IssueAlert Emerging Technologies ~ May, 2004

This week's announcement of the formation of Capgemini Energy L.P., a partnership between Capgemini America, Inc. and TXU to provide information technology, customer support, billing and other technology services to the more than 2.7 million customer, Dallas-based utility TXU Energy, has at once captured the interest of the utility industry and caused confusion and angst among utility executives, utility and energy technology suppliers, and utility and energy technology and business process outsourcers.

First and foremost, the sheer size of the deal is enough to command the attention of the industry. Even though it is widely known that "Everything is bigger in Texas," UtiliPoint suspects the huge Capgemini-TXU deal will do much more than raise eyebrows about the scope of work and achievement necessary for success. The size and timing of the deal is real world validation of UtiliPoint’s research on outsourcing including the recently released study on CIS and customer care that for several years has indicated a growing interest and momentum toward utility outsourcing of such services as bill printing, bill remittance, credit and collections, and CIS. Furthermore from a dimensional perspective the deal establishes Capgemini Energy as a major player in the American utility call center and billing IT services market and puts TXU Energy in the enviable position of potentially providing better service to customers, eliminating $175 million in annual operating costs, providing $140 million in cash savings in 2005 relative to 2003 levels, and enhancing the company’s competitive position.

Upon further examination it seems to UtiliPoint that the Capgemini Energy joint venture also raises the stakes for other large investor-owned utilities. TXU is not the first to have undertaken a massive outsourcing project. For example, Xcel has outsourced IT to IBM, Entergy has outsourced IT to SAIC, and BC Hydro has outsourced several business processes to Accenture. However this deal raises the bar for other large investor-owned utilities and executives inasmuch as they are now going to be compelled to make changes in their organizations that reduce operating costs, increase efficiency, and certainly bolster investor return. In the medium to long term this bodes well for competitive outsourcing suppliers. Short-term, however, UtiliPoint believes that outsourcers are going to be jockeying for position and investing heavily in marketing, business development, and solution development in a market that remains somewhat confused about the differences between outsourcing propositions and the disparity between outsourcers.

At the risk of appearing to be reductionist, it seems that the marketing and market position of the various large utility and energy business process and technology outsourcers is becoming very important in both the outsourcing review and selection process. With at least eight major outsourcing vendors established in North America and another dozen medium to large offshore BPO and technology outsourcers including IBM, EDS, ADS Alliance Data Systems, FirstData Corporation, SAIC, Accenture, Vertex, and Capgemini in the mix, utility executives are going to have a tough time "grocking" difference of real distinction between outsourcing models and value propositions. At its core, the decision to outsource is composed of a mixture of business need, financial imperative and strategic leadership and direction. The differences between outsourcers in this regard may be subtle or very obvious. For example, UtiliPoint sees a clear distinction between outsourcers that have horizontal capability – like Capgemini – to take over a bevy of business processes, IT, and back office capability, and outsourcers – like Alliance Data Systems, and First Data Corporation - that have deep vertical competence in outsourcing billing, CIS, payment and remittance, and customer care for utilities.

At this early date it is difficult to predict the endgame for large outsourcers and their large investor-owned utility customers. Without a doubt, the "Lone Star Deal" validates UtiliPoint’s research findings that the utility market is primed for a variety of outsourcing value propositions and that there are significant benefits to outsourcing including cost savings, improved business process and efficiency, and business agility. Looking forward, Capgemini Energy, L.P. has a lot to prove to TXU and to the utility and energy market, including the validation of the idea that there is an appetite on the part of utilities to outsource business process and IT to utility-developed and utility-backed ventures. Moreover, it will be most interesting to follow and analyze further outsourcing activity in the market. Big deals and competition always breed opportunity and risk. Time will tell if the "Lone Star Deal" shines as a leading example of the future potential of outsourcing or looms as a dark star in the annals of big bets gone awry.