Business Process Outsourcing: Myth or Reality?

Fortnightly Magazine - September 2004


Business Process Outsourcing

The utility HR department is the new battleground.

Today information technology (IT) outsourcing contracts are being signed on an almost weekly basis and are rapidly extending into business process outsourcing (BPO) deals covering a whole range of areas-customer care, human resources (HR), finance and accounting, and procurement, to name a few.

Recently, TXU Corp. agreed to enter into a partnership to outsource areas such as IT, human resources, the call center, billing, supply chain, and finance and accounting. The 10-year, $3.5 billion deal will help TXU deliver improved electric service for customers and higher satisfaction rates, while yielding significant savings for TXU.

Other recent examples include a 10-year, $1 billion outsourcing deal announced by Canadian hydroelectric generator BC Hydro for customer services, IT services, HR services, network computing services, financial systems, and purchasing. ENMAX Corp. in Calgary signed a 10-year customer care outsourcing agreement; and Southern Co. Gas agreed to a seven-year arrangement for call center, billing collections, exception-processing services, correspondence, and transaction and revenue operations.

Why the recent momentum toward BPO deals in the utility sector? For one, BPO is a means to control massive technology and infrastructure upgrades, and these back-office functions require constant care and feeding.

But beyond cost savings, utilities, like other businesses, are finding that the potential benefits of BPO can go deep into their operations. The economies of scale that enable providers of outsourced services to cut a client's costs are becoming less important than the economies of skill gained from calling on expertise that can chart the course of least risk.

Dispelling the Urban Myth

Providers of outsourced services are being employed to take primary responsibility for business processes and to make sure they link up with other processes within the operation. In addition, the provider can create and accelerate to market new strands to the client's business, galvanize change in the organization, and streamline management practices.

Increasingly, utilities use outsourcing as a fast-track route to becoming a high-performance business. They are leapfrogging other industries that have dabbled with occasional outsourcing agreements but have not committed fully to the concept. Such radical initiatives are in stark contrast to utilities' traditional reputations for hesitating to embrace change.

But there remains some reluctance in the utilities industry to fully embrace BPO, due in part to some myths surrounding this innovative concept. These include:

  • Utility outsourcing is a fad;
  • Outsourcing and a regulated environment don't mix;
  • Outsourcing leads to less flexibility and a loss of control of decisions;
  • Outsourcing is better done one function at a time;
  • Cutting costs through outsourcing leads to service degradation; and
  • Greater flexibility will erase the "customer touch."
  • In short, some executives fear losing control. But a solid, collaborative BPO relationship can give executives more control, and boost performance in the process. For those companies that have made such a move successfully, the key is a subtle combination of strict guidelines and demands, balanced by a spirit of collaboration and mutual respect.

    All companies that enter into BPO arrangements apply constraints. They set deadlines, enforce service levels, and approve important personnel changes. But the best companies take an additional step: They employ "enabling controls" that go beyond traditional constraints to cultivate trust between these companies and the providers, and expand the scope of their relationships.

    In HR, for instance, executives are well aware that the industry "perfect storm"-deregulation, blackouts, high prices, and the post-Enron fallout-have made the recruitment and retention of talent a difficult challenge for many utility and energy companies. And as is true for all companies, the aging workforce as the Baby Boom generation moves toward retirement is placing even further stress on HR departments.

    Handling the Utility Human Resources Crisis

    Hiring new workers from outside the industry is essential. However, energy and utility companies must do more to train newcomers to the industry about highly technical engineering and regulatory matters while acclimating employees to the unique utility culture. To allow HR departments to focus on these strategic HR issues, they must be freed from handling routine, time and resource-consuming administrative tasks and benefits transactions.

    In -a just released study by The Conference Board and sponsored by Accenture HR Services-interviews with CEOs and HR executives at utility and energy companies reveal that companies in this industry are leveraging HR outsourcing as well as intensifying their HR shared services and increasing their investments in HR technology. These three strategies continue to offer the HR function within the utility and energy companies the ability to rise above routine tasks and transactions to address the growing strategic issues.

    The survey found that most companies deliver HR services via a blended solution using both internal and external capabilities with multiple providers. Among companies fully outsourcing services, more than half of those surveyed do so for 401(k) programs, and about 30 percent for pensions/benefits, stock options administration, and health benefits.

    Furthermore, about half of the survey participants said they partially outsource health benefits, as well as training and development, and 40 percent partially outsource payroll. Our research has found that executives are highly satisfied with their outsourcing arrangements, and are more satisfied the more they outsource.

    In another recently released study by The Conference Board, also sponsored by Accenture HR Services, it was found that 76 percent of executives surveyed outsource one or more major HR function, and 80 percent said they would outsource again based on their experience. None reported plans to take outsourced services back in-house.

    And in Accenture's fourth annual , we found that the mean satisfaction rating with the HR and training functions is higher among respondents who outsource all of a particular training or HR activity, such as recruiting, payroll, training content development, or training delivery, than among those who outsource none of that activity.

    The question today is less about whether or not to outsource than how to get better at it. HR outsourcing enables HR executives to focus on strategic human capital issues and become a more integral part of the decision-making and planning processes. In other words, outsourcing allows HR departments to focus on their core business-people-because a company's business strategy is nothing if it doesn't have an appropriate people strategy at its core.

    Managing the Partnership

    Outsourcing at a deep strategic level clearly creates significant management issues concerning the governance of the deals and ensuring the commercial aims are achieved. Indeed, when an outsource provider is deployed to take responsibility for functions that are critical to the success of the business, the relationship between the provider and the client has to go deeper, approaching partnership at its extreme. Also, complexities arise from the number of options available, and most managers lack a standardized framework on which to build outsourcing decisions.

    Why integrate? Because utilities operations are growing more sophisticated. Add the fact that utilities have to explore options such as multi-utility offerings or cross-selling allied services, and a picture of near constant flux emerges. This means that for utilities, as with other businesses, when seeking the right people with whom to entrust responsibilities that are pivotal to the business, it is a high-risk move to fragment the operation and hand over the pieces to an assortment of agencies offering commodity services under contract.

    Customer relationship management (CRM) is a key differentiator between average and top performers in the utility industry. The right investment in CRM capabilities could have a direct impact on a utility's bottom line, generating hundreds of millions of dollars in additional profits. As utilities unbundle services and seek new ways to differentiate themselves and provide better services at lower costs, one area they look at is outsourcing customer-care capabilities.

    The potential for better risk management reinforces the power of outsourcing in today's utilities marketplace. Across all industries, the attractions of outsourcing include a guaranteed level of service at a lower cost than the in-house alternative. For utilities, these generic benefits are augmented by the ability to guarantee costs and therefore margins, smooth the entry to new markets in line with the evolving commercial and regulatory environment, and minimize the risk involved in any merger and acquisition deals.

    The outsourcing business model and the management statistics it generates are a powerful combination, providing a platform for better workforce intelligence at both an operational and strategic level. This is a critical factor in helping the retained HR function provide higher-value strategic services to the enterprise. The visibility and value of HR will increase as HR departments, spending less time on transactional work, are able to concentrate on making more strategic contributions to their organizations.

    This compelling business case is winning over a growing numbers of utilities. And by putting it into practice, they are hastening the rapid reshaping of the industry.

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