managing Utility Plant Assets. The effective management of utility plant assets is equally important for both a G&T and a distribution cooperative. "A utility engineering group," Reznicek said, "historically designed systems with so high a level of reliability in mind that, I think, in many cases we overbuilt. We had over capacity because we said it was cheaper to do this in the long run. And I don't quarrel with that old approach. In this new environment, however, we have to know and understand our growth potential better so that we don't overbuild and we don't overinvest."

Reznicek likens this approach to the "just-in-time" approach taken by manufacturing companies. Manufacturers that utilize this approach want to acquire raw materials precisely at the time when these materials are put into the production process ["just-in-time"]. Similarly, these manufacturing companies want to finish a product at precisely the time the product is sold.

"We need to take this same approach," Reznicek says, "that is, build additional capacity only when we need it. We need to get away from building it and letting it sit in the ground."

And when extra part-time capacity is needed, building must not be the only response considered. "In the past, in the utility industry, we tended to have large investments in plant and equipment that were used very infrequently and not to their maximum. An analogy would be a cab company that has 100 cabs and only 20 drivers, and they only hire the remaining 80 cab drivers on convention days once a month. That's ridiculous; they'll go broke. But we in the utility industry were culpable of that. Today the cab company has to learn to have 35 drivers for 35 cabs and maybe have a relationship with somebody close by who can give them another 10 or 15 or 20 more cabs on short notice so it's a whole different way of doing business."

In the utility business, maybe instead of expanding capacity, it's creating a relationship where excess power can be delivered in another fashion. Instead of expanding capacity, maybe there is a way to use new technology that will allow us to store power to use later or to control the customer's load and distribution.

There are, however, other areas besides capacity where this need to maximize values for the cooperative are essential. For example, is there a way to reduce inventory carrying costs? Or could we use our assets to perform work functions for others? Reznicek asks, "Could we call the cable television supplier in our area and offer our services to hang their wires back up for them for a fee? Or is there some other way we can maximize those line vehicles similarly for someone else within our region? We have to be very proactive about the utilization of assets."

Raising Capital Effectively. Another way to get maximum value for an entity is to raise capital effectively. To do this, a cooperative must know the cost of available funds whether this capital will come through debt or equity sources. It is essential that a cooperative have someone working within it that is qualified to appraise the advantages and disadvantages of raising capital through the various potential sources.

Reznicek emphasizes the importance of both properly managing assets and properly managing capital acquisition when he says, "If we can reduce our cost of capital and reduce our needs for capital, we will maintain a much leaner, more competitive organization."

COMPETITION

I asked Reznicek what his attitude would be toward greater competition if he were the manager of a rural electric cooperative or a G&T. "I would welcome it," he said, "because, first of all, it's going to happen. There's not a lot we can do to stop it. It's a little bit like standing in the ocean and the tide's coming in. It's going to happen.

"We can also look at it as an opportunity. Boston Edison has $1.6 billion in gross revenues. Gross electric power revenues for New England are $11.6 billion; for the gas industry, it's $4.5 billion; for oil, it's $4 billion; and for various related services, it's $6 billion. Suddenly, we're talking about this potential market of $25 billion in New England. If we look at ourselves in a broader context than just an electric supplier - instead, we're an energy company and an energy services company - we now can find new sources of revenues.

"A rural electric cooperative may already have the expertise within it to do some of the things banks and telephone companies have done; that is, find new services that can bring additional revenues into the enterprise."

I also asked Reznicek what he thought about technology as it relates to this new, more competitive environment. "Historically," Reznicek said, "the utility industry has been one of the most technically sophisticated industries in the world, and it's never been talked about much as a high tech industry. The fact that we deliver a quality product in America at the level of reliability we do is just unbelievable. But, again, the emphasis has been placed on the supply side.

"What we have to do is balance some of that technology. We need to pull it onto the other side of the meter to allow the communication to take place that allows control of the customer's energy use with the capability of the utility. This technology, and others like it, are not cheap, but they may be cheaper than your next incremental load."

Finally, I asked Reznicek how he would respond to those individuals in the industry who want to continue to do things the way they have always been done and who protest that these new ideas, new methods, and new technologies just "won't work" in the utility industry.

"Well," Reznicek said, "if we continue to say it won't work here, what we're really doing is cutting off our opportunities for survival. This is because there are companies that are not even in existence today or only planned in someone's mind today or are performing services in other areas today that will come in and fill the void if we don't.

"Pick up the Wall Street Journal, or the local Sunday newspaper, and look through the ads with the new logos, the new service providers, the new computer or communication companies. Five years ago, many of these organization didn't exist. Somebody came in and filled a market need. We have to look at ourselves filling a market need; and the market might be bigger than our traditional market of being just an electric supplier."

CONCLUSION

Greater competition is here and more is on the way. How utility companies prepare for and react to this greater competition will decide their futures. Being successful is going to take new ideas, new technologies, and a new way of looking at and handling traditional problems. This article outlined six keys to better management in a competitive environment:

* Pay attention to the strategic direction.

* Get control of your costs.

* Know your customers.

* Be responsive to your customers' needs.

* Make better decisions with the use of better information.

* Maximize all values for the enterprise.

Implementing some or all of these keys in a G&T or a rural electric cooperative will help those entities become more competitive. When I teach a group of people a new business model or a new business technique, there is a common argument I receive, whether the group comes from the electric utility industry or from somewhere other industry. That argument is, "It won't work. It's a great textbook theory and I know it works for some companies, but it just won't work for us."

These six keys for better management will work. Bernie Reznicek proved that during his many successful years acting as CEO for both a public [OPPD] and a private [Boston Edison] utility company.

Tom D. Lewis is an associate professor of accounting at Creighton University in Omaha, Nebraska. Dr. Lewis received his Ph.D. in accounting from the University of Nebraska-Lincoln. He has also received an MBA degree and a B.A. degree in English, both from the University of Nebraska-Lincoln. He holds both a Certified Public Accountant (CPA) certificate and a Certified Management Accountant (CMA) certificate.

Dr. Lewis has been an instructor in the NRECA Management Internship Program (MIP) for over thirteen years. He has also been an instructor for the NRECA Advanced Financial workshop for the last six years and has served as an instructor at the annual NRECA Accounting and Finance Conference for the last seven years. Dr. Lewis has published numerous accounting articles in such journals as Management Accounting and the Journal of Accounting Education.