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Business Process Outsourcing: Taking the Lead with IT

Investor-owned utilities (IOUs) are good candidates for outsourcing some of their in-house functions. The recently completed $3.5 billion transaction between TXU and Capgemini has brought a lot of buzz to this market segment.

The electric utilities industry has seen a number of industry events that have resulted in an increased focus on costs--always a good catalyst for outsourcing. For example, many trading operations lost a lot of money in the post-Enron meltdown and a number of foreign investments have turned out to be poor. Further, deregulation has forced many utilities to develop and manage cost-effective retail operations with contact centers. Some have discovered that external parties can not only do this for less money, but at a higher quality (e.g., shorter hold times) that can help them retain customers.

At the same time, several of the larger suppliers are making the energy/utility vertical a specialty. They include Accenture (BC Hydro), Capgemini (Hydro One), CSC (San Diego Gas and Electric), EDS (Avista), and IBM (Endesa).

Luckily, most utilities are large enough to provide enough scale for the outsourcing providers to be interested. Many utilities have already moved or are in the process of moving to shared services, which makes outsourcing the function easier for both the utility and the potential outsourcer.

The best candidates for outsourcing are a utilities' selling, general, and administrative (SG&A) expenses. This includes traditional outsourced cost areas like IT, finance and accounting, human resources, and procurement. In addition, some vertical industry solutions like wholesale bill clearing are outsourcing possibilities. The utilities industry's SG&A spend accounts for an annual cost of $19.1 billion, based on the most recent figures from the Department of Energy's Electric Power Annual.

Other good outsourcing candidates are portions of the non-fuel operations and maintenance costs (O&M). The Electric Power Annual estimates IOUs spent $25.1 billion on O&M in 2002. Third-party vendors already perform some activities like scheduled power plant maintenance. However, some IOUs believe this area is core to the operations since it is a source of their competitiveness. In that case, it is not a candidate for outsourcing.

The Possible Savings Can Be Billions

Outsourcing both IT and business processes in these two areas can generate potentially large savings. Gartner estimates utilities spent between $5-$6 billion annually on IT according to its 2001 IT Spending & Staffing Survey. We extrapolate that utilities spend between $5-$13 billion per year on business processes. Most outsourcing transactions we see generate net savings of between 15-35 percent. Making some reasonable assumptions about what is outsourceable, we estimate possible savings for the utility industry range from $1.5-$6.6 billion annually.

If the utility chooses to offshore some of its business processes or parts of its IT, the savings are bigger. We've seen offshore implementations produce savings of between 1-3 percent of the bottom line. For example, for a utility with annual revenue of $10 billion, we estimate the total employee expense is 35 percent. If the utility offshored just 10 percent of its workers and the savings were 25 percent, the utility could save $87.5 million. If the offshore savings totaled 40 percent, the utility could save $210 million.

Given the increasing competitive intensity in the industry, it is no surprise that utilities are turning to outsourcing as a tool to improve their performance. It is important that key functional leaders in IT, HR, and other support areas systematically identify opportunities to apply outsourcing to drive their businesses forward.

Publish Date: October 2004

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