Trends Suggest More and Bigger Utility Outsourcing Deals on the Horizon | Article

water hydrantUtility managers are reexamining how best to do business. Demand for greater return on investment puts pressure on their already thin profit margins after the introduction of new business processes in the wake of deregulation. Increased need for operational excellence forces reorganization and produces difficult management decisions.

More utilities are turning to outsourcing to reach their objectives. And the journey they take suggests an industry whose business methods are in a state of redefinition.

“Utilities are one of the most asset-intensive industries in the world. Optimizing operational business processes is vital to most utility providers,” says J. Christopher Perdue, Senior Director of Market Research for UtiliPoint International, Inc. “Few in a utility understand the interdependence of the hundreds of resources and technologies used to deliver services to their business operations in order to realize strategic goals,” he adds.

Outsourcers offer significant advantages of scale, reduced labor rates, highly experienced management teams, and fewer points of contact.

The 2004 agreement between TXU and Capgemini Energy, LLC, is a perfect example. It illustrates why a large utility like TXU chose to outsource not only its entire Customer Integrated Systems (CIS) and billing, but also its IT infrastructure and back office support. The utility stated at the beginning of the relationship that through outsourcing, it wished to realize a “step-change” in both cost reductions and improved customer service.

More sophisticated services are firing greater interest within the utility industry, according to Perdue. He says Utilipoint recently completed a survey of 300 investor-owned utilities (IOUs) in North America. When asked if they were considering outsourcing BPO, 13 percent of the utilities surveyed (about 40) said they were actively doing so. “We’ll probably see more activity in the near future in the US and probably even a higher instance on a global scale,” he says.

Trend 1: Keeping Customers with Responsive Care

Perdue notes most of the utility outsourcing relationships begun in the past few years have been primarily in the interests of their customer care operations: customer service itself, along with IT and back office processes that support it.

Though customer service is generally receiving more outsourcing attention, Perdue says the largest growth is in areas such as billing, both printing of paper bills and online billing and payment. “Online is a tremendous growth area,” he adds. “Utilities find that by giving customers what they want also saves them money.”

“This increased emphasis on customer care isn’t so much a result of deregulation as a natural progression of market forces that are inspiring utilities to focus more on their business operations to the public,” adds Perdue.

In explaining its relationship with Capgemini, H. Dan Farell, Senior Vice-President and Principal Financial Officer at TXU, says the focal point of the utility is on its core business, “which is energy supply and delivery, not finance and accounting, HR, or billing. We would never kid ourselves into thinking we could ever really achieve world-class competency in these areas.”

Bob Pryor, CEO of Capgemini, feels a prominent reason for why utilities are outsourcing more customer service duties is a simple matter of trust. “The industry is gaining comfort with the ability of outsourced service providers to be as concerned about the care of their customers as they are, and are becoming more comfortable with outsider contact with their customers.” He also observes that utilities are now more clearly realizing the benefits that third-party partners bring to customer care operations.

Jay Grewal is Director of Business Partnerships for BC Hydro, which is now in the third year of its BPO outsourcing relationship with Accenture Business Services for Utilities (ABSU). She says that so far, “about 95 percent of our expenditure has been devoted to some direct or support process of customer care.”

Cade Burks, Founder and Chief Technology Officer for EC Power, notes how customer-driven the utility industry is becoming, especially in deregulated areas. “Look at what the entrepreneur energy service providers are doing in the Texas market. Their customers are happy with lower prices and they are getting exceptional customer care. The operations are lean, yet full of specialized services and packages designed to attract and keep customers.”

Trend 2: Those That Outsource Do it More

Utilipoint’s recent survey asked utilities if they were planning on outsourcing some aspect of customer care over the next two years. Nearly 40 percent of those who already outsource such a function said they were planning more, while less than ten percent who have never outsourced a customer care task were planning to do so. “So those who are outsourcing plan to do more and at a much faster rate than those utilities that have yet to outsource,” Perdue notes.

Entergy Solutions is a perfect example, having entered into three outsourcing contracts since 1999, two with CSC.

Bill Morris, President of ABSU, notes opportunities to expand ABSU’s existing services internationally have opened up in the last 18 months. “We’ve established some beachheads and are exploring expanding relationships with our clients, but it takes awhile,” he says.

Another explanation for companies returning for more is the outsourcers themselves, according to Perdue. He feels they’ve done a good job of educating the market on the nuances of putting together good service level agreements (SLA) that benefit buyers. He says this leads to greater buyer comfort because a mature utility outsourcing industry now has a specific series of best practices. “There are better metrics to judge past successes, current buyer needs, provider capabilities, and future relationships between the two parties,” he notes.

Trend 3: The Deals Are Bigger and More Frequent

Since 2003, utility interest appears to have shifted toward providers that offer multiple service offerings that are also willing to accept larger portions of the risks and responsibilities.

The value of the deals is now consistently in the billions of dollars. On July 1, 2005, less than a month after executing the contract, IBM began delivery of a broad range of business transformation and outsourcing services to US utility NiSource, Inc., whose fifteen subsidiary companies deliver natural gas and electricity in the Midwest and Northeastern US.

The 10-year agreement is estimated to be worth $1.6 billion to IBM in service fees and project costs. NiSource expects the deal to deliver about $530 million in operating and capital cost savings across all of NiSource’s operating subsidiaries over the life of the contract. In addition, outsourcing will provide technology advances and enhanced service capabilities.

There was the 10-year Accenture/BC Hydro deal in 2003 that is worth $1.5 billion. Capgemini’s contract with TXU in 2004 was worth $3.5 billion. Others in the past two years have fallen between those figures, and their successes suggest similar outsourcing relationships are on the horizon.

“Utilities will continue to look to models outside the industry for new ideas and processes,” according to M. Stan Royal, CEO, Conversant, Inc. Depending on the cost profiles of utilities and the options that remain open to them, outsourcing may continue to see a steady but slow increase. A large part of this will hinge on the success of the high-profile BPO agreements we’ve seen lately, and the successes other verticals have with this approach.

progression of outsourcing in the utility industry

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