Over to outsourcing

Utilizing external talent and expertise to carry out certain operations is a widely adopted practice these days across many industries, helping to reduce costs, improve productivity and save time. Jon Brock, COO, at Utilipoint talks to Next Generation Power & Energy about why utilities are increasingly looking out rather than in.

Outsourcing in the utilites is a growing trend, as organizations realize the value of offloading operations traditionally undertaken in-house to an outside partner. In an attempt to better understand the market, UtiliPoint International recently undertook a study of business process outsourcing in the North American utilities market. The findings revealed that a significant portion of those interviewed had already undertaken some kind of outsourcing, or would be seriously considering it for the future. In fact, 33 percent of respondents had fully outsourced some processes while 54 percent had partially outsourced some processes. Only eight percent of respondents had not, or did not, plan to outsource.

Topping the list of most popular activities to outsource were those associated with construction and maintenance. Three-quarters (77 percent) of respondents indicated that they had outsourced in this area for over five years. “This may be due to an aging workforce and the ability to augment in-house construction activities with other work crews. This is a very common practice at most utilities today,” says John Brock, COO at Utilipoint.

Respondents revealed that the second most popular area to outsource, with 56 percent, was meter-to-cash/customer care functions, although many only partially outsourced processes. Again, a considerable few had already been involved in this for over five years. “Of all respondents, four percent claim to fully outsource meter-to-cash, field services, construction/maintenance and meter data management processes. While these percentages may seem small, there definitely is an interest in investigating the benefits of outsourcing to the utility market.”

One of the most interesting findings of the survey is that general business processes such as human resources and training are being favored for potential outsourcing expansion much more that utility-specific functions. “A great deal of relatively new activity is happening in these areas with perhaps much more under consideration,” notes Brock.

Why outsource?
Those surveyed for the research gave numerous reasons as to why choosing this option can be advantageous for their development. “Because utilities view BPO from varying perspectives, they also expect and measure different benefits,” identifies Brock. “Around 48 percent of utilities approach BPO with a desire to outsource and continually improve processes. This implies that utilities are willing to make a commitment to maintain an interactive relationship with their BPO service provider. Meanwhile, 27 percent look to outsource and transform the process, often taking the opportunity to assess current processes and make improvements hand-in-hand with their BPO service providers’ expertise. Less than 10 percent try to transform their process before pursuing outsourcing and under five percent look to outsourcing to transform the process only to have it return to the organization. None of the respondents from utilities that serve less than 250,000 consumers had the desire to transform internally first. Meanwhile, 68 percent of respondents from these smaller utilities were looking to outsource and gain continuous process improvements.”

What can be deduced from the study is that companies are taking the outsourcing route to advance the long-term development of their business, rather than simply to offload work. “They want to make process improvements along the way,” enthuses Brock. “Process improvements are beneficial, but the real benefits of BPO are much broader. When asked about the biggest benefits of BPO, reduced costs, a dedicated or redirection of focus to more strategic activities, and improved efficiency were cited as the top three. These are followed closely by improving organizational flexibility and gaining access to business process skills and knowledge that the BPO service provider brings to the table.”

Of these benefits, it is unsurprising that reducing costs is listed as one of the most popular. The savings from outsourcing can be huge, with estimates ranging from $1.5-$6.6 billion annually, according to Everest Partners.

Cost reduction is often used as the measurement of choice when organizations analyze the success of BPO. “This is tangible and can be understood by all,” says Brock. “When survey participants were asked about the three most important ways to measure BPO success, 75 percent cited cost reduction, 59 percent listed customer satisfaction and 49 percent felt improved process performance levels were a key metric. These results are true across all utilities regardless of commodity type provided.”

“The results seem to support that the measurement of these very visible metrics are the key to success and there may be a willingness to overlook schedules, timelines and contract adherence of the BPO service provider in order to maintain high results in these three areas.”

Although there are many advantages with outsourcing, there are also a number of challenges associated with its implementation. Most worrisome for respondents were poor quality of service, loss of control and inadequate service provider knowledge about the process/operation. “While these concerns and challenges are very legitimate, prospective or existing BPO buyers can address them in many ways,” says Brock. “It starts with developing a sound sourcing strategy with a realistic business case that includes measurable and achievable goals. Utilities must assess their current operating levels from a performance and cost standpoint, determining what improvements are desired and how much they are willing to pay for these achievements. Picking the best available outsourcing service provider obviously is important, but even the best service provider cannot deliver benefits from a fundamentally flawed or unrealistic business case.”

More speed, less haste
Selecting a BPO should be a carefully researched and considered process. According to Brook there are a number of factors that respondents believe they should take into account before selecting an outsourcing provider. “The three most important factors are service cost/price, rated by 47 percent; the ability to partner with the service provider by 36 percent; and utility experience by 23 percent. Other important factors for consideration are quality of staff, technical expertise, and commitment to transformational process improvement.

Much of the selection process should also take the size of the utility into account. “Service providers that focus on service cost/price and the ability to partner will fare well at all utilities,” explains Brock. “Smaller utilities have a broader set of important factors upon which the selection process is based. The largest utilities appear to place value on service provider’s utility industry expertise and commitment to transform the organization so that real process improvement benefits are obtained.”

After a leisurely start, compared to other industries, utilities are finally beginning to embrace outsourcing and are likely to in future, predicts Brock. “The utility industry has been slower to adopt outsourcing as a business strategy than many other verticals. Given this low penetration, combined with increasing cost pressures and competing demands for capital in process and technology investment, I expect to see continued significant growth across the industry’s portfolio of functions. Mixed-shore solutions will be the most likely service delivery model with the focus on limiting offshore roles to non-customer interface activities.”

Other news trends that Brock foresees involves the regulatory climate, which will continue to be a constraining factor in many jurisdictions. “Although”, he adds, “the cost-reduction focus of many utilities is clearly aligned with customer interests and will be a compelling offset to local employment issues.”

In addition, a looming skills shortage is also likely to drive outsourcing forward as the baby-boomer generation gradually retire and replacing them becomes a problem. “The growing shortage of skilled resources and the aging utility workforce also will influence these considerations. I expect the outsourcing value proposition for many utilities to shift from primarily cost reduction to a combination of cost control and access to capital for technology investment and skills.”

Finally, Brock anticipates that technology will be an enabling factor for outsourcing as service providers begin to bring service-orientated architectures (SOA) to market. He says: “Utilities in North America put a high priority on flexibility and integration requirements. With the high demand for new applications that enable energy efficiency and/or demand response, ease of integration becomes critical. Many have had SOA technology for some time, but the utility market appears to be warming to the idea. As the demand grows, so will the offerings. Therein may lie the flexibility and integration requirements that utilities need.”

The results of the survey emphasis the continued interest the utility industry has in outsourcing segments of their organizations. The overall feeling is that outsourcing is something many want to continue, or adopt in the future in order to take full advantage of the best benefits – reduced costs and improved efficiency.