Information Resource Management at Hydro-Quebec

Case Analysis

I. EXECUTIVE SUMMARY

Hydro-Quebec’s self-proclaimed goal is to become a world leader in energy. The company has
achieved significant success thus far, but has reached a crossroad in terms of the direction that it
should head. There are a number of significant issues facing the company, which require
concrete action. First and foremost, the company, in part due to its recent restructuring has left
itself without a central IT Strategy. With the way technology is changing rapidly as it does, lack
of a central strategy is a serious oversight and an example of poor future planning. Furthermore,
Hydro-Quebec is threatened by labor conflicts that further undermine its chances for success.
Adding to these issues is a vague and convoluted IS structure, along with troublesome
compatibility issues. It is important to re-negotiate with labor unions to ensure continued
effectiveness of the company’s workforce. The next step is to restructure IT across the company,
based on the already successful CESSIC model. Finally, critical systems need to be integrated;
and less critical ones as necessary. Implementation of these recommendations will position
Hydro-Quebec to truly become a world leader in energy.

II. OVERVIEW OF COMPANY’S HISTORY AND GROWTH

Hydro-Quebec is a government owned public utility company that was established in 1944. It
produces, transmits and distributes hydroelectricity. Hydro-Quebec operates in Canada as well
as the United States. It is the largest producer and distributor of energy in Canada and one of the
largest producers of hydroelectric power in the world. The company has operated as a monopoly
and has been the only supplier of energy in Quebec until 1997, at which point the U.S. electricity
market was deregulated. One of the key factors that made Hydro-Quebec successful was the
ability to produce and market electricity at extremely competitive prices throughout North
America. However, due to the market deregulation of 1997, reciprocity had to be established
among companies who wanted to sell energy in the U.S. This meant that Hydro-Quebec was no
longer going to be the only supplier of competitive priced electricity in Quebec. Due to these
developments, other companies could capture Hydro-Quebec’s market share. That means
competition for Hydro-Quebec and poses a challenge to remain a market leader in Quebec as
well as the rest of North America. Hydro-Quebec’s goal is to become a world leader in energy.
Senior management was given a challenge to show what Hydro-Quebec stands for in the market.
Like its counterparts in the North American utility industry, Hydro-Quebec was reorganized in
the late 1990s to comply with electricity deregulation in the United States. While still a vertically
integrated company, Hydro-Québec has created separate business units dealing with production,
transmission and distribution. These six autonomous divisions are Hydro-Quebec Production,
Hydro-Quebec TransEnergie, Hydro-Quebec Distribution, Hydro-Quebec Equipment, Hydro-
Quebec Petrole et Gaz, and Hydro-Quebec Technologie et Developpement Industriel. In addition
to corporate restructuring, Hydro-Quebec had to follow the trend in the 1990s and expand
technology and e-commerce in order to maintain their competitive edge and be able to capitalize
on a larger portion of North American market.

Up until the late 90s, Hydro-Quebec did not give priority to technology related projects. The
Applications Development and Maintenance division (DDMA) was in charge of such projects.
Hydro-Quebec business units were quite passive in ensuring that the DDMA knew of their
concerns, issues or recommendations. Such lack of initiative and understanding of Customer
Information Systems (CIS) could have had severe repercussions for Hydro-Quebec. They
potentially could have lost a huge market share. Thanks to the establishment of the Shared
Services Center (SSC) and overall organizational restructuring, Hydro-Quebec finally realized
that it would be beneficial if the business units themselves made technological investment
decisions. Each business unit made scaled decisions to expand their business and the way to do
that was to improve their CIS. SSC was now able to consult all six business units on their own
particular IT projects and investments. In fact they became, Hydro-Quebec’s exclusive IT
consulting services provider. They were now responsible for IT projects, support, budgeting,
development, training and everything else that comes with implementing, improving,
maintaining, and researching new Information Technology. This was just a small step in
implementation of new IT systems. Hydro-Quebec has a long way to go in making sure that all
business units have an overall IT strategy.

III. SWOT ANALYSIS

Strengths:

Hydro-Quebec is perceived among most Canadians as a success story and a source of national
pride. This can be partially attributed to the numerous strengths this company has.

a. The company maintains a relative monopoly in Canada on electricity distribution and

for the most part energy production and transportation as well. This is the strongest,
largest and most recognized utility brand in Canada.

b. The Government of Quebec is the sole shareholder of Hydro-Quebec. This makes it

easier for the company to attain favorable litigation and there is little government
resistance to various projects.

c. Hydro-Quebec has an exclusive agreement with its provider of IT consulting

solutions, the SSC. Thereby the SSC is specialized in IT consulting for one specific
company and will come up with solutions specified to HQ’s needs. In return, Hydro-
Quebec receives high quality services at a reasonable price and does not waste
resources shopping around for IT solutions.

d. With the implementation of SAP’s Customer Information System, Hydro-Quebec no

longer wastes resources on developing in-house programs. They take on no risk on
developing custom software and have no need to hire software developers.

e. Survival of the fittest - after the implementation of SAP systems, most end users that
had little product knowledge and a poor understanding of the business side, were
 ousted from their positions. HQ’s IT staff now consists of experts that understand
both the technical and the business side.

f. HQ’s Technologie et Development Industriel business unit focus’ only on innovation

of energy related technology. This is one of HQ’s main priorities and allows them to
remain a leader in the field of energy production and delivery services.

g. The company is barely affected by fluctuations in the fuel markets since

approximately 97% of power is generated by hydro-electric plants.

h. There are 6 separate business units, responsible for production, distribution,

transportation, equipment, gas delivery and research. Each unit specializes in its
responsibility and therefore has extensive expertise in its respective field.

Weaknesses:

Hydro-Quebec has a sound integrated business model and few weaknesses can be pointed out on
the IT end. There are a few components, which require attention.

a. The 6 separate HQ business units are responsible for making their own decisions
regarding IT investments. This originally aided them in developing a specialized IT
strategy in the 1990’s when no specific strategy existed. However, if each unit had a
central customer information system and standards, it would be easier for them to
share customer data and make decisions based on the company’s central goal of
becoming a world leader in energy.

b. As previously mentioned, HQ relies almost solely on hydroelectric power. In the

event of a global phenomenon and extreme climate change, such as where water
either froze or dried up in Canada, HQ would most likely be out of business. This is
strictly a hypothetical scenario.

Opportunities:

a. With continuously rising oil prices and most predictions that prices will continue to
rise, hydroelectric power becomes a very attractive alternative. HQ’s continuous
research and innovation in the field of clean energy may make them one of the world
leaders in energy production and consulting services.
 b. With the election of Barak Obama as president of the United States and his focus on
renewable energy, greenhouse gasses and electric vehicles, or “Going Green”, HQ
should look to sign long-term energy export contracts with the United States.

c. With recent innovations in wind turbine technology, HQ is looking to invest more

heavily in new wind farms.

d. With the newly implemented Customer Information Systems and the shift to a
customer service oriented culture, HQ can look towards thorough customer data
analysis in order to improve their customer outreach via complex retention and
marketing strategies.

Threats:

a. After the deregulation of the energy markets in the 1990’s, Hydro-Quebec had to
open its market to American operators, ending its full monopoly in Quebec and
therefore decreasing its market share in the industry.

b. Nuclear power has been an increasing trend throughout the 80’s and 90’s in Canada.
Ontario Power Generation and Bruce Power in Ontario, the Canadian leaders in
nuclear energy, have built 3 new plants in the last 20 years and are planning to build 2
more this decade. Hydro-Quebec currently only has one nuclear reactor. This will
further diminish HQ’s overall energy generation ratio in respect to other companies in
Canada.

c. Climate change prediction scenarios for the next 70 years indicate that the water flow
in Canada will increase drastically during the winter and spring seasons and decrease
drastically in the summer. HQ predicts that if no changes are made to operating
systems in their power plants, electricity output will decrease by 4-25% throughout
all plants.

IV. ORGANIZATION’S ENVIRONMENT

After Hydro-Quebec instituted structural organizational changes, the HQD division was ready
for a challenging overall information systems upgrade. This upgrade was necessary to retain a
competitive advantage and promote market growth in efficient energy deliver to the existing and
future consumers. An impactful strategic plan was devised to first be executed as a planning
exercise by Ghislaine Larocque, the newly appointed Vice President of Sales and Customer
Service. In September of 1999 this strategic exercise resulted in a new “E-commerce and
Customer Information Systems” unit. Key players in this project:

Customer Information Systems (CIS) Organization Chart

Yves Legris - Director

Karl Malenfant Lorraine Mayer Michel Gevry

Head of Development and Head of IT Cap Gemini Representative
Implementation

These key players were responsible for the modernization of HQD business processes as well as
the implementation and structure of the CIS project.

Hydro-Quebec Distribution (HQD) – this division is responsible for distributing electricity to

over 3.5 million Quebec customers. Customer service was a key factor in such distribution that
needed significant technological innovation and support to continue capturing market share. Yet,
the technological innovations to assist customers in a more efficient fashion were non-existent.
Each year HQD spent $50 million on more than 200 IT systems. This was a waste of funds since
there was no clear strategy and no overall system’s plan. The management team had no idea
what the current IT strategy looked like and how it would benefit HQD. HQD established a new
decision-making unit that was assigned to manage customer relations. This was a breakthrough
that Hydro-Quebec needed to finally pursue technological advances and market competition. The
first challenge for the team was to develop modernized customer software applications. There
were several options available to address the issue of old legacy systems that were no longer
adequate to run efficient business in the e-commerce world. HQD’s senior management decided
to abandon the old legacy systems due to costs and risks involved. A decision was made for best-
of suite approach. The fault here lies in the management and prior structure of the company not
realizing the consulting value SSC could bring to the CIS project. The next step was to figure out
how and who would implement the new CIS program that would give an overall competitive
edge as well as provide best customer service. Even though there was a structured planned to
eliminate legacy systems, there was no clear plan for human capital at hand. This results in the
first problem:

Problem #1: Labor conflict due to changing job roles

Overall HQD division failed to properly organize their HR transition. It seems that this division
was overwhelmed with outmost important tasks on how to maintain and preserve human capital.
Hydro-Quebec should have had a clearly defined HR strategy. Head of IT Lorraine Mayer
should have worked closely with the VP of Human Resources and Shared Services. The only
mentioned attempt to retain employees was training and attentive coaching strategy. What about
transitional training for staff and understanding of where the company was headed and what the
expectations where? Companies create a competitive edge by ensuring they have the best of the
best working for them. There were many old time programmers at Hydro-Quebec and clear and
outlined training and development programs could have been advantageous in the long run.
Hydro-Quebec could have preserved talent and shouldn’t have just accepted that some
employees “fell by the wayside”.

Hydro-Quebec changed job requirements (i.e.: transitioning from IT Architects to Application

Specialists) and that will lead to significant turnover and dissatisfaction within CIS employees.
Significant support for transition was already provided through Cap Gemini consultants, so that
employees who remain unable to adapt will likely need to be fired. Management should have
bared in mind that the company’s labor is unionized, and poor handling of transition could lead
to job action. Here are some alternatives:

Alternative 1A: Renegotiation

• Advantage: Union relations have been friendly, and labor likely to respond constructively
to collaborative approach
• Advantage: Union agreement already includes a contingency for job loss due to
technological change
• Disadvantage: Negotiation process is time consuming; may delay schedule
• Disadvantage: Factors other than job effectiveness, such as seniority, may need to enter
the considerations due to union involvement

Alternative 1B: Exclude Union from workforce turnover decisions

• Advantage: Employment decisions could be made purely on the basis of management
 goals
• Disadvantage: Deterioration of union relations could have a severe negative impact on
the company, including low morale, job action and strikes
• Disadvantage: Risk of alienating workforce, leading to brain drain of valuable
employees
• 1a and 1b are non-compatible

Alternative 1C: Reassign a portion of IT Architects to the other business units of Hydro
Quebec
• Advantage: Decrease in blow to morale
• Advantage: Amelioration of job loss would diffuse potential Union tension
• Advantage: Allows retention of knowledgeable staff by allocating them to business units
where IT Architects are still needed
• Disadvantage: Employee skills may not be transferable in the setting of other business
units

• Disadvantage: Influx of IT Architects may cause redundancies in other business units

• Disadvantage: May not be using resources efficiently

Problem #2: Lack of a central IT strategy at Hydro-Quebec

We feel this is the most significant shortcoming currently facing Hydro-Quebec, due to the
extensive risks associated with not having overall IT strategy. Currently there is no unified IT
Strategy across Hydro-Quebec’s 6 divisions. Each business unit is responsible for developing it’s
own strategy. This may be in the best interest of that Business Unit, however, collectively may
not be the best approach for Hydro-Quebec. These strategies are developed independently
without regard or consideration of any impact to the company as a whole. The longer these two
diverge, the greater the exposure for them to go in separate directions, which can lead to
redundancies, inefficiencies, and missed opportunities. For instance, technological innovation or
new software that may beneficial when applied to the entire organization, may be overlooked by
individual Business Units.

Alternative 2A: Business Units Retain Strategy Control

Allow each of the separate units to develop their own IT strategies with a continued focus on
their own goals.

• Advantages: Leaders of each unit likely want control and will favor this approach
• Advantages: Each Unit may have a better understanding of what strategy will work for its
 own goals
• Disadvantages: Risk of integration issues between disparate systems chose by each
business unit
• Disadvantages: Danger of creating “information silos” within each Business Unit.
Proficiencies and knowledge gained in one area is not shared with others.

Alternative 2B: Hydro-Quebec Takes Control of IT Strategy

Mutually exclusive to Alternative 1

Hydro-Quebec can set and define the strategies for each Business Unit according in alignment
with its own.

• Advantages: Ensure that the strategies of each Business Unit benefit not only that unit,
but the company as a whole
• Advantages: Ability to recognize and implement new software and technologies that
when employed to the entire company can result in savings
• Advantages: Improved interconnectivity between different Business Units to ensure
better cooperation between them
• Disadvantages: Business Units may resist this move if they want to keep control
• Disadvantages: Resistance can further exacerbate existing cultural issues

Alternative 2C: Shared IT Strategy between Hydro-Quebec and each Division

This is a hybrid of Alternatives 1 and 2

Calling on members from with each division, along with Hydro-Quebec senior IT staff, a
cooperative approach to defining strategies for the overall company and each Business Unit can
be used.
• Advantages: Across the board cooperation will result in strategies that are best for
everyone
• Advantages: Knowledge is shared between Hydro-Quebec and all 6 divisions
• Advantages: This is likely satisfy to the desires of all parties involved
• Disadvantages: Some divisions may not be genuinely concerned with or invested in the
overall company if they are overly focused on their own agendas

Problem #3: Hydro-Quebec’s reliance on Climate

97% of electricity generated by Hydro-Quebec is derived from as their name suggests,
hydropower. This fact naturally carries with it, much benefit. However, the weather and climate
even in this day and age remain unpredictable. For instance, weather extreme events such as the
Saguenay flood of 1996 or the Canadian Ice Storm of 1998 have caused over $2 billion worth of
damage. Due to the unpredictable nature of the hydrological regime, Hydro-Quebec has seen 31
annul energy production deficits and 30 annual surpluses from 1943-2005. Extreme climate
change in long run is even more difficult to prevent. In a very hypothetical and yet plausible
situation, if within a 100-200 years most of Canada were to dry up or freeze over, Hydro-Quebec
would be out of business. Thanks to recent breakthroughs in climate modeling, HQ has been able
to predict that within the next 70 years, water flow in Canada will increase by 1-14% throughout
different regions in Canada. They also predict that flow will increase drastically during the
winter and spring seasons and decrease drastically in the summer on an annual basis. HQ
predicts that if no changes are made to operating systems in their power plants, electricity output
will decrease by 4-25% throughout all plants.

Alternative 3A: Build Nuclear Reactors

Currently HQ only had one nuclear power plant. Investing in several more will decrease their
reliance on hydroelectric power.

• Advantages: Hedges against variations in climate. Nuclear power would be generated

without dependency on the weather
• Advantages: Hydro-electric retains their image as a provider of “clean” energy since
nuclear plants produce a 100 times less radiation that coal and oil burning plants and
practically no air pollution
• Disadvantages: Heavy initial costs for a project of this magnitude
• Disadvantages: Possibility of a reactor meltdown carries extreme environmental,
financial and public relations repercussions

Alternative 3B: Improve efficiency and adaptability of current hydro-electric plants

Hydro-Quebec can implement non-structural changes such as improved energy consumption

awareness programs during times of power deficits; invest more heavily in hydrological
forecasting tools and develop better methods of evaluating projects and finding new ways of
operating them under modified climatic conditions. They can also make structural
improvements, such as adding and upgrading generator turbines; diverting more tributaries to
their plants; creating new reservoirs; increasing spillway capacity; adding more gates to free
spillways; upgrading electrical components such as transmission lines, generators and
transformers.
• Advantages: Improves the predictability of the climate and the ability to operate more
efficiently and adaptively under changing climate conditions
• Advantages: No social, environmental or political ramifications
• Disadvantages: Initial costs for implementation of new equipment, landscaping and staff
training
 • Disadvantages: Even with better efficiency and adaptability to weather change, the
company still remains heavily dependent on weather conditions

Alternative 3C: Continue operating as is

Hydro-Quebec has the option to not invest in any new projects of such magnitude as the ones
mentioned in alternatives 3A and 3B. In cases of energy deficit, they will continue to import
energy from nearby competitors that generate non-hydro energy.
• Advantages: No upfront costs
• Disadvantages: Continued reliance on outside energy during times of production deficit
• Disadvantages: Hydro-Quebec remains predisposed to climate change risk

V. CONCLUSION AND RECOMMENDATIONS

Throughout the last two decades, Hydro-Quebec has faced multiple problems. One of its biggest
threats was the deregulation of the U.S. energy markets and its lack of an IT strategy and focus.
In order to remain competitive they had to restructure their business architecture; form an
exclusive agreement with the SSC; remove legacy systems and transition to a client services
oriented culture. These key changes allowed HQ to remain the largest producer and supplier of
energy in Canada and a model proponent of clean and renewable throughout North America.
However, certain issues remain that are a threat to Hydro-Quebec and its goal. These issues are
the lack of a central IT strategy; labor conflicts due to changing job roles and Hydro-Quebec’s
current in ability to adapt to forecasted climate changes. In order to adapt and overcome these
weaknesses, the following recommendations must be taken into account and implemented:

Recommendation 1

• Build a consensus with Union regarding changing labor requirements within the company
Friendly Union relations and existing clause regarding technological change make
favorable outcome of negotiations very likely.
• Union participation in transition will improve perception and support for CIS led
changes.
• It will also insure against potential job action, a very real threat as Quebec laws uphold a
high standard of collective bargaining rights.

Recommendation 2
• Develop a sound and efficient IT structure that will not prohibit the business units
from carrying out its core competency.
• Model IT structure for all units after the relationship between SSC and HQD (CESSIC).
• Perform testing and analysis on the degree to which each business unit requires its
 own IT department.
• Create a restructuring team made up of CESSIC and SSC employees that worked on
the CIS project.
• Consider rehiring Cap-Gemini consultants to develop IT departments in all business
groups alongside the CESSIC and SSC employees.
• Begin development of each unit’s IT department based on the results from earlier analysis.

Recommendation 3
• Institute structural and non-structural changes from alternative 3B.
• Utilities that produce non-hydro energy have a competitive advantage over HQ in that
field due to their specialization in other forms of energy production. In times of energy
generation deficit due to decreased water flow, it will cost Hydro-Quebec less if they are
to continue importing non-hydro energy as opposed to producing it themselves.

Hydro-Quebec is still the leader in energy throughout Canada. However,

once the above mentioned solutions are implemented, they will position
themselves to remain as such in the long run and compete for market share
as a world leader in renewable energy.