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The IT Outsourcing Question

The pros and cons of outsourcing utilities' IT functions.
Fortnightly Magazine - June 1 2003

industry group in Canada, says, "If you look at our industry, particularly in North America, it has to be the most fragmented major industry that still exists-300 to 400 utilities, particularly in the distribution and retail segments. Therefore, our industry just doesn't have the scale on an individual company basis either to invest in technology or to build the capabilities in a way to spread the cost economically across their cost base." Morris also said many utilities have governance constraints emanating from state, political, or social constraints, which lower the rates of mergers and acquisitions. Outsourcing is a way to obtain scale through an organization like Accenture, in order to gain those economies of scale, spread the investments, and obtain capabilities the utilities couldn't get otherwise, he says.

The Regulators

Nothing happens in the utility industry without the influence of regulators, especially something like IT outsourcing, which involves a lot of cash and service issues. But the experts believe the regulators need some educating.

According to Accenture's Bill Morris, one of the barriers to outsourcing until recently has been the regulatory environment in the industry. "Once a bunch of these deals are done it is going to be everywhere," he predicted. He believes that regulators have taken the approach that you should not break away IT from the core utility. He said the definition of what a core utility is has changed greatly in the last four or five years, even as regulators have seen the positive effects of outsourceing. "That is prompting the utilities to say, 'Hey, this is an avenue we didn't think we could do before, and we all know we don't have the scale and the ability to do this stuff,'" he said. "Just the conversations we are having with tens and tens of utilities across North America are just showing that momentum is building."

Morris referred again to the customer relationship management study. "The study we have done shows a high correlation between customer service levels and regulator decisions on rate base or whatever environment they have," he said. Morris added that at present he is negotiating a couple deals that are driven by quality and service aspects and the belief that there is more money and return involved.

Deffarges agreed that utilities that do not do their customer care right are very much penalized by regulators.



European Gas Pipeline Co. (EDS client since 1997)

SITUATION:

New company with no IT infrastructure. Needed a shipper information system for an undersea pipeline in nine months. System requirements included a Web-enabled system with ease of use, capacity buying/selling, and 99.9 percent availability.

APPROACH:

  • Plan and build a high-availability IT infrastructure specifically for the system;
  • Implement a shipper information system that connects gas shippers on the Internet through a standard Web browser; and
  • Provide a fully managed IT service with ongoing software development and maintenance for the shipping information system, hosting and monitoring of hardware, and all desktop services related to the system.

RESULTS:

  • Project fully implemented on time and 10 percent below budget;
  • Web interface was inexpensive and provided