Not long ago, when the banking industry started to suffer from poor trading results and low client activity, UBS, experienced serious financial woes. As a result, the Swiss financial services company decided to drastically downsize their workforce by over 10,000 employees in 2012. While the act was originally viewed with distain, defined by others in the industry as “doing a UBS,” it put UBS in a stronger financial position, allowing them to take the market share while their competitors continue to struggle today.
By making such drastic reductions in manpower, UBS was able to invest in strengthening their technical power. By strengthening their operations through better IT systems, UBS was able to transform their business and generate results, reporting a net profit up 79% to CHF 6.2 billion - despite today’s challenging market conditions. Now, the rest of the industry is following suit, with other major players, including Barclays and Deutsche Bank, announcing dramatic reductions in head count. Call them a trend setter, but in an industry characterised by severe “dislocation and change in the industry,” UBS is now "an example of Wall Street's leaner, smarter future."
This success story proves that in hard times, the size of a company is less relevant. Rather, what really matters is how companies optimise their top businesses, rather than trying to float their less profitable ones. As UBS’s CEO, Andrea Orcel, said, "It is all about innovation and execution.” Essentially, when faced with less manpower, companies must become smaller, leaner, more profitable units.
It’s no secret that the financial health of European utilities is in steady decline. In a rapidly transforming industry, previously unprecedented factors; such as clean power generation, larger renewable investments, policy changes, etc., are presenting new competitive pressures. As a result, utilities are now experiencing financial troubles, with major players suffering multi-billion dollar losses. German utility giants, RWE and E.ON, are suffering from reduced revenues, less demand, policy pressures and, for the first time, are not paying their dividends. Both Engie & EDF have announced significant losses in clientele and assets at the beginning of the year. With revenue falling under pressure, companies have to figure out how to reduce costs and effectively accomplish more with less resources.
The similarities between the banking industry and the current situation of the utility industry are uncanny. With major European utilities losing profits by the day, there’s a valuable lesson to be learned from the example set by UBS. While the era of renewable generation is forcing utilities to adapt, it also presents an opportunity to gain competitive advantage within the marketplace. To adapt to the new paradigm of today’s renewable world, power producers need to flush out their bad assets, and focus their resources on their profitable ones. While a bit late, German utilities RWE and E.ON are now realising this, and shifting their efforts away from fossil fuel fleets and more towards renewable generation.
Utility companies will need strong IT platforms and systems to successfully optimise and execute. By embracing digitalisation in the workforce, successful utilities will operate as faster, nimbler and more productive organisations. As David Crane, former CEO of NRG said best, “Having a good technology platform like energy investment management (EIM) is key if a company wants to be successful in a highly distributed energy industry.” Just as UBS, optimising IT systems will be crucial to making their top business assets successful in the complicated world of distributed generation.
To read more posts from Haresh, visit the Mercatus Energy Blog.