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Maintaining Control Over Outsourcing

Utilities can transform the business while managing risk.

Fortnightly Magazine - September 2005

Furthermore, this can help eliminate potential ambiguities on assigned duties by explicitly describing key actions and hand-offs between the utility and the vendor staff, and across different business units.

It is equally important to keep detailed and up-to-date documentation of these processes as reference guides to avoid loss of focus while ensuring consistent and uninterrupted service. Employee turnover rates typically run higher in outsourced arrangements—especially with offshore vendors, where turnover can range from 15-20 percent.

Therefore, a thorough documentation of processes can help prevent the risks of "brain drain," or loss of valuable information caused by staff turnovers and departing employees. Comprehensive process documentation also enables greater control over a potential transition between vendors or during termination of outsourcing contracts.

Driving Effectiveness

Once an outsourcing relationship is in place, one of the most fundamental risks is that of underperformance—when an outsourcing arrangement fails to meet its financial and performance targets. One of the primary, and appropriate, responses to this risk is to establish service level agreements (SLAs) that document and confirm expectations and boundaries of service and associated service-level goals. An outsourcing arrangement without defined SLAs risks not only the failure to attain negotiated performance improvements and customer satisfaction levels, but also the inability to hold the vendor accountable when commitments aren't fulfilled.

However, setting SLAs isn't enough to secure the quality of outsourced operations, without also choosing the performance measures necessary to tie a company's Key Performance Indicators (KPIs) to the expectations set by the relevant SLAs. The inability to measure progress and quantify returns creates the risk of diverging from financial and operational targets.

According to TXU CEO Wilder, his company evaluates the performance of CapGemini based on 350 different measures, basing CapGemini's pay on 125 of them. These measures range from customer-service satisfaction to error rates on bills to collection periods on accounts receivables. The arrangement has resulted in a dramatic improvement in customer service according to Wilder, and the overall business transformation has been a stunning success.

But companies shouldn't be content with only maintaining performance. To boost operating results to the next level, utilities must consider opportunities for ongoing performance improvement, which often become overshadowed by cost-cutting concerns. Flexible SLAs that set expectations for continuous improvement coupled with performance incentives provide a catalyst for future service enhancement.

For example, after reaching SLA targets and business goals the first year, Entergy began thinking about how SAIC could help propel the utility's IT organization to the next level by implementing improvements beyond cutting costs. The firms discussed Entergy's goals and, as a result, defined transformational objectives and SLAs that not only addressed existing expectations but also supported future business goals. That contract included a "Quality Performance Incentive" for meeting or exceeding SLA goals. "This is an ongoing process," the CIO reports. "We constantly re-assess the SLAs to make sure they're still aligned with our evolving business needs. In some cases, we've ratcheted those SLAs up a bit." 7

In today's business climate, utilities and their vendors must identify evolving needs and industry movements to strengthen existing capabilities and develop