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Economic by Name, Economic by Nature

The name of the 2000 British startup Economy Power Limited (EP) ensured that the company’s product was instantly understood by its prospective customers. The company was the brand. It sold electricity at an economic price. Not only that, the business strategy was that the word ‘economy’ would be the watchword in the management of the company.

The founders of EP took advantage of the final phase of the UK’s electricity industry deregulation in the late 1990s to set up a company specializing in the supply of electric power to small and medium enterprises (SMEs). Aiming at a well identified ($4 billion) niche in a large ($34 billion) total market, they chose their company name with good reason. They saw an opportunity to offer lower prices to a steady market segment, provided that they could run their new operation in a very lean and efficient way. The traditional Public Electricity Supply (PES) companies had a high-overhead infrastructure and still carried a heavy bureaucracy from their pre-deregulation days.

Economy Power had to be fleet of foot in all aspects of the business and most particularly in customer acquisition, billing and cash management. From its entry to market in July 2000, the company aimed at SME commercial customers who have higher energy consumption than domestic consumers, and who would be easier to transfer to a new supplier on the basis of price than larger corporates might be. While the PESs shaved their prices to the big boys, they paid little attention to cutting prices for SME energy buyers. Even so, to break into the market with an unknown brand, EP not only had to manifest its offer through the company name, but they also had to ensure that they could keep their own costs much more economic than the competition.

Lean Start, Lean Burn

For a company that had turnover at the time of its sale about five years later of about $150 million, it was started by its four founders with a tiny capital of a few hundred thousand dollars and a bank line of finance of under $100,000. From the time of the startup’s first business plan, it was intended to seek a realization or cash-out about five years later. This meant the business had to become profitable quickly as well as grow fast. One of the other entrants to the market, by comparison, was bankrolled to the tune of nearly $100 million, in sharp contrast to EP’s initial capital—a tenth of that sum.

Top managers Jeff Morgan (Chairman), Peter Darwell (CEO), Ronald Kirk (Deputy CEO) and Robin Fuller (CFO) sought additional funding, making several presentations of their business plan. One of these led to an offer to back the company with over $1million for a 49% stake (reducing to 30% if targets were met), but well into the due diligence process the backers got cold feet. Another investment offer collapsed, even after a positive due diligence process, on a change of policy at the funding firm.

In 2001, with a year’s delay, EP got private funding of about half a million dollars, but cash was still very tight, obliging the company to have very clear strategies to make the operation a success.

The first of three key pillars of strategy was to obtain a favorable contract with an electricity generator and fortunately, EP was able to negotiate excellent terms with the chosen generator. In addition and as part of the deal, the generator that worked with EP supplied a line of credit for several million dollars on favorable terms.

Buy-In the Best Services

The second pillar of strategy was to outsource the billing and registration process in exchange for a long-term contract. Hyder Business Services, a part of Hyder PLC, already a major player in the utilities business covering the whole of South Wales, supplied special customer registration and billing systems. It was vital for EP to prove to the electricity regulator that it could plug into the industry network to send and receive data-flows between all the companies in the industrythe Data Transfer Network (DTN).

Later, in 2002, the billing services business was purchased and became a key component of the company and one of its special strengths.

Sales Growth and Customer Retention

The third key pillar of strategy was to build sales through brokers working on commission only, albeit with generous bonuses based on “stock option equivalents.” Not only that, but what Robin Fuller called EP’s “dynamic cash flow” model was a vital component, because the company never had substantial cash reserves.

EP always waited until one of its in-house sales account managers was able to speak to a new customer to confirm essential contract details before shelling out commissions to brokers. Thus the company managed to avoid losses when customers defected. Indeed EP policy was for commissions to be “clawed back” where customers did terminate their contracts. Brokers had every reason to ensure contracts were correctly sold in the first place, and that customer satisfaction was the order of the day.

Sticking to its chosen market segment, EP only signed business with customers who purchased $1,000 or more of energy each year. Thus they avoided the bulk of potential loss from customer defection or business failure. By November 2003, EP had already gained a 4% share of UK SME electricity market share by volume (source: Datamonitor).

Cash Flow the Key

The cash flow horizon was never more than a few months, even by the time the company had thousands of customers. Robin Fuller comments in an understatement, “It was interesting to see how our sales receipts balanced up to our outgoings. Sometimes it was nerve-wracking!” The cash constraint meant that growth was not as fast as desired. However, if EP had gone for growth in a gung-ho fashion, management might have not have considered strategic and tactical decisions quite so carefully.

They had to pay very close attention to the quality of new contracts and recovering cash from debtors. Since they worked with commercial, rather than domestic customers, no supply started before the customer’s status was checked, payment was up-to-date with previous suppliers, and signed electronic (direct debit) payment forms had been received. Too many defaulters in the early life of the company would have stopped EP in its tracks.

It’s interesting to note that several much better-funded rivals went bust or were taken over in fire sales. The company always traded up to its near-term cash flow resources.

By the time of the sale of EP in June 2005, only about four years from active startup, the company had added some 40,000 contracts, which demonstrates how the focus on sales and cash flow management can produce spectacular results.

Highly Motivated, but No Excess Staff

At the time of the company’s sale to a major generating company, when it had sales of about $150 million, there was still a staff of only 250 people (even though some direct competitors had relatively fewer people, but with even more contracting out). However, the company did not include a payroll of large numbers of middle managers, unlike their bigger rivals. On the other hand, everyone in the company either had stock options or received a share of the eventual sale proceeds.

This was an unusual practice for a supply company, but it built loyalty and interest in the company’s success. Outside of the Board, there were no highly paid ex-industry managers, and nearly all the middle managers were young and had been employed for their wits and potential, rather than track record. In addition, there were bonuses paid for on-target cash collection performance. This emphasized the company’s determination to manage cash very tightly. One of EP’s direct competitors had payroll costs one-and-a-half times higher.

Realization was the Intention from the Start

The company’s founders had set themselves a goal to achieve EP’s sale or float within three to five years. The directors considered two realization options. The first was an IPO on London Stock Exchange’s AIM (Alternative Investment Market) or a full LSE float. The second was a trade sale to a quoted company or a piecemeal sale.

The IPO route was a costly and time-consuming option. It became clear that a trade sale was the way to go and it could have been either to one of the big existing players in the UK energy market or to a US company looking to gain a foothold in the deregulated UK market. The US companies might have been possible buyers of EP, but the timing was not auspicious.

A rival supply company had been bought by Centrica, a leading quoted energy supplier, in a deal that took only a few months to conclude and this helped EP to opt for such a route themselves. As a supply company with no generating capacity, EP would always be exposed to wholesale energy price movements. The big boys had both generation and supply, and thus were in a better position to manage prices.

Powergen, the country’s largest integrated energy business and part of the German multinational, E.ON Group, purchased Economy Power in June 2005, reportedly for $50 million. Thus the realization objective of EP’s business plan was achieved. The actual price of the deal was not officially disclosed, but the directors have now moved on to start new businesses using the experience and capital gained in the creation and building of Economy Power. Being the business name is clearly a formula that works.

Lessons Learned and Applied Fast

Not only did EP have a fast growth, but during its short independent life the experience gained by the entrepreneurial team enabled the founding a family of firms using the lessons that running EP had taught.

Three new firms were founded as subsidiaries of EP before the company was sold, but did not form part of the sale, since they were outside the interest areas of the buyer. The three EP ‘children’ are ECO2 Limited (renewable energy generation), Economy Calls Limited (telephone services) and Economy HR Limited (human resources consulting).

ECO2 was created initially to provide EP with sufficient renewable energy to meet its obligations under the UK Government’s Renewables Obligation that required licensed electricity suppliers to source a specific and annually increasing percentage of the electricity they supply from renewable sources. It rises from 5.5% in 2005/06 to 15.4% by 2015/16. Apart from the obligation itself, the Government estimated that the initiative would provide support to industry of £1 billion a year by 2010.* This was clearly an opportunity not to be missed.

Jumping at the Opportunity

The Directors of the Economy business decided to go well beyond their legal obligation to produce 20 MWs and go for 100MWs of energy. Now independent of Economy Power, ECO2 Limited is run by the old shareholders of EP (70%) and three industry-experienced managers who hold the remaining 30% of the company. ECO2 now (in 2006) runs four landfill gas sites producing 6.2 MWs and is actively pursuing ten windfarm sites throughout the UK. Four of these are currently the subject of detailed planning applications.

In the style of the EP realization, two projects have already been sold on to new owners for further development. The first is a 10.5 MW windfarm in the Grampian Region of Scotland and the second is a biomass plant in Port Talbot in South Wales that will produce 14 MWs from incinerating wood when completed in 2008.

Younger Economy Family Members Try Out Their ‘Wings’

Economy Calls, the telephone services company that sells calls and line rental contracts to SMEs looks most like its parent. This ‘child’ of EP has similar characteristics, particularly in its way of acquiring and registering customers through commission-only brokers. It also uses the same kind of customer service structure, billing and credit control. Not surprisingly and even though the company is in its infancy, Robin Fuller’s “dynamic cash flow” model is fully operational in this new startup.

Economy HR is even more of a youngster at the time of writing. With just five full-time staff, the human resources consulting business was started as a pilot project in EP and launched operationally in early 2006. The product is the sale of consultancy to British SMEs—the market the company knows well—to help them meet the ever-increasing burden of legislation relating to personnel, health & safety as well as grievance and tribunal procedures. The HR outsourcing marketplace is experiencing rapid growth potential for cost savings to be delivered by investment in external HR transactions and processes. Currently the most popular functions outsourced are training, IT and payroll, but opportunities to apply the ‘Economy’ way of doing business are offering a new challenge to the ‘Economy’ entrepreneurs.


This Entrepreneurship article was written by William Keyser on 8/31/2006

William Keyser, veteran entrepreneur, is Managing Director of WorkSavvy! Business Startup. He counsels would-be and early-stage entrepreneurs. The Website is packed full of free ideas, information, and tools for the budding businessperson, who wants to start sooner, grow stronger and last longer.