P&U sector rethinks business models to tackle cyber security challenges

BY Fraser Tennant

Understanding the cyber security challenges facing the power and utilities (P&U) sector and improving how businesses respond to them is the overarching theme of a new EY report published this week.

In EY’s ‘Creating trust in the digital world’ global information survey 2015, 1755 respondents from global P&U organisations provide insight into the most important cyber security issues facing the sector today – a sector currently undergoing major transformation due to the introduction of smart meters and data networks across the digital energy value chain.

Moreover, the onset of this digital energy value chain, what EY describes as the “attack surface” of P&U organisations, is expanding considerably, as is the sophistication and persistence of the cyber attacks being launched by cyber criminals.

Highlighting the main concerns of the P&U sector, the EY report reveals that 19 percent of P&U responders admit that they do not have an information security strategy; 46 percent point to a lack of executive awareness or support as a major obstacle to dealing with threats to cyber security; and 55 percent confirm that their organisation does not have a dedicated security operations centre (SOC).

In terms of how P&U organisations should manage a cyber attack, the report recommends that they first identify their key risk management principles and apply them to the cyber risk issue. Fundamentally, this means knowing their critical assets; making cyber risk more tangible; aligning cyber risk with existing risk frameworks; making cyber risk relevant to the business; and embedding risk appetite within investment decisions.   

Furthermore, says EY, organisations should adopt a three-stage improvement process: (i) ‘Activate’ (establishing and improving cyber security foundations); (ii) ‘Adapt’ (adapting cyber security to changing requirements); and (iii) ‘Anticipate’ (predicting what is coming to be better prepared).

“P&U companies are rethinking their business models by being more innovative and offering a richer customer and employee experience through a variety of channels”, states the report. “However, there are significant cyber threats, and organisations need to recognise and understand the current challenges to get ahead of the cyber criminals.”

Although the EY report makes it clear that the P&U organisations are indeed making significant progress as far as tightening up their cyber security, the overriding message is that there remains considerable room for improvement across the sector.

Report: Global information survey 2015: creating trust in the digital world

Global investment in FinTech to top $150bn within 5 years claims new report

BY Fraser Tennant

Global investment in FinTech is set to top $150bn over the next five years, putting one in four financial services (FS) companies potentially at risk, according to a report published this week by PwC.

The report, ‘Blurred Lines: How FinTech is shaping Financial Services’, is based on a survey of 544 respondents across 46 countries and examines the development of new financial services sector technologies and their potential impact on the FS market.

Pointedly, 83 percent of survey respondents said they felt at risk of losing some of their business to standalone FinTech firms, with 67 percent citing pressure on margins as being the top threat to business, followed by loss of market share (59 percent).

In terms of the relationship between FS firms and FinTech companies, while the report notes that joint partnerships are “the most common way” in which collaboration takes place, it also makes clear that there are particular challenges to overcome. Chief among these are IT security, regulatory uncertainty and differences in business models.

“Given how fast technology is changing and lines are blurring, no business can afford to rest on its laurels,” said Steve Davies, EMEA FinTech leader at PwC. “As competition hots up, the result will be a reduction in margins and a loss of market share for traditional financial institutions. Those who do not act now are at risk of falling behind as FinTech changes the industry from the outside. Incumbents cannot afford to ignore this trend. Nevertheless, our survey shows that 25 percent of firms currently have no interaction at all with FinTech companies.”

The PwC report also identifies the distributed ledger technology Blockchain as being the next evolution in the FinTech story, with huge cost savings and improvements in transparency being real possibilities – a “once-in-a-lifetime opportunity”, according to Mr Davies. Testament to this belief is PwC’s identification of more than 700 companies that have recently entered this space.

Mr Davies concluded: “In the past, financial services companies have provided invaluable services to clients by acting as intermediaries in the system. Their functions are now increasingly being usurped by technology-driven business models. Before these traditional intermediary roles become obsolete, firms need to wake up to the once in a generation opportunity provided by this changing financial landscape.”

Report: Blurred Lines: How FinTech is shaping Financial Services

Energy faces uncertain future as megatrends transform oil & gas sector

BY Fraser Tennant

Industry megatrends, such as historically low commodity prices, are transforming the oil & gas sector with a challenging future the likely outcome, according to PwC’s New Energy Futures report published this week.

Recognising the uncertainty clouding the sector’s future, the report proposes a framework which evaluates four potential future scenarios that could help companies successfully navigate an increasingly complex and volatile global market over the next 5 to 15 years.

The four are: (i)  the oil and gas sector evolves along current lines with limited government intervention; (ii) demand from energy consumers (retail & commercial) for cleaner energy drives the transition towards a low carbon; (iii) governments drive increased energy efficiency, expansion of renewable energy demand and accelerated development of disruptive technologies; and (iv) supply constraints are triggered through direct government action, such as implementing carbon legislation or withholding licences (e.g,. Shale, Arctic) or geopolitical disruption.

“Global demand for affordable, reliable energy will continue to grow for the foreseeable future, but there is a new longer-term backdrop, as the world transitions to a low carbon system,” said Viren Doshi, PwC’s Strategy& oil and gas leader. “Momentum to replace fossil fuels with cleaner energy sources is building, and oil and gas companies need to consider their futures in this context."

The report also recommends that companies across the oil & gas chain: (i) have a clear strategy and alignment with portfolio, decision making processes and capabilities; (ii) have an ability to be agile and resilient in uncertain times; (iii) have an innovative response to disruptive change using existing assets as well as technology, knowledge and capabilities; (iv) have a readiness to form alliances and collaborate across the supply chain; and (v) safeguard the social licence to operate by sustaining the trust and support of investors and wider stakeholders through increased transparency.

Jan-Willem Velthuijsen, PwC’s chief economist in Europe, believes that the recommendations will allow companies to “reassess their current strategy and plans, with implications for the operating model, partnering strategy, resourcing and technical capabilities and other areas".

Despite all the uncertainty and prediction of a challenging future, Mr Doshi is in no doubt as to oil and gas sector’s ability to innovate and adapt to a rapidly changing world: “Time and again, successful operators have demonstrated the ability to respond to challenges by taking a long term view, innovating, adapting and gauging major trends as they define medium-long term investment plans.

“We are convinced that they can do so again."

M&A deals drop in oil & gas space

BY Richard Summerfield

Strong headwinds in the oil & gas markets and wider global economic uncertainty have made a significant impact on deal making over the last two years. Indeed, mergers and acquisitions activity in the US oil & gas industry plummeted to its lowest fourth quarter period in five years, according to a new report from PwC.

PwC’s Q4 Oil & Gas Deals Analysis noted that Q4 2015 saw 42 deals in the oil & gas space with values of $50m and above. Those deals recorded in the final quarter of last year were worth $31.6bn. The previous year saw 70 deals worth $103.4bn during the same period. 2015 saw a 69 percent decline in total deal value year on year.

Doug Meier, PwC’s US Oil & Gas Sector Deals Leader, said, “Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals.

"While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity," he added.

The difficulties seen in deal making in the US in Q4 were experienced the world over last year, according to PwC’s data. In 2015, worldwide power and renewables deal value reached $199bn, a decline of 16 percent from the $236.2bn recorded in 2014. However, in spite of this decline, renewable activity boomed in 2015, nearly doubling year on year from $28.3bn in 2014 to $55.3bn in 2015. Renewables’ share of deal value rose from12 percent in 2014 to 28 percent in 2015.

Europe and the Asia-Pacific region were the most popular locations in terms of number, by both bidder and target in 2015, with 313 and 318 deals in each region respectively. The US led the field on total deal value.

Looking ahead, PwC expects Europe to be a strong focus of activity in 2016 as the region continues to provide the highest volume of global power and renewable deal activity, although deal numbers and value dipped in 2015.

Report: PwC’s Q4 Oil & Gas Deals Analysis

Financial services firms report strong business growth but sober optimism in new survey

BY Fraser Tennant

Financial services firms are reporting strong growth in business volumes and improving profitability, according to the latest CBI/PwC Financial Services Survey published this week.

The quarterly survey, which reflects the views of 100 financial services firms in the three months to December 2015, reveals that the overall level of business remained “above normal” – despite the fact that business with overseas customers fell to its lowest level in three years.

The survey also found that although there was a marked increase in optimism in the financial services sector in the first half of 2015, this had risen only slightly by the year’s end due to the impact of strong competition on incomes (though tight cost control has helped to support a growth in profitability).

Key findings in the CBI/PwC survey include: (i) 45 percent of financial services firms stated that business volumes were up, while 22 percent said they were down; (ii) 30 percent of firms expected business volumes to increase, while 20 percent said they expect to see a fall; (iii) 14 percent of financial services firms indicated they felt more optimistic about the overall business situation compared with three months ago, while 8 percent said they felt less optimistic; and (iv) 29 percent of respondents confirmed that, in volume terms, their level of business was above normal, while 18 percent stated that it was below normal.

Despite strong growth in profitability driven by easing cost pressures and increasing business volumes, Rain Newton-Smith, CBI Director for Economics, is aware of the downside risks from developments overseas. She said: “The global economic outlook remains uncertain while China rebalances, which is having knock-on effects on emerging markets, amidst continued unrest in the Middle East.

“While investment intentions remain robust in IT, and marketing spend is set to expand as firms seek new customers, elsewhere companies are curtailing their capital spending due to poor returns.”

Over the next 12 months, the survey forecasts that financial firms expect to see weaker growth in business volumes, in addition to flat income and rising costs. In the meantime, employment prospects remain mixed, with banks in particular reporting a fall in employment.

“It’s clear that optimism is muted across the whole (financial services) sector and each sub-sector has its own challenges," commented Kevin Burrowes, UK financial services leader at PwC. “Against this backdrop, the growing spectre of cyber-crime looms large and the threat of major attacks continues to stalk the entire financial services industry.”

Report: CBI/PwC Financial Services Survey December 2015