Tpi.net

Deregulation SparksTransformational SourcingAmong Utilities By Dr. Nigel Walker
Partner, TPI
CONTENTS
Background and Evolution of the Utilities DEREGULATION SPARKS TRANSFORMATIONAL SOURCING AMONG UTILITIES
Utilities have considered the advantages of Today, asset transfers and third-party sourcing are outsourcing for years, though it usually involved becoming more attractive, allowing utilities to sell transferring people rather than assets in the regulated their non-core business- and IT-related operations era. The ongoing competitive pressure spurred by and associated equipment to their chosen service utilities deregulation has now freed — or perhaps providers. In this way, they may lower their overhead forced — utility executives to consider alternative costs and sell electric power at a more competitive sourcing strategies as an integral factor in positioning price for the consumer while maintaining profits.
their companies for strategic advantage.
In the past, some utilities and service providers More than ever, the focus for utilities is on cost formed joint ventures in order to launch and evolve reduction, variability of costs and better service customized, commercial capabilities. Joint ventures provision to stay in business and sustain success, such as Capgemini Energy, which is co-owned by thus executives are getting more serious about TXU (Texasbased utility), meant that both entities investigating new alternatives for competing more could attract newer and greater numbers of effectively. Based on the regulatory history and customers while simultaneously allowing the utility resulting industry participant behavior that TPI has to gain a share of the proceeds. In response to this noted in this sector, we believe that utilities’ appetite model, a large number of IT service providers have for sourcing alternatives will continue to grow.
strengthened their specialist utility areas and can also boast a critical mass of utility customers in a fairly BACKGROUND AND EVOLUTION OF THE
UTILITIES INDUSTRY COMPETITIVE LAND-
With TXU having adopted a successful outsourcing The deregulation of some electric power markets strategy in 2004 that contributed to the quadrupling has ushered in an era of new competition among of its stock value, other utilities are now eyeing the utilities in North America, and competition is similar options as a sound bet for their long-term forcing power providers to offer consumers more future. Some of the largest industry players are now competitive rates with variable cost structures versus vigorously considering outsourcing business processes the traditional fixedcost structure.
and information technology (IT) components to gain an edge or to simply stay in the competitive game.
Copyright 2006 – All Rights Reserved Technology Partners International, Inc.
DEREGULATION SPARKS TRANSFORMATIONAL SOURCING AMONG UTILITIES
RADICAL TRANSFORMATION IS IMPERA-
Because utilities want and need to improve the TIVE FOR MEETING DEREGULATION CHAL-
way they do business, they desire best-of-breed technologies and world-class processes that service Utilities’ transformation goals revolve around a providers can offer. Accenture and Capgemini, with quantum shift in capability rather than merely making strong transformational consulting experience, are over the back office of IT, Finance & Accounting, Human strong service providers in this scenario. Others such Resources, Customer Relationship Management as EDS and IBM have quite large utility customer (CRM), Procurement and other functions. Today’s bases, albeit primarily in the IT realm.
utilities executives do not want the service provider to “run the same mess for less.” Instead, they want TPI expects to see more outsourcing transactions in the service provider to help them radically transform the utility industry this year and in coming years. After the services they are currently supporting. This the TXU outsourcing transaction in 2004, TPI saw its means fundamentally transforming and boosting pipeline for transactions in the energy sector grow productivity and efficiency, which leads to cost as utility firms adopted assessments of alternative reductions and better performance that positions the sourcing options at an unforeseen pace. TXU’s four- utilities for a deregulated (or — at minimum — less fold rise in stock price has certainly spurred its peers to regulated), more competitive environment.
look at sourcing as a viable approach to transforming their businesses to meet the changing demands of Utilities continue to experiment with outsourcing contract lengths, number of service providers and scope of services delivered. Many believe that they may negotiate lower costs if they outsource entire functions — or end–to-end processes such as procure-to-pay or hire-toretire — for longer terms. Other sourcing transactions have a narrower scope, such as outsourcing Applications Development & Maintenance (ADM) to a firm that can do it more efficiently with a better cost structure.
Copyright 2006 – All Rights Reserved Technology Partners International, Inc.
DEREGULATION SPARKS TRANSFORMATIONAL SOURCING AMONG UTILITIES
SOURCING OPTIONS CAN HELP ADDRESS
creating substantial demand for transformational ONGOING CUSTOMER RELATIONSHIP MAN-
sourcing strategies in the utility industry. Cinergy’s AGEMENT CHALLENGES
US$9.1 bil ion merger with Duke Energy and Exelon’s Utilities are still viewed as a community service, and acquisition of Public Service Enterprise Group (PSEG) utility companies must stay in touch with their local are two examples of high-profile M&A activity among consumers. For this reason, CRM has always been a formidable requirement and a challenge for utili-ties. Owing to the enormous number of residential OUTSOURCING IN UTILITIES INDUSTRY
customers that must be served, the demand for POISED FOR ACCELERATION
more sophisticated and unique systems to enhance As demonstrated by TXU and others, utilities are customer-facing business processes runs high. Often, increasingly recognizing the need to adapt to today’s in fact, a utility’s entire employee base has annual market conditions and are acting on that knowledge. bonuses linked to customer satisfaction statistics, so And although they may slightly lag some other they are very focused on customer service interac- industry sectors in their speed to change, TPI believes tion and satisfaction. Some are outsourcing both that, based on current trends, utilities will pursue people and technology. Others outsource only the sourcing strategies more aggressively as they look technology, electing to keep their own people so to remain competitive, reduce costs and increase as to remain closer to the local community and to For more information about sourcing issues and options for utilities, contact Dr. Nigel Walker, Partner, SMOOTHER MERGERS AND ACQUISITIONS,
GREATER COST REDUCTIONS THROUGH
TPI, at [email protected] or +1 972 523 0963.
TRANSFORMATIONAL SOURCING
The energy industry expects more utility mergers in
the wake of deregulation, which wil , in turn, stimulate
greater interest in outsourcing strategies.
Merging companies stand to benefit from cost reduction opportunities as they successful y integrate and transform their respective operations into single entities, and outsourcing can help pave the way. Merger and acquisition (M&A) activities, consolidation and other emerging business opportunities are Copyright 2006 – All Rights Reserved Technology Partners International, Inc.
ABOUT TPI: TPI is the founder and innovator for the sourcing advisory industry, and the largest sourcing advisory firm in the
world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep func-
tional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works
with organizations to help them optimize their business operations through the best combination of insourcing, offshoring,
shared services and outsourcing. For additional information, visit www.tpi.net.
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Source: http://www.tpi.net/pdf/papers/Deregulation%20Sparks%20Among%20Utilities.pdf