Despite some opinions that suggest outsourcing isn’t an appropriate alternative for utility companies, recent market research suggests otherwise. In fact, a study completed in early 2007 by EquaTerra and UtiliPoint found that while the utility industry historically has been slower than others to adopt BPO, utilities today are embracing it as a viable business strategy – with larger scope and potential benefits. The study was based on survey responses from executives at more than 50 North American utilities. Among the findings:
- More than 80 percent of respondents had fully or partially outsourced some business processes.
- More than 70 percent were satisfied with BPO.
- A strong majority expected to launch new BPO initiatives within the year, and the areas most likely to be considered included human resources and meter-to-cash.
Let’s look at some other facts that foretell robust growth in utilities industry outsourcing.
The Headlines Don’t Tell the Real Story
New utility industry outsourcing deals are far more prevalent than headlines purport, especially smaller deals that didn’t make the news because they weren’t large enough to require public disclosure. Utilities are typically cautious about publicizing their third-party contracting relationships, and outsourcing arrangements are no exception. And while nearly all major providers serving the utility outsourcing market are making investments in people and solutions to support expected growth, their hands are frequently tied when it comes to publicly announcing contract wins. Further, as outsourcing arrangements approach the end of the contract lifecycle, most will be renewed or expanded to include additional functions. A 2006 EquaTerra study of over 400 respondents – across a wide range of industries – with existing outsourcing contracts found that less than two percent planned to curtail or eliminate their outsourcing efforts.
The Gamut of Outsourced Functions and Processes
IT outsourcing remains strong, as many utilities outsource parts of IT, such as infrastructure – like management of servers, mainframe, and desktop services – as well as application development and maintenance. Most utilities already outsource some aspect of HR, including processes such as payroll processing or benefits administration. In customer service, many utilities use third parties to handle customer service functions such as remittance processing or call centers. The expected growth in advanced metering initiatives is also expected to be a driver for alternative sourcing strategies from meter procurement and installation to meter data management and CIS integration.
No Insulation for Utilities
The argument has been made that since utilities have protected service territories and guaranteed rates of return they are insulated from the typical pressures that lead to outsourcing. In fact, there is no guaranteed rate of return for utilities, and earning an allowed rate of return in a period of increasing costs and low revenue growth can pose a significant challenge for utility executives. This challenge has resulted in headcount reductions and other efficiency campaigns in prior years, but further gains from such initiatives are expected to be minimal. Further, utilities in fully or partially deregulated states – such as Texas, New York, Pennsylvania and Ohio – are subject to varying degrees of competition and, thus, increased earnings pressure. In short, regulatory caveats don’t preclude utilities from the negative earnings impact of increasing costs – or from outsourcing as a potential solution.
Thinking about outsourcing? Ask yourself these questions. BPO isn’t necessarily the right choice for every utility seeking change, but it is an option more frequently on the table. In determining whether outsourcing is right for your organization – and, if so, how it should be executed – consider the following:
What are your expectations? Cost savings alone or other business improvements? In the recent EquaTerra/UtiliPoint study, executives reported that improving efficiency and effectiveness were the key benefits sought from outsourcing. While cost reduction often remains a primary driver, utilities increasingly are leveraging outsourcing to access hard-to-find skills and resources.
In IT, for instance, utilities may struggle to recruit and retain people who are skilled in certain programming languages or application development. In engineering, the aging U.S. workforce and the decline in engineering graduates will make it difficult for utilities to hire domestically. Meanwhile, in procurement, the global demand for power-industry supplies has created a domestic scarcity of these products and, therefore, a scarcity of people who know where to find them and how to buy them. In these situations, utilities are evaluating resources and expertise from third-party service providers.
Whether you’re seeking cost savings or other business improvements, it’s important to be clear about your objectives with both your service provider and your internal constituents.
What are the political barriers? Are there concerns about offshoring? In the political arena, outsourcing is often viewed through a negative lens, usually because outsourcing is assumed to mean offshoring, which isn’t always the case. The reality is that most companies already outsource many activities – whether it’s their security to a security agency or their tree-trimming to a field services company – and it hasn’t created a political issue.
However, if your primary objective is cost reduction, then utilizing offshore delivery centers will be a consideration, and you’ll need to assess the regulatory and political sensitivities surrounding that decision. One option is to choose a service provider that has onshore and offshore capabilities, so you can start with domestic outsourcing and retain the flexibility to phase in offshore delivery resources over time.
What functions are in scope for outsourcing, and will executive leadership get behind a strategy? In evaluating scope, keep in mind that the service provider community varies in maturity. IT outsourcing, for example, is very mature, with many providers and deep experience. Other outsourced functions, such as HR, finance & accounting, customer service, and supply chain, are less mature than IT, but there are still many capable providers in the market. Outsourcing engineering and operations, meanwhile, is much less mature. As the portfolio of in-scope functions grows into a broader bundle, the number of service providers that can deliver across all functions becomes much smaller. Many companies are weighing a best-of-class approach against the complexity of managing multiple providers.
In addition, consider the key executives who need to be on board for the initiative to succeed. If you’re outsourcing finance and accounting, for example, which executives are internal customers to the F&A organization, and how will they react to the plan? Remember to assess the executive landscape and ensure the organization will support the outsourcing strategy.
Is your organization ready for transformation? Is there a tolerance for end-to-end process change? Beyond getting buy-in from leadership, consider the adaptability of the rest of the organization. How receptive have business units been to past initiatives? During a merger or acquisition, for example, how did the organization respond to combining functions and changing leadership? Or, with the introduction of a new ERP system, how effectively was process change and standardization addressed? Organizational readiness should be a key component of any outsourcing strategy.
What are the accounting and regulatory implications of outsourcing? An outsourcing agreement can include a variety of costs beyond ongoing service delivery charges. These include one-time costs for severance and transition, and potential transformation costs for new systems or process improvement. The accounting recognition of these costs, and the characterization of these costs as operating versus capital expenditures, can be impacted by the specific pricing terms and contract provisions. The regulatory treatment of these costs also needs to be evaluated and a strategy developed to ensure proper rate recovery.
Final Thoughts
The executives in utility companies today face significant regulatory and financial challenges as they strive to reduce costs and improve business performance. And they continue to evaluate innovative solutions that can increase shareholder value. While utility companies have been slower to adopt outsourcing as a business strategy than other industries, increasing costs, internal competition for capital and the need to deliver measurable value across the enterprise should drive positive and robust growth in the adoption of outsourcing in the North American utilities industry.
