Powering Up Business Transformation

Battered by unrelenting cost spikes, a de-regulated environment that is spawning nimble rivals, and aging assets as well as an aging workforce that is propping up legacy systems , the energy industry has reached an inflection point. To contend with growing structural inefficiencies, power utilities must adopt cost effective ways to renovate their operational processes and re-think how they acquire, build, deploy and manage business-critical IT systems.

For many years, the industry operated with a “not-invented-here” bias. This limited the ability of many players to turn on a dime and embrace new thinking about how to cut IT costs, while building a foundation to support business process innovation. For instance, many companies remained committed to extending proprietary systems coded in Cobol or making due with first generation ERP packages that were costly to implement and even more expensive over time to maintain. Unlike other industries that began outsourcing elements of their IT operations in the late 1980s and 1990s, few energy utilities were comfortable hiring third parties to offload development of application extensions or maintenance of IT infrastructure. They feared that a loss of IT control could ultimately undermine their business success.

Following deregulation in the late 1990s, industry dynamics began to shift. As regional monopolies disappeared, and broader market opportunities emerged, the industry establishment needed to learn how to compete by becoming more customer-centric. Moreover, M&A activity reshaped the industry landscape, bringing an array of new customers, as well as diversified offerings (such as energy management, and other unregulated products and services). This placed a premium on having more cost-effective and streamlined operational systems to elevate service delivery. It also made clear the rationale for having integrated decision support systems to enable deeper customer intimacy and better cross-functional planning inside the energy enterprise and with business partners. The changed environment also highlighted the potential for new Web-based technologies to support real-time information exchanges with customers and business partners and to support differentiating services -- delivered via new channels -- to boost the top line.

Specifically, energy companies realized they needed to update:

• Customer Care & Billing: Using Customer Information Systems (CIS) and advanced metering technologies to better serve the customer and cut operational costs.
• Asset Management: Breaking down functional and technology-specific “silos” that manage strategic assets and using IT to create new business processes that improve asset utilization and the bottom-line.
• Meter Data Management: Gathering data from multiple metering systems into a single data repository and to feed multiple applications, such as billing, forecasting, customer service, system operation, and maintenance to drive improved operational efficiencies.
• Outage Management: Building systems to analyze an outage and make an estimate on the probable cause to speed fixes and reduce remediation costs, and, importantly, to engender tighter customer loyalty.
• Work Management: Developing systems that provide a single business platform for initiating, tracking, designing, scheduling, reporting and closing all types of work orders, including construction, maintenance, customer service and operations.
• Supply Chain Optimization: Getting a real-time view of the supply chain to improve inventory management and customer service. This includes online order entry, tracking and processing, billing, audit, supplier partner management etc.
• Business Information Management: Making a smooth transition to Web-based systems and solutions to address changing business needs.

Skills Infusion, Resource Flexibility

Unfortunately, many companies lacked the internal skill sets and, in some cases, the funding necessary to tackle some if not all of these projects simultaneously. Some began to enlist the aid of third-party IT services companies with established domain expertise across the vast technology stack required to facilitate this radical transformation. Trendsetting utilities companies came to the conclusion that tapping a third-party’s collective best practices, domain smarts and technology savvy would not only enable them to save money but to accelerate their readiness to compete in the 21st century.

They also realized that partnering with an IT services firm didn’t necessarily mean a reduction of headcount, which was critical in an industry where long-term employment emerged as the rule rather than the exception. With plenty of “to-do’s,” these industry leaders embraced IT outsourcing as a strategic means to an end – augmenting existing IT staff with specialists that could be added and subtracted as business needs dictated.

In fact, IT services providers with extensive offshore operations are able to apply new thinking to solving business problems with advanced technology. Via intellectual arbitrage, as this concept is known, clients of global IT services companies gain access to the best minds residing in globally disbursed delivery centers trained in everything from the latest Web 2.0 Ajax coding techniques and ERP systems built on new service-oriented architectures technologies through tried and true program/project management techniques to deploy enterprise-scale technologies in ways that meet or exceed business goals.

In his book “Dealing with Darwin”, noted IT industry consultant Geoffrey Moore reveals how laser focus on “core” strengths can help companies boost innovation and achieve competitive separation. “Innovate or get marginalized,” Moore says, suggesting that the only way to innovate is by jettisoning peripheral or “context” activities that consume resources that are in many cases already in short supply.

Transform while Perform

Those firms that have embraced IT outsourcing are seeing that their internal IT are freed up to focus more intently on strategic concerns that support top-line objectives. But they need a framework to help balance the mundane maintenance – which can often consume 80% of the IT budget -- with strategic initiatives to help keep IT in strict alignment with business goals. Cognizant has developed one such framework to de-risk the decision to hire third-party IT experts. Called Transform while PerformTM (TwP), this framework enables the enterprise to set the stage for innovation by leaving context to IT service partners and reallocating internal resources to core activities that drive business value. For instance, using TwP clients can draw on Cognizant’s cost advantages in offshore application maintenance and testing and project management to focus internal IT on initiatives such as Web-based customer billing and support or metering and outage management that drive customer loyalty and ultimately top-line growth. Resources can be added or subtracted, on an as needed basis, to meet business needs.

TwP was created in response to changing market needs, which earlier this decade prioritized IT cost cutting over capabilities build-out. Entering the new millennium, Cognizant’s model, like those of other service providers, was cost-based. IT services provision was tactical in nature, and vendors took a short-term view and thus were viewed by clients as vendors – not as strategic partners. As the global economy rebounded, and enterprises worldwide shifted from cost containment to growth mode, their needs for IT services changed. With business process innovation the over-arching “C” suite mantra, corporations the world over needed help extracting more business value from their IT investments. In recognition of this objective, Cognizant launched TwP.

TwP builds off of Cognizant’s dual-managed engagement model called Two-in-a Box. In this model, a senior Cognizant manager, called the client partner, works side by side with the client’s leadership teams to craft a strategy that keeps IT in tight alignment with business goals. The Cognizant client partner then works closely with Cognizant’s offshore delivery team to ensure that delivery is on spec, on time and within budget.

TwP kicks off with a strategic planning workshop that connects key constituents across the client’s IT and line of business with Cognizant business analysts. Together the client and Cognizant teams define project goals in the context of business needs, IT skill requirements, gaps in the applications architecture, and strengths and weakness across the rest of the client’s infrastructure. Implementation schedules are then created to ensure that deliverables meet the client’s time and business requirements. As a result of TwP, Cognizant operates as a close business partner that shares the client’s operating principles and objectives.

TwP’s initial focus is on helping the client meet expense reduction targets by augmenting internal IT staff with lower cost personnel. Cognizant clients have achieved cost savings of up to 40% annually. So, the question becomes what to do with these cost savings. To really reap the benefits of outsourcing, companies need to invest these cost savings into IT initiatives that build business value. This means investing in IT that further optimizes internal processes (to drive additional cost savings) or building new applications that drive competitive advantage in today’s marketplace or support initiatives into adjacent markets.

So, where to begin? Start by asking a few simple but important questions: “Are we doing enough to optimize the existing IT infrastructure?” “Are we wringing costs from the right activities?” “How do our outsourcing outcomes stack up against others in the marketplace?” “Are we putting in place an IT foundation to meet business innovation mandates from the C-suite?” “Are we able to quantify the business value derived from outsourcing initiatives?”

Many companies can’t answer these questions -- unless they measure what matters. The reason: Many enterprises not only have a hard time calculating the expense side of the IT equation, but they also find it challenging to factor in the role IT plays in generating business value. Very often, a third-party – removed from the politics of IT management and line-of-business pressures – can more objectively and effectively calculate not only the returns on IT investment but also the soft and hard contributions that IT makes to enterprise goals.

Think, Calculate Return on Outsourcing

Working with Forrester Consulting., an arm of the well-known independent technology and market research firm, we developed a methodology to calculate existing and long-term returns on investments achieved by outsourcing application development and maintenance. Via a series of interviews with “C” level and line of business managers, Cognizant team members create a baseline assessment of enterprise IT spend, examining the company’s alignment of IT strategy with business objectives – while factoring in risk.

Called Return on Outsourcing (ROO), the methodology enables clients to expose the strategic business value, risk reduction and economic impact of applications development and maintenance outsourcing. On either a project or program basis, the tool can help:

• Reveal the factors that lead to long-term success of strategic outsourcing
• Set initial ROO expectations (cost savings, plus long-term business value) that can be generated by partnering with Cognizant
• Provide a roadmap that details ways to generate enduring business value from outsourcing applications development and maintenance by tapping additional Cognizant IT outsourcing services

Specifically, the ROO methodology illustrates how clients reduce IT costs and facilitate greater operational flexibility over time. From there it shows how clients can apply freed-up resources to bolster core competencies that generate or extend competitive advantage. Importantly, the methodology details how long-term engagements can help clients transform their IT infrastructures and organizations to support improved operational agility and heightened top- and bottom-line performance.

With Forrester, Cognizant has built an ROO Calculator1 that graphically depicts business value generation from the following perspectives:

• IT Governance and Control
• Process Knowledge and Expertise
• Project Management/Project Delivery Skills
• Technology Expertise
  

ROO Metrics

Using the ROO Calculator offers two different dashboard views that reveal, across multiple dimensions, outsourcing’s impact on financial and industry performance.
The Financial Dashboard details costs savings and efficiencies that can be realized over time by calculating how changes in labor and technology infrastructure expenses impact financial performance. The findings can be presented in both risk-adjusted and non-adjusted views to detail:

1. Operational Flexibility (business options and efficiencies) to enable:
   • More reliable and enhanced internal processes
   • Improved adaptability to future requirements
2. Business Value (top- and bottom-line benefits) to enable:
   • Initial cost savings
   • Continuous cost efficiency
   • Final financial impacts – cash flow analysis
   • Improved innovation and quality
   • Time to revenue/value
3. Total Cost of Ownership includes expenses related to:
   • Third-party services
   • Internal labor
   • Additional capital equipment requirements
   
4. Risk and Uncertainty:
   • Risk and risk mitigation of IT services is detailed (including a confidence range) in terms of current delivery strategy and alternatives.
   

The Performance Dashboard shows:

1. Comparative Benchmarks that assess the client’s performance against its particular peer group or best-of-breed companies outside of its vertical industry.
2. Best Practice Comparative Estimates from which recommendations can be made for improving performance.

ROO – Just the Beginning

An ROO analysis can help companies identify the likely business benefits of outsourcing earlier in the engagement. It helps clients avoid predicaments that have dogged outsourcing deals in years past: The belated realization that an outsourcing partnership isn’t delivering expected cost savings and operational improvements. An outsourcing decision, like any other key technology initiative, calls for a long-term analysis of business goals and the impact of missed opportunities. Outsourcing provides operational efficiencies, but also opens the door for optimizing IT resources that support business process renovations or innovations that boost the top line.

Chris MacRitchie is a client partner in Cognizant’s Manufacturing, Energy, and Utilities Industry … He can be reached at Chris.MacRitchie@Cognizant.com.

The Calculator is based on Forrester’s concept of Total Economic ImpactTM (TEI), a proprietary methodology used by the firm to advise clients on technology decision making..

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of global IT and business process outsourcing services. Based in Teaneck, N.J., the company uses a unique on-site/offshore outsourcing model to provide applications management, development, integration, reengineering; infrastructure management; business process outsourcing; and numerous related services, such as enterprise consulting, technology architecture, program management, and change management.
Cognizant has over 43,000 employees who are committed to partnerships that sustain long-term, proven value for customers by delivering high-quality, cost-effective solutions through its development centers in India and on-site client teams. Cognizant maintains P-CMM, SW-CMM and CMMI Maturity Level 5 assessments from an independent third-party assessor and ranked among the top information technology companies in Business Week's Hot Growth Companies. Cognizant is a member of the NASDAQ-100 Index and the S&P 500 Index. Find additional information about Cognizant at www.cognizant.com