Punctuated by both industry events and the impact of new
technologies, the recent history of the energy industry
has been defined by a volatile environment for both buyers
and suppliers of software applications and solution technologies.
For CIS and related software, the industry's experience
over the last decade or so convincingly demonstrates this.
If the past is the key to understanding the future, then
analysis of the evolution of CIS solutions set against the
backdrop of industry events and technology introductions
provides both a perspective against which buyers can make
selection decisions and a way to make predictions for the
future.
According to accepted theory, software markets should follow
a classic technology adoption curve: early adopters nurturing
small vendors and emerging products into maturity with a
majority of buyers later adopting the resulting industry
standard software. Early adopters will take a bet on a vendor
and its product, provide coaching and support until the
market matures sufficiently to the point of sustained demand
or fails to materialize at all. Early vendors are often
boot-strapped or venture capital-backed start-ups with a
visionary leader who sees a market opportunity.
However, in a vertical industry, such as the energy industry,
the technology adoption curve is often dislocated by external
events over which neither suppliers nor buyers of the technology
have any control. Each dislocation event triggers a prolonged
period of uncertainty and often results in changed buyer
requirements that have a significant impact on the vendor
community (Figure 1). Unlike larger, more horizontal markets,
a dislocation event does not necessarily sound the death
knell for the technology. In fact, it often spurs a period
of increased demand following the period of uncertainty
albeit for a slightly different version of the technology.
The dislocation event is also often characterized by the
continuation of a smaller niche market for the original
technology while the period of rapid growth represents a
slightly different and often much larger market.
Take, for example, the video cassette market as it developed
several years ago when two standards competed for acceptance.
The adoption curve for video cassettes was really about
the emergence of two standards; VHS and BetaMax, each having
its proponents. In the end, it was the VHS format cassette
that emerged as the choice of the majority and it was the
VHS market that grew as demand surged. Meanwhile, despite
being considered a superior solution, the Betamax format
market shrank back to a smaller niche market for video professionals.
The impact of a dislocation event on vendors and their
solutions can be categorized as follows;
Stranded vendors — Poorly capitalized or over-stretched
vendors find themselves unable to respond to the change
in the market and are forced to drop back to remain a smaller
niche player. Stranded vendors often become acquisition
targets for new entrants and sometimes go out of business
altogether.
Survivors — These are the vendors that are able to
evolve their products fast enough to keep pace with the
shift in the market and benefit from the later resurgence
in demand.
New Entrants — The dislocation event presents new
entrants with a previously unforeseen opportunity to enter
a market and potentially displace market leaders. New entrants
are usually either large existing vendors with software
products in peripheral markets or start-ups that can create
something new that meets the changed requirement as opposed
to having to modify something that already exists.
A significant dislocation event in CIS software markets
was the prospect of deregulation in the mid-to-late-1990s.
In a regulated world, most large utilities had maintained
a strong IT department and utilized this capability to build
and deploy custom solutions or had chosen to deploy solutions
from large system integrators such as Accenture (then known
as Andersen Consulting), PriceWaterhouse and others. Indeed,
there was little choice for buyers of third-party solutions
and mid-sized utilities generally opted for SCT's Banner
system. When the prospect of deregulation emerged, utilities
found themselves running large monolithic systems that were
built for a specific set of requirements or too costly to
modify. These installed systems would not provide the flexibility
in terms of customer presentation, rating calculations and
multiple commodity billing, among other significant requirements,
which would be required in a deregulated world. As a result,
many of these systems were replaced over the next several
years with a growing number of new solutions from new suppliers.
With its experience in retail markets in New Zealand, Peace
Software became a new entrant into North American CIS software
markets. Start-ups such as Excelergy and others rapidly
emerged with potential solutions while SAP, having stayed
in Europe, saw its opportunity to enter the North American
market with a high-end solution. Similarly, some vendors
engineered their survival to benefit from the changed market,
like SPL WorldGroup did with its CorDaptix solution. The
coming threat of Y2K spurred on the replacement of legacy
systems driving sustained demand for new, more flexible
packaged CIS solutions through and beyond 2000. The impact
of the threat of deregulation also attracted new entrants
to aspects of the CIS software market that were not previously
well served including the cooperative utility market.
Since 2000, the CIS market has again slowed and has only
recently shown signs of renewed growth. Uncertainty following
significant events, such as California's deregulation experience
and the collapse of Enron, created a new and prolonged dislocation
event that has had significant and ongoing impact on the
vendor community and available solutions. The impact of
the latest dislocation event has already resulted in the
exit of a number of vendors from the market including Lumenor
and US Power Solutions and the entry of others such as Conversant
and NirvanaSoft, two vendors that have built entirely new
applications on object-oriented architectures. There remains
a very real danger that more vendors will disappear or be
acquired as they reach a make or break point over the next
one to two years.
There are emerging signs that the last dislocation event
is coming to an end and UtiliPoint research shows that demand
for CIS is growing. According to UtiliPoint, approximately
5 percent of surveyed utilities in 2002 said they were looking
to buy a system that year, while 16 percent of surveyed
utilities in 2004 said they were looking to buy. The same
research shows that just about half of the CIS systems in
place at North American utilities were installed after 1996
and that legacy systems are still in place at about 25 percent
of the surveyed utilities. What is driving this growing
and renewed demand? UtiliPoint research suggests that no
single factor is driving the improved demand but that a
combination of factors that includes improving ease of use,
better functionality, improved ability to integrate to other
software applications, ability to better handle more complex
rating structures and multiple commodity billing are all
at play. This suggests that after a period of uncertainty,
utilities are gaining confidence in market conditions and
continue to recognize that improved customer service and
billing accuracy remain critical issues.
So how does an understanding of the evolution of CIS software
markets help us understand the vendor landscape and how
the future may play out? Firstly, it helps buyers differentiate
and classify vendors and their solutions since an understanding
of how and at what point in time the vendor's product emerged
will tell you a good deal about its likely functionality
and fit to requirements. It helps clarify decisions that
include vendor risk as a selection category and demands
that buyers make determinations of the maturity of the vendor/product,
its likelihood of survival and whether the utility is prepared
to play the role of an early adopter of technology or would
prefer to invest in more mature technology. Secondly, it
demonstrates that today's dominant product can readily become
yesterday's legacy system and demands that utilities consider
their broader business strategy both today and into the
future when selecting a solution. Finally, while it is difficult
to predict what tomorrow's dislocation event might be, we
know with surety that there will be one.
Figure 1: Anatomy of a Market Dislocation
Event &
Its Impact on Vendors and Product Adoption
