Outsourcing and the Utility Evolve as a Competitive Age Dawns

As the 21st century approaches and then overtakes the present, conjecture over what the new millennium will bring ranges from the banal to the fantastic to the impossible. But one thing is certain: The electric utility business model will change over the next few years, and it will do so at a rapid pace. In the early part of the new century, outsourcing will play a large role in that evolution-both as a result of the various changes and, to some degree, as a cause of them.

According to a recent study by the META Group’s Energy Information Strategies (EIS) arm, outsourcing within the distribution side of the utility industry will increase significantly between 2000 and 2004. The study, which surveyed about 50 large North American utilities, indicates that utilities currently outsource infrastructure services (design, construction, maintenance) to a high degree, and they will continue to outsource that function heavily in the future. Current outsourcing of information technologies (IT) and revenue cycle services (metering, billing, settlement) is moderate, while customer relationship management (CRM) currently is outsourced at a relatively low rate. According to the META Group study, IT and CRM services, will show the most growth in outsourcing over the next five years, followed by the continued growth in outsourcing of the revenue cycle function (see Figure 1).

Rick Nicholson, EIS vice president, said that the projected increase in outsourcing is a product of the changing utility environment. “We see a number of business and regulatory pressures, such as performance-based regulation and new prudency reviews, driving pipes and wires lines of business toward increased outsourcing of services,” Nicholson said.

“As part of that, we see pipes and wires companies being squeezed into more of an asset owner or asset manager role,” he said. “A lot of the things they may have done in the past that were part and parcel of the distribution function are being either taken away from them or put in an environment where it makes sense for the utilities to look at whether they should outsource the functions. The more aggressive utilities are going to ask themselves how they can maximize the return on their investments and their assets, and one way of doing that is to look at what functions they’re currently performing in-house that might be done better and more cost-effectively by an outsourcer.”

The Virtual Utility

Like most any significant change in the current utility industry, the move toward a greater degree of outsourcing can be attributed to deregulation’s imminence. Peter Bendor-Samuel has been studying outsourcing, both as a supplier and as a consultant, for nearly a quarter of a century and currently serves as the editor of the Outsourcing Journal (www.outsourcing-journal.com) and as president and CEO of The Everest Group, which provides consulting to companies with outsourced processes. He believes that the push toward more outsourcing agreements in the utility industry is a direct result of the move to a more competitive marketplace.

“Under regulation, industries are more bureaucratic, less efficient because of the lack of competition,” Bendor-Samuel said. “Once an industry is deregulated, the participants have to start looking at how they can cut costs and do things more efficiently. They’re looking to minimize capital investments. Outsourcing works well in this environment because it lets the industry participants use what we call OPM-other people’s money.”

But beyond its passive role as an effect of changes taking place in the industry, increased outsourcing will also be an active driver of change, transforming the existing utility into what Nicholson refers to as a “virtual service network.”

“In the past, you had a situation where nearly all the services were provisioned internally by the utility,” Nicholson said. “Now you’re moving toward a future where you have a mix of services that are internally and externally provisioned, and that mix changes over time. That network of services, both internal and external, is what we refer to as a virtual service network. The role of whoever is handling the outsourcing is going to be a role of managing this mix of services-this virtual network of services coming from a whole host of sources.”

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A prime example of this fundamental change in the utility business structure is embodied by DTE Edison America. Headquartered in Ann Arbor, Mich., DTE Edison America is the deregulated subsidiary of DTE Energy Co. and serves the small-business and residential markets in the deregulated Pennsylvania energy market. The utility expects to begin providing energy to New Jersey in the first quarter of 2000. DTE Edison America’s current business model looks remarkably like the utility of the future Nicholson described as a virtual services network. Leslie Christensen, DTE Edison America vice president, even uses words similar to Nicholson’s when she describes the nature of her business.

“We were designed from the beginning as a virtual business,” she said. “DTE Edison America was founded as a way to go out and explore the new way of selling electricity to a specific type of customer. To achieve that, we wanted to outsource non-core processes to the best of the best outsourced suppliers.”

In the case of DTE Edison America, the customer service function is among the processes deemed non-core. DTE Edison America recently entered into a 24-month contract with teleservices agency Ron Weber and Associates (RWA), which now handles the majority of DTE Edison America’s customer service. RWA representatives not only answer incoming customer calls for DTE Edison America, they also respond to customer e-mail and faxes and make outbound calls to credit card paying customers to alert them when their cards have expired. In the not-too-distant future, RWA call center representatives also will offer natural gas and telecommunication services to customers when they make their outbound calls.

What that all adds up to is a multi-purpose outsourcing arrangement that allows a lot of room for the growth that DTE Edison plans to experience. Despite the fact that cost savings is the main driver behind most outsourcing decisions, Christensen said that the flexibility of the RWA arrangement and the expertise that RWA can provide were major criteria in making this particular outsourcing decision.

“It does come down to the money, but it also is a great deal about focus,” she said. “DTE Edison America is at its heart a marketing company. That’s what we want our focus to be on, getting and keeping customers. If you think about all the work that a customer care center does-hiring people, training people, doing all the process improvement work-the idea of partnering with people who are the best of the best at what they do so you don’t have to develop that competency within your organization is very attractive. We’re a small company, and we can remain small but serve a large group of customers by using a group of vendors who are the best of the best in their respective areas.”

You Get What You Inspect

The benefits of outsourcing are many (see Table 1), but outsourcing also has its inherent risks. Chief among those risks is the fact that in an outsourcing relationship, the client turns over a great deal of power to the supplier, said Bendor-Samuel. “In an outsourcing agreement, the buyer transfers ownership of the process to the supplier,” he said. “You don’t have as much say in how the supplier carries out the individual tasks within that process as you would in a simple contracting agreement. You simply hire the supplier to get you a result, such as a certain number of meters read in a certain amount of time with a certain degree of accuracy. The minute details of how those meters are read-whether the supplier drives by or walks by, or what type of vehicles they use-are largely in the hands of the supplier.”

For that reason, it is in an organization’s best interest to keep close tabs on the supplier in an outsourcing agreement. “You need to be very good at vendor management,” Christensen said. “You can’t just hire out a call center and then walk away from it. You have to be very involved in what the vendors are doing. You need to have a daily presence in their minds.”

Bendor-Samuel agrees. He says that many of the problems that arise in an outsourcing relationship are due to the fact that companies don’t always have a good understanding of the specific arrangements they’re entering into. “People know how to buy tasks, but that’s contracting, not outsourcing,” he said. “They don’t know how to buy processes, and that’s what you’re buying when you outsource.”

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Bendor-Samuel said that to have a successful client/vendor relationship, it is important that sourcing companies understand the principles of an outsourcing agreement and that they constantly monitor the vendor’s work. “You get what you inspect, not what you expect,” Bendor-Samuel said. “You have to set out in advance what it is you want the supplier to provide. What is the process? That process has to be something measurable, and you have to measure the supplier’s results over time or you won’t get what you paid for. Many companies that enter an outsourcing relationship don’t understand that. They don’t understand how to measure what they’re buying.”

DTE Edison America has taken steps to ensure that its relationship with RWA doesn’t fail on that note. Christensen said that RWA’s process improvement procedures were what separated the teleservices agency from other market participants. “Ron Weber has a team of people that all listen to the calls every day, and we have people from our group who do the same,” Christensen said. “We’re all constantly listening to what the reps are saying, both the tone of their voices and the content of the information, and we’re always working together to improve the process. It isn’t once a week that we do this; we do it on a daily basis.

“We all have agreed on what we want from a tone of voice perspective and also from a content perspective. We’re always listening to find out if our reps are giving customers the correct kind of customer care.”

Mutual Evolution

Just as an increase in the level of outsourcing will change the look of utilities and how they conduct business in the near future, the evolution of the newly deregulated electric utility industry will have an effect on the nature of outsourcing agreements. The third-party supplier market will adjust to the uncertainties of a changing electric industry and provide outsourcing contract terms more amenable to the flexibility that the new utility will demand.

“If you look specifically at IT outsourcing, the norm in the past was for a utility to outsource their entire IT organization lock, stock and barrel,” said Nicholson. “To do that, they had to sign a relatively long-term contract with the supplier-say 10 or 15 years.”

“We see that two things will change dramatically,” he said. “One is that the type of outsourcing is going to become much more specific. Instead of outsourcing an entire IT department, utilities will look at their organization and ask themselves what they are doing well, what they aren’t doing well, and they’ll get more granular about what they outsource. The second thing is that the terms of the contracts will be much shorter. There’s so much uncertainty (in the industry), it’s hard to lock yourself into a long-term contract.”

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