The latest twist in the Energy Retail Market: Big is beautiful or feeding frenzy?

The announcement, last week that SSE and Npower are planning to spin off their respective retail businesses in a combined merger, makes a lot of sense if you sit on the Board of either business.

Both businesses have consistently tried, and failed, to stem losses of customer numbers driven by a combination of increasing competition and relentless negative press. Both businesses are looking at a new world where the ‘super profits’ achieved from SVT customers will come to an end, either through the imposition of price caps or a self managed market shift to fixed price only contracts. And both businesses are looking at rapidly growing and nimble competition developing new, technology lead, propositions and niche offerings. Whilst, at the same time, trying to solve their own internal and expensive system challenges, whether increasingly outdated (SSE) or suffering the consequences of previous poor implementations (Npower).

Therefore, to any rational Board, doing nothing is not an option. Doing something, not least refocusing your core business on stable earnings and offloading the problem children makes a lot of sense. So will big mean beautiful or a feeding frenzy for the competition?

The answer will depend to a large extent, on how well the integration is lead and managed. It is worth reflecting on lessons learned from previous ‘mega’ integrations in the late 1990s and early 2000s. The one I remember best, and have the scars to bear, was the taking over of the remnants of TXU by E.ON. There was good, bad and downright stupid through the programme that followed- all of which offer lessons for the new combined business:

Lesson number 1- Don’t take your eye off the customer:

When there are so many moving parts internally, it is very easy to lose sight of what is happening in the market. With large scale integration, the need to align people, brands, systems, products and operations means that it is very easy to get myopically focused on the internal programme. BAU can be put on the back burner and before you know it the business is out of the market on pricing, product and positioning, and customers are leaving in their droves. Add to this dynamic, in today’s market, 60 odd competitors who are rubbing their hands and actively targeting your customers, and without very careful management the scale and value being created could diminish before you’re even through the starting gate.

Lesson number 2- Protect your talent.

It is easy to imagine the tom toms already going within the affected businesses as the lack of detail on plans gets converted into urban myths- sites being closed, jobs being cut, and uncertainty being the new norm. On one hand, with combined businesses, there should be a plethora of talent so losing some who chose to walk should not be a major issue. However, with a market full of opportunity for experienced industry professionals, this announcement could be the trigger for many to go searching for pastures new. With a long timeline before the deal is complete, recruiters and the competition will inevitably be circling. One thing is for certain, with an integration of this complexity and scale, the ability to retain the top talent and experience will be critical to success.

Lesson number 3- System integration is all about the detail.

There are more car crash stories in this market than success stories and that is largely down to the underlying complexity of the market design. Whilst expert programme directors, consultants and governance are necessary and usually thrown at the programme , the real critical factor between success and failure, is the priority and focus put on the detailed industry knowledge being input into system design, migration strategy and data cleanse. In reality, it is the handful of ‘industry geeks’ who will make or break the programme. Boring though it may be, the devil is in the detail and time and time again, programmes have failed through being outsourced to programme ‘experts’ without the necessary focus on technical knowledge and detail.

Lesson number 4- Humility is a strength: The Big 6 have for years had an arrogant air that comes from the comfort of size and scale gifted to them at market opening. The big budget set pieces, the ability to influence policy and regulation and the impressive financial numbers all contribute. Equally size gives many working within the ability to waft around and avoid responsibility and accountability. This culture and sentiment has without a doubt, in recent years worked to the big 6 detriment, and contributed to the rapid growth of the competitive market. For far too long, competition other than between the Big 6, was seen as a side show and the blinkers remained on until too late. Creating a new and unique culture, at scale, where customers are genuinely central to the business, will only be possible if the new business sets out with very different mindsets and behaviours.

Both SSE and Npower are between a rock and a hard place. The market is harder than it has ever been, and creating scale and might with combined forces, is potentially their only route to renewed growth. However, if integration is badly managed and a new cultural norm is not created, the outcome could be worse than if they’d never started. More than ever before, the sharks will be circling ready to exploit any weakness. Time will tell.