Outsourcing Helps Utilities Grow and Prosper
By Sekhar Kondepudi, Diablo Research Co.
Outsourcing, once a code word for “downsizing” in major corporations, is quickly becoming a strategic tool for sustained corporate growth and stability in companies of all sizes. An increasing number of companies nationwide, including utilities, are establishing strategic alliances and partnerships with external contracting companies to get specialized expertise that is either unavailable or over-committed in-house. This article examines ways to maximize this resource and establish the most productive relationship possible with providers of outsource services.
Outsourcing is not a new concept in business, but it is getting more attention in this era of the lean, mean corporation. Traditionally, outsourcing refers to situations in which a company contracts with an outside provider instead of using internal resources. This ranges from temporary office workers to fill in for a secretary`s vacation to contract sales representatives to research and development and contract engineering. The benefits of outsourcing include reduced costs, accelerated development schedules, immediate access to special expertise and the ability to focus on the core activities of the business.
Outsourcing cuts costs in several ways. As the cost of maintaining full-time employees continues to increase, outsourcing allows companies to staff at appropriate levels for standard operations, adding outsource services to fill peak demands in a cost-effective manner. Companies also avoid the disruption of continuous hire/layoff cycles. In a well-managed outsourcing relationship, companies pay only for the services they need at any given time.
The New York City-based Outsourcing Institute reports that more than 85 percent of companies in the United States now outsource work they used to do in-house. According to Dun & Bradstreet (D&B), the outsource market will grow to $180 billion in 1998. A large share of this market is related to high technology, engineering or software. D&B reports that the primary driver behind this market growth is instant access to specialized expertise. In a time of severe shortages of high technology and engineering talent, instant access to an experienced pool of technical talent is a critical benefit. It`s especially beneficial when a company can access an entire team that can manage an entire project, as compared to lone consultants.
Utility Industry Outsourcing
Like the rest of the business world, outsourcing is not new to the utility industry. Billing and other customer information systems have long been outsourced. More recently, there has been a trend to outsource meter-reading activities, especially in today`s deregulated environment. Several large utilities outsource meter reading to companies like CellNet and ITRON, that develop the product and infrastructure. Another example is KN Energy, which launched Internet access services for utility customers using wireless Ricochet modems, outsourcing the technical aspects of the project to Metricom, the makers of Ricochet.
Institutes like the Electric Power Research Institute (EPRI) and the Gas Research Institute (GRI) are effectively contract management research firms. These institutes were created by industry leaders who recognized that as the pace of technological change accelerated, it became more and more difficult for utilities to justify the cost of full in-house research laboratories. It`s more prudent for utilities to use these funds to contract research and development (R&D). This model has proven successful and many new technologies have been developed and commercialized as a result of this approach. Interestingly enough, even GRI and EPRI use outsourcing for a large percentage of the work they do in developing these new technologies. In the utility industry, what`s new about outsourcing is its dramatic increase due to the demands of the deregulated utility business environment. Market dynamics are changing rapidly. Utilities are scrambling to cut costs, improve customer service and increase offerings. Those slow to adapt will be left behind and hampered in their ability to catch up due to inadequate regional market information and experience.
Forward-thinking utilities are developing value-added products and services to offer their customers. These offerings include: AMR, remote meter disconnects, time-of-use pricing at the meter, load management, customer-determined billing cycles, outage detection and restoration at the meter, energy management, bill disaggregation and utility modified setpoints for demand-side management. In addition, utilities want to position themselves as the primary source for advanced non-energy related services like security, medical monitoring and home automation. In competition with telephone and cable companies to be the primary provider of information services in the home, advanced services like Internet access, appliance monitoring, financial and insurance services and long-distance bundling are also being considered by utilities and offered in some cases. The need to create and offer new services often tax R&D resources within utilities. Deregulation has led to the shrinking of internal R&D departments in utilities as cost cutting measures are implemented. This, combined with the increasing need for totally new product and service development, has created a void.
Product development and contract engineering companies like Diablo Research are filling this void. In 1997, the Sunnyvale, Calif., firm performed more than 150,000 hours of utility-related project work and, according to Tim Tight, Diablo`s marketing and sales vice president, expects to double that amount this year. “We`ve never seen so much demand for outsourced engineering services by utilities,” he said. The demand is so great, Diablo recently created a new division, the Home Automation and Utility Services division to address the need.
Picking a Partner
So, you`re a forward thinking utility and want to develop a new set of value-added products and services, but you lack the internal resources to identify the technology, develop prototypes, perform proof-of-concept work, test the prototypes and bring the products to full scale implementation. It`s clear you need an outside resource. How do you choose the right one? How can you best work with them to get the most for your money? Here are some guidelines.
The most important aspect of choosing an outsourcing provider is finding one that`s a good fit for the way you like to do business. What works for one company may not work so well for another. To develop an initial list of prospects, review utility publications and resource directories.
Ask around at industry conferences and trade shows. Visit booths and request follow-up information. At this stage, you`re looking for companies with a history of doing the work you have in mind. Evaluate their list of current and former customers. Use the Internet for research. Visit the Web sites of companies you`re interested in. If a prospective partner doesn`t have a Web site, they`re probably not at the cutting edge of technology. Also, look at geography–is it important to work with someone nearby, or are other considerations more important? Most companies, in this age of instant communication, don` t find distance a deterrent in choosing resources.
Experience is the most important factor to consider in selecting an outsource partner. For example, many utilities have development plans that revolve around the use of an existing two-way communications infrastructure, such as AMR, building on that base. In this case, the outsource partner should have extensive experience and industry relationships in AMR, utility communications networks and associated technologies. For most utility projects, familiarity with technologies including power line carrier (PLC), radio frequency (RF), wireless and wired local and wide area networks is also important.
Once you`ve narrowed your search to five or six firms to consider, meet with principals of each firm and discuss your needs in detail. Ask for references from current or former customers. Look for demonstrated expertise in the areas you need. Follow up on the references, asking for a detailed critique of the outsource company`s performance. Here`s a list of the critical qualities you should look for:
Depth and breadth of experience. A contracting firm should have broad experience in a number of areas, as well as experience that goes deep within each area. This shows that the company employs people who are interested in a wide range of related technologies and have the capability to develop expertise in each of them. A fundamental understanding of state-of-the-art technologies is mandatory. For utilities, this includes PLC, RF, infrared, LANs and WANs. It`s also important that they have a firm grasp on the realities of the marketplace and the application of these technologies to fit marketplace needs. One way to measure this sense is to look at the backgrounds of key individuals within the company. Ideally, you`d like to see people with some entrepreneurial background and solid business experience in getting new products off the ground successfully.
Turnkey services. A good contractor provides services from concept to prototype through final production. The ability to take a “drawing on a napkin” and turn it into a fully
developed product is an excellent measure of how good the firm really is. Ask for examples.
Quality and standards. A properly defined and well-implemented quality and standards policy is a sign of a committed contracting firm. Many engineering firms are touting ISO 9000 certification as an indication of quality. While true, it is not the only sign of a quality company. ISO 9000 implementation can be very expensive and these costs are typically passed along to customers. A well-documented quality assurance program is usually adequate. Look at the company`s design processes and review system. Judge how important this is in the culture of the company. Find out if the company tracks quality results.
Confidentiality of proprietary information. This is an absolute. Most products in development have intellectual property associated with them and a contracting firm that cannot demonstrate its commitment to the appropriate treatment of these issues should not be used. Non-disclosure agreements are standard, but not always taken seriously.
Innovation. Innovation in using other technologies and seeking new solutions can be of great benefit for customers. For example, in creating the underlying technology for the Whisper suite of automatic meter reading products, Diablo Research used a spread spectrum technology originally designed for a two-way paging system–a completely different application.
Making the Partnership Work
Once you`ve found the perfect partner, there are many things you can do to make the relationship work to its maximum effectiveness. A number of companies have adopted the term Phase Zero to describe the specification definition and consensus phase. This phase is extremely important to the success of the project and the satisfaction of the client. It is here that communications architecture and protocols are agreed to, performance specs and testing standards are sorted out, technical tradeoffs are identified and schedules and budgets are verified. It is also in this phase where the critical question, “How do we know when we`re done?” is asked.
A series of milestones and critical design reviews will come out of Phase Zero. To assure the fastest development time, you must make supporting this process and providing feedback to technical questions the highest priority. There should be a clear agreement on how scope changes will be handled.
In addition to the design reviews, it is imperative to establish and support continual communication. From the outset, set up a regular schedule of meetings. They can be face to face, videoconferences or conference calls–whatever fits best into your company`s culture. You can mix the three in any way that makes sense to you and to your project. Establish protocols for the electronic exchange of files and e-mail, so technical glitches in communication don`t mar your progress.
In large projects, the logistics usually involve an account team from the service provider working with your contract management team. In smaller projects there is usually a less formal approach, but the need to dedicate time and resources to project coordination cannot be overemphasized. You can help the project run smoothly by recognizing this need and by not changing contract management personnel during the course of the project.
Staying on Schedule
One of the most essential attributes of a good contractor is reliability. As your project progresses, track schedules and note any delays, slip-ups or deviations from the original specifications. Bring these concerns to light in your regular meetings and make sure your partner understands your insistence on meeting deadlines. Establish a procedure of notification if delays are anticipated and make sure there`s a good reason. It is also recommended to have the contractor regularly communicate percentage of completion and expected cost at completion.
A related issue is speed. Responsiveness on both sides of the project is key. Your outsource partner should act quickly on suggested modifications and you should commit to quick turnarounds on matters needing your input. Don`t hesitate to insist on timely responses and don`t slow up the process on your end. Flexibility is also important. You want your contractor to be flexible in dealing with your requests as the project moves forward, but watch out for too much flexibility–there`s a fine line that a good contractor knows how to walk. Too much flexibility can adversely affect a project`s quality and run up costs. One of the signs of a good contractor is the willingness to stand firm on issues that affect quality and the bottom line.
Finally, remember that this relationship will only be as good as the effort that is put into it by both parties. You can`t simply hire an outsourcing firm and tell them to go away and come back when the project is done. Chosen and managed well, the strategic use of outsourcing can help you meet challenging objectives and give you a competitive advantage as you wring the most out of every R&D dollar. A well-planned approach to outsourcing, including careful analysis of contract resources, documented project planning and continuous coordination throughout the project`s life is essential.
Sekhar Kondepudi is Diablo Research Co.`s Business Development Manager, Home Automation & Utility Services. His primary responsibilities lie in helping the utility industry identify and develop new value-added products and services. He is very familiar with the outsourcing industry having outsourced work from his previous jobs at EPRI and the U.S. Environmental Protection Agency (EPA).
Sekhar holds a bachelor`s of science degree in mechanical engineering from the Indian Institute of Technology, Bombay, India, a master`s of science degree from Colorado State University and a doctorate from Texas A & M University in the same field.
(Left) Forming a good working relationship with your outsource partner along with continuous coordination throughout the project`s life is essential to a successful outcome. One advantage of working with contract engineering and product development companies is that they have teams of specialists and millions of dollars of design and test equipment to instantly focus on a project.
Every design company has its own internal processes for assuring satisfied customers. This flow chart shows how one such company goes from initial specification phase to final production. A similar chart exists for software development.