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Outsourcing: Dynamo for Transformation

Born in1983 with the acquisition of several Spanish electrical companies, Grupo Endesa now is the number one producer, distributor and reseller of energy power in Spain and in South America. Also providing electrical energy in Africa, Endesa Group is the fourth largest European power company by stock capitalization value. In 1983, the Spanish government owned the company.

After its first initial public offering (IPO) in 1988, early shareholders must have been excited with the company’s rapid growth and market share.

But there was a series of sizeable challenges just around the corner.

Surge Control

The Group’s challenges focused on operational and regulatory issues, as well as strategic marketing tactics. The first issue was privatization. Endesa’s second IPO occurred in 1994, reducing the state’s share to 66.89 percent; and the third IPO made Endesa a private company in 1998. As the Spanish government continued to decrease its ownership of the Group, the pressure to increase shareholder value catapulted.

A second major challenge occurred because Spain would be joining the European Union, which required deregulation of the Spanish electricity market by January 2003. The group would be required to separate its various regulated and deregulated electricity activities.

Endesa’s corporate structure and business processes also would need to change in order to be competitive by the upcoming deadline for deregulation. It would be implementing 441 Centers of Service to provide a more flexible network of channels of customer service and ease traffic flow from the regulated to deregulated markets. The company also would need to develop a unique brand strategy among its upcoming competitors due to the deregulated market.

Moreover, Endesa also decided to pursue a diversification strategy within Spain, acquiring interests in telecommunications, water and gas distribution companies and new technologies for cogeneration and renewable energies.

Complicating matters, privatization, deregulation and diversification strategies were all happening at the same time. Making matters worse, says Nicanor Compte, Endesa’s IT manager, the company had not integrated from its acquisitions; so, by 1995, it was basically functioning in many of its processes like 13 companies instead of one. Each had its separate mainframe; and there were seven different active billing systems, six different financial systems and HR solutions, and 10 different end user management platforms.

Compte says the company in 1995 defined two strategies to deal with these challenges. One was to create a separate services unit to deliver IT services and solutions to the different Endesa companies. Thus, the company began a corporate reorganization in 1998, resulting in consolidation of its companies in Spain and in the creation of Endesa Operaciones y Servicios Comerciales to handle the company’s support processes, such as billing and collections, customer service and other back-office functions.

Electrical Converter

“The other strategy,” Compte recalls, “was to use outsourcing as a new working practice in order to achieve integration.” A 1995 study of outsourcing options resulted in a decision to outsource all non-core business processes, beginning with all IT systems management and end user support.

Consolidating and centralizing the IT and back-office functions under the newly created Endesa Servicios entity has enabled the company to redesign its business processes, thus increasing its level of efficiency and operating flexibility, as well as the quality of service to its customers. Compte says the company also was “looking for cost synergies.”

Without outsourcing, these objectives would not have been possible for Endesa to achieve. IBM was awarded the outsourcing contracts and is the power behind the successes. The network station management was outsourced in 1996; the billing and customer service systems were outsourced in 1997, and the distributed systems and ERP systems were outsourced in 1999. In July 2000, all three contracts were renewed with IBM through 2005.

Compte recalls the integration process as being a major pain point. “It required a lot of resources from IBM, just from a technical perspective, to make this work at all, let alone in the time targets we had. IBM had to have a lot of different skills, because we had so many different technical environments. They had experience in all those environments, as well as bringing to us best practice methodologies for standardization and platforms.”

The transition was accomplished on time – in just 18 months – with Endesa relying on IBM to ensure a safe and efficient transition. First, eight data centers were relocated to IBM premises. Then the outsourcer began tackling consolidation of the billing systems, followed by the HR systems. “IBM made it possible for us to deliver a better quality of services and in a less painful way as well,” Compte states.

IBM’s experience and best practices for its other clients was also valuable in dealing with employee resistance. As Compte explains, Endesa’s employees were accustomed to the security of working for a government-owned company.

“We were almost privatized, and then the company decided to outsource. It was a big cultural shock,” he says. “But IBM is a well-known company, and that provided a high level of confidence to the employees.” A working relationship with a “partner” company is something Endesa had not experienced before, he continues. “So the high level of confidence and the partnership attitude was very important. And all of our expectations have been met with flexibility and no problems.”

Electrical Outlet

The corporate reorganization also set in motion a plan to achieve operational savings over a five-year period, projected as Euro 238.6 million per year, as well as additional savings of Euro 7.6 million per year. Top on the list of business objectives in Endesa’s 2001-2005 Strategic Plan is a continued reduction of operating costs in its domestic electricity business, as well as an improvement of the efficiency and productivity ratios in its newer Latin American electric markets.

Just as an electrical outlet leads to a power source, Nicanor Compte advises companies considering outsourcing to “share with the outsourcing partner what your company’s objectives are in order to get higher efficiency and get a higher return from their collaboration.”

The outsourcing strategy of leveraging IBM’s powerful expertise and resources has worked well for his company. Endesa’s operating profit in the first nine months of 2000 rose 20.6 percent. Additionally, the company’s net income for the first nine months of 2001 was 6.1 percent higher than in the first nine months of 2000.

More importantly, the savings from reducing operational costs creates capital resources to invest in new markets and in improving services in existing markets.

Understandably, Endesa’s shareholders are pleased.

Lessons from the Outsourcing Journal

  • Cost synergies and process efficiencies can be achieved through consolidation and standardization.
  • Outsourcing is an effective strategy to accomplish corporate transformation to accommodate expansion.
  • For a win-win relationship, the outsourcer must understand from the outset exactly what short-term and long-terms results the buyer wants to achieve.

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