IssueAlert Emerging Technologies ~ August, 2003

What is business process outsourcing or BPO? It seems to be getting a lot of press recently. The major analyst organizations claim it is a growing trend that will continue for the next several years. Other industries such as financial services and banking have embraced it. Are utilities beginning to embrace it? This IssueAlert takes a look at what business process outsourcing is and whether or not it can work in the utility industry.

Acronyms Abound
Before speaking clearly on the subject of outsourcing, one must understand the acronyms that are used in connection with outsourcing. Outsourcing is emerging with several models. For the purpose of this IssueAlert, the different types of outsourcing can be defined as:

The Market: Factual Data
Earlier this year, UtiliPoint led an effort to survey North American utilities to explore their positions on utility customer care. That survey resulted in 304 utilities completing the survey from both the United States and Canada. Customer care at the utility includes business processes that affect a customer information system (CIS), billing systems, customer relationship management (CRM), and call center activities.

Of the possible CIS/billing solutions existing in the North American marketplace, the legacy/in-house solutions owned the market with 34.3 percent of the 304 utilities running a legacy solution. This number is not surprising but does present an opportunity for service providers in the utility customer care space. However, instead of using deregulation as a reason to replace the billing solution, the service providers are being forced to prove return on investment (ROI) or problem-solving capabilities.

Out of twelve options in the survey, the directors of customer care rated the billing system and improving customer service as information technology's top two priorities at the utility. When asked if they were seeking to replace their current billing system, 9.9 percent of the utilities answered "yes." This percentage ranged as high as 14.0 percent in some regions of North America. This number compares to 5 percent of utilities shopping for a new CIS last year, demonstrating a doubling of the market year over year.

The survey also found that more utilities are considering outsourcing as an option today than five years ago. Forty-four percent of IOUs, 53 percent of co-ops, and 45 percent of municipals entertain outsourcing a function of customer care. When 304 utilities in North America were asked what they would likely outsource, they answered (in priority order):

Source: UtiliPoint International, Inc.

Based on factual survey information, it certainly seems like a genuine interest exists at utilities to entertain outsourcing a function of customer care.

Responsibilities Overlooked?
It is easy for utilities to claim that they can provide customer care more cheaply than an outsourcer would, one of the key arguments against outsourcing. However, when one takes a look at each of the functional areas affected by customer care, many utilities fail to include all the costs associated with it. In a report performed by TMG Consulting and authored by TMG Vice President Mark Crapeau, many functional areas are overlooked. According to Crapeau, every utility is unique when it comes to considering the notion of outsourcing. There are two primary reasons why utilities consider outsourcing:

Resource constraints can be a result of not having the right skills to run the new application or environment, trying to manage multiple high priority projects, or wage constraints (typically more of an issue for the public sector).

Capital constraints can be a result of other competing capital projects, cash flow shortfalls, and market conditions. In these situations, outsourcing may provide the payment streams that more closely match the cash position of the utility.

Typically a utility will include license, maintenance fees of 15-20 percent of license, and some resource allocations. This falls dramatically short of what is actually required to own and operate a CIS in-house. In some cases I have seen project estimates double once all the factors have been accounted for.

Following is a table that points out the responsibilities of the utility versus a vendor for both outsourced and in-house CIS solutions.

Source: TMG Consulting

The majority of utilities today fail to consider every resource constraint involved when it comes to customer care. The utilities include obvious costs such as programmers/analysts and hardware but exclude other costs such as back-up, disaster recovery, security, and other critical items that accompany the operation of an in-house solution.

Analysis of utility operating environments performed by IBM confirms this. According to the data presented by IBM, utility customer care functions can achieve reductions in cost by outsourcing of the following:

The typical savings could range from 25-40 percent. I have actually witnessed utility operations where up to 50 percent can be achieved. UtiliPoint's survey also identified the top three areas that utilities themselves claim are ripe for cost savings. They include:

From working inside the utility and with BPO providers, it is UtiliPoint's belief that savings can be realized in most utilities when a strategic partnership is formed with a BPO service provider.

This analysis can be validated with a case study I recently picked up at the CIS Conference 2003 in Nashville, Tenn. The case study was published by utility BPO leader Alliance Data Systems (Alliance) and focused on its client Puget Sound Energy.

Puget Sound Energy Sells Customer Care Assets to Alliance
Per the case study, in 1996 Puget Sound Energy incorporated ConneXt as a retail subsidiary to create an off-the-shelf software solution that delivered a full range of customer care and billing applications for utilities. However, by 2000, ConneXt found its sales growth inhibited by utilities preferring to implement their own customer information system solutions. “Puget Sound Energy was very satisfied with ConneXt and its ConsumerLinX product, however, the lack of utilities purchasing customer information systems (CIS) in the past few years has resulted in diminished opportunities for ConneXt,” said Robert L. Dryden, President and CEO of ConneXt. “The decision was made to either sell the asset or downsize the company.”

Puget Sound Energy turned to Alliance, a $900 million global provider of transaction processing, customer care and billing services. Puget Sound Energy found Alliance, which manages more than 1.7 billion transactions and 85 million consumer relationships for some of North America's largest utility, retail, petroleum, and financial companies, to be a sophisticated business process resource. The Alliance employees have solid backgrounds in utility billing and call center operations, giving them the experience to be a leading BPO provider.

Terms of the agreement included the purchase of the ConneXt ConsumerLinX software, many of its employees, and most of the assets. To ensure best-in-class CIS BPO, Puget Sound Energy entered into a ten-year service agreement for comprehensive application migration, support, maintenance, and billing services with Alliance. Also, potential licensing opportunities of the ConsumerLinX software, through Alliance's broad customer base, were identified as potential future revenue for Puget Sound Energy.

The Results?
Reading stats, analysis, and theories from consultants and vendors can sometimes be a little hard to believe. That is why I like to present factual survey data as a basis for the analysis or in this case, get the results straight from the utility. According to the utility, Puget Sound Energy realized unanticipated downstream value from the Alliance BPO arrangement. Best practice methodology employed by Alliance increased transaction productivity by an estimated 25-50 percent. Business process productivity gains include:

Looking at actual results from Puget Sound Energy, it appears that the outsourcing analysis claiming savings by multiple industries, vendors, and analysts is in-line. Every situation differs but it seems that utilities could realize significant O&M savings from business process outsourcing.

Conclusion
Utilities in North America today are increasingly focused on efforts to satisfy their customer base in the home territory, otherwise known as “getting back to the basics.” To accomplish this, utilities are focusing their efforts in several key areas:

Outsourcing can be a way to reduce costs. Business Process Outsourcing can be a way to not only reduce costs, but gain efficiencies in unidentified areas of the utility due to best practice methodologies employed by the BPO providers.

Recent announcements that validate a trend towards increased BPO activity in North America include Georgia Natural Gas renewing a BPO contract with Alliance and Southern Company Gas signing a new BPO contract with Accenture. Can the BPO model work in the utility industry? Yes. Will utilities get comfortable with this new model? It may take some time but as more sign on and as the numbers are published, savings and efficiencies are there for the ones willing to embrace it.