1. Energy and Utilities Industry Perspective May 2010 IBM Institute for Business Value

3. In this largest known sample of face-to-face CEO interviews, we spoke with over 1,500 CEOs and public sector leaders, 60 in E&U The study represents organizations in 60 countries and 33 industries Note: The CEO response sample has been weighted based on 2008 Actual Regional GDP of the IMF World Economic Outlook, October 2009; Growth Markets include Latin America, Asia Pacific (excluding Japan), Middle East and Africa 13% Communications 25% Distribution 18% Financial Services 24% Industrial 20% Public 25% Growth markets* 21% North America 42% Europe 12% Japan Sectors Regions

6. E&U is strongly differentiated from most other industries on many of the CEO Study factors... Identified environmental issues as a top external factor in the next three years View sustainability as a top factor impacting the business in the next 5 years Expect bigger government and heavier regulation in the next five years Focusing on increasing the share of variable cost in the business Placing emphasis on simplifying products and operations Focusing on quick decisions vs. thorough decision processes Identified globalization as a top external factor in the next three years Views on the future: E&U CEOs vs. All Participants 92% 70% 48% 29% 32% 18% 21% 68% 59% 95% 23% 3% All Participants E&U E&U Rank* 1 1 1 19 19 20 20 * of 20 major industries in 2010 CEO Study 62% 34%

7. ... but in 2010, we have begun to see some convergence toward more common cross-industry expectations Believe that people skills and talent shortages will need focus in the next five years View increases in complexity and uncertainty as likely See industry transformation as a driving factor in shaping the business over the next five years Expect an “information explosion” to transform the industry Believe technological change will be a top external factor in the next three years Balance top-down communication with viral communication in the organization All Participants E&U 79% 74% 62% 66% 61% 59% Views on the future: Energy and Utilities CEOs vs. All Participants 39% 38% 39% 33% 81% 88%

8. Market, technological, and macroeconomic forces are the key external factor for CEOs across all industries… Three most important ‘external’ forces over the next three years for all CEOs

9. … but E&U CEOs see the world in a markedly different way, with environmental and regulatory concerns far outdistancing the others Three most important ‘external’ forces over the next three years All Participants E&U 56% 28% 39% 38% 38% 38% 37% 25% 35% 63% 23% 3% 21% 68% 19% 12% 9% 8%

11. The vast majority of CEOs, including those in E&U, perceive the New Economic Environment as distinctly different More volatile Deeper/faster cycles, more risk More uncertain Less predictable More complex Multi-faceted, interconnected Structurally different Sustained change 18% 13 69% 21% 14% 65% 22% 18% 60% 21% 26% 53% The New Economic Environment All Participants 22% 12 66% 17% 17% 66% 22% 13% 65% 20% 28% 52% Energy and Utilities Not at all/to a limited extent To a large/very large extent To some extent ““ We are entering an era of ten to twenty years of new significant investment. There is opportunity and uncertainty that we have not seen before.” Utility President, United States

12. Sustainability concerns will affect almost all E&U companies; two-thirds of E&U CEOs also expect substantial industry transformation 62% 61% 59% Industry transformation 58% Information explosion Sustainability Shorter time cycles Talent shortages Factors impacting your organization to a large extent over the next five years Insights from the IBM Global CEO Study 2010 58% Shifts between mature and rapidly developing markets Shift between public and private boundaries Shift between global and local markets Scarcity of natural resources 50% 38% 36% 29% 66% 59% 95% 44% 47% 25% 47% 16% 57% All Participants E&U

13. A strong majority of CEOs are working with high complexity – and that complexity is expected to become even more pronounced 79% Expect high/very high level of complexity over the next 5 years 60% Currently experiencing high/very high level of complexity Experienced and expected level of complexity 74% Expect high/very high level of complexity over the next 5 years 65% Currently experiencing high/very high level of complexity 14 % more All Participants Energy and Utilities 32 % more

14. CEOs are now challenged to close the complexity gap and use complexity to their advantage 79% 49% Expect high/very high level of complexity over 5 years Feel prepared for expected complexity 30 % Complexity gap* Expected level of complexity and preparedness to handle All Participants 74% 50% Expect high/very high level of complexity over 5 years Feel prepared for expected complexity 24 % Complexity gap* Energy and Utilities * Complexity gap = difference between expected complexity and the extent to which CEOs feel prepared to manage complexity “ Ten years ago it was easier to predict what the next ten years would be like...the rules have changed. The rate of change adds to the complexity -- we have a harder time seeing the future..” Utility CEO, United States

15. Complexity challenges are compounded by regional differences CEOs in North America expect “big government” and more regulation North America EU China Japan 87% 70% 53% 50% 61% China Japan EU North America 42% 33% 33% CEOs in China see “global thinking” as a top leadership quality Japan North America China EU 74% 49% 48% 43% CEOs in Japan are most impacted by the shift in economic power to growth markets EU North America Japan China 45% 58% 71% 78% CEOs in the European Union are least impacted by talent shortage

17. We identified Standout organizations that delivered superior performance over both the long term and recent short term Long-term, steady-state performance Short-term, crisis performance Performance Analysis Framework Top 50 percent Long-term Performance 4 Year Operating margin CAGR (2H03/1H04 – 2H07/1H08) Short-term Performance 1 Year Operating Margin Growth Rate (2H07/1H08 - 2H08/1H09) Standouts Top 50 percent

18. Even in the challenging 2008-2009 period, Standouts grew revenue as well as operating margin 5% 0% -5% -10% -15% 5% 10% Others Overall Standouts Revenue CAGR Operating Margin CAGR 5% 0% -5% -10% -15% 5% 10% Others Overall Standouts Revenue Growth Operating Margin Growth 10% 10% Long term performance (4 year: 2H’03/1H’04 – 2H’07/1H’08) Short term performance (1 Year: 2H’07/1H’08 - 2H’08/1H’09) 15% 15% Note: Long-term Performance: 4 year operating margin and revenue CAGR (2H03/1H04 – 2H07/1H08); Short-term performance: 1 year operating margin and revenue growth rate (2H07/1H08 - 2H08/1H09);

19. Standouts are also better prepared to manage the expected complexity Complexity gap* Note: Long-term performance: 4 year operating margin CAGR (2H03/1H04 – 2H07/1H08); Short-term performance: 1 year operating margin growth rate (2H07/1H08 - 2H08/1H09) “ Climate change and renewable energy are complex issues that we will have to manage.” Utility CEO, United States * Complexity gap = difference between expected complexity and the extent to which CEOs feel prepared to manage complexity Long-term, steady-state performance Short-term, crisis performance Top 50 percent Standouts 22 % Gap 6 % Gap 52 % Gap 35 % Gap Top 50 percent

22. CEOs stress the importance of integrity, change, and creativity Which are the most important leadership qualities over the next three years? Change Creativity Integrity “ So many other things fail when integrity gets out of whack. ” Utility CEO, United States “ Technology, especially with the implementation of Smart Meter and Smart Grid components will radically change how we operate, generate significantly more information, and change the way customers use and consume electricity. ” Utility CEO, United States “ We need to be flexible, not sticking to traditional ways of thinking. Creativity and proactive discussion are required. ” Utility Executive Director, Japan

23. E&U CEOs see creativity and influence as critical leadership qualities that must be guided by strong ethical principles to ensure success 60% 52% 35% Creativity Integrity Global thinking Top three leadership qualities over the next five years All Participants Energy and Utilities 47% 63% 43% Creativity Integrity Influence “ Authority has to be earned through trust and trust comes from integrity and openness. ” Utility CEO, United States “ We need to be flexible, not sticking to traditional ways of thinking. Creativity and proactive discussion are required. ” Utility Executive Director, Japan “ Influence is critical in a regulated environment with a heavy national/political agenda. ” Utility CEO, Europe

25. Creative leaders are more prepared to break with the status quo of industry, enterprise, and revenue models Deep dive analysis: CEOs that selected ‘creativity’ as a crucial leadership quality Innovation as crucial capability 81 % more ... And they are more likely to pursue all types of business model change Creative leaders rate innovation more highly as crucial capability... 60% 52% 15 % more Enterprise model 57% 52% 10 % more Industry model 54% 45% 20 % more Revenue model 38% 21% Creatives “ In the next five years, innovation will radically change how we run our business more than anything else.” Utility General Manager, United States Others Creatives Others Creatives Others Creatives Others

26. E&U leaders are moving forward with leadership styles and balanced communication approaches embraced by Standouts 13% 8% 79% 25% 17% 58% Continuous change Ad-hoc initiatives Persuade and influence Command and control 28% 33% 38% (Managed) viral communication Top-down communication Standouts realizing rapid change over the next five years 13% 5% 82% Continuous change Ad-hoc initiatives 18% 12% 70% Persuade and influence Command and control 38% 28% 34% (Managed) viral communication Top-down communication Standouts E&U Standouts Standouts E&U E&U

27. E&U CEOs rely more on thorough decisions than quick decisions, unlike CEOs in many other industries… “ While timely and thorough decision making is important, optionality is a key to success for us in the past. This strategy may be slower paced, but it is a winning strategy for us.” Utility General Manager, United States Ways to achieve rapid change over next five years: Decision Making 42% 25% 33% Total Sample 45% 37% 18% E&U Thorough decisions Quick Decisions Both

28. ...but those who value creativity as a top leadership trait are as likely to favor thorough decisions as those who do not Preference for thorough decisions among Energy and Utilities CEOs 36% E&U CEOs valuing creativity more highly* 38% E&U CEOs valuing creativity less highly * More highly = in top three of leadership qualities important for the next five years

31. ‘ Getting closer to the customer’ is a priority for firms across all industries – and even more important for Standouts 83% Others Overall Others and E&U vs. Overall Standouts Getting closer to the customer 72% E&U 95% Standouts “ Our customers have an unusually high technology adoption rate; we are sharing more power and heating information directly to clients using Facebook and Twitter. ” Utility CEO, United States “ To surprise customers requires unexpected ideas through interactions of people with diverse perspectives. ” Shukuo Ishikawa President and CEO, Representative Director, NAMCO BANDAI Holdings, Inc., Japan

32. This will become critical for E&U companies as the nature of value exchanged between providers and customers becomes more complex Traditional Industry Value Model Sources: Valocchi, Michael, John Juliano and Allan Schurr. “Switching perspectives: Creating new business models for a changing world of energy.” IBM Institute for Business Value. 2010; Jansen, W., W. Steenbakkers, and H. Jagers, New Business Models for the Knowledge Economy , Gower Publishing, 2007. Emerging Industry Value Model At the same time customers are becoming more demanding, they actually have much more to offer in reciprocal value to energy and other product/service providers.

33. CEOs want to better understand customer needs, offer new services, and collaborate more; those in E&U also focus strongly on social responsibility 82% Better understanding of needs 70% New or different services 69% More collaboration, info sharing 61% New or different products 51% New or different channels 46% Increased focus on social responsibility All Participants E&U CEOs’ view of where customer expectations will change to a large extent 81% 63% 64% 39% 39% 58% “ Customers will be more and more concerned and demanding about the whole product value chain, especially regarding environmental impact.” Utility CEO, Europe

34. To stay in lockstep with customers, Standouts maintain a better understanding of preferred channels and price-value trade offs 42% Others 58% Standouts Focus on price-value equation 38 % 45% Others 51% Standouts Use of new or different channels 13 % 39% E&U 51% Standouts 31 % Overall Others vs. Standouts E&U vs. Overall Standouts Overall Others vs. Standouts E&U vs. Overall Standouts 42% E&U 58% Standouts 38 % more more more more

35. Customer-centric CEOs intend to exploit the information explosion to better understand and serve customers 49% Other CEOs 63% Customer focused CEOs Impact on organization of information explosion 29 % more 66% Other CEOs 78% More focus on insight and intelligence to realize strategy 18 % more Customer focused CEOs Deep dive analysis: CEOs that scored high or very high on ‘getting closer to the customer’ ... to generate insight and intelligence Customer focused CEOs use data... “ … but those efforts are limited yet, and we need further action for this to generate needs from seeds. ” Utility Executive Director, Japan “ We analyze Voice of the Customer data collected at customer centers in order to properly understand consumer needs… ”

38. Revenue from new sources will emerge from new business models; three elements of dexterity will be required to leverage them 30% 25% Next 5 years Revenue generated from new sources “ For new sources of revenue and value… be inspired, viral, and decentralized.” Utility CEO, Europe Deep dive analysis: CEOs that selected ‘iterative strategies, quick decisions and execute with speed’ 20 % more 20% 15% Last 5 years 33 % more Dexterous CEOs Others Dexterous CEOs Others

39. E&U CEOs already are near Standout levels of performance in their reliance on an iterative approach to strategy... Ways to achieve rapid change over next five years: Iterative Strategy Processes 64% Others 74% Standouts 16 % Overall Others vs. Standouts Energy and Utilities vs. Overall Standouts 69% E&U 74% Standouts 7 % more more

40. … and their speed of execution of these strategies 39% Others 45% Standouts 16 % more Most crucial capabilities for execution success over the next 5 years: Execution Speed “ The aim is adaptability, the tool is execution speed. ” Dr. Faruk Yarman General Manager, Havelsan, Turkey E&U Standouts 10 % more 41% 45% “ Leaders are seeing the changes - however, the personnel have not yet incorporated them. The speed of changes must still be increased. ” Utility CEO, Europe Overall Others vs. Standouts Energy and Utilities vs. Standouts

41. However, a shift toward faster decision making – another trait of Standout organizations – will need to occur “ The consequences of making bad decisions last for a very long time. We have to be very risk averse -- but the world is speeding up, so we have to make faster, thorough decisions.” Utility CEO, United States Ways to achieve rapid change over next five years: Decision Making 28% Others 43% Standouts 54 % Overall Others vs. Standouts Energy and Utilities vs. Overall Standouts 18% E&U 43% Standouts 139 % more more

42. Standouts are also able to simplify operations and products to better manage complexity 47% Others 61% Standouts Changes to operating strategy: Simplify 30 % Overall Others vs. Standouts Energy and Utilities vs. Standouts 29% E&U 61% Standouts 110 % more more “ There is a duality – the ability to manage a more complex customer demand, but simplify operations (and associated costs) at the same time. ” Utility CEO, Europe “ Simplification and standardization are key strategies that we have been using for several years to reduce existing and future complexity. ” Brenda Barnes, Chairman and CEO, Sara Lee, United States

45. Taking advantage in the New Economic Environment Handle Uncertainty Deal with Volatility Leverage Complexity Be comfortable with ambiguity, act despite uncertainty, generate unexpected ideas Use predictive analytics to anticipate customer needs, model customer scenarios Develop flexible organizations and processes that are ready to constantly adapt and course correct Break status quo to lead and benefit from industry transformation, convince and communicate with passion Interact directly to tune into rapidly changing customer preferences Leverage global capabilities to quickly adapt to shifts in local markets Find non-linear solutions; create cross-silo teams, encourage interconnected thinking Give customers direct access to everyone in your organization, and direct access for everyone to customers Simplify operations, services and products for your customers, your organization and your partners Reinvent customer relationships Build operating dexterity Embody creative leadership

46. IBM has provided perspective on these themes in its last three Energy and Utilities IBV papers, including a new one in 2010 Embody creative leadership Embody creative leadership Reinvent customer relationships Reinvent customer relationships Build operating dexterity

47. In the near future, E&U CEOs will be forced by dramatic industry change to increase their organizations’ dexterity Sources: Valocchi, Michael, John Juliano and Allan Schurr. “Switching perspectives: Creating new business models for a changing world of energy.” IBM Institute for Business Value. 2010 This will be necessary to handle rapid regulatory, technical and customer change, and capture revenue growth from new business models.

48. To respond to this, industry model innovation will be a particularly strong area of focus for E&U CEOs over the next five years... Impact of industry transformation over the next five years: E&U companies 32% 66% Focus on industry model changes over the next five years: E&U companies 40% 60% 0% The E&U executives surveyed expect that the percentage of revenue from new sources will double over the next five years. 2% None Large to very large Minor to moderate

50. Multi-sided businesses, which provide benefits by increasing and capturing indirect network externalities, will emerge in E&U Side 1 Side 2 1 Growth in the number of potential customers on Side One for complementary products and services on Side Two occurs 2 This then leads to an increase in the quantity and diversity of complements made available by Side Two 3 Because Side One users are favorably inclined to a wider variety of products and services on the other side, more to join the platform 4 The increased number of users makes it even more attractive for Side Two to develop new complements Sources: Valocchi, Michael, John Juliano and Allan Schurr. “Switching perspectives: Creating new business models for a changing world of energy.” IBM Institute for Business Value. 2010; Eisenmann, T. and A. Hagiu, “Staging Two-Sided Platforms”, HBS Publishing, 2007.

51. There are numerous examples of multi-sided platforms outside the Energy and Utilities industry Sources: Valocchi, Michael, John Juliano and Allan Schurr. “Switching perspectives: Creating new business models for a changing world of energy.” IBM Institute for Business Value. 2010; Eisenmann, T., G. Parker, and M. Van Alstyne, “Strategies for Two-Sided Markets,” Harvard Business Review, 2006; Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006.

52. We expect a wide variety of multi-sided platforms to develop in the industry in the near future Source: Valocchi, Michael, John Juliano and Allan Schurr. “Switching perspectives: Creating new business models for a changing world of energy.” IBM Institute for Business Value. 2010.

53. Seizing the upside of complexity Honor your customers above all else Use two-way communications to sync with customers Profit from the information explosion Embrace ambiguity Take risks that disrupt legacy business models Leapfrog beyond “tried-and-true” management styles Simplify whenever possible Manage systemic complexity Promote a mindset of being fast and flexible 1 2 3 Be “glocal” Reinvent customer relationships Build operating dexterity Embody creative leadership

54. Key contacts John Juliano Global Lead, Energy and Utilities IBM Institute for Business Value [email_address] Tel. +1 240 361 8157 Michael Valocchi Global Lead Partner, Energy and Utilities IBM Global Business Services [email_address] Tel. +1 610 212 9763 Ricardo Klatovsky E&U Industry Leader, Southern Europe IBM Global Business Services [email_address] Tel. +34 913 977 395 Visit the IBM Institute for Business Value (IBV) at: www.ibm.com/iibv/ Capitalizing on Complexity is available at : www.ibm.com/ceostudy Switching perspectives is available at : www.ibm.com/services/gbs/switchingperspectives