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How to strengthen Open Innovation between utilities and SMEs?

Aligning utilities and SMEs to create value can guarantee the upscale of open-innovation.

The painful yet epic split

Whether you call it "a dance with the elephants" or open-innovation, the future of energy and water utilities is increasingly inspired by innovative SMEs.

In order to address their market challenges, be more competitive or improve productivity, corporates need to innovate, to adopt new trends in technologies. SMEs have a proven track record of quickly responding to them so they are a natural partner for large companies.

Working with SMEs though, takes innovation, R&D and asset management teams out of their comfort zone as they need to be more creative, flexible and to adapt to new entrepreneurial practices, pace and business models e.g. OPEX versus APEX.

On the other hand, SMEs seem to easily win proof-of-concept pilot projects with the energy and water utilities. Demonstrating commercial viability across one or several enterprise functions and, as a result, “upscaling” seems to be a lot more challenging as most pilots do not convert into sales opportunities. For SMEs, it feels like doing the split between two worlds that do not operate in the same way.

Adopting a financially quantified value proposition methodology is a proven way to align Corporates and SMEs, ensuring a long-term relationship.

Why should SMEs focus on value creation?

Caption: Not everyone likes Norwegian buns. I do! (Image rights: Agily3 Ltd)

First, let’s state the obvious: it's not companies but utilities’ decision-makers who buy products and services. They have to collectively evaluate the benefits derived from the features and to agree on the purchase.  How those people understand the concept of “value” – which includes price - may vary depending on their role in the company.

Your target decision-maker might, like me, love (or not) Norwegian buns, devour them upon purchase or bring them home to the kids. Understanding your customer profile and preferences as well as the benefits sought from your product or service is critical.

With a robust value proposition analysis, Procurement Managers evaluate better offers from suppliers, not only in monetary terms.

On the seller side, developing a good value proposition is not a new marketing concept yet only 5% of all companies have developed a quantified value proposition (Mc Kinsey). Will you overlook an opportunity differentiate from competitors?

Most companies face difficulties when developing quantified value propositions though and when trying to use the concept of value propositions profitably (Prof McDonald, Grant Oliver).

There are 3 ways in which monetary value can be created:

  1. By delivering value such as revenue gain, productivity increase, speed of operations or delivery, etc.
  2. Reducing cost or risk materialising
  3. Avoiding cost or risk materialising.

For the past 20 years, Cranfield Best Practice Research Club has been monitoring how the customer buys: the procurement methods, “must-have” vendor selection criteria of B2B companies and the procurement professionals purchasing matrix to name a few.

This research was the origin of the Financially Quantified Value Propositions methodology – e.g. utilities,  an innovation in marketing. Applied to B2B Sales and used in combination with Key Account Marketing, the new approach helps vendors achieve the following benefits:

  • Close more deals, between 2% and 10%
  • Reduce discounting by up to 30% and win bigger deals, up to 30%
  • Improve marketing campaign effectiveness
  • Develop lasting relationships.

5 steps towards customer value creation

Like all Corporates, large utilities buy on well-documented business cases addressing the Corporate objectives. Unfortunately, most SMEs do not disclose how their innovation creates value for their customers, or do it at a stage when it is too late.

Ideally, this is what they should do – and be able to do - up front and before investing into a pilot:

  1. Define the target market they are in. Check the utility strategic objectives.
  2. Identify the buying process and decision makers.
  3. Understand who will most benefit from the innovation? and how?
  4. Discover the decision makers’ needs and how do they define and measure value.
  5. Assess how each decision maker measures value: in € or £ saved, in time, in revenue generated or else.

How can utilities help startups understand their needs?

Times are changing and I noticed a lot of efforts from utilities, smaller SMEs and the regulators to foster innovation across the value chain, to be fully aligned on benefits and outcomes much earlier in the innovation process.

To ensure that a larger proportion of pilots will upscale, utilities could consider a number of activities:

  • Highlight upfront how the project connects with the corporate objectives and the derived innovation requirements.
  • Early in the process pinpoint: the decision making process, the decision makers are – inside or outside the company* -, who will benefit most, the problem they wish to resolve, the value sought and how it will measured?
  • Map the innovation stage-gates but also the further procurement processes.
  • Highlight SME-friendly measures.
  • Propose solutions for SMEs to participate in large tenders and perhaps facilitate some sort of matchmaking with mid-size companies who are incumbent suppliers of products and services.
  • Clarify who owns the intellectual property (IP) derived from the pilots.
  • Confirm if and how you can work with the SME business model e.g. Software as a Service (SaaS) focusing on “access” over “ownership”. A phenomenon currently trending in business (Subscribed, Tien Tzuo).

In addition, to double the benefits from value propositions, consider using the approach of “Customer Immersion”; it's one of the corporate game-changers recently highlighted by NESTA and Mind the Bridge as one of five European open-innovation mechanisms. Customer immersion helps not only startups test, improve and promote their product or value proposition but also Corporates understand what customers value is.

Finally, understanding how far an SME progressed with their enterprise journey is critical, since a contract will have a huge impact on their cash flow and operations. It is essential to anticipate the growth needs and to manage expectations:

  • Who is your partner? A startup looking for a pilot to prove its technical concept, a small business seeking a big project to prove its commercial concept and win a Corporate reference, an SME upscaling or a well-established business with regular revenue streams?
  • Does it need funding as well as revenue?
  • Is business support required?
  • What else is required to support the enterprise growth?

Utilities and SMEs have many reasons to rally around the concept of quantified value propositions since it will accelerate the innovation process: pilots will more easily hop the innovation gates and cross the go-to-market chasm to deliver solutions to strategic challenges across several functions or business units (BUs) of the enterprise. Ultimately, focusing on value will also secure lasting corporate and startup collaboration.

About the author

Virginie Vinel MCIM helps energy and water utilities as well as semiconductor corporates and SMEs in their supply chain transform to achieve higher performance. Since 2016 she is a Board Director of the UK Future Water Association and an innovation coach for the European Commission Horizon2020 SME Instrument programme as well as Scottish Enterprise, sharing her 25-year practitioner's and Director experience on both sides of the innovation chasm. To date, she has coached or advised more than 50 small businesses and mid-size businesses to build go-to-market strategies backed by strong value propositions and bridge the gap between the corporate and small business world.

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Virginie Vinel