Michael R. Foley Vice President, Utility Services First Data Utility Group April 13, 2005 Why Outsourcing has worked in other industries…. And, why it works for Utilities
Jan 30, 2016
Michael R. FoleyVice President, Utility Services
First Data Utility GroupApril 13, 2005
Why Outsourcing has worked in other industries….
And, why it works for Utilities
Outsourcing is a Major Driver of
North American Economy
Pervasive throughout all industries Service providers are everywhere; on,
near and offshore Standardization of models—portability
and compliance built in Web-based technology platforms
enable performance anywhere, anytime Outsourcing cannot be reversed or
ignored—any legislation will fail US economy is largely dependent upon
outsourcing
Reasons Companies Outsource
10%
12%
12%
18%
20%
25%
36%
38%
54%
55%
0% 10% 20% 30% 40% 50% 60%
Function difficult to manage
Take advantage of offshore capabilities
Share risks
Reduce time-to-market
Accelerate reengineering benefits
Resources not available internally
Gain access to world-class capabilities
Free resources for other purposes
Reduce and control operating costs
Improve company focus
Ris
ing
“ In the end this is why companies look for help” DJO
Source: The Outsourcing Institute, Fifth Annual Outsourcing Index, December 2002
Model Type Typical Characteristics
Evolving Outsourcing Business Models
Asset Purchase/Divestiture
Cash for assets, funded byBTO, cost savings guarantees
Business Transformation Outsourcing (BTO)
A little or a lot….
Business Process Outsourcing (BPO)
Multiple processes, SLAsobligation to re-engineer,gain sharing, cost savings
Single or Multiple processes,SLAs, cost savings
Evolving Outsourcing Business Models
Key Success Factors
Transaction UtilityTransaction Utility
Value Proposition:Lowest Cost
Transaction UtilityTransaction Utility
Value Proposition:Lowest Cost
Transaction UtilityTransaction Utility
Value Proposition:Lowest Cost
Process OutsourcingProcess Outsourcing
Value Proposition:Cost ReductionService Levels
User Satisfaction
Process OutsourcingProcess Outsourcing
Value Proposition:Cost ReductionService Levels
User Satisfaction
TransformationTransformation
Value Proposition:Competency Focus
Business ImpactThought
Leadership
IT Outsourcing(Apps + Infrastructure)
• Business model• Consulting capability• Vertical industry
credibility
• Deep process/subject matter expertise• Leverageable solutions• Program management
• Delivery capability . . .– Low cost– Multi-client– Multifunction– Best shore
Customer Value
Company Processes Outsourced
Virtually any business process can be being outsourced
General Motors Manufacturing, Design
Delta AirlinesMaintenance, HR
Catering, Call Center
Typical examples
Comcast Billing, Customer Service
Industries where Outsourcing prevails:
Automotive Consumer
Goods Financial
Services Government Health Care Insurance
Manufacturing Technology Transportation Telco, Cable &
ISP Utilities and
Energy
Utility Industry Structural Issues Driving Outsourcing Decisions
Customer Expectations Shareholder Expectations Regulatory Expectations Restructuring/Competition – it’s
here to stay Energy/Utilities Industry emerging
from capital crunch Failed diversification efforts put
focus back on wires and pipes Focus on operational efficiencies
and technology
Changing Business Environment Forcing Utilities to a “Run the Business Better Strategy”
Outsourcing Isn’t New To The Utility Industry
0%
10%
20%
30%
40%
50%
60%
1999 2001 2002 2003
% U
tili
ties
Ou
tso
urc
ing
Cer
tain
Car
e A
ctiv
itie
s
Utilities have increasingly used outsourcing to reduce
cost …
0 10 20 30 40 50
RemittanceProcessing
After Hour Calls
BillProcessing
Call Overflow
Credit &Collections
% Outsourcing
… but only in a fragmented way
Source: Chartwell; 2003
We believe a more comprehensive outsourcing approach that is integrated with business strategies and goals will yield substantially greater benefit.
Through consolidation, standardization, better technology and labor costs
Improvements in quality through error reduction and business process improvement.
Service level agreements that align with contractual and regulatory requirements
Typical Savings Potential: 15% to 40%
The Business Case for Utilities is Compelling
Credit/ Collections
25%-35% Reduction
Technology
15%-20% Reduction
Billing
15%-20% Reduction
Contact Center
35%-55% Reduction
$100
$60-$75
Baseline Costs
Projected Stable
Operations (no inflation)
Cost Advantage of Outsourcing and Offshoring
Co
st p
er T
ran
sact
ion
(In
dex
)
Client Volume Outsourcer Volume
Transaction VolumeSource: Booz Allen Hamilton
100 -
85 -
68 -
58 -
50 -
5% - 10%ProcessOptimization
15% - 20%Scale
10% - 20%OffshoreLabor &Overhead
U.S. Outsourcer
Client Today
Client with Reengineeredand Restructured Services
Outsourcer WithOffshoreCapabilities
CaptiveOffshore
“Demand for BPO services will continue to grow in 2004 and beyond... Through 2005 business process outsourcing (BPO) and business transformation outsourcing (BTO) will ultimately become synonymous…”
METAGroup, John Van Decker / Stan Lepeak, August 20, 2004
“….Predict that half of all G2000 companies will use enterprise HRO by 2008…” METAGroup, Ron Hanscome Enterprise HR Outsourcing: Ready or not Feb
24, 2004
"During 2004/05, continuing pressure to achieve operational efficiency, adoption of the asset management model, and a regulatory environment favoring the purchase of services versus internal provisioning will drive significant increases in outsourcing…”
Meta Group, Dr. Zarco Sumic, May 20, 2004
Market Point of View
What Should Utilities Outsource?
Prop
rieta
ry N
atur
e of
Fun
ctio
n
NotProprietary
Data isProprietary
BusinessProcess isProprietary
Profit Model isProprietary
Source: Harvard Business Review,February 2005 Uniqueness of Business Process or Function
Unique to self Common acrossIndustries
High Priority forOutsourcing
Medium Priority forOutsourcing
Low Priority forOutsourcing
How Strong are Your Capabilities?
Outsource to increasecapability at Lower
Cost
Com
pany
’s A
bili
ty to
Per
form
Func
tion
Betterthan
Sufficient
NotSufficent
Sufficient
Company’s Cost per Transaction
Above industrymedian
At industrymedian
Below industrymedian
Outsource to increasecapability even at higher
cost if necessary
ConsiderCreationof new
businessunit, if
adjacentto corebusiness
Outsource to reduce cost;sacrifice capability if
necessary
Outsource to reducecost
Source: HarvardBusiness ReviewFebruary, 2005
Significant Outsourcing Deals
Cap Gemini/TXU --Meter to Cash, Shared Services Xcel Energy – IT, Back Office Outsourcing Puget Sound – CIS Hosting, Application Management NStar, Entergy, PSEG, Cinergy, Avista– IT Outsourcing City of Austin, Orlando Utilities – CIS Hosting,
Application Mgmt Metro St. Louis – CIS, EBPP Direct Energy – Back office processes LIPA – Electric Operations, Back Office Enbridge, Hydro One – Meter to Cash Southern Company Gas – Back Office BC Hydro – Meter to Cash, Shared Services Williams Companies – Back Office Operations NiSource -- Pending
… And Capital Markets See The Value Outsourcing Creates
“Strategic outsourcing positively impacts shareholder value. Our research suggests the difference is in the order of 5.4% above the individual sector average and 4.9% above the overall FTSE100.”
Source: Morgan Chambers, “Outsourcing in the FTSE 100; The Definitive Study”, 2001
“Evidence shows that IT outsourcing has a discernible positive impact on share prices. A study of 27 companies undertaking large IT outsourcing initiatives indicates an average gain in shareholder value of 5.7% over and above the general market trend.”
Source: Stern Stewart, “IT Outsourcing and Shareholder Value”, August, 2000
Source: Stern Stewart, “IT Outsourcing and Shareholder Value”,
August, 2000
$94
$96
$98
$100
$102
$104
$106
$108
$110
$112
$114
$94
$96
$98
$100
$102
$104
$106
$108
$110
$112
$114
-40 -30 -20 -10 0 10 20 30 40
Performance Of Outsourcing Companies Versus The Market
Measured From 40 Days Before Announcement To 40 Days After Announcement
Outsourcing Index $110.98
Market Index $106.33
Day Of Press Release
Obstacles to Utility Outsourcing
Control Issues Risk (Actual or
Perceived) Regulatory Political Organized Labor Aging Workforce Other Stakeholders
Summary Top 10 Reasons for Utility
Outsourcing
Focus on core competency
Increase enterprise flexibility
Increase customer satisfaction
Innovation
Gain access to markets
Generate cash Free up capital Turn fixed
costs into variable costs
Reduce costs Spread risk
In the Fortune 500 listing, First Data ranked number 216 based on revenues in 2004.
In Fortune's 2004 Most Admired Companies, First Data ranked second in the category of computer data services companies.
“We have world-class technology, processes, and experienced people that are highly transferable to other markets. We have unmatched scale and a business model that is extendable. We’re looking at opportunities that leverage the business model across a spectrum of industries.
- Charlie Fote, CEO and President, First Data Corporation
First Data CorporationAmong America’s Most Admired
Companies
Outsourcing?
“Do what you do best; outsource the rest…”
Tom Peters
In Search of Excellence