Reinventing a Major Electric Power Provider With the Help of Simulation Software

Due to deregulation in the utility industry, a major electric power provider determined that, in order to be competitive in this new environment, the organization would have to move from a cost-centered company to a profit-centered company. The utility hired a leading consulting firm to work with their executives and internal reengineering team to assess their organizational and management structure and make recommendations on how to redefine processes and develop a new performance measurement system tied to profits, as opposed to costs.

The consulting firm opted to do an EVA™ (Economic Value Added) analysis for one of the utility's strategic business units, in order to identify the drivers to cost and forecast an economic outcome, i.e., profit or loss, to a future period. The project manager spearheading the effort on behalf of the consulting firm called upon Greg Hansen, President of CAPI (Computer Aided Process Improvement) to build and simulate the model in order to evaluate the effects of different decisions on economic outcome. Hansen was chosen, because "he understood the Extend + BPR™ software tool set very well, having worked with Imagine That to develop the BPR library. He was also very good at translating ideas into working models." The consulting firm was looking for a model developer who understood how business worked, and Hansen was "more than a programmer-- he could figure out the problems inherent in the analysis."

The consulting firm outlined what they wanted to accomplish with Hansen and provided him with data and their inter-related functions. From there, Hansen built a prototype, and test data were run. The model went through a total of three iterations, as the consulting firm rethought, refined and tested its concepts. This was not to be unexpected -- by working with simulation, the utility was forced to think through its processes, formulas, and their inter-relationships well in advance of their testing and implementation. It also enabled them to take concept to reality.

As a strong proponent of using technology as a business tool, the consulting firm believes that the EVA couldn't have been done effectively without simulation, and, in fact, the simulation helped sell the executives of the utility firm on the concept of linking value drivers to financial data. According to the project leader, "The most important aspect of simulation is the ability to do comparative 'what if' analysis to identify how changes in one or more variables affect outcome. It was imperative to understand the relationships among cost drivers and how they affect financial performance. We used the power of simulation to link variables, and what could have been an incredibly arduous, if not impossible task, became simple."

With the model complete, the consulting firm has started its implementation on an organizational level in such areas as reporting systems and transfer pricing. Because of its success, simulation will continue to be used, and will be driven down through the organization to the plant level and local level to turn a cost-centered company into a focused, profit-driven organization favorably positioned to compete in a changing marketplace.

Display of Accumulated EVA by Month and Return on Invested Capital by Month

Extend+BPR is a trademark of Imagine That!, Inc., San Jose, CA. EVA is a trademark of Stern Stewart Company, NY, NY.