Title: Next Generation Challenges of Outsourcing in the Utility

Industry

As shown in Figure 1, the outsourcing business from 2004 thru 2007 is trending
downward. This trend is puzzling to some and fully understood by others
including myself. Energy and Utility (Electric & Gas) industry expectations are
increasingly called upon to improve service levels, customer satisfaction and
optimize their cost structure.

$M
6,000

5,000

4,000
BPO
3,000
ITO
Next Generation
2,000 Outsourcing Model BPO
Sourcing to Pay
Hire to Retire
1,000 Account to Report
Meter to Cash
0 ITO
IT , ADM & IM
2004 2005 2006 2007

Figure 1. Status of Utility Outsourcing Market

Total Contract Values Signed ‘04-’07

Furthermore, following the passage of Energy Policy Act of 2005 and in light of
the numerous issues facing the industry today, see Figure 2, there is a
tremendous need for cash that is certainly far exceeds the cash flow generated
from operations. Highlighted financial pressures continue to plague the industry
as companies strive to balance adequate shareholder returns with reasonable
rates in a period of intense infrastructure investment and rising fuel prices.
Multibillion dollar capital requirement over the next decade will put stress on the
traditional financial strength of the industry. Meeting those needs represents a
significant challenge. Companies will continue to struggle to provide investors
with growing returns while keeping their focus on their business. This is in
addition to PUCHA repeal and the desire to grow adds another dimension to the
challenge of meeting their desired objective of acquiring other assets and being a
player in the expected industry consolidation.
 Industry
Consolidation (M&A)

Regulatory New Technologies

Issues AMI, Smart Grid
& DR

Wind and
Renewable Industry Aging Infrastructure
Reliability &
Power
Challenges Network Constraints

LNG Supply Constraints

Development •Nuclear
•Clean Coal
•Gas
Information •Etc
Management

Utilities are challenged by costly and at times inflexible issues…..

Figure 2. Current Industry Situation – Energy Bill

It is also obvious that it is almost impossible to generate enough cash from

generation to fulfill their needs. It is also obvious that unlocking their hidden
assets that are embedded in their front and back offices (outsourcing) should be
seriously considered!! What happened? Further analysis to Figure 1 as well as
what is going on in the market revealed the following:
1. Numerous outsourcing deals that were signed since 2002-2007 are under
review for numerous reasons
2. Since 2004-2007 the industry signed more deals but the TCV in $$ are
much smaller, and
3. The number of BPO deals are almost twice the number of ITO
(IT,ADM&IM)…
This is revealing indeed. The industry is still very interested in outsourcing some
of their processes while awaiting the result of the ongoing reviews.

Further analysis of this situation indicated that outsourcing “is pre-eminently a

place of leadership”. The utility executives, while watching the deals under
review, are not sure yet whether outsourcing will work for them. They could get
swamped by unanticipated problems or suffer from crippling flaws they have not
yet seen or heard of. All outsourcing deals are blind dates between the utility
and the service provider/vendor. This huge customer’s expectations gap have
developed during the selection process and get wider during contract negotiation.
In most cases the customer follows the typical procurement processes in
selecting the vendor. After the selection is completed attention is focused on
negotiating the outsourcing contract and arguing on its constituent clauses.
Some of the clauses deal with the scope of the maintenance as responsibility for
the help desk, data center operations, etc. while others deal with the service
levels. In the absence of integrated models and best practices that helps both
parties, the negotiations tend to focus around service levels, extent of disaster
discovery, contingency need and the role of the helpdesk!! There is a strong
need for both the customer and the vendor to focus on the maintenance models
that will be adopted to provide the service. These models would help them to
define the appropriate process, metrics and governance structure to ensure
engagement success. For example, the maintenance process is different from
the process currently used, this may lead to longer transition times and ultimate
user dissatisfaction. Customers also need to evaluate the proprietary tools and
techniques of the vendor to assess their impact on the outsourcing contract.

Given the increasingly strategic value of IT systems and processes, the

maintenance models for outsourcing of business critical systems need to be
managed at a strategic level as opposed to the tactical level approaches
currently used. Typical maintenance services contracts, which are quantified by
service level agreements (SLA’s) reflect metrics that are defined once at the start
of the contract, and reported on regularly for the rest of the contract duration.
They focus more on what is expected for the sustenance of the current systems
than on how to ensure better value for the vendor services during the contract
period.

From the customers perspectives the SLA document should be a “living” one,
highlighting current “business value” and adequately balancing the technical and
non technical aspects of the relationship between the customer and the vendor.
As arbitration and cancellation are really the last choices in an outsourcing
contract, it is necessary that the maintenance model used fro outsourcing. TO
better understand this we will present the perspectives of the customer and the
vendor in an outsourcing relationship.

A further diagnostic made also revealed a certain behavior that evolves between
the customer and the vendor. This is the expectation gap that already existed
prior to the contract signing but was not addressed during the courtship and
infancy periods. This gap gets even wider if the relationship is ever allowed to go
through the “valley of despair” that is caused due to in ineffective change
management process. See Figure 3.
 Inflection Point FUTURE SUCCESS
Growth, innovation and
entrepreneurship are the rule
• Reinvigorate account mgnt.
leadership
•Need to reintroduce vendors
capabilities to customer
Time to • Co-develop future plan
Reassess/review “Crisis of • Review SLA’s and governance
Adolescence” models
PEAK PERFORMANCE
Organization knows its business and is
Good change mgnt will poised for growth and innovation
never allow the
Customer to go through
the valley of Despair STABILITY & COMPLACENCY
Continue with current leadership team skill sets
.
Value
PRIME
Customer Pathway ARISTOCRACY
Finger pointing, cannot see or solve problems
ADOLESCENT
Typical Start up over, crisis of leadership. growth
“Valley of Despair” and innovation lacking; need new talent
Cost Reductions
Achieved
BUREAUCRACY
Organization is on life support

Transition • Changes resulting from

Complete transformation could have major
Value

INFANCY impact on relationships

Agreement signed, just getting
organized, transition has taken place
. DEATH
COURTSHIP
Contract not signed yet. Wild enthusiasm
and unrealistic expectations
.
Time
12-18Mo
Later
12-24Mo 24-48Mo Time
TRANSFORMATION

This analysis is based on the work of Ichak Adizes work on Corporate Lifecycles

Figure 3. The Outsourcing Lifecycle

Behaviors typical at the “crises of adolescence”inflection point are:
Customer View :
Require further improvements in costs and service
Expect more investment from “gain-sharing’ with service provider
Demand greater flexibility to meet changing businesss needs…
Vendor View:
Focused on creating/maintaining stable service delivery..
First priority is cost reduction and service level performance..
Second objective is risk avoidance…
Innovation viewed as potential threat to stability and near-term profitability..
Shared Views:
Other party is trying to extract more than contractually agreed to..
More conflicts arise as parties attempt to balance changing business
requirements with a delivery model predicated on efficiency and low cost..

This inflection point is reached due the presence of a huge gap of expexctations
that exists between both party from day one but was not addressed due to
numerous factors including ineffective Change management process or poor
Governance model…

The customer’s expectations are usually inclusive of an expected business level

benefits from outsourcing and desire in achieving consistency and coherence in
measuring and managing the vendor performance beyond technical factors. The
expectations usually result in certain questions facing the customer such as:
 How to include the strategic elements of value in vendor performance in
addition to the tactical metrics?
How to acquire a good view of vendor’s strategies and influence them to this
advantage? Does the vendor consider the utility vertical as a strategic
element of their global growth?
What is the appropriate governance model that enables the customers to
conduct periodic vendor evaluations that aligns with the business needs?
How to set and update SLA’s on an ongoing basis to realistically reflect
users needs? (This is necessary as SLA’s set at the start of a contract may
quickly lose their significance and can be of limited value to the users)

The vendor meanwhile would like to have a long tern contract that is profitable
and potentially growing in value due to major enhancements to either the process
or applications supported. Some of the questions vendor management usually
face are:

Where should investments be made and in what quantum to achieve

additional customer business?
How to align the future investments with the customer’s business strategy?
What are the metrics that need to be cascaded to balance the technical side
of delivery on projects with the overall account management?
How to maximize the engagement profitability without impacting customer
satisfaction?

Given the fact that all outsourcing engagements are signed for several years, the
new model for future engagements need to integrate the seemingly contradictory
customer and vendor objectives. This new model should be around achieving
these four (4) major elements:
Integrated. Allows customer and vendor to see clearly the mutual
dependencies and develop a structured method to manage.
Coherent. Manage diverse priorities and ensure proper utilization of scarce
resources by evaluating them against agreed value propositions.
Balanced. Take into account that priorities change over time. Manage and
execute accordingly.
Flexible. Permit the use of existing and proven models as complimentary Comment [A1]: Pls make it same color as
Integrate,coherent and balanced..
and facilitate the transformation of business value propositions into definable
projects.

In essence, the model should assist quantitative predictions of the current and
future performance of the contract, provide a simplified abstraction of the
underlying details and help the customers and vendors plan actions for
improvements. Executing the new model will create needed intimacy that is
needed between the customers and vendor. This will also minimize and perhaps
eliminate all “under review” engagements and enable both entities to unlock the
hidden value and create a win-win model instead of the zero sum one. As shown
on Figure 4, achieving intimacy require constant movement of the bar both
upward & forward at certain sets of process organized in a logical way as a
model.

Need to Account Mgnt & Governance

move the
Service Provider

bar Strong
UPWARD

Weak
High Value
Consulting Maker
Broad & Integrated
Business Solutions

Value Added y Future State Innovation

ac
Services im (Good Ideas)
nt
ntI
li e Follower
C
ld
ui Service Provider
B
Transformation is Need to
complete move the
Service Provider bar
Need to As of Contract signing UPWARD
move the
Service Provider

bar Narrow IT Weak Strong Static

Services
UPWARD

Efficiency & Continuous SLA improvement

Figure 4. GROWTH & INNOVATION – The roadmap

for future growth

The main four (4) activities are: Comment [A2]: Add Figure 4 here
Account Management/Governance. The purpose of vendors account
management and clients Governance Model is to create a high performance
culture that is characterized by the following:
o Performance metrics are based on value creation
o Ambitious performance targets are set according to enterprise
strategy and goals
o Metrics and targets are communicated to the workforce in such a
manner that each person measured can understand his or her
contribution to the success of the organization. All variable
compensation for both Governance and Account managers should
have some KPI’s.

Move the bar forward

Creation of continuous improvement. Outsourcing engagements are not just
a group of IT projects with schedules and deadlines but a true “Engagement”
between the customer and the vendor. This is characterized by the
following :
o Results are measured and reported consistently
o Significant incentives are provided for superior performance; and
o There are clear and known consequences for inadequate
performance
 Move the bar forward
Move from tactical to high value business solutions. This is characterized as
the “Value Creation” stage. The focus is to ensure that the engagement
achieves its functional objectives and is adding value to the customer by
keeping track of changing priorities of his business. It is also an opportunity
to the vendor by showing their commitment to the customer by recruiting and
keeping subject matter experts that are dedicated to the relevant part of the
customers business e.g. Retail, Wholesale, Generation or Transmission &
Distribution.

Move the bar upward

Innovation/Good ideas. Utilities that embrace innovation as an integral
concept to transform from an operationally focused, risk averse culture to
one that rewards innovative ideas represents a dramatic change. There is a
need for a fundamental change to the overall capital allocation practices and
processes within the company. The Energy Policy Act of 2005 has some
specific incentives for innovation relating to real time pricing, smart meters,
transmission infrastructure, nuclear power, clean coal, and renewable energy.
Companies need to adjust the strategic planning process to generate and
implement innovative/good ideas that produce tangible results such as
increasing revenues, reducing costs or improve customer satisfaction etc.

Move the bar upward

Over the next decade the utility industry needs to become known for adopting
outsourcing to create badly needed cash and for its innovative development and
leadership in this area, not for being the laggard that was willing to embrace
change.

About the Author:

Amin T.Bishara is an Independent Consultant..
He is a former Vice President of Capgemini and the Sales Leader
Of the TXU/Capgemini Outsourcing Deal..He was also one of the main
Architect of setting up CGE…
Mr.Bishara is biographed in the Marquis’s Who is Who in America ,Who is Who
in the World and Who is Who in Business and Finance…