Reducing risk exposure through outsourcing


By Jamie Biddle, CEO of ORCOM

June 11, 2002 — Utilities today are faced with more risk and uncertainty than in any time in the last 100 years.

Deregulation of the electric market appears stalled, privatization of the water industry is moving backwards, rate increases are no longer a sure thing and consumers are expecting improved customer service. At the same time, Wall Street is demanding steady earnings growth from Investor Owned Utilities, while profits from highly touted new lines of business, such as energy trading and telecommunications, are proving illusive.

Municipal and co-operative utilities are finding it difficult to find and retain technology and operational experts at a time when customer retention is vital.

How does a utility CEO prepare for an uncertain future, improve earnings and retain competitive agility while limiting the risks associated with making the wrong investments? Improving customer care and billing can have a positive impact on these issues. It can be a proactive response to community and regulatory pressure and improve customer retention, revenue growth and cash flow. However, making the wrong technology investments when capital is scarce is very risky.

Failed software implementations, shifting business models, technology obsolescence and the possibility that regulatory authorities may disallow the recovery of investments are huge risks in today’s business climate.

It has been researched that one in four CIS implementations fail. Failed implementations are costing utilities both time and money, not to mention jeopardizing the status of important data such as customer history and records.

The uncertain status of deregulation and the rise in merger activity require very flexible technology platforms to adapt to shifting business models. Technology purchased to manage business processes today must have greater long-term potential as technology integration issues become more complex and processes must be quickly adjusted to meet ever-changing supply and demand issues. Investing upfront in new technology may not provide the flexibility required to add acquired customers or bill for additional services and may become stranded costs as business models change.

Keeping up with rapidly changing technology requirements is difficult and expensive. If the enterprise has failed to optimize its traditional business processes, it will soon be overwhelmed with the compound effect of trying to keep up with both old and new technology and become victims of technology obsolescence.

In addition, utility commission may disallow the recovery of investment in rate base. This means that utilities may not be able to recover major investments in new technology at a time when capital investment is needed in new revenue producing assets.

Utility industry analysts are increasingly suggesting outsourcing functional areas such as customer care and billing as a way to reduce these risks. An outsourcing partner can take control of aligning technology, operating costs and business strategies by deploying professional management techniques. Leverage an outsource vendor’s economies of scale can spread risk more equitably across the enterprise


Analyst Expectations

Analysts believe that by outsourcing customer care operations, utilities can save millions of dollars and headaches while increasing their quality of service. According to Gartner Group’s Predictions for 2002 published in January, “Outsourcing and trusted suppliers will take more control as capital spending reduces in favor of operating budgets.” This is no surprise following Dataquest’s recent reports predicting exponential growth in the business process outsourcing area. According to Gartner, Worldwide, BPO services will grow from $207.7 billion in 1999 to $543.5 billion in 2004 [May 2000, Scholl] and outsourcing revenue will reach $101.6 billion in 2001, an 8 percent increase over 2000 revenue of $93.8 billion [Dec 2001, Caldwell].

Outsourcing customer care and billing can greatly reduce operating costs while improving customer satisfaction. At the same time, outsourcing reduces the risks and costs associated with major investments in new technology. Hiring operational expertise and investing in new technology is risky in an uncertain market environment. Purchasing, supporting and upgrading software and hardware can easily stretch into the multi-million dollar mark not including the cost of staff to operate these systems. Then there is always the issue of time. Delay, faulty operations or on/offsite repairs can cost utilities million in cost overruns.

Keeping in mind the risks addressed earlier, let us take a look at one energy company in utility to better understand the extent of these risks and how outsourcing met their needs on multiple levels.

Case Study-Power Company
One U.S.-based power company serving more than 350,000 accounts purchased a third party software solution and was having extreme difficulty getting it live in time for an approaching deregulation deadline. Desperate for an immediate solution, the utility approached an outsourcer who promised to have a system in place in time to meet their deadline. In addition, the outsourcer promised that the utility no longer had to worry about maintaining any technology infrastructure, nor did they have to worry about long-term upgrades. By outsourcing, the utility avoided spending capital expenditures on infrastructure.

The bottom line was that the outsource solution met the deadline while relieving the utility of all the risks discussed above:

* The outsourcer now had to worry about technology obsolescence, not the utility
* Because service levels were in place, the utility did not spend its time worried about failed implementations and could concentrate on servicing their customers
* Outsourcing the solution streamlined the utility’s business model; Only a few delegated customer service reps were given the task of maintaining every-day contact with the outsourcer
* Deadlines and necessary regulations were met on time and up to par with requirements; the third party software solution however was a lost investment


Using outsourcing as a way to reduce risk may be new to the utilities industry, but not to business. Other industries, like telecommunications and finance rely on outsourcing as a means of refocusing on competency and delivering excellent service. Competition has dictated such. It is only now, in the aftermath of deregulation and an increasingly changing energy market that utilities are waking up to similar issues. One could expect that analyst predictions are right on and that utilities will understand the cost advantages and competitive advantages of outsourcing, and follow that path to profitability.

Biddle is the CEO of ORCOM solutions based in Bend, Ore. He can be reached at Jamie_biddle@orcom.com.

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