make a game-changing impact – before the others do · make a game-changing impact – before the...
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Make a game-changingimpact – before the others doThe impact of digitalization indistrict heating12/2016
© 2016 Deloitte & Touche Oy, Group of Companies. 2Source: Customer interviews
Major actor inreal estate
-We introduced a major 5-year energy changing project, andwe achieved a 6-year payback period- What role did heating companies play in the project?
-None whatsoever.
- Why not?
-Good question... It did not even cross our minds that theywould have the knowledge or interest to help us saveenergy...
© 2016 Deloitte & Touche Oy, Group of Companies. 3
Digitalization is speeding up the transitionSummary
The role of digitalization in the operating environment of district heating suppliers
The changes currently taking place in the operating environment present district heating companies with both opportunities and threats. One ofthe trends affecting the district heating business is digitalization, which will change the ways of workingbusiness models, services and productsas well as the customer experiences. Besides digitalization, the operating environment and business operations of district heating suppliers areaffected by the improved energy efficiency in buildings and better access to alternative heating methods, both of which continually reduce thedemand for heating energy. The major wave of modernization, which will shake the basic structures and business models, is yet to come.
Change in customer behavior
Changes in customer behavior will drivechange in the way businesses work –digitalization will bring new methods tomeet the changing needs.
The impact of digitalization
digitalization affects the value chain in thedistrict heating business every step of theway – competition in the field will becomestiffer
Opportunities created by digitalization
digitalization will createa broad rangeofopportunities from improved efficiency tocomplete transformation of the businessoperations
• Above all, customers value easy solutions and aretypically not interested in actively communicatingwith the energy supplier.
• Customers wish for a professional partner whocan offer easily accessible overall solutions
• Other key motives behind customer behavior arereliability of operations, securing requiredoperating conditions and the clarity of servicecontent and pricing
• The unmet needs of district heating customerscreate a vacuum which can be filled by variouscompeting operations, such as energy efficiencyconsultants or providers of alternative heatingmethods
• digitalization will speed up the ongoing transitionin district heating – a key role in the competitionbetween different methods of heating will beplayed by the actors’ capacity to leverage theopportunities presented by digitalization
• The amount of knowledge will increase withdigitalization, and so will customers’ awareness ofavailable options and the likelihood of customersseeking higher energy efficiency and switching toanother method of heat production
• Highly developed technologies are withineveryone’s reach and real-time data related tothe supply and consumption of heating will bemore readily available than ever
• Blockchain technology and AI enable thedevelopment of smart, distributed networks
• digitalization can be leveraged in– the development of customer experience
and in engaging the customer– the creation of new business models,
products and services– improving the efficiency of and optimising
the core business– Improving the efficiency of and optimising
the support functions• digitalization supports the emergence of new
roles and business models with district heatingcompanies, other operators in the field andexternal third parties
• District heating companies must select theirdigitalization strategies to drive the change –listening to the customer, the company’s cultureand an experimental approach are key
District heating companies must decide on their role as the demand for heatingenergy decreases and the availability of alternative heating methods improves
© 2016 Deloitte & Touche Oy, Group of Companies. 4
Digitalization as thedriver for changeWhat does digitalization meanin general?
© 2016 Deloitte & Touche Oy, Group of Companies. 5
Digitalization
Digitalization refers to development powered bytechnology. Digitalization changes the way we behave andoperate, the way the customer experience is formed,business models, services and products. Digitalizationaffects the competitive positions and breaks downtraditional barriers between business segments.
Digitalization makes things easier and faster. More andmore tasks can be automated thanks to technology,without the need for human, manual input.
Source: Deloitte analysis
© 2016 Deloitte & Touche Oy, Group of Companies. 6
“There is no doubt that new servicesare on their way in.
We need to cannibalize our own business by offeringenergy saving services. If we don’t do it,
somebody else will.”
Source: Expert interviews
District heating company
© 2016 Deloitte & Touche Oy, Group of Companies. 7
Digitalization is one of the strongest trends affecting thedistrict heating business
Digitalization driving change
Digitalization
Rising environmental values
Regulation concerning new constructionproduction and renovation
Improving energy efficiency
Regulation on district heating industry
Availability and price of alternative heating systems
Climate change and carbon-free future
Distributed generation
Changes in the business environment… …create challenges and opportunities fordistrict heating companies
How can digitalization help to addressthese challenges?
• Where we can find growth in the future? Have weinvestigated all relevant options?
• What do our clients really need now and in the future?
• Are we able to improve our competitiveness? Arewe able to maintain our current clients?
• What should we prioritize?
• What won’t we need in the future?
• Who are our main competitors? Will there benewcomers or substitutes in the market?
Urbanization
Developing energy technology
Source: Deloitte analysis
© 2016 Deloitte & Touche Oy, Group of Companies. 8
Utilities are still a little way off the pace in digitalizationDigitalization driving change
MediaDigital has changed the way media are produced, distributed and consumed, and how theconsumption is monetized – e.g. Spotify and Netflix.
RetailLarge players, such as Amazon, have broadly utilized digitalization, and generally onlinechannels have become a must-have for retailers. Fresh products’ e-sales are increasing.
Telecom, Financial and Professional ServicesIn addition to IT, Telecom has been a major enabler in digitizing other sectors. Financialand Professional services rate digital high on their agendas, not least because of disruptingstartups.
LogisticsSupply chain optimization is developing, powered by connected vehicles and goods, butautonomous means of logistics and crowd platforms are still at a very early stage.
HealthcareThe industry has digitized some core operations, but e.g. new business models are stillemerging. Some promising startups have gained publicity.
UtilitiesVery few steps taken towards extensive digital business. Some ‘smart’ meters are installed,but the utilization of the data and customer relations is still narrow. Focus on internaloperations.
Public ServicesBecause of the non-competitive scene, not much effort is generally made in digital.However, the cost saving potential has driven some services to be digitized.
Digital impact
Digital maturitySources: Deloitte University Press, Deloitte analysis
© 2016 Deloitte & Touche Oy, Group of Companies. 9
Long-term success may prove a hindrance to development –the energy sector has its own cross to bear
Digitalization as the driver for change
District heating operators mayhave qualities ...
...that have proved a disadvantagein other sectors...
...when disrupting startups relying ondigitalization have entered the markets
High switching costs have prevented a rapid loss of customers in the districtheating business – the stagnation of district heating companies will, however,
create a vacuum asking to be filled by (digital) disrupting startups
Good resources
Market leadership
Decades-long planning periods
Good, controlled profits
Natural monopoly
Internal rigidity
Slow innovation
Source: Deloitte analysis
© 2016 Deloitte & Touche Oy, Group of Companies. 10
The needs of district heatingcustomersWhat do district heating customersvalue and need?
© 2016 Deloitte & Touche Oy, Group of Companies. 11
The change in customer behavior drives business sectorstowards change – digitalization provides a tool to respond tothe changing behavior
The behavior of district heating customers
The make-or-breakcustomer experience
An interactive customer experiencemay either consolidate a customer
relationship or destroy it
Tailored servicesCustomers expect clearly packaged
service experiences that are aspersonalized as possible
The importance of impressionsPurchase decisions and customer
loyalty are increasingly strongly basedon image and impressions
Shift in powerThe power is being shifted to an
increasing degree to the customers(e.g. ownership and use
of customer data)
Emphasis on the social aspectThe selling of products and services has
gained a strong social dimension
Blurred boundariesExpectations of the level and quality of
services are constantly increasing –comparisons are made
across sector boundaries
digitalization not only affects customer behavior and expectations, but also provides tools for the development of thecustomer experience, business models and service offering.
In the development work based on opportunities offered by digitalization, three issues are vital:1. The product/service must be desirable from the customer perspective.2. The product/service must be technically feasible.3. The product/service must be financially profitable.
District heating companies must be aware of their customers’ everyday lives and identify the thingsand activities that customers are genuinely interested in and prepared to pay for.
Source: Deloitte analysis
© 2016 Deloitte & Touche Oy, Group of Companies. 12
Segmenting is based on the motives related to customers’heating service preferences, such as reliability and price
The segmentation of district heating customers
In the analysis of customer needs, district heating customers are segmented according tothese motives. The question asked in this analysis is, “What key motives* does the customerhave regarding district heating? And how should these needs be prioritized?”
Energy seller(the traditional
role of a heatingsupplier)
Building managers,management companies,
property service businesses
Businesses,industry,entrepreneurs
Housingcompanies andsingle-occupanthouses
The elements of the communication between energy seller and customer in the current situation
*) Motive = the reason or rationale behind an action. Sources: Customer interviews, Deloitte analysis
Publicorganizations
In a typical set up, a heating serviceoperative stands between the energy seller
and the end user, whose role hastraditionally been to make sure that
heating is supplied without problems.
The end user is normally not interested in actively engagingin dialogue with the energy seller
End users (district heating customers)
The steering of theheating service operative(e.g. buildingmanagement company)mainly takes placethrough commissions andsanctions
The heating serviceoperative (e.g. buildingmanager, managementcompanies) also hold aconsultative role
© 2016 Deloitte & Touche Oy, Group of Companies. 13
KEY FINDING FROM THE INTERVIEWS:
Customers want a professionalpartner who can offer easily accessible
overall solutions.
Individual digital services, such asusage monitoring, are interesting butdo not provide significant added value
to the customer.
Source: Customer interviews
© 2016 Deloitte & Touche Oy, Group of Companies. 14
Summary of the identified needs by segmentThe needs of district heating customers
CUSTOMERS ARE PARTICULARLY INTERESTED IN: CUSTOMERS DO NOT WISH TO BE INVOLVED IN:
• Securing reliability – customers are prepared to pay tominimize risks to their business operations
• Securing health and safety – customers approach (businesscritical) operating conditions as a whole, and heating is just onefactor among many
• Open communication and true partnership – customers areprepared to invest time in optimizing the heating supply, butneed the assistance of a professional and profitable partner inthis
• Securing health and safety – customers approach (businesscritical) operating conditions as a whole, and heating is just onefactor among many
• Professional consultation on the status of propertiesbased on benchmarking – customers are interested incomparative data for facilities and properties
• Manual adjustments & optimization – customers are not preparedto spend time on heating optimization
• Heating method – instead of heating methods, customers need todiscuss what the different heating operatives can offer them throughtheir services
• Raw consumption data – customers are interested in finalconclusions
• Raw consumption data – customers are interested in finalconclusions
• Individual solutions – customers want clear and easy solutions thatinclude the entire property stock under their management
• Provider-dictated pricing – customers want more influence over theuser costs of heating services
• Transparent overall solutions – customers want to see theirheating services presented in concrete, plain language
• Overall economy – customers want to understand the effectof the services they have selected on the annual userexpenditure in the long run
• Flexible solutions – customers are concerned about vendorlock-in and want to reserve the right to reorganize their heatingservices in a different way in the future
• Overall responsibility for heating services – customers want apartner to assume the responsibility for the implementation andoptimization of the heating services
• Decision-making & competitive tendering – customers are notprepared to make decision on heating services without the necessaryknowledge about the field
• Raw consumption data – customers are interested in finalconclusions
Sources: Customer interviews, Deloitte analysis
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© 2016 Deloitte & Touche Oy, Group of Companies. 15
The impact of digitalization ondistrict heatingHow will digitalization change theoperating environment for districtheating suppliers?
© 2016 Deloitte & Touche Oy, Group of Companies. 16
Actors
Examples ofthe key
effects ofdigitalization
Key trends indigitalization
Sources: Customer interviews, expert interviews, Deloitte analysis
District heating consumption District heating distribution District heat production
Sales Consumption
District heatingand cooling networks
District heatingand coolingproduction
Fuel productionand transport
The generalvalue chain
in DHCustomerservice
Analyticsand big data
IoT(smart cities,
connected homes)
AugmentedrealityAI Blockchain
technology RoboticsMobile devices
and user-orientedmobile services
Network management, designers,contractors, housing companies andcomponent suppliers
Fuel and district suppliers, logisticspartners, facility designers, contractorsand component suppliers
Customers (households, housing companies,business premises, industrial facilities, publicorganizations), building managers, technicalbuilding services providers etc.
• Customers’ increased demands forservices (personalization, added value)
• The increase in the demand and use ofdigital self-services
• Increased transparency andcomparability of prices
• Lower threshold for switching heatingmethods and suppliers
• The increasing amount of data to becollected and utilized, more complicateddata management and higher demandfor knowledge-based services
• The greater importance of customerexperience and customer engagement
• Modelling and analytics in networkdesign, investments and contracting
• Remote control and monitoring of thenetwork and substations
• Predictive servicing and maintenancethrough sensors and analytics
• The introduction of mobile systems inmaintenance management
• The optimal management of networkload including local heating supplies
• Optimized fuel deliveries and supplybased on consumption and weatherforecasts
• Predictive servicing and maintenancethrough sensors and analytics
• Leveraging data and analytics in thescheduling of investment
• More efficient energy trading• The development of new revenue
models, products and services• digitalization of all support functions
(incl. invoicing, payment collection,payroll)
Digitalization affects the value chain in the district heatingbusiness every step of the way
The impact of digitalization on district heating
© 2016 Deloitte & Touche Oy, Group of Companies. 17
Digitalization increases competition between heating methodsand the growing service business operations within the field
The impact of digitalization in district heating
Sources: Expert interviews, Deloitte analysis
Technology productioncosts will grow smaller
Customers are offered several alternativeproduction methods and better possibilities for
optimizing their consumption of heating
Information about alternativesis more readily available
The threshold for switching productionmethods,
suppliers and service providers becomeslower
AI and blockchain technologyenable smart distributed networksCustomers will benefit from easier pricecomparison, purchasing distributed energyproducts and smart meters
Expectations for customerexperiences come as a given todistrict heating companiesThe level of customer expectation is based oncustomer experiences
Ecosystems and networks havemore to offer to customers andheating suppliersThe operating model typical of the digital eraenables the expansion and new optimizationof the business operations of district heatingcompanies
Real-time data ismore widely available
Accumulating the awareness of customerneeds using analytics, fulfilling customer
needs using analytics (service content, timingof service offering)
= alternative heating methods = services available to users (district heating service business operations)
New products and servicesService and product portfolios will continue to expandbeyond traditional heat supply and sales, competitionwill no longer be limited between different forms of
heating
© 2016 Deloitte & Touche Oy, Group of Companies. 18
Opportunities created bydigitalizationWhat type of opportunities doesdigitalization open up for districtheating companies?
© 2016 Deloitte & Touche Oy, Group of Companies. 19
The four interrelated areas with digital potential for districtheating companies – focus on customers, enabled by digitaloperations
Customerexperience &engagement
New businessmodels, products
and services
Core operationsand costs
Back officeoperations
“Broaden the view” “Enhance the performance”
Source: Deloitte insight
digitalization enables the building ofa fully digitalized service path and apersonalized multichannel customer
experience
digitalization enables a deeperunderstanding of customers’ needsand changes in the earning logicand pricing models in business
operations
digitalization enables a moreefficient optimization of productionand the distribution network as wellas a better timing of investments
digitalization enables processesbased fully on electronic data
management and a higherautomation rate
© 2016 Deloitte & Touche Oy, Group of Companies. 20
Digitalization will create a broad range of opportunities fromimproved efficiency to complete transformation of the businessoperations
Opportunities created by digitalizationIM
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WIDER PERSPECTIVE – developing customerexperience and service offering
Full transformationChanging the operating environment and role of the company.Lateral thinking when envisaging services, products and revenuemodels and superior operative efficiency through leveraging theopportunities offered by digitalization.
First steps towards the newIdentification of new business opportunities and the ongoingstreamlining of current business activities. The margins in a newbusiness operation may be high, and the volumes lower, comparedto traditional business operations.
Controlled developmentImproved efficiency and profitability through the digitalization ofsupport and core functions. Serves as a basis for more broad-based development of operations. Profitability may improve, butnew business is not created.
Accelerating changeThe fullest possible automation in business operations and use ofdata in all company activities (insight driven organization). Thecannibalization of traditional business operations will speed up andnew revenue models become established.
Sources: Deloitte analysis
Limited development Full transformation
© 2016 Deloitte & Touche Oy, Group of Companies. 21
The identified needs of DH customers serve as an incentive forcompanies to undertake a complete development of theirbusiness operations
Opportunities created by digitalization
Transparency, overalleconomy
Digitalization of core andsupport functions,
electronic datamanagement, transparentpricing in the tenderingprocess, real-time andreliable reporting to the
customer
Overall solutions,professional partners,
true cooperation
Expansion into newservices and fields,
responding to an everwider range of customer
demands with thecompany’s own service
portfolio
Desire to expand therole of the consumer ofheating to include the
supply of heating
Identification of the newrole and new business
opportunities in adistributed digital multi-
supplier network
Clearly defined,accessible added value
services
Customer-orientedservice development,leveraging data-based
customer analysis,understanding customer
needs, packaged services,CRM
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© 2016 Deloitte & Touche Oy, Group of Companies. 22
Digitalization creates development paths that DH companiestowards new roles in a changing operating environment
Opportunities created by digitalization
Using individual remotely read meters for each dwelling/facility. Collection ofcustomer and consumption data. Leveraging technology in support functions.1
District heating offered as a turn key service by expanding business operationsinto maintenance and servicing.3
2 Data is collected from systems, customers are offered reporting andautomated notification services. Collected raw data are sold to third parties.
Added value created for customers through forecasts and dynamic occurrencereporting and the possibility to make comparisons with other properties.5
4Data sourced from the network, production, usage and weather conditions arecombined, which helps achieve superior efficiency and predictable propertymanagement and maintenance.
Consumption data are used for consultation in energy saving though systemoptimization and structural repairs.6
Sell to customers what they care about the most: the operating condition. Anoperating condition may be priced with a flat monthly rate.
7 Serve as operators in a dynamic multi-supplier consumer network based ondigitalized optimization and contracts
8
Create a service platform for housing with service providers offering their ownapplications and services.9
1
2
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5 8
4 7 9
SUPERIOREFFICIENCY
SELLING FACILITYCONDITIONS
SMART LIVINGECOSYSTEM
MANAGEMENT
digitalization OFKEY FUNCTIONS
AND SELLINGDATA
TO EXTERNALPARTIES
PROGRESSIVEDIGITAL SERVICES
DYNAMIC DIGITALHEATINGNETWORK
CONTROLLEDDEVELOPMENT
ENERGYEFFICIENCY
CONSULTATION
DISTRICTHEATING AS A
TURNKEYSOLUTION
Development trends supported by digitalizationLimited development Full transformation
Sources: Customer interviews, expert interviews, Deloitte analysis
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WIDER PERSPECTIVE – developing customerexperience and service offering
© 2016 Deloitte & Touche Oy, Group of Companies. 23
Digitalization emphasizes the change in the roles of differentoperatives and the new opportunities now available to newproviders
Opportunities created by digitalization
Digitalization supports the emergence of new roles and business models with district heatingcompanies, other operators in the field and external third parties
End users will serve asheating suppliers andsellers to an increasingextent.
Customers are looking for partners whocan give them an easier everyday life,more stable conditions and better cost-efficiency. The role of the service provider(e.g. energy efficiency, heatingmanagement) may be taken by serviceproviders with expertise (incl. somebuilding management companies) orheating companies.
The role of the technical operatives(those concentrating on energy systemmanagement) will reduce. Variousplayers will increasingly be taking theoperative role. Larger operatives (e.g.building management companies) candevelop their expertise if they so wishto be able to offer a wide range ofbuilding technical services.
Heating suppliers can freelychoose their future role: theymay remain pure heating energysuppliers or expand their serviceoffering into new servicesegments and enter into closerinteraction with end customers.
Sources: Customer interviews, expert interviews, Deloitte analysis
Energy sellerBuilding managers,
management companies,property service
businesses
Businesses,industry,entrepreneurs
Housing companiesand single-occupanthouses
The elements of the relationship between energy seller and customer in the future
Publicorganizations
End users
Specialized serviceproviders
© 2016 Deloitte & Touche Oy, Group of Companies. 24
Sources
Customer interviews Sector and expertinterviews Public sources Deloitte’s experience
• The customers of districtheating companies
• Consumers and businesseswho have selected anotherheating method
• District heating and energycompanies
• Component suppliers fordistrict heating networks
• Big data applicationproviders
• Energy management expertcompany
• Energy expert, adjunctprofessor
• Company websites
• Sector reports
• Academic studies
• Deloitte studies
• Deloitte analysis
• Deloitte’s expertise andexperience in other fields
Contact detailsJenni Männistö Anne GrönbergManager, Deloitte Partner, [email protected] [email protected]
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