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As competitive pressures push utilities to look for new ways to do business, outsourcing the information technology (IT) function becomes increasingly attractive. By contracting for outside IT services, utilities can reduce costs and increase efficiency.

The decision to outsource, however, now goes beyond cost-cutting considerations. Companies are just as likely to turn to outsourcing when they want to concentrate on new business opportunities or dramatically change their overall structure. Rather than simply cutting IT expenditures, outsourcing can deliver substantial value in terms of long-term performance and profitability. And it is no longer the troubled organizations that are outsourcing. At least 35 percent of Fortune 500 companies will have outsourcing partners in 1995.

Cooperative Outsourcing

Future relationships with IT providers will increasingly involve shared risks and rewards. These value-based contracts (em which link compensation to a provider's ability to deliver specific benefits (em are rapidly gaining popularity across all industries. The U.S. systems-integration market alone experienced a 300-percent increase in value-based contracts from 1993 to 1994.

Cooperative outsourcing links the service provider's profit to agreed-upon improvements in a utility's basic corporate performance, as measured against earnings, competitive positioning, performance against budget, and customer satisfaction. Other industry-specific measures include cost per kilowatt-hour, customer retention ratings, levels of uncollectibles, and productivity rates.

By tying IT performance to business performance metrics, cooperative outsourcing ensures that a utility's IT and corporate goals are in sync. However, this requires a willingness on the part of the utility to disclose mission critical business information to the services provider. Utilities have historically resisted outsourcing for fear of losing control of their information functions. With cooperative outsourcing, responsibility for IT is no longer assumed entirely by the services provider. Instead, both companies combine their core resources to work together.

Common Utility Concerns

Ownership of Technology. Rights to own, use, license, and market technology developed under a cooperative outsourcing contract must be carefully negotiated up front. Solutions can range from mutual ownership without a duty of accounting to each other, to agreements whereby the utility grants full marketing and/or licensing rights to the IT company to reduce development costs. In between is an arrangement whereby each company owns the technology and subsequent enhancements that it brings to the relationship.

Privacy and Ethics. Utilities may worry about the access the IT provider has to highly strategic and confidential business information. In this regard, however, cooperative outsourcing arrangements do not differ from traditional outsourcing contracts. IT services companies live and die by their commitment to secrecy regarding a client's sensitive information.

Tax Implications. Although cooperative outsourcing agreements "partner" two or more companies to accomplish business objectives, such arrangements are not "partnerships" in the strict legal sense. They are, rather, similar to joint marketing or standard vendor arrangements, and do not receive the same tax treatment as a legal partnership.

Cooperative outsourcing is not for everyone. If a utility's needs are limited to reducing data-center costs, a conventional outsourcing agreement may still be best. If, however, the goals include maximizing overall performance, a value-based arrangement can offer additional flexibility. Further, if a utility is considering