Managing Utility Technology and Service Acquisitions in the Smart Grid Age SGL Partners June 2012
A disciplined and comprehensive acquisition process is essential for utilities to get the most out of their Smart Grid investments. In the pre-smart Grid world, utilities and their regulators could presume that a technology decision would have a shelf life of 10-20 years, or in the case of transformers, for example, 30-45 years. But as disruptive Information and Communication Technologies (ICT) and innovative Smart Grid technologies are poised to enhance utility operations and service delivery, there are profound ramifications for product acquisition cycles. The ICT solutions embedded in the Smart Grid have lifecycles impacted by periodic hardware, firmware, and software upgrades and releases. Well-documented in the Technology S Curve of Innovation 1, it is a challenge that has been answered in the acquisition processes of other businesses, such as telecommunications, high tech, and financial services. This white paper describes a practical and flexible methodology proven in these industries that can assist utilities in the selection and acquisition of solutions that address current and future operating states to deliver immediate and long-term benefits. A proven and disciplined process helps guarantee that your investments of time and money in new technologies, services, and/or processes deliver the highest ROIs for all stakeholders. 1 The S-Curve elegantly sums up the innovation cycle of introduction, growth and maturation experienced in most industries. It has been studied and found to accurately model technology innovations in industries ranging from semiconductors to jet engines to telecommunications. It is a useful way to visualize innovation trends and technology cycles. Smart Grid Library Page 2
A Smart Acquisition Process Whether or not your utility has a formal product/service acquisition process in place, our proven methodology can help expedite timelines and clarify criteria for the selection of new Smart Grid technologies or services. Charles F. Kettering, a famous American inventor, put it best. A problem well stated is a problem half solved. Our disciplined process helps utilities future-proof their decisions by defining the future desired state of operations while addressing immediate pain points. Our process is structured on thorough knowledge of your utility s unique challenges and objectives, and uses a phased approach to create and evaluate Requests for Proposals and deliver documented, quantifiable decisions. An RFP is a customized document that states your problems. After all, if you are committed to reading through vendor responses, don t you want them to be relevant to your situation? Most importantly, our methodology helps you plan your technology decisions and investments to select the solutions that address your highest priorities and deliver the optimal ROI. Open and transparent acquisition processes result in the Discovery most informed decisions, the most aggressive vendor pricing, and the most balanced competitive vendor Content Development environment. An RFP must be customized to address your unique Distribution needs through a process that gathers feedback from Evaluation the stakeholders in your utility. Stakeholders often feel the pain due to technologies that are past their Negotiation prime or out-dated ways of doing business. Stakeholders may include other departments that can or will be impacted by adoptions of new technologies or services including changes in processes or employee skills. To ensure that you get solutions that support in your utility s objectives, and to help secure buy-in from all stakeholders needed to ensure deployment success, our acquisition methodology starts with a Discovery Phase that ensures that RFPs accurately and comprehensively state your problems and objectives now and in the future. Discovery Phase The Discovery phase is an objective, vendor-agnostic, and technology-agnostic analysis of your utility s needs. Utility needs are contingent upon the organizational strategy, which varies based on unique short and long-term goals for your investor-owned utility (IOU), municipal, or cooperative utility. The Discovery phase also has to account for the real pains that your Smart Grid Library Page 3
organization is experiencing today. For instance, aging infrastructure may cause increased outage frequencies or durations, which in turn puts pressure on your field resources to respond to service disruptions. What does this information mean to the Discovery phase? It will help identify and prioritize the types of solutions that your utility should consider for acquisition. It will identify criteria that offer immediate relief to the most impacted stakeholders and longterm benefits to other groups that feel less pain. Vendors are extremely happy to spend time with you to persuade you that their service or solution best answers your problems. They will supply you with RFP templates and documents that describe the benefits of their products and services. We understand that time-strapped utility resources often feel the lure of defaulting into letting vendors define their problems too. But the old adage is particularly appropriate to describe vendor motivations: if all you have is a hammer, everything looks like a nail. That is why it is critically important for utilities to objectively define pain points and align them with utility short and long term objectives. A very important stage of the Discovery phase focuses on budgets. Valuable information is revealed by asking questions about the sources of budget funding, and how project funds are allocated across technologies, people, and ongoing support. The RFP team should establish budget guidelines or limits before releasing an RFP. Knowing your not to exceed price for capital and/or operating expenditures is strongly recommended to ensure that your time is spent on serious evaluation of affordable solutions. Once the raw data is assembled, our methodology documents all findings to form a foundation for internal discussion and consensus-building. Not surprisingly, utilities are organizations made up of competing objectives and visions. Our Discovery phase ensures that all internal departments are aligned on the short term and long term objectives to be achieved with the acquisition of a technology. The Discovery phase also identifies the RFP team the key utility stakeholders responsible for development of the RFP and the evaluation of RFP responses. The team needs to be of a manageable size and breadth of organizational experience to make valid selections and support the consensus-driven decisions that lead to the most successful acquisition projects. Team composition also covers identification of who the ultimate decision-makers are for any big ticket purchase decisions. A problem well-stated is a problem half-solved. Charles F. Kettering, American Inventor Smart Grid Library Page 4
RFP Content Development Phase We could elaborate on the many sins of commission and omission we ve seen in RFPs over the years but the bottom line is that no organization has time to waste. Utilities should produce RFPs that concisely identify their problems and deliver relevant information about business and technical requirements. Well-written RFPs encourage high-quality vendor responses, an important goal of the RFP Content Development Phase. Once all the information is gathered in the Discovery Phase, it must be converted into the business and technical requirements of your utility. It is very important to loosely define technical requirements to avoid the exclusion of leading vendors because of some detail of their architecture, standards or partners. The technical requirements (how something is done) must be more flexible than business requirements (what must be done). Your business requirements, as defined during the Discovery Phase, must be exact enough so that the selected solution(s) will meet your utility s short and long term objectives. RFPs should obtain comprehensive information about the Total Cost of Ownership (TCO) for any solution. While an initial purchase price may be attractive, a careful analysis of annual maintenance costs and resource training fees may spotlight a high TCO that doesn t meet your annual operating budget requirements. If you are undecided about key architectures, directions, or what your peers are doing, start with a Request for Information (RFI). RFIs provide a structured process to get educated by the vendors and gather information that helps frame your requirements for a later RFP. Vendors will of course attempt to influence your thoughts about platforms, standards, budgets, deployment efforts and general timing of your efforts, but the process is more relaxed because the RFI process generally means that you will not commit to purchase decisions. The Content Development Phase creates RFPs that deliver an apples to apples comparison of competing vendors solutions. We ve seen many RFP responses where vendors simply cut and paste vast amounts of text that danced around an answer without actually supplying one. Free-form responses may be preferred by vendors, but it increases the review time, sometimes fairly dramatically, on your time-constrained utility resources. Our acquisition methodology creates a customized RFP evaluation framework that expedites response review timelines. In addition, this evaluation framework sets the stage for the most quantifiable and objective review of responses that lends itself to utility procurement documentation and reporting requirements. Smart Grid Library Page 5
RFP Distribution Phase The published RFP should include an exact time frame for proposal delivery, vendor evaluation, customer reference checking and final selection. This time frame should be limited to ensure that your RFP team remains intact and retains knowledge of the solutions and decisions. An RFP process that lasts more than a couple of months risks losing team members, focus, and budget. Many utilities have strict guidelines for vendor relationships and some utilities may have stated preferences for vendors who conform to specific criteria. Be sure to include these guidelines in the RFP. The RFP should be distributed to vendors who can meet procurement criteria, rather than exclude vendor responses for lack of compliance on these grounds instead of the RFP s business and technical requirements. The RFP Distribution phase includes structured and documented processes for vendors to obtain the information they need for their responses. Determine the policies and processes for RFP questions and clarifications and if this information is openly available to all vendors or if each Q&A is treated as a closed one on one conversation. Vendors can hesitate to ask questions that they think may alert their competition to their bid strategy or product secrets. RFP Evaluation Phase Our proven methodology produces the essential RFP content that presents your utility s unique challenges and opportunities. It also sets the foundation for the most time-effective evaluation process of vendor alternatives. As part of our acquisition methodology, the RFP team must define evaluation criteria and how to score answers to make rational, unbiased, and quantifiable vendor selections. Our process ensures that the business and technical requirements shape the selection decision. Without this disciplined approach, you are left with price as the deciding factor instead of the real value a product/service delivers to your utility. An added benefit of defining the business, technical, and other criteria up front is that this information helps vendors propose and price the most relevant packages and options. The vendor responses will alert you to potential changes in internal resources roles and responsibilities. It is very important that the RFP team promptly addresses these situations with transparency and sensitivity. What will happen to current employees if their jobs no longer exist with the solutions being considered? Smart Grid Library Page 6
In our disciplined acquisition methodology, we take the time to check the customer references. We have evaluated RFP responses where references aren t using the product or service discussed in the response or didn t like the product or implementation. References, even the positive ones, can share valuable information that assists in the evaluation process and sometimes even in contract negotiations, because we ve asked the right questions. Negotiations Phase There are basically two pricing and contract negotiation approaches that can be used once a selection has been made. If your company has a purchasing department then they will often handle the delivery details and negotiate the pricing. The other approach is that the selection team negotiates the contract for pricing, delivery and support. Regardless of which approach is used at your utility, here are some of the most important points about contract negotiations. You are not just selecting a vendor - you are choosing a partner in delivery and completion of a successful project. Therefore, it is very important to interview the vendor s project manager, technicians, and other project resources to ensure that you have the correct talent for your implementation. Reserve the right to reject anyone that does not meet your project requirements, and add contract language that gives your utility recourse if your project team is re-assigned while your implementation is underway. Ask the vendor to document the time and deliverables expectations of utility resources. This is extremely important to avoid situations where your utility resources spend their valuable time training the vendor resources, and it helps set expectations for cross-departmental projects. We use a comprehensive checklist of items that include confirmation of solution releases, timelines, and details about project plans. Careful attention to documenting expectations and commitments helps maintain clarity over the duration of the project implementation and maintains support beyond cutover dates. The goal is to wring ambiguity out of the project and ensure that expectations are understood and met. And when they are not, it s very important to have an exit strategy. Pricing is an important part of any contract negotiation, and we always like to see any initial purchase discounts carried over the first year after cutover to cover any additional products or services that were not itemized in the original purchase decision. Utilities have the most power to influence prices during contract negotiations so use this time wisely! Smart Grid Library Page 7
Conclusion There are many solid reasons for going through a rigorous and disciplined acquisition methodology when buying solutions and services as you build out your Smart Grid. First, you are able to obtain consensus and acceptance within your utility as to what is required and how the solution(s) will be selected. Second, a comprehensive RFP development and evaluation process delivers necessary knowledge about how various products and providers can support short and long term objectives and the pros and cons of each vendor alternative. Third, this approach rationalizes and expedites the RFP evaluation process. And finally, it is the best method to encourage a competitive environment among vendors and thus receive the best prices for products and services. For More Information SGL Partners, a division of the Smart Grid Library, offers a range of focused services and deliverables that include strategic insights, disruptive innovation and change management roadmaps, and technology/service acquisition guidance to help clients achieve maximum success in their Smart Grid initiatives. We can help your utility plan and manage Smart Grid acquisition projects. We can help you future-proof your technology and service acquisition decisions and achieve the maximum ROI based on your utility s unique requirements. Contact us for more information: Christine Hertzog, Managing Director: chertzog@smartgridlibrary.com Bill Maikranz, Consulting Director: billmaikranz@smartgridlibrary.com www.smartgridlibrary.com Smart Grid Library Page 8