The IT Outsourcing Question
June 1, 2003
By Lori A. Burkhart
The pros and cons of outsourcing utilities' IT functions.
Utility companies have a lot to think about these days. Whether or not to outsource information technologies (IT) is part of the equation being calculated in the present economy. While some managers feel anxiety at turning over important company functions to outsiders, others see it as an opportunity to free up IT staff for other work. And keeping up with ever-changing technology is a daunting task.
Companies that specialize in outsourcing are certain not only that they can save utility companies money and make utility staff available for in-house work, but that they can improve IT performance, thereby giving their clients a leg up on competitors. Other factors are involved, of course, but the experts believe there is no better time to outsource IT, and that the elimination of operational errors is perhaps the most important advantage to be had. They claim their experience translates into improved reliability, allowing utilities to attain a level of quality and service that could not be achieved alone.
That could explain why BC Hydro on Feb. 28 of this year signed a 10-year contract valued at $1 billion with Accenture, designed to save customers money while improving customer care. BC Hydro will outsource its entire customer services, some IT services, network-computing services, HR services, financial systems, purchasing and building, and office services.
Outsourcing Trends
Experts say that IT outsourcing by utilities will increase. According to Etienne H. Deffarges, global managing partner of utilities at Accenture, the trend is definitely upward. The industry is in trouble and is under financial pressure. Therefore, outsourcing is a fairly reliable way to cut costs. Second, as if cost pressures were not enough, the industry is also under a great burden to improve in areas such as customer service and use of technology.
"A good outsourcing program, principally in an area like customer care-metering, billing, managing call centers-can help improve customer service as well as reduce costs, and that is very important for utilities," said Deffarges. "We actually ran a survey in the United States, where we demonstrated that companies that have the best customer services also have the highest allowed rate of return." He emphasized that IT is an area greatly scrutinized by regulators.
Nicholson said he is starting to see the very beginning of a decentralization trend. "You have two things going on: pressure to reduce IT budgets, and central IT organizations starting to lose some control back out to the lines of business. Those two things together tell us to expect to see more outsourcing. Either one of those factors alone could lead you to the conclusion that you will see more outsourcing, but the two of them together make a pretty strong case," he says. And while the trend may not be toward pure IT outsourcing, it will most likely be toward a combination of business process and IT outsourcing, experts say.
Economies of Scale
Another reason utilities are finding themselves in need of IT outsourcing is purely related to size. Bill Morris, managing partner of Accenture's utility industry group in Canada, says, "If you look at our industry, particularly in North America, it has to be the most fragmented major industry that still exists-300 to 400 utilities, particularly in the distribution and retail segments. Therefore, our industry just doesn't have the scale on an individual company basis either to invest in technology or to build the capabilities in a way to spread the cost economically across their cost base." Morris also said many utilities have governance constraints emanating from state, political, or social constraints, which lower the rates of mergers and acquisitions. Outsourcing is a way to obtain scale through an organization like Accenture, in order to gain those economies of scale, spread the investments, and obtain capabilities the utilities couldn't get otherwise, he says.
The Regulators
Nothing happens in the utility industry without the influence of regulators, especially something like IT outsourcing, which involves a lot of cash and service issues. But the experts believe the regulators need some educating.
According to Accenture's Bill Morris, one of the barriers to outsourcing until recently has been the regulatory environment in the industry. "Once a bunch of these deals are done it is going to be everywhere," he predicted. He believes that regulators have taken the approach that you should not break away IT from the core utility. He said the definition of what a core utility is has changed greatly in the last four or five years, even as regulators have seen the positive effects of outsourceing. "That is prompting the utilities to say, 'Hey, this is an avenue we didn't think we could do before, and we all know we don't have the scale and the ability to do this stuff,'" he said. "Just the conversations we are having with tens and tens of utilities across North America are just showing that momentum is building."
Morris referred again to the customer relationship management study. "The study we have done shows a high correlation between customer service levels and regulator decisions on rate base or whatever environment they have," he said. Morris added that at present he is negotiating a couple deals that are driven by quality and service aspects and the belief that there is more money and return involved.
Deffarges agreed that utilities that do not do their customer care right are very much penalized by regulators.
Lori A. Burkhart is a legal editor of Public Utilities Fortnightly.
European Gas Pipeline Co. (EDS client since 1997)
SITUATION:
New company with no IT infrastructure. Needed a shipper information system for an undersea pipeline in nine months. System requirements included a Web-enabled system with ease of use, capacity buying/selling, and 99.9 percent availability.
APPROACH:
- Plan and build a high-availability IT infrastructure specifically for the system;
- Implement a shipper information system that connects gas shippers on the Internet through a standard Web browser; and
- Provide a fully managed IT service with ongoing software development and maintenance for the shipping information system, hosting and monitoring of hardware, and all desktop services related to the system.
RESULTS:
- Project fully implemented on time and 10 percent below budget;
- Web interface was inexpensive and provided excellent ease of use;
- Infrastructure costs declined by 4 percent per year; and
- High availability needs were met.
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