ENERGY COMPANIES may not be as hated as banks, but they are a close second. Big profits and rocketing energy bills have resulted in politicians lining up to lambast the industry as dominated by a cabal of six firms that operate in a market that is fundamentally uncompetitive.
A lot of political statements have been made about how the sector needs to be reformed – these range from breaking up the dominant players to freezing prices – and in the latest development, the market has been referred to the Competition Markets Authority (see page 46) by regulator Ofgem.
The investigation, likely to take about 18 months, could, somewhat perversely, benefit the market, ending as it does the high degree of uncertainty that has hampered investment in what is a capital-intensive industry.
“In its totality, it has an impact on investors. The technical reaction would be to ask for a higher-risk premium because of higher political and regulatory uncertainty,” Jens Madrian, chief financial officer of RWE Npower, tells Financial Director. “In the retail area, we need to provide energy at a lower cost, which would imply you need to get certainty to allow people to include a lower-risk premium.”
At a group level – RWE Npower is part of the RWE Group, one of Europe’s five leading electricity and gas companies – the business reported an operating result of €5.9bn (£4.87bn) in the last financial year from sales of £54bn. Nevertheless, the company is operating under a significant debt pile – cut to €2.3bn in 2013, but higher than its target of three times EBITDA by the end of 2016.
As part of its ‘RWE 2015’ programme, launched in 2012, Madrian and other divisional CFOs are busy implementing measures to reduce cost and increase revenue by streamlining back-office processes.
“We are trying to reduce overall net debt in the group to a more healthy level as earnings in the generation business have been dropping down severely” Madrian explains.
But, for Madrian, that doesn’t mean cutting back on large-scale infrastructure projects. As CFO of RWE Npower, Madrian only has control of the retail (or customer-facing) side of the business.
As Madrian joined RWE in 1999 at the group level, where he held various roles before going to RWE Npower in 2005, you could be forgiven for thinking he was taking a step back and forgoing a certain level of control. He doesn’t see it this way.
“The tone is not set in a one-way direction from the group to the UK; an active part of my role is to challenge that as well,” he says.
While the change programme is mandated at a group level, the UK arm is itself undergoing huge structural and cultural change, set in motion by the introduction of a new board, including a new CEO, Paul Massara, and Madrian as the new CFO, at the start of 2013. One key change has been the establishment of shared service centres to “generate transactional synergies” and centres of expertise that bundle together “functional experts”.
A shared service centre was set up in Krakow, with the majority of transaction-based, scalable activities being outsourced during the course of this year.
“Currently, we have numerous experts on IFRS accounting. If you look at the totality of it you have too many of them and you could do it more efficiently. Bundling of expertise is happening in these types of areas,” Madrian says.
Madrian expects it will take about two or three years to go through all the functions in all the countries. From an Npower perspective, he wanted to be one of the first in the queue for transferring accounting services, such as accounts payable and receivables, some ledgers, over to Krakow. “De facto, this will happen towards the end of 2014,” he says.
Held to account
The interesting question is how Madrian will handle the human element of the move. While the financial case is easy to understand, keeping staff focused and motivated on delivering a service just before their jobs become redundant is no easy task.
“We want to treat them fairly so they stick with us up to that point. We can’t afford the breakdown. That is not a challenge with cost saving anymore. It is all around good management and leadership. This is where you win and lose it,” he says.
Madrian explains that he has tried to engage the team from the beginning, which meant having “very open, honest conversations with them, trying to deal with their worries”. For instance, he recently travelled up to Worcester (where the team is based) to instil a sense of pride in what is being achieved and the quality of processes being handed over to Poland.
“I promised, ‘I won’t leave you out and treat you as the fifth wheel of the wagon. You are part of my team and you will continue to be so.’ I can only applaud the people there.”
So how much will be saved for the human cost? So far the group hasn’t quoted any numbers, but Madrian asserts that “if it wasn’t worth it, we wouldn’t go for it”.
A key part of the ‘worth it’ test is his ability to hold the centres to account at the group level. This is done, in part, through a steering group, which includes six regional finance heads and the group CFO, that sets the targets, including the quality level, cost level, and trajectory.
“Given our goal to get cost down for the customer, I will hold the heads of these centres to account for their ability to generate savings for ourselves. My trade-off is always that if I could do it cheaper than you, why would I outsource it in the first place?” Madrian says.
Ultimately, though, Madrian sees cost reduction through the prism of how it can be passed on to the customer. In the domestic market, only 17% of the energy is price the customer sees is can be influenced by the business, he explains.
“That’s not a whole lot. On the other hand, we can influence it and we will tackle it. The whole idea of bundling is to generate a financially improved picture and better service for the operating units in the countries. I shall hold these areas to account for good-quality service at affordable price levels,” he explains.
Good costs, bad costs
Clearly, the business has made great strides in reducing its cost base. But according to Madrian, costs need to come down only in the “most commercial sense”. For instance, when there is a business opportunity, that would actually drive customer value forward – investments need to be made.
“I would call these costs good costs. These are good costs and have me smiling when we spend them,” Madrian says. “There are also a lot of bad costs which we have taken out in 2013 and will continue to take out in order to allow our customers to participate from a lower cost base and therefore hopefully lower prices.”
One such investment has been in Npower’s customer billing system. Indeed, Madrian sees the “massive” investment in the underlying IT platform as very much a business issue that affects “everything that is important to us”.
Under the present system, Npower hasn’t been able to deliver “what the customer rightly expects”. And though the project is only at the implementation stage, Madrian is confident he can see the “light at the end of tunnel”.
“We have built an analytics team. Just having a good plan and good analytics doesn’t necessarily lend itself to practical realities of doing things,” he says. “While doing the right thing with the best intentions, we are getting from customers a reaction that isn’t positive.”
If there was any doubt about the size of the challenge, an energy satisfaction survey by Which? Switch found that Npower languished at the bottom of the table with a customer satisfaction score of just 31%. It would have come as no surprise to Madrian that the accuracy and clarity of its bills are scoring particularly badly.
“We can’t deliver a service to our customers and create an experience for our domestic customers that they deserve. It also delivers a high level of inefficiencies and extra cost which we are trying to avoid. This is a no-win story,” he says. “I don’t see this as an IT issue whatsoever. It is a business challenge where IT plays an important part.”
Madrian aspires to the goal that, by 2015, Npower is number one in its domestic market for customer experience, though he concedes that “being six out of six, it might sound a million miles away”. ?
IN BLACK AND WHITE
2013 – present Chief financial officer, RWE Npower
2010 – present Head, retail sales portfolio management, RWE
2008 – 2012 Managing director, commercial division, RWE Npower
2005 – 2008 Director, RWE Npower and Npower renewables
1999 – 2005 Various roles, RWE AG and RWE supply and trading