Why outsourcing works

Cognizant’s Charles Kaprelian, Sapient’s Rob Milstead and Richard Charles of Alliance Data look at the impact outsourcing can have on the power utilities industry, and discuss the difference between operational and transformational outsourcing.

NGP&E. Many industries have turned to outsourcing as a means of cutting costs or to enable them to focus on core competencies. Why has outsourcing proven attractive to the utilities industry? What are some of the operations and services being outsourced?
RC. Most utilities recognize the value of outsourcing to decrease customer service costs; however, regulatory bodies require them to more carefully balance cost-of-service with quality of customer service. Beyond cost savings, some utilities are considering outsourcing to unlock the value of underperforming assets, assist in M&A integration, enhance revenue, achieve cost certainty in rate recovery and act as a safety net for skills lost to retirement. We also see utilities select outsourcing to gain access to technology and talent – technology from the standpoint that the utility is often able to shift the risk of technical obsolescence to the outsourcer; talent from the standpoint that specialized resources are often scarce and may be secured more cost-effectively through a third party.

Utilities are outsourcing a broader range of services than they ever have before. These services can encompass entire operations such as meter-to-cash, or single services such as handling inbound calls or bill print. One reason why outsourcing continues to grow within utilities is that there are now a number of mature outsourcing providers that can provide either broad or specialized process expertise. The success of these engagements is proven, and that aids utilities weighing the decision to outsource.

RM. The utilities industry initially turned to outsourcing for the promise of cost savings. However, utilities soon began to realize that it was also possible to improve service levels and realize savings in areas of their business. Outsourcing presents an attractive option for handing off specific functions of a business that were expensive to maintain, were not necessarily core competencies and posed numerous operational challenges (e.g. meter reading with accuracy, training, employee turnover problems). Utilities also saw the potential for outsourcing to solve some of the problems that M&A growth introduced. Often the integration of two or more operating companies meant there was a tremendous problem with scale and complexity internally. Outsourcing offers solutions to address those challenges in both business operations and IT.

While widespread outsourcing hasn’t been adopted in the industry yet, there are still several areas that seem to be popular: bill printing/mailing are often at the top of the list. Meter reading, leak surveys in the gas business, mapping and other GIS functions are also growing in popularity. The most progressive utilities are realizing that gaining efficiencies and improving service quality through outsourcing are not mutually exclusive. For example, the concept of call center outsourcing – often considered the primary touch point for customer service – is beginning to be discussed at a growing number of companies.

CK. In the case of IT/BPO services, the utilities industry is struggling with balancing the right skills at the right time, which is the result of a couple of key drivers. First, the utilities industry, on average, has an aging workforce and therefore is losing critical business knowledge as workers begin to retire. Second, the application architecture at a typical utility usually includes a combination of legacy applications and new ERP/work management products.

In the case of the legacy applications, it is difficult to entice new workers to adopt the skills necessary to support them as the older workers retire. In the case of the new software packages, as soon as utilities train personnel to use these products, they risk losing them to the marketplace where there is high demand for these skills. The net result is a constant balancing act of maintaining the right skills at the right time, which has not traditionally been a core competence of utilities. Conversely, this is clearly a core competence of a successful third-party IT/BPO services company.

The utilities industry has been outsourcing peak demand for IT services in the case of large implementation projects for many years, but leading utility companies have begun to outsource the everyday maintenance and operation of applications in order to free up their own internal resources from context and redeploy to core. This change allows leading utilities to reduce the cost of ‘keeping the lights on’ and use these savings to fund new strategic initiatives.

NGP&E. What are the major differences between operational and transformational outsourcing? Of these, which type of outsourcing is being most commonly used by the utility industry?
RC. First, I don’t believe these terms are universally understood or agreed upon, so let me offer my definitions. Under the operational outsourcing model, a company turns over a closely related set of functions or processes, and generally expects the provider to utilize the same inputs while delivering better quality, lower unit costs or both. Transformational outsourcing occurs when a company and the provider work together to focus predominantly on a business outcome – typically an outcome far superior than the company could achieve alone. While the term ‘transformational outsourcing’ is used frequently by both providers and companies, in practice it’s quite difficult to achieve. I think service providers sometimes mistakenly convey to utilities that in order to achieve transformational results, the utility needs to relinquish more control to the provider. Instead, what’s most required to achieve transformational outsourcing is deep involvement by the utility and joint commitment. Oftentimes boilerplate contracts simply don’t allow for or encourage transformational outsourcing, so companies intent on achieving transformational results need to be willing to work beyond their typical comfort range.

RM. I think utilities really need to understand their goals and the definition of each upfront to ensure they are picking a certain flavor of outsourcing for the right reason. Operational outsourcing is what the industry is most familiar with as it relates to specific functions within the business and IT. The goals are often cost reduction-oriented with an eye towards minimal service improvements. Often, certain operational outsourcing may be the starting point for more strategic types of outsourcing.

Transformational outsourcing is still a concept in its early days for utilities. This type of outsourcing is impressive from the breadth of services and process areas being considered. These relationships are often much more partnership-oriented where the company is looking to expand its capabilities beyond what it can currently offer. Introducing specific expertise – for example in energy trading and risk management – often means these companies can change their business model to take advantage of better decision-making. Better decision-making in specific parts of a utilities business often means dramatic impact to top line and bottom line performance. This idea changes the driver from cost savings to value creation. Imagine the power of an outsourcing provider not signing up for specific service-level agreements, but instead committing to delivering on a percentage point of EBITA. It’s a very interesting dynamic to add to the conversation.

CK. Each industry has traditionally started with operational outsourcing and gradually progressed toward more transformation outsourcing. Industry leaders normally lead the way. The utility industry on the whole is still very much in the operational outsourcing stage in terms of IT and BPO services with the exception of some retail energy providers which have moved quickly to transformation initiatives including, in some cases, the complete outsourcing of customer service (both the underlying technology and the business process).

NGP&E. The energy industry is certainly a hotbed of change – from deregulation and new regulations to expansion into new markets and regions. How can business process outsourcing help utilities adapt better to changing market and consumer needs?
RC. BPO provides a strong platform to help both utilities and deregulated energy providers manage changing market and consumer needs. From the utility’s perspective, it is difficult to manage quickly changing business or market requirements in large, mission-critical customer information systems. BPO providers have invested heavily in tools and solutions to capture, assess and integrate the changes into systems and processes. From a retailer’s perspective, a goal of continued growth means that new markets are a fact of life; and with each new market come new business and market rules. Alliance Data manages customer care, billing and market transaction management in virtually every active deregulated energy market in North America. This experience and solution toolkit benefits our clients as they seek to expand. The result is that they can grow with proven processes and systems already supporting the new market requirements. In both cases, the overarching benefit is the value of an experienced, reliable partner that manages the technical and functional change seamlessly so that the utility or retailer can focus on providing the best customer experience to new and existing customers.

RM. I think there are two real areas of opportunity for utilities and the concept of BPO. The first area relates to finding a partner to assume responsibility for business processes that involve the basics of running the business. Quality and efficiency is mandatory and doing so in a manner that typically leads to costs savings is a tremendous benefit. This allows the utility to focus on more strategic areas of growth by worrying less about running the business. This may involve determining the right processes to thrive in new regulatory climate or possibly look at growth through acquisition. The second area of opportunity relates more to transformational outsourcing. Utilities may be looking for specific expertise from partners to help them expand the business in new ways.

In addition, it’s clear that utilities are faced with ever-increasing demands from their consumers. Utilities are looking for help earlier in the process for thinking strategically about how to meet these demands in an economically feasible manner. As more utilities get deeper into time-based rates and the processes and technology associated, they are looking for help with infrastructure, integration, customer service and billing, and other areas. Innovations like these require drastic changes to realize the benefits. The idea of building the in-house expertise and learning tough lessons has a direct impact on when the utility can recoup some of the capital invested. Strategic-thinking utilities are investigating these new ways of working with partners to help deliver aspects of the program sooner with fewer bumps in the road.

CK. By following the strategy of offshoring context activities and focusing employees on core activities, utilities can unlock the capacity, capability, and funding to focus their leadership on strategic initiatives that can help them adapt to changing market and consumer needs.

NGP&E. What factors need to be taken into consideration before looking to a BPO operator? Do you have any top tips for choosing the right partner, and are there any potential pitfalls to look out for?
RC. We typically advise utilities interested in outsourcing to evaluate potential partners along four dimensions: industry focus (do they understand the drivers in your industry? Can they help you anticipate the changes ahead?); financial stability (will this partner be around for the long-haul? Does their balance sheet allow them to assume the potential risk they are signing up for?); capabilities mix (if needed, can the provider flex the nature or scope of services provided to meet changing business needs, or will that require a new partner?); and cultural fit (probably the most important, but most difficult to measure during the evaluation period). If a utility fails to employ a clear scoring methodology the result may simply be a ‘gut decision’. A poorly defined scope will invite loose responses. Yet in contrast, utilizing an overly structured procurement process – one geared to buying equipment versus services – will minimize the potential innovation of the providers. Fortunately, the potential pitfalls during the evaluation are fairly well known and there a number of excellent selection firms available to help utilities navigate past them.

RM. Picking a partner is a sometimes long and revealing process. Certainly the basics involve things like qualifications, experience, agreed upon service metrics, etc. but often-unexplored areas include things like outsourcing provider employee retention metrics and new employee training. Training is often a critical area for outsourcing opportunities that involve customer or vendor contact. Training certainly involves functional and technical training, but utilities should also be curious about things like communication training. Accent neutralization is offered by many providers as a way to try and minimize challenges with international employees. A utility needs to decide what’s important upfront and seek alignment on the decision-making process before evaluating possible providers.

The real key, however, is ensuring that the utility is fully aware of the internal commitment needed. The importance of designating a full-time team to work on partner selection and then see it through to implementation cannot be underestimated. Simply engaging with a BPO provider does not mean success; it takes time and dedication on the part of the utility to make sure the provider is properly ramping up and gradually assuming full responsibilities. The cost-savings will be realized eventually, but investing time upfront and during implementation will assure a transition that is quicker to value and service metrics.

CK. Rather than view BPO as a big-bang transaction, my advice is to follow a strategy of gradually outsourcing context activities, redeploy key resources to core and repeat the cycle to expand the pool of activities to outsource. Develop your own internal team to oversee this ongoing cycle.

I would look for a provider who can help your internal organization perform a portfolio analysis where the combined team analyzes your processes and applications for their ‘outsourcability’ based on a proven approach of taking a number of operational, financial, strategic and risk factors into consideration. Following this incremental approach minimizes the pitfalls, which makes risks easier to manage. You need a partner you can trust and grow with over time. Listen to what other clients are saying about their relationships with any partners you consider.

NGP&E. What does the future hold with regards to outsourcing in the energy industry? Are there any trends (technological, regulatory, market) on the horizon that you think will impact on the sector?
RC. The future for outsourcing within the energy industry is very positive. We continue to see increased adoption and a majority of utilities today have already outsourced one or more customer care related functions. One technological trend is the adoption of service-oriented architecture (SOA). From an outsourcer’s perspective, we’re excited about SOA because we can focus more on the business processes rather than the underlying technologies that support them. SOA allows us to create reusable code and leverage our existing portfolio of applications. This is important since the utilities to which we provide outsourcing services often have heterogeneous technical environments. The bottom line is increased agility and the ability to bring new applications and processes to the market in less time with a superior ROI.

With respect to regulatory trends, EPACT 2005 encourages utilities to invest in automated metering infrastructure (AMI) including meter-data-management (MDM) systems. These are multimillion-dollar investments, in some cases using new technologies that are unproven at this scale. Some utilities will choose hosted solutions for providing these new capabilities.

Utilities will likely also increasingly gravitate toward outsourcing to meet the demands of today’s consumer with respect to how they interact with their utility. The ability to pay bills online, address questions and concerns via the web, remotely control home appliances, and other ‘self-care’ functions will continue to see increased adoption. Outsourcers can help utilities address these challenges in an efficient and cost-effective manner.

RM. Certainly the industry is not getting any easier. Change continues to accelerate. Changing markets, changing customer demands and the pure economics of how utilities make money are all evolving. What is clear is the role that technology plays in enabling how a utility must deal with these changes. Manual processes will have to go away if value and shareholder returns are to be found. It seems like capital investment in infrastructure, and generation specifically, is on the rise to meet the upcoming demands. Technology certainly plays a role here too, not just in operations, but how technology can be used to help make better decisions at the right time to maximize efficiency and revenue potential. Utilities seem to taking a bigger picture view of how everything fits together. There are some early adopters in this area but, in general, most utilities are again focusing on efficiency and growth and they understand how technology can help them transform their business. As a part of this, utilities want advice and expertise for developing their strategic roadmaps.

Outsourcing and BPO certainly have a role to play in helping utilities deliver on their promises, but there is a long way to go for widespread adoption. More utilities are experimenting with outsourcing before making corporate commitments. This approach makes perfect sense in evolving in small iterations before making a huge leap. Given what I see now, my belief is that the huge outsourcing deals may be on the decline to a degree. What I see is momentum towards expert outsourcing where utilities realize that the cost of developing and maintaining specific areas of a business internally exceed what may be possible through a partner. It should come as no surprise that utilities feel a sense of obligation to their employees, shareholders and the communities in which they operate, which makes this type of outsourcing even more desirable.

CK. Outsourcing is itself a trend being adopted in the energy industry, which will begin to have profound impacts on the sector. Expect M&A activity to continue, which will increase the scale and corresponding value delivered by these combined organizations. M&A provides an opportunity to review context versus core activities and enable the merged entity to discover ways to extract additional value. M&A consolidation also creates the scale to justify investments in advanced capabilities.

Utilities are reaching the inflection point in terms of advanced metering and intelligent grid. Smart meter deployments continue to increase exponentially. In addition to the metering, communication and meter data management technologies proving themselves, the business case economics for deploying these technologies are now proving themselves. This new platform will create opportunity for significant gains in operational efficiency. They will also enable new regulatory frameworks, as regions struggle with the increasing demand for energy and look to create demand management incentives that actually have an impact.

We are also seeing continued adoption of bi-directional customer self-service through expanding communication channels. Similar to signing up for alerts and notifications delivered to e-mail/voice-mail/text message by financial institutions, utilities with an intelligent grid will be able to notify customers of power outages, restorations and other service delivery events, in addition to account status information, which will be a major value add to customers and utilities alike.