A June 2004 Conference Board study, sponsored by Accenture HR Services, found investor-owned utility firms are using human resources (HR) outsourcing as one tool to help them cope in a changing business environment. The report, titled "Outsourcing HR in the Power Utilities and Energy Industry," notes today's more competitive environment "is changing the role of their HR functions." Outsourcing has become crucial in the utilities industry despite "the strong culture of employee-as-family."
The report, a followup to The Conference Board's, "HR Outsourcing: Benefits, Challenges, and Trends" report (Why HRO Is Still Growing and What Needs Fixing,) found that HR departments at utility companies have started to embrace outsourcing as a means to reduce costs and improve service to employees. After cost reduction, HR departments discovered another benefit: "When done right, outsourcing HR functions allows a company to simultaneously reduce costs and free time for strategic action." The report further states that "freeing resources for strategic action in HR has come from shucking off some of the routine administrative tasks and benefits transactions that tend to soak up time or through increasing the efficiency with which these tasks can be completed." The larger utility companies are typically outsourcing health, pension, 401(k) plans, life insurance programs, and IT. Once the HR departments didn't have to worry about these routine transactions, they were able to spend time building relationships with their unions--an important strategic goal. As the report explains, major restructurings of the past decade have made smoother relationships between these two partners essential. "Managements and union leaders are under heavy pressure to modify the old ways of doing business." Glenn Davidson, Chief of Market Strategy and Corporate Development for Accenture HR Services, notes North American utilities spend approximately $39 billion annually on non-core services. "Deregulation and competition have created tremendous pressures for utilities to cut operating costs while improving customer service. In this environment, companies are being challenged to build the utility of the future - a lean provider of power generation, transmission, and distribution that is run tightly and efficiently," he says. This industry evolution is prompting utilities to look to specialist providers for their non-core functions. These outsourcers can create economies of scale that help utilities better control their bottom line. "For utilities, the bottom line potential is electrifying," Davidson says.
Easing the Capital Crunch
David Dell, senior consultant at The Conference Board and one of the study's authors, says the difficulties spawned by deregulation have caused regulators to insist that "utilities get back to the basics of making sure the lights don't go off." Focusing on their core business means not managing an HR or a finance and accounting department, he continues.
Dell adds outsourcing HR "became more appealing" because of the industry's current shortage of capital. He says energy companies spent large sums in venturing into new businesses allowed by deregulation, which created significant debt. At the same time investors, believing utilities were no longer a growth industry, turned away from investing in them, which cut off their investment pipeline. That meant these companies didn't have much money to invest in internal technology. "Outsourcing helped them avoid capital expenditures," Dell notes.
Outsourcing their HR IT allowed energy companies to access to new technology that:
- Provides eLearning for a global workplace
- Facilitates work group collaboration across geographic boundaries
- Institutes "just-in-time" training
- Tracks and administers talent management and leadership development programs
- Handles applicant and recruitment processing
- Offers access to workforce surveys as feedback mechanisms
- Creates communication channels that allow for instantaneous contact with a global workforce
- Links work-life and personal-life portals to thousands of appropriate Web sites.
Lessons the HR Executives Learned
The study found the HR department negotiates the outsourcing agreement, assisted by purchasing and the internal legal department. The HR department also manages the relationship with the supplier.
Most utility HR executives reported they received "the results they expected" from outsourcing although some said the results were "mixed." Most of the respondents described problems with their providers at some stage of the relationship. They classified these problems as "growing pains" and most successfully resolved them. The challenges fell into the following categories:
- Failure to realize cost savings because of hidden or escalating costs
- Poor service or lack of responsiveness by the provider
- Supplier management difficulties, especially when there were multiple suppliers to oversee
- Financial instability of the provider
The HR professionals also mentioned areas where they could have done better. For example, during the initial preparations "you have to know what you want, line up your support, and clean up your act." Advice when selecting providers included "look wide and drill deep, keep your options open, and get all the information and help you can." When it came time for change management, they advised, "Take time to prepare" and "Do it fast." Regarding technology, they noted that "technology is crucial and complicated." They wished they had anticipated the costs of upgrades and change. And they suggested testing crucial technology.
When it came to quality assurance, they felt it was imperative to draft detailed service level agreements with penalties and track both performance and cost savings. "React fast," they said to keep problems from growing. The buyers said they realized later they had to clearly understand their governance model to achieve the results they wanted. Finally, governance worked best when they assigned the right person to the governance post.
Not all utility executives have jumped on the outsourcing bandwagon. The Conference Board/Accenture report says half--55 percent--told the interviewers "questionable cost/benefit justification was a barrier" to outsourcing HR services. Respondents said they wanted to see a success story that would "reliably demonstrate that outsourcing not only produces savings but affords access to better technology while ensuring at least equal levels of service."
In addition, power utility and energy companies have their own industry-specific challenges. Regulators demand greater efficiency from companies, which puts pressure to keep all their costs down. But the unions demand increased salaries and benefits without changing work rules. The report says some companies see the difficulties in negotiating between these two groups as "too big an impediment to even explore outsourcing options."
The study concluded that HR outsourcing helped in part to dispel some of the pessimism surrounding the challenges of the utilities and energy industry. "Well-managed HR departments have gained respect in their organizations and have become established players at headquarters," it says. At the same time, outsourcing "lets them focus on supplying a strong, stable, secure energy supply cost effectively," concludes Dell.
How the study was done: The Conference Board spent a year interviewing more than 40 executives in energy resource and utility companies. It spoke with both CEOs and HR executives.