“WE CAN DO IT BETTER”
Periodically, I’ll hear asset owners say they plan on building out their own solar field service business unit. This means they’ll perform not only asset and operations management, but also do the field service work themselves. If I ask them why, they’ll say they can do it better than the alternatives in the marketplace.
When I hear this, my first question is always: “How do you define ‘better’?” Better in business usually means faster, cheaper or better quality. Does self-performing O&M really result in faster, cheaper or better solar O&M?
Let’s look at the potential benefits and drawbacks of self-performing solar field service work to see if there’s a good rationale for solar O&M vertical integration.
A VERTICALLY INTEGRATED O&M MODEL
Vertical integration is a structure in which a company owns the supply chain for its product.
In the case of solar O&M, the asset owner could own the asset management, operations management and field service management functions of their business. This means that they have direct management control of the aforementioned functions, including badged employees who perform all tasks.
BENEFITS OF VERTICAL INTEGRATION:
- Independence from suppliers: Needless to say, if you are in-sourcing services that suppliers can provide, you are somewhat insulated from the price swings and unpredictability that they bring to your business.
- Economies of scale: Scale economies can generate significant cost benefits for a vertically integrated owner.
- Better cost control: Like supplier independence, if you can make something cheaper than alternatives in the marketplace, you may be able to better control your final finished product costs.
- Improved product knowledge: Arguably the most important aspect of solar O&M vertical integration is becoming the subject matter expert on how to optimally operate and maintain your portfolio of assets.
DRAWBACKS OF VERTICAL INTEGRATION:
- Costly to set up: The time, money and know-how of developing the people, business processes and infrastructure for a national or global solar O&M supply chain should not be underestimated.
- Difficult to manage: Being good at all things not only costs a lot of money to set up, it tends to erode specialization, which ironically, is likely the thing that got you started in the business in the first place.
- Rigidity to market trends: When you have made the investment to outfit every field service tech with an IR gun, its hard to turn on a dime and outsource thermal imagery to a drone service provider even when it is obvious their cost-of-service is well below what you can do it for.
A HYBRID O&M MODEL
In the modern service economy, perhaps a better model than an all in-source or all out-source model is a hybrid O&M business model.
The hybrid business model attempts to take the advantages of vertical integration and out-sourcing to tailor the right service delivery model for your company.
The hybrid business model attempts to take the advantages of vertical integration and out-sourcing to tailor the right service delivery model for your company. As a result, a hybrid business model may not look the same for any two organizations.
For example, if your organization has significant performance engineering and analytical strength, you may want to perform this critical function in-house.
On the other hand, if you don’t have deep technical capability inside your organization, it may be better to out-source a portion of this “human-in-the-loop” service to software vendors that provide this as a bolt-on to their software platform.
BENEFITS OF A HYBRID MODEL
The hybrid business model allows you to tailor your service delivery model based on your company’s unique strengths, weaknesses, culture and maturity level to deliver the best O&M for your solar portfolio.
The hybrid business model also allows you to exercise a high degree of flexibility by taking advantage of rapid changes in the marketplace and leveraging vendor partners who are aligned with your business goals.
Finally, a hybrid business model allows you to quickly change out a component of the value chain that is not performing in your best interest without killing the organization in the process.
POTENTIAL PITFALLS OF A HYBRID MODEL
While there are many benefits to a hybrid O&M model, setting up and managing a hybrid O&M business model is not easy. Partner agreements must be well-aligned so the contractor is intrinsically motivated to act in the owner’s best interest.
In a hybrid O&M business model, it’s more about good contractor management and less about owning every link in the value chain.
In a hybrid solar O&M business model, it’s more about good contractor management and less about owning every link in the value chain. To be successful, a hybrid O&M model requires real-time visibility into the operational performance of every asset and transparency between the partners.
Nevertheless, in my experience, a hybrid business model is the best available model for optimizing the long-term performance of a solar portfolio of assets.
SUMMARY
Today’s service economy allows even small- and medium-sized organizations to leverage partnership scale economies that were unavailable even a decade ago.
A hybrid O&M business model allows asset owners to plug the right service partner into their supply chain to assemble the best overall O&M results. Faster, cheaper and best quality.
Steve Hanawalt is a founder and executive vice president at Power Factors.
