The Edge

High-tech co-op delivers cutting-edge
computer services for rural utilities

By Dan Campbell, editor


hen a rural utility cooperative selects a computer information technology for crucial services such as customer billing and data protection, it may in effect be “betting the farm.” The goal is to find a competitive edge, but a wrong choice can have a devastating impact. For most of the 40 years since its inception, National Information Solutions Cooperative (NISC) (and its predecessor co-ops) has been making the choice a pretty safe bet for members.

The idea behind NISC was originally conceived in the early 1960s by the Rural Electrification Administration (now the Utilities Program of USDA Rural Development). The goal was to help smaller, rural electric distribution coops better compete with larger utilities by developing jointly owned information technology support centers. Starting with three members in 1964, NISC has grown into an organization with 473 rural utility and telecom members that provide service to 7.2 million electric consumers and telecommunications subscribers. The co-op generates $85 million in annual sales, most of it from leasing computer software and support services to members.

NISC operates in an industry known for very thin margins, in which efficiency at all operational levels is crucial. As a mark of its reputation in this regard, NISC also provides services to a number of Fortune 500 companies, on a nonmember basis. This helps generate a revenue stream that subsidizes the fees charged to members. The co-op provides billing and other services for customers such as AT&T, Wal- Mart and GTE, also helping some of them analyze energyconsumption patterns to help with energy conservation efforts.

“There hasn’t been one year in our 40 years that we have failed to add members and increase revenue,” says Vern Dosch, the co-op’s president and CEO. “This is a very volatile business. Technology, energy and telecommunications have all been in turmoil, particularly during the last 10 years. Yet, when you look at the history of this organization, you see very steady, stair-step growth. We are adding 10 to12 new members per year and revenue goes up every year. Not one year in the past 40 has our revenue or membership declined.”

NISC membership includes about 44 percent of its potential market of 800 rural electric cooperatives and 8 percent of the nation’s 1,300 rural telecommunications co-ops and privately held companies (the latter are typically family- owned).

Expanded broadband
facilitates merger
REA’s original plan had been to create six regional information technology cooperatives to serve the rural utility sector. Computers were just coming onto the landscape in the early 1960s, and rural electric and telephone businesses were still largely handling billing and accounting by hand. REA leaders met with statewide utility co-op associations, promoting the idea that these associations were in the perfect position to serve as business incubators to foster this type of cooperation among co-ops.

It made no sense, REA said, for each electric distribution co-op to buy a mainframe computer at a cost of more than $1million, hire their own programmers and develop their own software (which could not be licensed at that time). “Even in ‘64, they recognized that the technology business was all about economies of scale,” Dosch says.

The North Dakota statewide co-op association took the lead with the concept, and, ultimately, two co-ops sprung out of the original data processing business venture: the North Central Data Cooperative (NCDC) in Mandan, N.D., and the Central Area Data Processing Cooperative (CADP) in St. Peters, Mo.

“Perhaps the greatest driver behind the success and growth of NCDC, CADP and NISC during the last four decades has been the steadfast relationships built with members,” noted Joe Harris, chairman of the NISC board of directors. “The fact that all but two of the original 17 member systems are still with us today speaks volumes about our commitment to people, processes and technology.”

For most of their business lives, CADP and NCDC provided very similar services to rural utilities. In 1999, both were looking at the need for multi-million-dollar investments to reengineer their software products. This led to merger discussions, and the consolidation was consummated in 2000.

The development of broadband Internet service greatly facilitated the merger, making it possible to seamlessly integrate the two operations, despite being separated by more than 1,000 miles.

The co-op now has about 280 employees based in Mandan, and 250 more at its new Lake St. Louis facility (about 40 miles west of St. Louis). In May of last year, NISC completed the 135,000-square-foot facility, allowing all of its Missouri employees to work under one roof. The co-op also has about 26 “virtual” employees scattered about the country. Services include Internet bill payment and presentation; graphical and mobile mapping systems; activity-costing systems; energy deregulated and diversified billing, including propane, water, gas, etc., and telecommunications switch provisioning, among others.

Reinventing the co-op
It is usually difficult to quickly put aside the competitive inclinations of businesses involved in a merger, and that was the case here. “We had been fierce competitors, then suddenly one day we were best friends and cohorts,” recalls Dosch, who had been with NCDC prior to the merger, which he joined in 1986 as business manager before moving up to CEO of NISC 4 years ago.

After the merger, the two staffs immediately began working jointly on a major development project for a new product called iVUE, intended to help move the co-op’s software into “a dynamic, open systems arena, away from the proprietary servers of the past,” Dosch says. More than anything else, this collaborative project — which lasted over 2 years — helped to cement the two organizations into one co-op.

“I can’t say it was easy,” Dosch recalls. “We had to literally reinvent the organization from the bottom up.” Often in a merger there is a dominant partner which says: here is how we will operate, like it or leave. “That was not at all our approach, because this was a consolidation of equals. Every policy had to be rewritten; new vice presidents were selected. We were very similar, yet there were differences in business strategies and cultures.”

It was worth the effort. NISC has been “built to lead” the rural utility industry on the technology front, Dosch says. The organization has matured since the consolidation, and now has more employees with “deeper skill sets,” which is creating new opportunities, he adds. “The ability to deliver robust, scaleable technology that meets the needs of a diversified group of utilities and telecoms has grown by leaps and bounds just in the last year. Both offices today work collaboratively on software development, installation and support.”

Ultimate test
In the mid-1960s, the entire thrust of the business was to automate billing products. Large, main-frame computers were used to calculate, process and print bills in a central location. But 40 years on, NISC is essentially a software house that develops products it licenses to members.

From a single billing product in the early 1960s, it today offers a full suite of more than 100 software products and services. These include billing, accounting, engineering and ancillary products, such as electronic bill presentment and payment, interfaces for automatic meter reading, etc.

“We’ve essentially become the outsourced Information Technology (I.T.) department and help desk for our members,” Dosch says. “We are able to handle as little or as much of their I.T. solutions and services as they require.”

NISC also provides disaster recovery and business continuance service. With the worst hurricane season on record last year, this part of the business has proven to be a lifeline for some members. Indeed, Hurricane Katrina became the ultimate test of NISC’s business continuance capability.

The co-op’s disaster recovery staff carefully monitored the progress of Katrina early on, plotting the path of the storm and determining which members would be in harm’s way. Two or three days before the storm hit land, NISC was communicating with those members and backing up their data. “This is an easier task today than in the recent past, because hardware is really just a commodity now — you don’t have large centralized service bureaus any longer,” Dosch says.

The co-op’s disaster team identified 40 members in the path of the hurricane, but in the end, just five of them were severely impacted. NISC’s support for those co-ops ranged from going on site and helping to rebuild their networks and infrastructure, to backing up their data and providing access to it via the Internet.

With members in 47 states, hurricanes are far from the only weather calamity members face; ice storms, tornadoes and floods can all take their toll.

Utilities are also now considered part of the nation’s homeland security network, and security considerations have been ramped up considerably since the 9-11 terrorist assaults on America.

Co-op advantage
The co-op business structure of NISC has contributed to his success, Dosch says. As a co-op, the company is better poised to pursue long-term goals.

“The Achilles heel of so many technology firms is that they are just looking to their stock price and what to tell the stock analysts this quarter. By contrast, our board understands the cyclical nature of this business as it relates to developing a new product and investing in it; they understand that revenues will be small as you ramp up, and that it will be a couple of years into deployment of the product before you see the benefit.

“We’re not constrained by a mentality of ‘we’ve got to push this software out the door, even though it’s not ready yet, because we’ve got to meet a revenue target.’ We can take a long-term view. Members belong to our co-op because they need mission-critical software to run their businesses. They are not all that concerned about the return on their equity level in NISC and what rate of return they will get on the equity.”

NISC directors understand this business cycle because most of them have been through it a couple of times. They’ve also seen the “melt down” of many competitors in past 10 years, Dosch says. “NISC kept clicking along, growing and adding new products while so many others were falling.”

Since members are more concerned with service than double-digit returns on equity, the co-op’s margins are modest in most years, typically $1.5 million to $2.5 million. Margins are allocated back to member-owners on a prorated basis, with 21 percent paid in cash.

The co-op board has 14 members, elected by regions. Each region nominates and elects its own director.

Economy of scale
Another key co-op advantage is the economy of scale derived from utilities with similar needs joining forces. For example, the billing products NISC developed cost $13 million. It would have been cost-prohibitive for most of its individual members to shoulder that cost alone. But spreading the cost out among hundreds of members makes it very affordable.

Co-ops have traditionally also enjoyed a greater degree of customer loyalty, because the members have a vested interest in the business and have a say in its governance through the election of directors and participation on advisory committees.

“The loyalty factor is still there, but less so today than 20 years ago, when customers could recall when and why the cooperative was formed. It was a huge factor then. Today, with the next generation, they don’t have the historical background of the organization.”

The biggest disadvantages of a coop, from a management viewpoint, is the need to serve many masters, since every customer is also an owner. “We are not just a vendor to these utility systems; they all own a piece of us and thus have a louder voice than they would in a non co-op.

Technology concerns
Staying ahead of the technology curve is, of course, an ongoing task. To help NISC do so, it relies heavily on its Innovations Group — a panel of techsavvy employees tasked with tracking emerging technologies and how the coop can use them.

A big concern recently involves the Blackberry patent-infringement lawsuit and the impact its precedent could set for intellectual property rights throughout the industry. For the first time, NISC is now taking out patents on certain aspects of new products.

“We’re having to become more defensive,” says Dosch. “You have to beware of ‘patent trolls’ — patent owners who often don’t produce a product, but are just out to generate funds from a patent that they have no intention of ever using themselves.”

It’s rather like walking through a field of landmines, he continues. “My biggest concern is that this type of activity can hinder innovation. Software companies are now scared to death to put tens of millions of dollars into product R&D, then find a patent troll somewhere has a patent for that process and can throw up road blocks.”




















Attracting a skilled rural workforce

As an intellectual- property company, NISC’s lifeblood is largely the intellect and innovation of its employees. Wouldn’t it be much easier to attract these types of highly educated workers in Silicone Valley, Boston or one of the nation’s other computing hotbeds rather than in rural areas like Mandan, N.D., and Lake St. Louis, Mo.?

“Easier to hire them, yes, but not necessarily easier to keep them on board,” says NISC CEO Vern Dosch. In many urban environments, it is easier to find workers, but it is usually more challenging to find employees who will make a commitment to not just work for a company, but to become an integral part of the business.

“Here, we talk about creating careers, rather than jobs,” Dosch says. “We feel that our rural locations are actually one of our competitive advantages.” NISC has an annual staff turnover rate of just 4-5 percent, and has about 75 staff members who have been with the co-op for more than 20 years. “Most of our staff come and stay.”

A number of employees are refugees from the big city, who have moved to North Dakota or Missouri to escape the congestion, pollution, crime, high cost of living and failing schools of many cities. Some are outdoor sports enthusiasts and looking for the friendlier, more relaxed pace of rural life.

“Some of our best employees grew up in the Midwest, have gone to the bright lights of the big city, but are now raising a family and they want to come back to rural North Dakota or Missouri, where we don’t have to lock the doors all the time and where the school systems consistently score higher than national averages.

“I really can’t think of any big disadvantage of having a technology company in rural North Dakota, other than maybe that travel in and out is a little more expensive. Since there are no constraints in our ability to secure Internet bandwidth, there is a lot less need for business travel than there used to be,” he adds.

NISC is hesitant to use “headhunters” to pull workers from other technology businesses. “Our goal is to grow our own. We encourage personal development, technical and interpersonal skills. When you get an employee with good aptitude and attitude, we aren’t afraid to put some money into them to develop the skills we need. If we need someone with a Masters’ degree, the co-op will pay for the education.”



Importance of shared values

After the merger of the two co-ops that created NISC in 2000, employees were tasked with developing a statement of values that would become the cornerstone of the co-op’s business culture. “This was pre-Enron and World Com, before it was considered cool — or mandated by Sarbanes- Oxley — to have such a document that spells out the basic premise of the way we do business,” says CEO Vern Dosch. The unique thing about ours, and why it is so effective, is that it was not developed by the board or vice presidents and then forced down on employees. They wrote it.”

A group of employees was secluded for a couple of days, and came up with the statement. The vice presidents made only a few very minor changes and the board adopted it without change. It now hangs in every office and is part of the employee orientation and evaluation process.

NISC Statement of Shared Values
(Editor’s note: The following is slightly abridged, due to space limitations.)

“At NISC, we believe in striving for excellence with a passion and determination that is founded on our shared values. These values will inspire us, guide us and determine the manner in which we will conduct ourselves in carrying out the business of our organization.






March/April Table of Contents