BPO for U?

Richard Goreing, BPO regional manager, EDS and Sunil Sharma, managing consultant, EDS

July 17, 2003 — In this EL&P web exclusive, experts from EDS discuss whether business process outsourcing is viable for utilities.

According to research from IDC, worldwide spending on business process outsourcing (BPO) services totaled US$712billion in 2001 and the market is expected to reach US$1.2 trillion by 2006.

Couple the above statistics with utilities’ intense focus on asset profitability, process centric thinking and economic value add, and we have a strong motivation for BPO. Indeed, what was often considered fixed cost overhead should now be viewed as a series of variable business processes that should be managed with the ebb and flow of the business. Fixed costs, intrinsic to back office, and indeed some front office activities such as customer response centers, can now become variable costs, growing and shrinking according to the changing marketplace and business needs.

Deciding among the various BPO possibilities – and the best manner in which to outsource – will depend on an organization’s unique requirements and its overall strategy and objectives (see “insource/a la carte/full service” figure).

Full service outsourcing involves delegating all parts of the process to a provider and allows organizations to cut costs and gain advantages of process and scale of economies.

The logical pairing of two or three processes that results in a more comprehensive BPO is becoming more alluring. An example is when accounts payable and procurement can speed up a company’s procurement activities as well as reduce the cost of purchased materials.

It’s also worth mentioning a shared utility strategy, where outsourcing a process but retaining a stake in the utility to gain an economic return through providing this capability to other organizations within the industry is a strong consideration. For example, a power generator takes a stake in a joint venture and a shared service center for its finance, procurement and administration function, and then actively sells the same service to other companies within its sector.

With so many options available, companies don’t often manage to realize all the BPO benefits of cost savings, improved efficiencies linking them to business performance and increased shareholder value. So to avoid under-whelming themselves, companies should consider taking to scrutinizing the whole organization, paying attention to the following:

Standardization: The first thing an analysis should reveal is whether or not standard processes and procedures are in place. Is there a best practice process for the organization or is every facility operating differently? Improving and maintaining certain processes requires a hefty capital investment, whereas outsourcing them will save the capital cost.

Training and knowledge sharing: Simply identifying, developing and creating the right cultural environment for best practices to be shared between functions, groups and business units is another effective way of improving internal performance.

Consolidation: Rather than have many people, places and centers performing the same function or process, companies should consolidate resources into shared service centers, with potential immediate cost savings of 15 to 40 percent possible.

Digitization: Web enhancements or interfaces can bring self-service options to companies’ internal processes such as benefits, procurement, finance and accounting.

But while advances in technology afford companies new ways to cut costs and become more efficient, they are also fertile ground for asking fresh questions and reassessing current practices. After all, ten years ago many companies would or could not consider going offshore or even creating shared service centers. As mentioned above, when considering various outsourcing models, the next step is to hand over responsibility for shared service centers to a single provider that also serves other companies through such a facility. In doing so, companies can obtain full advantage of economies of scale and process efficiencies (see “BPO/Benefits of scale efficiency” figure).

Outsourcing is a tremendous opportunity for many utilities, but faith must be tempered by reason. The leap from make to buy requires a clear strategy, and a factual assessment of the company’s strength, weaknesses, and objectives. The balance should swing towards BPO when providers offer:

* Dramatic cost savings from cheaper labor and procurement, lower capital intensiveness and bigger scale;
* A location, process technology or capability that would be hard to acquire or reproduce;
* Improved productivity and a more diverse user base, which helps to cut down on supply surpluses and shortages;

While the above may all stack up to be extremely enticing, utilities should also consider the following:

* Contract with a provider that has BPO experience and has core capability in this arena;
* BPO is about building a true partnership, often revealing intimate cost and budget information relating to the operations. This will require serious cultural issues to be tackled in order for organizations to help the provider help them.
* The element of anxiety amongst in-scope employees will be high – both the provider and company must work quickly to develop and deliver the appropriate communication messages, particularly in any heavily unionized environment; the sooner the better.

For more information, contact Sunil Sharma at sunil.sharma@eds.com, or visit the EDS web site at www.eds.com.

EDS is a leading global services company that provides strategy, implementation, business transformation and operational solutions for clients managing the business and technology complexities of the digital economy.

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