When utilities evaluate business process outsourcing, they need to determine which processes are most advantageous to outsource—core or non-core? These terms sometimes are used interchangeably, but it is important to note the difference between the two. By definition, a core competence is an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity. On the other hand, core functions are those processes, like customer care or emergency restoration, that a utility is obligated to provide.
Many utilities consider all processes—from transmission and delivery through customer service—as core competencies to be kept in-house. However, when service costs of utilities are compared, this conclusion is questionable.
For instance, recent FERC data on customer-service costs for electric utilities with 1 million to 5 million customers shows a wide range across the utilities.
If customer service is a core competence, we should see a tight clustering of the data points, accompanied by a downward trending of service costs as the customer base increases (reflecting normalization for such factors as wage rates, etc.). In contrast, there is little correlation between the number of customers and the amount spent on "core" customer service functions.
Rather than debating the merits of core or non-core, perhaps the more critical questions utilities should ask are:
If the answer to the latter two questions is "no," perhaps it is time that business process outsourcing (BPO) be considered core to a utility's performance.
Cost-effective process performance is a BPO provider's core competence. Leading outsourcers develop an understanding of how the utility uses technology to serve customers, how well well it performs customer services, where the gaps are, and where the overlaps occur. Examples of this performance include:
Most executives agree; there is tremendous opportunity to take costs out of utility operations. So perhaps it's time for utilities to decouple the idea of "core competencies" from the decision of how best to provision them. By assessing performance through this filter, utilities can discern which processes are the most advantageous to outsource.
The average age of the energy industry workforce is nearing 50, with an estimated 45 percent eligible for retirement over the next five years. As such, utilities and their unions are seeking new ways to revitalize their workforce, cut health care and pension costs, and forestall skill loss. Fortunately, utilities, unions, and outsourcing providers don't have to be adversaries. As a performance partner, BPO providers offer many options that make outsourcing gains, union transition, and workforce retirement mutually beneficial.
Outsourcing is of concern to utility employees. This sensitive customer-service issue requires open and honest involvement from all parties—the union, utility, outsourcer, and regulators—to be successful. However, there is a middle ground. Utility managements are taking many creative approaches to ensure union job continuity, where applicable, and retraining and relocation when possible.
For utilities in jeopardy of losing valuable employee skills to workforce retirement, BPO may be a viable safety net. Leading providers have deep experience in utility processes, practices, and platforms. They can fill application integration and project management gaps, manage revenue-cycle (meter-to-cash) process requirements, and provide scale for fluctuating call center and IT demand. In a time of dwindling resources, this support allows utility employees to focus on more high-value activities.
For unions concerned with employee displacement, many business process outsourcers offer the ability to re-badge utility personnel as vendor employees. Both Puget Sound Energy and TXU chose employee transfer as part of their billing, customer care, and enterprise outsourcing agreements. As members of the outsourcing team, many of these utility employees gain training in new technologies and process improvement practices that may advance their skill sets, career options, and job satisfaction.
For union members that remain with the utility, their knowledge of customer service practices and legacy processes is valuable during the outsourcing transition period in terms of contract governance, project management, and business continuity.
After years of little activity, many utilities are facing their first rate filing in a decade. However, the rate-case landscape has changed dramatically from the mid-1990s, when many regulatory commissions allowed electric and gas utilities to recover stranded costs required by retail wheeling. On average, electric utilities have seen their allowed return on equity decline every year since 2000, capturing just enough in rate increases to ensure earnings stability. While low interest rates may be a factor, this decrease in equity return is putting a pinch on many utilities facing deferred capital expenditures and increasing health care, pension, and system reliability costs.
Today, cost of service and rate design aren't the only factors driving rate recovery. In regulatory environments where prudent expenditures are of increasing concern, there is reason to believe that BPO may enhance the success of rate case allowances by demonstrating to regulators that escalating service costs are better handled by providers whose efficient operations directly benefit rate payers.
For example, many regulators are concerned with the escalating cost of utility customer information systems (CIS)—due to the perception that billing and customer care system upgrades or replacements are not yielding true efficiency, improved service, or value for the money. Because of this, some regulators are evaluating BPO for its ability to protect rate payer interests through:
These outsourcing gains directly support the regulators' mandate to protect ratepayer interests. Yet, the idea of BPO serving as a contributor to the rate case remains a paradigm shift for most utilities. Historically, they have looked to rate cases for capital improvement and fuel cost recovery only, rather than for demonstration of operational savings.
Viewed through an alternate lens, rate cases provide an opportunity to align rates more closely with a utility's current market conditions and changing customer expectations. For utilities that consider BPO a part of innovation, better performance, and good stewardship of ratepayer assets, we offer the following suggestions for engaging regulators in going beyond standard service definitions. First, be prepared. Get solid data by tracking your current CIS and service costs rather than relying on historical and inaccurate data. Adjust analyses for factors such as end effects, capital costs, and depreciation. Next, engage analysts and leading outsourcers to provide data on service level benchmarks, cost models, and the service improvements customers value and are willing to pay for. And last, communicate your outsourcing strategy and business case with regulators before the rate-case horizon is imminent.