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Maintaining Control Over Outsourcing

Utilities can transform the business while managing risk.

Fortnightly Magazine - September 2005

nature allows them to be replicated and managed by a third-party with relative ease.

When done correctly, outsourcing non-core services allows utilities not only to increase their investment in strategic functions, but also to leverage the process efficiencies, best practices, and reduction in staffing and technology costs typically afforded by vendors.

Entergy provides an example of this, with the success of its IT outsourcing arrangement with vendor SAIC. In 1999, Entergy decided to refocus on its core businesses by outsourcing to SAIC a broad range of its traditional IT functions, including data-center operations, desktop support, telecommunications, field services and various applications. In its first year, the Entergy/SAIC engagement brought $11 million in savings and satisfactory achievement of targeted service levels. 5 The success of the relationship led to a reduction in Entergy IT staff churn to below 10 percent, annual IT cost savings of 20 percent, and a steady rise in customer satisfaction levels. 6

Today, some utilities are considering new ways to leverage cross-industry expertise beyond traditionally outsourced services such as IT, accounting, and HR. For example, TXU Corp. recently considered the possibility of shifting its trading and risk-management function to Credit Suisse First Boston. Concerns with cost and strategy alignment prevented the deal from advancing. But John Wilder, CEO of TXU, still remains bullish about the concept, which could allow TXU to gain from the commodity trading talent provided by a financial-services firm.

Determining which activities to keep in-house often depends on the attributes of the service. Not every non-core activity is necessarily a good candidate for outsourcing. For example, account reconciliation isn't considered a core function, but some companies that have outsourced this service have experienced difficulty attesting to financial statements because of a loss of transparency into how their numbers were derived. Consequently, some companies decide to keep in-house services that are critical to financial statements or are highly regulated. The decision to outsource services of this nature should be accompanied by an emphasis on well-defined policies and procedures and a tighter control environment.

Shifting Gears

Outsourcing risk is not limited to the service outsourced. Companies sometimes overlook the potential impacts of outsourcing on operations kept in-house. All processes—whether outsourced or retained by the organization—are often interdependent. Their individual efficiency and effectiveness can have a significant impact on a company's overall operational performance.

For example, a tax department relies on the accuracy and completeness of information provided by the fixed-assets department. Without such cooperation, the tax department may be left performing extensive data clean-up or losing potential tax savings caused by incorrect data.

To prevent problems of that nature, all business relationships should be explicitly identified to meet the overarching needs of the organization. Additionally, groups with a significant reliance on an outsourced service should be involved in setting service expectations and evaluating the vendor's performance.

Clear definition of processes and responsibilities, along with accurate documentation, also serve as critical components of success when a utility transforms operations or migrates tasks to a vendor. Establishing well-defined and standardized processes can reduce variability in service quality and increase reliability.