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Next generation outsourcing in utilities market

8 October 2008

Cost reduction is the biggest show in town for the utilities,’ Senior Counsel (Commercial) at National Grid PLC, Ian Leedham, told delegates at BLP’s outsourcing breakfast.

The above said the utilities sector do have an obvious need for reliable and robust services at all times, along with improved customer service and increased efficiency. Skills retention was also becoming a problem as a result of the sector’s ageing working population, and there is consistently additional regulatory and political pressures for cost reduction along with demand for greater return on investment from the city.

Outsourcing in utilities has to be as efficient as possible, which leads to tight financial discipline. ‘We need to satisfy the regulator that we’re investing correctly – however things can still happen beyond our control,’ he said, citing last year’s extreme weather events where flooding was causing substantial operational challenges. ‘So, if we outsource we have to be absolutely confident that service will be maintained.’

Effective outsourcing enables companies to concentrate on what they do best, as well as allowing for increased productivity, better technology and access to skilled and trained manpower at better rates. It is also important to see any of our staff see moving to an outsourcer as a positive career path, he said.

Disadvantages, however, could include risk of losing control of key areas, insolvency of outsourcers, hidden costs (such as the time spent co-ordinating the contract), loss of flexibility and security issues. So what should organisations be looking out for? ‘A lot of people assume outsourcing is the same the world over, but there are different types of companies who do different types of outsourcing.’ The main thing therefore was for an organisation to identify its own key drivers and priorities from any outsourcing and not simply saying “do my mess for less!”. 

‘You need to look at what the timing is – is it achievable?’ he said. ‘What about service criticality, and what is the worst that could happen? As far as utilities are concerned, it’s all very well recovering money but services are paramount.’

Organisations needed to think about what kind of outsourcing structure they are looking for. A buyer’s outsourcing maturity is a key factor, as companies originally tended to begin with relatively simplistic, opportunistic deals before moving on to focus on value rather than cost.

Mergers and acquisitions could clearly cause disruptions in any outsourcing cycle,. ‘and utilities might not be the only one who merges. What if your outsourcer merges – how would you feel if your outsourcer was the same as your competitor’s?’

There is also a tendency for organisations to focus on the beginning of the contract and not spend enough time thinking through exit and termination strategies, he said. It is also essential to be confident that the outsourcer really understands your sector and their expectations were aligned with yours.

‘So, is there any low hanging fruit out there?’ Generally, at this time there were more deals around but of a smaller dimension – the US had slowed up and many outsourcing projects in the financial services sector had obviously been shelved because of the current financial situation. HR outsourcing was also sluggish and telecoms were dropping back, however Business Process outsourcing overall was likely to exceed last year’s levels, and helpdesks and infrastructure remained strong. Developing economies could also be a huge growth opportunity for companies looking to outsource.

It was also possible that the credit crunch could mean an upturn in outsourcing, as companies need to cut their operating costs to remain profitable. Renewal rates for contracts are still high and there was a growth in multi-sourcing, both of which are positive signs of “buyer maturity”.

Overall, outsourcers need to be aware that governance and security concerns meant utilities are unable to take risks. ‘Utilities have regulatory and political baggage which makes them different,’ he said, stressing that any outsourcers going into this area would need to make sure they were able to buy into a common ideology. ‘Do not underestimate service, regulatory and data issues – you only lose your reputation once, and that’s not a cost you can afford to pay when it hits share prices.’

When challenged on a potential lack of innovation in the utilities sector Ian replied that  ‘National Grid likes to be inventive. We’re a company full of talented engineers.’ Nonetheless, there are issues around maintenance and control of innovations and the need to consolidate ideas, he said. ‘There’s nothing wrong with innovation, we are actively foster it at National Grid, choosing which ideas to follow and which to abandon is difficult but necessary.’



 

 

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Mark Lewis

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Partner, Commercial & Outsourcing

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