Ken Silverstein EnergyBiz Insider Editor-in-Chief

Global competition and cost pressures mean utilities and other energy companies must become more efficient and increase productivity. A means of achieving those aims is by outsourcing, or using outside firms to supply personnel and/or services. If companies don't cut down their expenses, they may not remain viable, and consumers can turn elsewhere for those essential services. Moreover, many companies are recognizing that they must focus on their core services and not on ancillary activities that an outside firm could do better and possibly, cheaper. Lower-skilled jobs such as tree trimming and meter reading are targets. And so are some high-skilled jobs, like software programming.

Some mega-deals have been announced in the recent past. Take NiSource, which has begun outsourcing services to IBM. It's a 10-year deal and estimated at $1.6 billion in value - one that NiSource says will deliver $530 million in operating and capital cost savings, not to mention enhance its technological capabilities.

"Utilities are losing their expertise through retirement," says Randy Schrieber, senior vice president for ABB in Raleigh, in a talk in Las Vegas. "The people who have this expertise are moving on and outsourcing is playing a bigger part."

Is outsourcing a trend? Gartner, a research firm, says that the global market for customer service outsourcing will grow from $8.4 billion in 2004 to $12.2 billion in 2007, although off-shore outsourcing where jobs are shipped to such places as India will only account for five percent of that market by 2007.

Meantime, consulting firm UtiliPoint International performed a survey that found 78 percent of utilities have either outsourced a customer care function (defined as billing, collections, remittance, contact center,) or are planning to outsource a customer care function in the next two years. Roughly 59 percent of utilities have already outsourced at least one customer care or back office function, it says.

Business Strategies

Take TXU Corp., which as part of a widespread effort to reduce overhead has signed a deal with Capgemini Energy to drive $140 million in cash savings through outsourcing. The money will be used to bolster its core businesses, TXU says. The deal provides information technology, customer support and billing to TXU, with the objective of expanding the service to other utilities in the future. About 2,700 jobs -- a fifth of TXU's labor force -- moved to Capgemini Energy in July 2004.

"We've demonstrated that utility companies, like Hydro One and Ontario Power Generation in Canada, can experience tremendous success with business service outsourcing," says Capgemini CEO Bob Pryor, in an interview with IssueAlert. "And, from that experience, we know that a platform like we're forming with TXU can deliver to additional clients."

The movement to deregulation and back again has forced utilities to re-think their business strategies. Relinquishing control over their staffs has been a struggle for the biggest power and gas providers. Nevertheless, the necessity to bring overall quality at affordable prices to consumers may eventually prompt many utilities to consider this business strategy. Currently, many companies are assessing their strategies and in doing so, are determining whether certain services could be doled out.

Some outsourcing agreements are done at arm's length while others are closely intertwined. According to AMR Research, about 25 percent of all such contracts are neatly integrated while 75 percent are pretty much independent. Under any circumstance, companies will compare the cost of doing the job internally to what an outsourcer may offer. It's not just about figuring the salaries paid to workers but it also entails adding up the assets that must be kept on hand to do the job.

Like many big companies, Columbus-based American Electric Power contracts its tree trimming. It lends itself well to outsourcing, says Philip Wright, an operations manager for the company, because the skill set necessary for the job is not technical. In a prior talk with this writer, he said, "Through inspections we get the quality we are looking for." While the company says physical work is being contracted, it also says that the oversight of that work will remain in-house. Reliability and accountability are central to the company's operations -- the reasons for following that strategy.

While reducing costs are central to the notion of outsourcing, it may not be paramount in the eyes of the organization, which also needs to maintain quality and exceptional customer care. If outsiders don't understand the core business or management styles dramatically differ, it could curtail operations.

Furthermore, outsourcing could be more expensive. Gartner reports that outsourced operations are 30 percent more costly than the customer service operations run by the most effective companies. The figures show that in-house personnel are still taking time out of their day -- and away from other critical services -- to bring outsourcers up to speed. Simply, outsourcing should be part of a comprehensive business strategy and not merely a technique to cut cost, the research firm says.

Experts say that the key is to identify a trusted outsourcer and understand that regardless of how the agreement is to work that initially the relationship will have to be closely managed. And companies should understand the cost upfront and keep a watchful eye on their partners. Lastly, companies should use a greater level of "penmanship" during the contractual phase to ensure that they are protected in the event something does go wrong.

"If you know what the risks are, you can manage them upfront," says Brad Abibi, project manager for IBM in Boca Raton, in an earlier interview with this writer.

With cost pressures mounting, utilities are now focusing the bulk of their resources on their inherent strengths. An off-shoot of this is that they are considering hiring outsiders with an expertise in areas beyond their core competency. If done right, it can be a smart business strategy that can increase productivity.

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