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Hafslund Nett building strength for the future

Interview with Kristin Lian, Managing Director at Hafslund Nett

We recently spoke with Kristin Lian, the Managing Director at Hafslund Nett about the consolidation of the distribution sector and Hafslund’s “lessons learned” from their acquisition of Fortum Distribution in Norway in 2014. The interview was conducted before the announcement of restructuring in Hafslund.

Kristin Lian, Managing Director at Hafslund Nett

Kristin Lian was appointed Managing Director of Hafslund Nett in March 2013. Before that she headed the department Netteier (“Asset owner”) since 2010, where she was responsible for asset strategy, investment decisions and the network's overall performance

PA Thank you for meeting with us and sharing some of your perspectives on the distribution business. And, as you know, we are also eager to hear your views on the acquisition and integration of Fortum’s norwegian distribution business – let’s call it “lessons learned”. But first, tell us how you ended up in the energy business?

Kristin I entered the energy industry in the 90s, an industry quite different from what it is today. Development was slower. Today, my perception is that the industry is moving fast. For the next five years, the industry will move as fast as the last 20. I understand industry outsiders who Kristin Lian was appointed Managing Director of Hafslund Nett in March 2013. Before that she headed the department Netteier (“Asset owner”) since 2010, where she was responsible for asset strategy, investment decisions and the network’s overall performance. perceive the utility sector as a conservative and slow moving industry. I think they are wrong. The industry currently experiences a shift in technology, which I think has been difficult to communicate to the external market, thus the misleading and conservative perception. We are also experiencing changes in regulation and market design – in addition to SMART grid, Big data, Internet of Things and more. However, I believe the introduction of AMS to be the most important driver for disruption today. Hafslund Nett alone will have close to 700.000 customers using this new technology. Installation starts soon, and then access to customer information increases significantly. Those players that has the ability to utilize this information, will have a competitive advantage.

PA So you are trying to use technology in a new and different way?

Kristin Well, Hafslund has two primary goals. One is to be more efficient. The other is to create better customer experiences. Being efficient is a broad term. If we can utilize data better, take better decisions and improve our execution, efficiency will increase. Our efficiency gains will be transferred to our customers. For each kroner earned, half goes to the customers, and the other half to our owners, after tax. Using technology in a new way is no goal in itself, but we see it as a mean to achieve our two primary goals.

Hafslund Nett has always had a strong focus on operations. In the future, we also need to become good at developing our company, our people and our business. In order to succeed with the technological shift, Hafslund needs to further improve the current organisation, including developing and strengthening capabilities and competencies of our employees.

PA What about the customers and their new role in the energy system, for example as “plus-customers”?

Kristin Some speak about a shift in power balance between customers and distribution companies. In my opinion, such a power struggle has never existed. But, the customer becomes more important for us and the energy system in the future, as the customers will take the role as both consumer and producer. Hafslund Nett’s role will be to ensure a well-functioning energy system by leading the integration of both customers and so-called plus- customers in the future.

PA Does it represent a challenge that the customer takes a role as both consumer and producer? Is the network designed for “two-way traffic”? Are you relaxed concerning this development?

Kristin Absolutely, I’m relaxed! With regards to technology and network design, our infrastructure is fully able to support both consumers and producers at household levels. What is important is to find a business model that is fair to all parties. The industry has a joint responsibility to develop economically feasible models. Hafslund Nett and the other distribution companies including Statnett has the responsibility to integrate solar power with wind, hydro generation and even batteries. This task will become more challenging in the future. It is a very cool challenge for Hafslund Nett.

PA Now, let’s turn our focus to Hafslund’s acquisition of Fortum Distribution in Norway in 2014. The market viewed this very much as the perfect shoo-in for Hafslund and probably as an ideal industrial solution. Did you and the management team see it the same way at the time?

Kristin Absolutely, back then we viewed ourselves as an ideal new owner of Fortum Distribution from a business perspective. This opportunity would be a perfect match for our existing business, for many reasons. We knew the financial synergies resulting from such a case were attractive. However, we were not ready to buy at any price. It had to represent a financially sound deal. That was a challenge, because we were certain that the sale of the distribution business would attract many suitors – also ones who were requiring lower returns on investment than we were. Therefore, some of the other suitors were not in need of the same synergies as Hafslund.

PA You mentioned the key word “price”, which leads us to your business case. We often experience a tendency to overestimate synergies – compared to what the acquirer is able to realise – and underestimate integration costs – compared to what the acquirer is able to manage when “push come to shove” in the integration phase. Did you perceive this as a real risk for your business case, or did you have good control of these elements?

Kristin We felt our business case was solid and robust. We knew the target’s business and operations fairly well, therefore we had a very good understanding and estimate of concrete synergies. Some would even say that our judgement was conservative. That’s fair, but we wanted to be on the safe side. On the other hand, we were less comfortable with the integration costs and investments. It is a while since we were in a similar situation, so we had to rely on our best judgements and thorough due diligence.

We have been tracking realised synergies compared to our business case since day one. In 2016, we realised NOK 60 mill in annual synergies, which means we are close to two years ahead of our financial benefit realisation plan. This is good news for both the company and our shareholders.

“Through this exercise and the 2,5 years of experience of working as “one company”, I must say that we have learned a lot from our new colleagues, and vice versa. As a company we are much stronger today.”

PA Let’s go back to spring 2014. How did the Fortum organisation react when they first learned that Hafslund would become the new owner?

Kristin I think that the reactions were mixed. On the one hand I believe many of the employees had a positive view of Hafslund as an energy company with good and robust operations and a sound business culture. On the other hand they also knew that we would seek solutions that were in the best interest of the new company and the new organisation as a whole. That inevitably means the biggest changes for the Fortum organisation and the most synergies at the hand of Hafslund.

I believe this has turned out fairly well for all parties after all. A few employees decided to part ways, but since then we have had hardly any leavers. Some have moved closer to the offices at Skøyen, and some are using the benefits of our flexible working arrangements.

PA This sounds more and more as a success story. If you were to reflect on some of the key success criteria or the key management decisions that laid the foundation for this success, what would you emphasise?

Kristin There are several dimensions involved. Firstly, we had strong focus on the potential synergies from the beginning, even before the start of the due diligence process. We knew how we would design the new, integrated organisation – the end-state solution – and we had a clear plan how to do it, even if the details of this plan were filled in as we progressed. Secondly – and most importantly – we knew that integrating two companies is all about people. Therefore, we had to involve many of our employees – both to find the best solutions and to gain support and ownership to these solutions. Good communication and involvement were two very important levers for our success. We as an organisation learned a lot from this work and experience.

PA Our understanding is that you relocated most – if not all – functions and resources to your main office at Skøyen?

Kristin From the beginning – and even during the acquisition process – we were very clear on our design policies for the new integrated company. Those policies meant a centralisation of our functions and resources. Exceptions to this rule were possible, if our efficiency was not adversely impacted and we maintained critical mass with respect to our resources and competencies. We had a thorough process involving all departments were we assessed various alternatives and the associated pros and cons. In the beginning, we kept a few resources in Sarpsborg. Now we have a fully centralised solution.

PA Cultural differences are often mentioned as one of the key barriers for successful integration. Can you share with us your views on this and some of the lessons learned from your case?

Kristin We knew it was important for us to understand the cultural differences. Furthermore, we had to understand how these differences could be managed, and even used to our advantage. Our assessment of the culture differences led to some interesting insights. One way to see this is along the two axis of “relationship” and “structure”. The Fortum organisational culture was predominantly structural, whereas Hafslund tended more towards the axis relationships. In practical terms this means that Fortum had stronger, formal processes with clear responsibility, whereas Hafslund relied more on established relationships in the organisation to solve tasks and problems. Through this exercise and the 2,5 years of experience of working as “one company”, I must say that we have learned a lot from our new colleagues, and vice versa. As a company we are much stronger today.

PA Any barriers you would like to elaborate, and what was the biggest challenge you faced as a company?

Kristin I would say that we didn’t meet any difficult barriers and resistance along the way. We were clear from the start what our intentions were, and we followed the plan. Our employees were involved and played an important part in the integration effort. And we had a very good dialogue and weekly meetings with the various workers’ unions.

Our biggest challenge was probably the timeline associated with the integration of IT-systems. Many systems were involved and we had a few critical milestone ahead of us. If deliverables and milestones were not met, we would have had to adjust the plan and postpone the transition to a common IT-system platform. This would have incurred additional integration costs. We managed to follow the plan, thanks to the fantastic efforts of our organisation, supported by key suppliers.

PA We often hear managers, who have experienced similar challenges with transformation efforts and tight schedules, say that they didn’t underestimate the task and its complexity – they overestimated resource availability, both availability of own resources and external suppliers. Does that resonate with your own experience?

Kristin Absolutely. Our own employees had to deal with both daily operations and a significant integration effort. Our “normal” job did not disappear, and new systems and processes had to be consolidated and implemented. Employees had to familiarise themselves with each other's skills and expertise. The organisation worked a lot during the first year. Did we underestimate the magnitude of the challenge? Maybe, on the resource side of it – we had a few of the “Tordenskjold’s soldiers”.

PA In hindsight, is there anything you would have done differently?

Kristin Nothing that comes to my mind right now. We can’t say that everything went smooth and was perfectly solved, but we are really satisfied with what the organisation has done and what we have achieved together. We sincerely believe that this is the road to follow for many distribution companies in Norway. The economies of scale and the benefits are obvious, through either mergers or acquisitions. It’s difficult to achieve the same results through cooperations and partnerships. We know some believe in this solution, but we don’t.

PA So this is an undivided success story, from start to end?

Kristin Yes, I would say so. It’s been a very positive experience. The financial benefits are clear and tangible. However, the most positive consequence of this acquisition is all the new colleagues we have welcomed to our Hafslund family. We have now a larger pool of competence and experience, and we have gradually improved our existing Hafslund Nett operating model, processes and IT-systems by taking advantage of Fortum Distribution’s experience and practices. Fortum had really good business process knowledge. We have used the best from two worlds – the value from that shouldn’t be underestimated.

PA Shouldn’t this path be followed by many more distribution and even hydro power generation companies?

Kristin The synergies are real and they are significant. One can combine the best from two worlds. Our efficiency and the ability to take better decisions improves. Now we are the owner of both regional and local networks in large parts of Østfold. That gives us the possibility to assess all investment alternatives – replacements, capacity increases, redundancies and so forth – and optimise across all voltage levels and the entire network in our concession area. That’s best for both us as a company and the society as a whole.

We should not forget the ability to strengthen our skill and experience base. Together we become stronger and wiser and the company becomes better positioned to deal with all the technological and regulatory challenges. Without a doubt – size matters.

PA Looking back at the discussions and developments in Norway so far, did you expect the consolidation of the sector to progress faster?

Kristin I believe the whole sector expected this to develop faster. Despite the slow start, I believe all signs indicate that this will happen. It’s clear what the authorities want – all regulatory changes point in the same direction. Low power prices, also for the foreseeable future, put extra pressure on energy companies and owners. Due to this, and other factors, I do not believe we have 140 distribution companies in, let’s say, 10 years. But I expect this will take time, but it will happen and it should. We have an obligation to our customers, to our owners and the society as a whole – savings and efficiencies we generate are equally shared by our customers and our owners.

PA Can you share with us where Hafslund Nett is going from here, what are the future plans?

Kristin Our objective is to grow, also through inorganic growth if the opportunities arise. We also have to manage the significant organic growth in our concession area, approximately 10.000 new customers per year. To become the best possible company for our customers, our employees, our owners and the society as a whole, we have bold ambitions and are currently focusing on four key goals. We want to be the distribution company with the best cost efficiency; the leading company in deploying digital solutions and new technology; the leading knowledge and skill company in the distribution sector; and we want to be pursuing growth opportunities.

Our current performance on many dimensions are good and satisfactory – that also includes the positive feedback we receive from the regulator and other stakeholders. Sound business and network operations have always been our core strength – now we have to build on this to become equally good at developing the future Hafslund Nett.

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