Energy and utility industry executives are increasingly called upon to improve
service levels, increase responsiveness and optimize their cost structure. In
short, executives in these industries, as well as in others, are being challenged
to continuously get better, faster and cheaper. Traditional approaches to address
these challenges involved securing transformational consulting services to design
and implement new business processes, upgrading application portfolios and selectively
leveraging global resourcing.

The evolution of the business transformation outsourcing (BTO) services marketplace
now affords executives an alternative approach to procure transformed services
to support their business. Providers maintain many key support services for
the industries through institutionalized business process and technical solutions.
Pre-architected global delivery models leverage the provider’s network of delivery
centers to obtain the skills, capabilities and labor arbitrage advantages of
global resourcing. Finally, building transformation into longer-term operating
services contracts allows the provider to underwrite transformation investments
required while delivering contractually agreed service levels for the “in scope”
processes.

Leveraging BTO approaches from leading providers can be a vehicle to provide:

  • Improved returns and accelerated timing of those returns;
  • Increased management capacity as the service provider will provide services
    management oversight at agreed service levels;
  • Additional sources of capital available to underwrite transformation investments;
    and
  • Mitigation of transition and transformation risks managed from one external
    provider within a customized governance framework.

In summary, integrated service providers in the BTO marketplace are providing
a holistic offering that has been traditionally procured separately by clients.

A number of recently completed and highly publicized transactions have been
executed in the marketplace. Companies such as TXU, NiSource and Williams Energy
have embraced BTO solutions to transform their businesses.

Managing Expectations

As we discuss BTO solutions with energy and utility industry executives who
are contemplating embarking on a business transformation project, we see a number
of early issues raised. Primary concern revolves around expectations management.

We find that client executive teams who have internally agreed upon their objectives
and priorities for the BTO program are better prepared to evaluate recommendations.
The more solidified and better communicated the program objectives and priorities
are, the better a service provider can “adjust the dials” to customize a solution
to meet the client’s requirements. This fine-tuning of a solution does not happen
in a vacuum. The client team is an integral participant in helping to shape
solutions, and having a solid starting point can accelerate the process. In
addition, a clear statement of program objectives will allow the client and
the provider to “test” solution alternatives against the program requirements.

So what do we mean when we suggest a clear understanding of objectives and
priorities? Take the better, faster, cheaper example mentioned earlier. While
generally, each of the concepts is important, can the client highlight the key
overarching criteria that the program has to meet? Can the client define what
success means? Having a clear picture of what the client is aspiring to achieve
and considering trade-offs are imperative to being able to judge the success
of the initiative.

Objectives and Service Delivery Areas

Another dimension is the client’s appetite for transformation. We often distinguish
between business process outsourcing (BPO) – taking over operations of the client’s
existing processes with incremental process improvements – versus business transformation
outsourcing, or fundamental changes to the business processes, people and underlying
technology supporting the client’s business. If you are looking more for BPO,
a “lift and shift” strategy to obtain labor arbitrage benefits, certain providers
may be better suited to provide such a solution. Similarly, if the client seeks
more fundamental transformation, other providers will have the relevant industry,
transformational and technical capabilities. While these are not mutually exclusive,
we often find that a client leans one way or the other or has some preconceived
objectives on a process-by- process basis.

Another key area we explore with clients is from where they would prefer their
solutions and services to be delivered. Is there a particular concern regarding
the extent of onshore versus offshore delivery? Is the client comfortable with
near-shore solutions, or are they accustomed to global and offshore delivery
of services? Many of the large BPO and BTO providers can tailor solutions to
address particular client desires, recognizing that this “fine-tuning” may have
some trade-offs in other dimensions of the overall solution.

As
we work with our clients to address the process orientation of what should be
in scope, we generally start with the assertion that more value can be achieved
through a broader scope. Clients who are not as mature in the use of outsourced
services generally tend to be more conservative in their initial efforts. However,
we encourage clients to consider the breadth of the process, and engage the
provider to explain how their solution can address your overall needs. Figure
1 depicts the major processes that energy and utility clients usually assess
for prospective outsourcing initiatives.

Let’s quickly examine the scope of theses processes and how they might fit
into a BTO initiative:

  • Procure to Pay – This process covers key supply chain, sourcing
    and some payment processing. Benefits that clients generally seek are strategic
    sourcing to drive down overall supply chain direct and indirect spend, and
    tools and analytics to provide companywide visibility to sourcing compliance.
  • Hire to Retire – Primarily within the Human Resources function,
    these processes support virtually all of the major processes required from
    on-boarding new recruits to managing the benefits and retirement processes
    for retiring staff. Key features of BTO solutions include added transformation
    across virtually all business processes, including providing high levels of
    self-service to the client’s staff, which generally enables customized services
    at a lower transaction cost.
  • Account to Report – Within the finance function, these processes
    warrant extensive dialogue, especially given the recent Sarbanes- Oxley legislation
    and Section 404 reporting requirements. We find that, in addition to technologies,
    controls and tools we have implemented to support globally resourced finance
    processes, a key focus on these processes involves a client’s control environment
    and how our solutions integrate within their overall risk management framework.
  • Meter to Cash – This area extends beyond the back office and is
    the primary connection for energy and utility companies with their clients.
    Meter to cash comprises the processes that extend from usage collection through
    payment. Some clients break the scope down into subprocesses such as billing,
    credit and collections or call center management, and consider outsourcing
    them on a stand-alone basis.
  • Common Processes and Information Technology Infrastructure – Solutions
    in each process area are often accompanied by outsourcing initiatives within
    the IT function of the business. Many of the leading BTO providers are also
    long-term traditional IT strategic outsourcing services providers and can
    often provide an integrated solution.

While there is no prescriptive model for the number or breadth of processes
to be included for a particular company, as mentioned earlier, the greater the
breadth, the greater the opportunity for a provider to generate more value in
their solution. Also, the more scale in a transaction, the better the solution
provider can provide access to capital as part of transformational investments,
and this should not be dismissed, especially if using the program to assist
in defraying investment capital is one of the client’s key objectives.

As
the client contemplates a particular program – whether a “best of breed” approach
or a broader effort with a single or primary provider makes sense – it should
consider this: Many clients who start out on a single-process-tower, best-of-breed
approach move toward a prime-aggregated or single-provider model. The reason
is that the incremental benefits erode when the client considers multiple solutions,
procurement, negotiation, transition and governance processes that it will need
to establish to address multiple providers. In our experience, having a more
strategic relationship with the primary provider allows the service relationship
to not only withstand inevitable transition hiccups but will allow it to blossom
into a strategic asset for the client.

Figure 2 highlights the core offerings of IBM’s overall BTO portfolio, and
provides an example of the typical business processes supported through outsourcing.
Note that there is a high degree of correlation between the core offerings and
the key energy and utility industry processes that were mentioned earlier.

For providers that have integrated BTO and Strategic Outsourcing capabilities,
virtually all of these processes and subprocesses are supported by applications
transformation and technology transformation. Additionally, some providers also
leverage financing services to accelerate value to clients.

Conclusion

We continue to see increased interest from the energy and utility industries
in how BTO can provide a unique solution to address their performance, shareholder
and transformation challenges. BTO is a new way to engage a full-scope provider
to support the client’s objectives and priorities. Having a clear view of objectives
is a critical starting point. Developing the scope of the program is also important
as the client solicits and reviews offerings from providers.

As the client engages with a provider, it should explore the creative dimensions
that a larger-scale BTO transaction can provide. For example, investment capital,
joint go-tomarket opportunities and specific community initiatives are topics
that can be addressed with clients during these transactions. BTO provides today’s
energy and utility executives with a powerful new tool to help enhance overall
business performance and address specific objectives.