Examining Business Process Outsourcing

What does next-level utility performance look like? The energy industry may
be one of the most complex business environments, as it is capital-intensive,
regulatory-constrained, ROI-managed, environmentally challenged, often unionized
and accountable for near-perfect reliability.

Utilities that achieve “next level” performance in such a challenging environment
are skilled at balancing asset portfolios with regulatory constraints. They
understand that all assets must contribute to business performance and actively
seek effective partners and strategies.

Today, most utilities recognize the value of business process outsourcing (BPO)
to decrease customer service costs. However, some are beginning to consider
BPO to unlock the value of underperforming assets, assist in M&A integration,
enhance revenue, achieve cost certainty in rate recovery and act as a safety
net for skills lost to retirement.

With this in mind, we explore 10 questions that executives should consider
regarding business process outsourcing. As a number of North American utilities
have proven, a comprehensive approach can yield substantial performance results.

1. Core Processes vs. Noncore Processes: Which Are the Best Candidates for

When utilities evaluate business process outsourcing, the question often arises
– “Which processes are most advantageous to outsource – core or noncore?” Perhaps
the more critical questions utilities should ask are:

  • Are our key processes performing well?
  • Are they cost-efficient and effective?
  • Do they enhance or inhibit corporate performance and customer satisfaction?

If the answer to these questions is “no,” then perhaps it is time that business
process outsourcing be considered critical and therefore core, to a utility’s
performance – not ownership of the processes.

2. Should We Outsource Entire Processes or Leverage Stand-Alone Services?

The more a utility participates in end-to-end process outsourcing, the greater
the ability to increase performance, capture synergies and mitigate risk across
functional areas, revenue processes and technology investments. Fortunately,
the transition can be a stepped approach rather than an “all or nothing” decision.

Outsourcing single services allows the utility to incrementally reduce costs
and gain outsourcing experience – scaling the scope only after achieving tangible
value and quantified success. However, the transactional nature of the “start
small” outsourcing model provides few opportunities to add strategic value across
operational functions. In contrast, the greatest advantages in outsourcing entire
processes come from process synergies which result from control of related upstream
and downstream functions.

Without the constraint of operational silos, the outsourcer can redesign ineffective
or outmoded business processes that are inhibiting performance. Legacy processes
become standardized, often reducing or eliminating redundant functions and data
inaccuracy. Labor-intensive manual processes are often automated, allowing personnel
to be reallocated to more high-value tasks. This “hands on the wheel” control
enables the utility to gain synergistic improvement in process execution across
the entire organization.

3. Beyond Cost Savings, What Performance Advantages Can We Gain From BPO?

Most executives understand the cost-saving advantages that business process
outsourcing can provide. Others recognize BPO for its ability to transfer IT
risk. Beyond cost savings, there are five distinct advantages that business
process outsourcing provides utilities:

Stranded Assets – Unlock the Value: For utilities that rely on
legacy platforms or those who possess CIS assets that have not performed as
expected, transferring outdated and underperforming systems to a proven outsourcer
provides both balance sheet and capital investment relief – without Wall Street
scrutiny or the need for rate recovery.

Revenue Enhancement: In recent years, gain-sharing has emerged as an
important means to capture value. Structured properly, gainsharing agreements
allow the parties to consider opportunities that may be too risky to pursue
individually. Good candidates for gainsharing include bad debt, call volume,
IVR utilization and field crew efficiency.

Risk Mitigation: Most utilities have interfaced dozens of disparate
applications to legacy and secondary systems. This complexity leaves them vulnerable
to escalating maintenance costs, upgrade constraints and technology currency
risk. In contrast, business process outsourcing allows the utility to transfer
the operational and financial risk of large-scale IT initiatives to the provider.

IT Business Partner: Outsourcers use continuous improvement methodologies
to identify improvement opportunities, measure performance against goals and
forecasts and leverage best practices to standardize process performance. Typical
service-level agreements reward or penalize BPO providers for contract performance,
while scorecards assure the utility that service levels are achieved or exceeded.

Change Agent: As a change agent, the outsourcer ensures that the right
people, processes and technologies are aligned to the utility vision. This change
in roles, responsibilities and practices often increases service accountability.

More than a cost-cutting tool, business process outsourcing accelerates utility
performance through financial engineering, risk transfer, continuous improvement,
cultural accountability and revenue enhancement such as gain-sharing mechanisms.

Workforce Retirement, Unions and BPO: Is There a Middle Ground for Our Employees?

Leading providers have deep experience in utility processes, practices and
platforms. They can often fill application integration and project management
gaps, manage revenue cycle (meter-to-cash) process requirements and provide
scale for fluctuating call center and IT demand. In a time of dwindling resources,
this support allows utility employees to focus on more high-value activities.

For unions concerned with employee displacement, many business process outsourcers
offer the ability to re-badge utility personnel as their employees. As members
of the outsourcing team, many of these utility employees gain exposure to new
technologies and process improvement skills that may advance their career options.

5. Can Business Process Outsourcing Benefit Rate Cases?

In regulatory environments where prudent expenditures are of concern, business
process outsourcing may enhance the success of rate-case allowances by demonstrating
to regulators that escalating service costs are better handled by providers
whose efficient operations directly benefit rate payers. Some commissions are
evaluating business process outsourcing for its ability to protect rate-payer

Yet, considering business process outsourcing as a rate-case contributor is
a paradigm shift for most utilities. Historically, rate cases have focused on
capital improvement and cost recovery – rather than demonstration of operational
savings. Viewed through an alternate lens, however, rate cases provide an opportunity
to align rates more closely with a utility’s current market conditions and with
changing customer expectations.

For those utilities that are considering business process outsourcing as good
stewardship of rate-payer assets, we offer the following suggestions for engaging
regulators in going beyond “standard service” definitions:

  • Be prepared with solid data on current service costs rather than relying
    on historical and inaccurate data;
  • Engage analysts and leading outsourcers to provide data on service benchmarks,
    cost models and the improvements customers may be willing to pay for; and
  • Seek agreement from regulators on outsourcing goals, then communicate your
    outsourcing strategy and business case with them before the rate-case horizon.

6. Does Increased Performance Demand Offshore Outsourcing?

With all the publicity, it is easy for executives to assume that outsourcing
means offshoring.

Onshore outsourcing is often the best option for utilities, as it combines
increased business performance with local control, community involvement and
the matching of cultural demographics. Near-shore outsourcing combines the benefits
of geographical proximity, time zone convenience and bilingual capabilities
with cost savings. Utility executives have typically shown little enthusiasm
for offshore outsourcing – particularly for front-office activities like customer
care. However, overseas providers are increasingly being evaluated for large-scale
programming or commodity processing.

7. What Should We Look for in a Next-Level Outsourcing Partner?

To determine the qualities that are effective in an outsourcing partner, it
is important to define your outsourcing strategy and the results you expect.
Leading outsourcers must demonstrate robust business continuity practices, mature
disaster recovery strategies and processes for contract disentanglement.

Financial Strength and Stability: Successful business process outsourcing
is capital-intensive. The provider should demonstrate solid financial performance
and stability over time, a history of regular technology investment and the
ability to acquire needed resources.

Broad Technology Experience: BPO providers should demonstrate a track
record of enhancing legacy systems, solving implementation and migration challenges,
streamlining and automating business processes and providing strategy for future
IT needs.

Utility Experience/Cultural Aptitude: In regulated markets, a business
process outsourcer should be highly familiar with regulatory requirements, jurisdictional
rules, rate recovery issues, customer care processes, union concerns and shareholder
expectations. Conversely, for those utilities operating in retail markets, the
outsourcer should demonstrate experience with market transactional processes,
provider-of-last-resort requirements, retail billing practices and oversight

8. What Is the Most Effective Outsourcing Governance Structure?

Creating the appropriate governance structure is as essential as choosing the
right service provider. Be prepared to give your agreement the importance it
deserves by considering the following 10 criteria.

  1. Governance Strategy: Build an agreement that is tailored to your
    strategic goals.
  2. Collaborative Management: Define the expected savings, process improvements,
    performance outcomes and “actionable” changes you hope to capture.
  3. Roles and Responsibilities: Define the key roles, responsibilities,
    business processes and intersections between each organization.
  4. Compliance Reporting: Include requirements for examining the provider’s
    process compliance.
  5. Tracking Mechanisms: Identify every measurement that is important
    to success and the methods and tools that will be employed.
  6. Issue Resolution: Create a formal resolution process that defines
    when an issue should be escalated and who should be responsible for resolving
    the issue.
  7. Communications Plan: Build a communications plan that includes daily
    measures, weekly reports and regular presentations to an executive steering
  8. Service-Level Agreements: Define key performance indicators (KPIs)
    for evaluating SLA performance, the frequency of measurement and whether performance
    rewards or penalties will be enacted.
  9. Change Control: Describe change control procedures, when a change
    should be recommended, how it will get approved and how it will be deployed
    through the organization.
  10. Business Continuity/Disentanglement: Establish a continuity plan
    that defines what will occur if the provider is in default or unable to meet
    service-level agreements.

9. How Should We Conduct an Outsourcing Evaluation?

A thorough business process sourcing evaluation is a complex, time-consuming
undertaking that demands a collaborative approach. There are many variations
to sourcing studies, but most evaluation approaches contain these basic elements:
planning, discovery and design. Each phase encompasses several steps. How these
are bundled or ordered is less important than simply ensuring that they are
completed successfully.

Phase 1: Planning
The planning phase is critical to conduct thoroughly
because it determines the nature of the evaluation, its scope, duration and
effectiveness. Essential questions should be addressed, such as what services
should be considered, what business objectives must be achieved and what financial
targets create an attractive alternative. This phase typically requires one
to two months.

Phase 2: Discovery
The goal of the discovery phase is to determine
whether outsourcing makes sense for your organization. Two distinct work streams
must occur in this phase. The first is focused externally on gathering information
from potential partners via RFIs or RFPs in conjunction with interviews, site
visits and reference checks. The second work stream is focused internally on
verifying internal costs and service levels – both as they occur today and as
they are expected to in the future. By the end of the discovery phase, multiple
providers may be identified as good candidates to move on to the design phase.
A thorough discovery phase typically lasts two to four months.

Phase 3: Design
The design phase encompasses the substantial activities
needed to tailor the provider’s solution to your needs. By this point, the buyer
and potential providers should have moved beyond the guarded exchange of information
to open conversations that expose the true opportunities to create value and
share risk. The goal of this phase is to reach executable agreements with one
or more potential providers. The time frame for completing design is two to
four months.

10. What if Our Organization Isn’t Ready for Full Outsourcing? Are There Other
Options We Can Leverage?

Business process outsourcers offer utilities multiple options for increased
system performance without committing to full outsourcing.

Outsourcer as Consultant: Outsourcers often inherit complex legacy systems
and process problems that require innovative approaches to resolve. Hence they
have a heritage of improving the utility assets they assume. When utilized in
a consulting capacity, outsourcers often bring a more pragmatic approach to
resolving real-time problems than strategy firms.

Managed Services: Utilities can engage an experienced outsourcer through
a managed service agreement. In this scenario, the IT assets and the utility’s
knowledge of legacy operating environments remain with the utility while the
outsourcer fills internal resource gaps on an as-needed, cost-effective basis.

Service Performance: Alternately, a utility may choose to use the outsourcer
for targeted, short-term business services. For instance, the utility may opt
to use the outsourcer’s expertise in operating call centers to lower costs and
improve customer service quality. Call centers are excellent candidates for
this type of approach, as outsourcers often employ automation and process-improvement
methodologies that bring costs and quality in line with utility objectives.

For More Information
This article is an excerpt of “Business
Process Outsourcing: 10 Questions Utility Executives Should Consider.” To obtain
a complimentary copy of this 25-page white paper, please contact Kim Kanady
via email at utilityservices@alldata.net.