Transforming British Gas

THE BUSINESS SITUATION ANDENVIRONMENT DRIVING A CHANGE

Prior to privatization in 1986 British Gas had been anationalized industry for 37 years, with 90,000employees following the traditions and practices ofthe public sector. There was a monopoly in gassupply, a steady growth in the gas market, and asteady pro®t stream.

Privatization in itself, although a big event at thetime, did not impose any radical changes on thebusinessÐthe monopoly remained. It did encou-rage the newly created Regulators to focus on thecompany. Not only was the Director General of GasSupply showing an interest in the businessÐsowere the Of®ce of Fair Trading, the Monopoliesand Mergers Commission and the Department ofTrade and Industry.

During the period from 1987 until 1993 thepressure from these regulatory bodies was felt bythe company. This culminated into several refer-ences to the MMC and some dif®cult challenges forthe company from 1994 onwards (Figure 1):

. Competition in the industrial and commercialsector, resulting in rapid reduction in marketshare in the segment (this was approximately45% of gas supply turnover).

. Separation of the transportation business fromthe trading activities. (The original structure isshown in Figure 2).

. A requirement to have full competition in thedomestic market in 1998 with pilots involving500,000 customers in the South West in 1996 and2 million in the South in 1997.

. Pricing formulae and controls.

. Establishment and monitoring of service stan-dards.

. Uncertainty created through unknown outcomesof the various regulatory reviews.

. A 50% reduction in pro®tability of the businessduring the period 1991 to 1994 (Figure 3).

These presented the company with a newchallenge on a huge scale with the growth ofcompetition being a major driving force for change.In order to compete effectively and win againstaggressive competitors, it was essential to create adifferent organization, culture and strategy. Therewas a further need for massive ®nancial savingsand to operate far more effectively in new markets.With competition the driver for substantial changea radical approach was needed to get the business®t for the future challenges.

The process the business has gone through toaddress these issues in three years is quite

80 CCC 0969-3866/97/020080-09$17.50& 1997 by John Wiley & Sons Ltd and Cornwallis Emmanuel Ltd.

&Case Study

Transforming British Gas

Steve PearceProjects and Consultancy Manager, British Gas Trading Limited

The need to change the way any business operates quickly is essential for remainingcompetitive. Understanding what your key competencies and capabilities are is a keyprerequisite before initiating a change programme. The restructuring of the UK gas industrypresents an additional complication to transforming the business: the market changes,regulatory pressures and an inherited culture all serve to make the journey move complicated.

Ensuring the destination is reached requires a full understanding of the environment, aradical change planning process which highlights key competencies and an implementationplan capable of measuring achievements in all aspects of the change. The business competencydeveloped during the change process will ensure the company will remain the leading player inthe emerging energy business. & 1997 by John Wiley & Sons Ltd and Cornwallis Emmanuel Ltd.

Knowledge and Process Management Volume 4 Number 2 pp 80±88 (1997)

remarkable. This paper highlights the journey sofar in the following sections:

. Development of the change process.

. Business core competencies and critical businessprocesses.

. Implementing the re-engineering and structuralchanges.

. Competency development.

. Lessons and opportunities.

DEVELOPMENT OF THE CHANGE PROCESS

The recognition of all the future challenges by thesenior executives in the organization ensured thatchange objectives were clear. The ®rst step was toplan the business transformation.

Strategic benchmarking

It was recognized that the past culture hadencouraged an inward looking managementapproach. To get managers thinking of competi-tion and `out of the box' the company needed tounderstand and apply Benchmarking techniques.A small project team researched the wholesubject, learning from those who had usedBenchmarking as a competitive and strategic tool.This led to a company Benchmarking processwhich was also built on external experience.Figure 4 shows the framework used to decidethe type of Benchmarking for speci®c businessdrivers. This prioritized the type of benchmarkingthat would be used for developing the strategictransformation plans. Benchmarking decisionswere taken by relating the scope of change thatwas needed on particular business issues. For

Knowledge and Process Management CASE STUDY

Transforming British Gas 81

Figure 1 The change timeline

Figure 2 The integrated structure in 1993

Operating profit 1991 1994 1995

UKgas business 1268 515 407Exploration and production 187 289 441Otheractivities 202 183 55Total 1657 987 903

Figure 3 The ®nancial challenge

example, at the strategic level, benchmarking howcompetition in gas supply was delivered bytransportation companies provided clear goalsfor the change plans. The shaded sections showthe types of Benchmarking used to help deter-mine the competencies and identify the strategicimprovements needed.

These Benchmarking studies were used to sup-port the belief that there was a substantialcompetitive gap and provide external evidenceand comparison. The Benchmarking drive wassupported by `Just in time' training and planningworkshops for study teams. The Benchmarkingwork highlighted the growing gap between currentperformance and those of similar organizationsand competitors.

These studies set realistic (but stretching) goalsand strategic objectives for the Strategic Develop-ment Process. The Benchmarking work highlightedthe gap between current performance, what wasbeing achieved externally, and the rate of changeneeded to reach a leading position (Figure 5).

Strategy development process

The traditional management approach to planningchange in the company was unlikely to deliver theradical change needed to remain competitive ordeliver in time to meet the external challenges ofregulation and competition in 1996. In May 1993 aseven month intensive planning project started withthe aim of planning the re-engineering of the

CASE STUDY Knowledge and Process Management

82 S. Pearce

Figure 4 Benchmarking activityÐprioritization matrix

Figure 5 The Benchmarking objective

business processes. Figure 6 shows the variousexternal inputs used in the process and how a corecompetency analysis was used to validate thebusiness plans.

A development Strategy Team was created,headed by ®ve Development Directors (championsfor each business unit being created). This groupworked as a team with complete freedom toexamine the future strategy of the UK gas business.To ensure the team was not in¯uenced by pasttraditions, the team was supplemented with adiagonal slice from within the organization andexternal consultants. A particular feature of theteam was its cross functional members, separateenvironment from the rest of the business and theuse of the team working principles of Katzenbackand Smith.

`A team is a small number of people, withcomplementary skills, who are committed to acommon purpose and a set of performance goals forwhich they hold themselves mutually accountable.'

External input to the process

There was resistance to making external compar-isons because of the old cultureÐ`we can't becompared', `we are different.' To counteract thistendency within the organization, a number ofexternal studies were commissioned in variousareas. These were based on the need to make furthercomparison and understand competitive pressure,market dynamics and the impact of deregulation.Some of the analysis and recommendations seemedsomewhat radical and unbelievable to somemanagers in the organization. Three years later,competition, new markets and a completely restruc-tured organization, give a timely reminder of the

valuable contribution to the strategy these externalinputs made.

The International business during this periodundertook a core competency assessment and theconsultants also worked with the Gas BusinessStrategy teams to help determine core competen-cies for the UK gas business.

BUSINESS CORE COMPETENCIES ANDCRITICAL BUSINESS PROCESSES

To ensure the transformation plans were robust acore competency review was used to understandwhere there were signi®cant strengths and what themajor business processes were. The objective was toidentify where these needed to be developed orchanged to meet new business requirements.

Critical business processes

The Benchmarking studies helped inform the corecompetency work, which was complemented withan analysis of the main business processes. Thishelped with understanding the speci®c activitiesand tasks within the old integrated organization. Itprovided an opportunity to group these in a way thatcreated four business units centred around speci®cnew markets, customers, processes and competen-cies (Figure 7).

The critical business processes and the businessprocess model approach was used to design thenew organizations, taking into account the need tobuild on and develop the core competencies. Theintegrated nature of the gas business had maskedthe critical processes and the core competencies.This had resulted in diluted management attentionon core competency development. The critical



Figure 6 The development strategy team planning model

processes for the UK gas business that arose fromthe studies in 1993 are illustrated in Figure 8.

These critical processes were a signi®cant depar-ture from the traditions of the past where the rangeof services were bundled together. This approachresulted in structuring around the processes so thata new commercial approach developed within eachof the new organizations. This prepared the neworganizations for new process designs and theintroduction of new IT systems to support the re-engineered businesses.

Core competency review

The core competency assessment covered the fol-lowing parts of the business:

. Transport of gas (including LNG).

. Distribution of gas (including maintenance of thesystem).

. Gas supply.

. Gas services to customers.

. Retail of gas appliances.

These areas were chosen because they were theprincipal activities of the business in 1993. Theyrepresented activities on which past growth hadbeen achieved. These were the parts of thebusinesses being redesigned by the developmentstrategy team. For each of these activities the

analysis categorized the competency using acombination of self assessment and externalreview. This assessment supplemented the thor-ough review of business activities.

The core competency review involved severalworkshops with those involved in the competencyactivities, but also those from outside these parts ofthe company. This served to critically examine theactivities objectivelyÐthere were no sacred cows.The workshop analysis was supplement by exter-nal views and competitor comparison. Thisanalysis was hard hitting as some of the areas onwhich the strategy was based at the time were not amajor strength. Changes to several aspects ofcompany strategy were implemented in 1994 as aresult of this review.

This exercise highlighted the key strengths onwhich to build the restructuring and re-engineer-ing plans. This helped con®rm the critical processwork and provide a base on which to develop thestrategies of the new businesses being created.The Market Gas competencies assessment con-®rmed the strategic review of the supply businessand the following capabilities were identi®ed(Figure 9).

These highlighted the strategic competencies thatneeded improvement in order to follow the currentstrategy at the time. It also indicated the extent towhich cross business unit activities could beimproved.


84 S. Pearce

Figure 7 The new business unit structure in 1995

New business unit (1995) Critical Process Description

British GasTransCo Transport gas Providinga range of gas transportation services from theterminal to themeter inclusive, together with an emergency service

British Gas Retail Sell products Managinga chain of shops sellingan enlarged range ofdomestic cookingandheating products

British Gas Service Operate fieldservice

Operatinga quality field service business whose operationis focused on the servicingand installation of gas heating

British Gas Supply Market gas Marketing, sellingandbilling gas to domestic industrialand commercial customers in the UK

Figure 8 Key process objectives for the businesses in 1993

IMPLEMENTING THE RE-ENGINEERINGAND STRUCTURAL CHANGES

The objective of this phase was to plan theimplementation of many dif®cult and complicatedchanges involving recruitment, new processes,internal and external services and business archi-tecture (IT, telecoms, of®ces, vehicles). The timescale set for this phase was 2 years to coincide withopening of the domestic market to competition in1996.

This target was viewed by nearly all in theorganization as impossible given the traditionalapproach to change and the massive work activityneeded. The need to change this fast was driven bythe business environment. When implementedthese changes would improve customer serviceswhilst meeting the external regulatory and com-mercial pressures. The changes would also deliveran annual cost reduction of £600 million perannum. The planning process delivered transitionactions which involved the following:

. The creation of ®ve new business units.

. The closure of 12 Regional Of®ces.

. The closure of several Headquarters of®ces.

. The reduction of staff employed by 25,000.

. The selection of managers and staff to join eachBusiness Unit.

. The introduction of ®ve new computer systemshandling millions of transactions to support newbusiness processes.

. The creation of new call centre facilities ensuringthe smooth transition of customer services andsystems.

. The introduction of new working practices.

. The introduction of new products and services.

The implementation process started with therecruitment of the Managing Directors and Man-agement Teams for the new business units inDecember 1993. This was followed by furtherrecruitment of the rest of the management struc-ture. All the selection was completed on a personalcompetency basis. This differed from the past byfocusing on the management behaviour andcompetency needed for the new organizations tobe successful (Figure 10).

The various structures were aimed at signi®cantdelayering and reducing the numbers of manage-ment posts by 66%. The various new roles werepro®led against these competencies enabling theright skills to be matched to the future businessneeds of the roles. Some of the strategic plansrequired development of skills for customer facingstaff. These too were recruited against a compe-tency pro®le relevant to their new roles. A range ofsupport services for those who were unsuccessful



Competencies Supporting competencies Evidence

Market Gas Knowledge of customers Goodknowledge of existing and potential customersPredict competitors' behaviour Established reputation for reliability and customer supportAbility to advise customers Highmarket penetration achievedAbility to demonstrate reliability High level of customer satisfactionAbility to sell to different customer types

Figure 9 The core competency assessment 1993

Concern fororderand quality Teamworking

Change orientation Analytical thinking

Communication Developing

Leadership Conceptual thinking

Business flair Customerorientation

External sensitivity Performance orientation

Influencing Initiate

Strategic thinking

Figure 10 Management behavioural competencies

and elected to leave the organization were pro-vided. These included outplacement help,counselling and an enhanced voluntary redun-dancy scheme. The whole downsizing processproceeded very fast with the company exceedingthe reduction target ahead of schedule.

During this period the business operationscontinued under the old structure while the newbusiness units prepared to take responsibility forthe existing operations, this transfer started inMarch 1994. The next stage was to start thedevelopment and implementation of new systemsand business infrastructure.

To manage this transition process there wereweekly reviews between the Business Unit Mana-ging Directors. This was supplemented with speci®cteam development workshops once a month toensure all implementation issues were handedeffectively. The same approach was used with eachbusiness unit management team, with regular teamdevelopment and the use of facilitation for work-shops and meetings. The aim was to ensure the skillsneeded to run very different businesses developedquickly and that the right culture started to develop.

To track the progress towards business excel-lence, best practice and cultural change, the EFQMModel for Business Excellence Model was used toassess and prioritize the improvement and transi-tion plans (Figure 11). This further ensured acapability based strategy was delivering businessresults and that capabilities were developed intocompetencies. The EFQM Model has been used as ameasure to ensure the priorities are balancedbetween immediate results, building for the futureand ensuring customer and employee satisfactionare improved. In some of the new small businessesthat are being created within some business units,the EFQM model is used to `design in' excellenceprocesses from the start up of these organizationson green ®eld sites.

A leadership programme was designed andimplemented for business mangers as a directresult of reviews using this framework. This helpeddevelop a leadership competence to enable ourleaders to motivate all employees towards thecompany vision.

The various change projects and businessimprovement activities were plotted against themodel headings to ensure there were no gaps in theapproach. This supplemented the change manage-ment process used in some Business Units toensure the strategic goals were achieved. Changeprojects were planned and resource managed togive added con®dence in delivery capability.

COMPETENCY DEVELOPMENT

The objective of this stage in the change process wasto use the opportunity to develop core competenciesduring the transition process and introduce newways of working.

The re-engineering, restructuring, strategic plan-ning, transition planning and implementation hadradically reformed British Gas. These new strategicagendas required the building of capabilities whichdeveloped into full competencies aligned with thestrategy. The development of capability was essen-tial for organizational excellence, the developmentof new competencies and to gain competitiveadvantage in the new markets (Figure 12).

The competency gaps highlighted through thisprocess fell into three categories; people skills,process capability and technological skills.

Taking the people aspects ®rst, the competencyrecruitment made a good start for the BusinessUnits. The next stage was to re®ne the peoplemodel and align it to the new business needsassociated with the new strategies. This combinedboth technical skill with people management skill.


86 S. Pearce

Figure 11 The business excellence model used to review progress

The new skills were very relevant to achieving fastimplementation of changes and new services.Examples included; risk management, projectmanagement, leading change, pro®t and lossmanagement and resource planning.

A new approach to skill development was usedalongside the new people pro®le to ensure theorganization understood the people skills anddevelopment needs. This process also highlightedgaps which could have delayed the implementa-tion of change and pointed to where externalrecruitment should be used. The performance,development and skill assessment process effec-tively ensured the resource planning processaligned with business competency development(Figure 13).

The process competencies were developed byprocess improvement and redesign. Where therewas a signi®cant gap to the achievement ofstrategic goals, the company formed strategicalliances and joint ventures.

The capability assessment and identi®cation ofcore competencies also helped to ensure that thoseactivities which were not core competencies wereoutsourced to organizations able to perform theactivities more effectively.

The key to re-engineering successfully and tobusiness excellence was leadership. Continuingthrough the change process is a priority for thecompany given recent plans to demerge the tradingparts of the company. This again generated a needfor different process and business competencies.

The leadership of the change processes andleadership skill development has been addressedin the leadership programme. This aimed atdifferentiating between leadership and manage-ment. The programme enabled managers to learnleadership skills measuring their individual com-petence development over a period of 6 months.

LESSONS AND OPPORTUNITIES

The change process provided a major opportunityfor the businesses and individuals to develop theircompetencies. The scale of the change British Gashas achieved in three years is remarkable and thelessons learnt are valuable to every organization. Itwas a rare opportunity but also a major challenge notwithout its dif®culties.

The main lessons were:

. Making external comparisons and benchmarkingwas essential for sustaining the business into thefuture. (Processes are not as good as you thinkthey are!).

. Identifying clear strategic goals based on marketand external analysis helped break throughinternal cultural barriers.

. A clear understanding of the businesses pro-cesses, their inputs and outcomes was critical toimprovement and change.

. Effective transition planning and monitoring wasessential.



Figure 12 Core competency development approach

Figure 13 Business competencyÐthe essential ingredients

. It was relatively easy to downsize but developingcompetence for the future required considerableeffort. There was a substantial lead time andlearning process before the bene®ts of compe-tency development appeared.

. Test capability ®rst, identify gaps and aligncapability with strategy, then develop competen-cies for future strategic goals.

. The competency driven strategy ultimately led topeople skill development with processes andtechnology enabling delivery.

. Invest to develop core competencies and letothers deliver the non core against best practicetargets.

. The market, business environment and custo-mers ultimately decide if the organization has thecore competencies!

. Concentrate on the `how'Ðit is how an organiza-tion works that delivers competence.

. Leading change required many leaders at alllevels in the organization.

The benchmarking work determined the speedat which change was needed. Without it the pacewould have been too slow to survive against theonset of competition. When the market is fullyopen in 1998, our customers, employees andshareholders will have seen a massive transforma-tion from utility to a truly market orientated serviceorganization.

British Gas has enabled the restructuring of theUK gas industry against a timetable of only 3 years.Already there are many European companiesasking: How did British Gas achieve it?


88 S. Pearce

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Transforming British Gas