Competition in the energy sector means that utilities are increasingly being forced to ensure that their business operates efficiently and effectively. This has resulted in a focus on the outsourcing of meter reading, billing, customer call centres, and in particular information technology (IT) activities in recent years. The emphasis on outsourcing the IT function has arisen from the fact that IT competence is becoming a strategic factor for competition in the energy industry. Companies are asking themselves whether it is more efficient to perform services in-house, or to outsource some or all of these tasks. There is also the possibility of a partial or selective outsourcing of sub-processes.
A recent report on IT outsourcing in the energy industry gives a review of the market, based on 70 interviews with experts in the industry. It analyses the advantages and disadvantages of outsourcing and identifies several sourcing strategies for various processes.
The need for action on the part of utilities as far as their IT environment is concerned stems from the basic legal requirements stipulated by regulators, as well as from the increasing complexity of IT systems. One example of this is the increase in the number of interfaces within particular systems – and of course the fact that the technology itself continues to change at such a rapid rate. Many utilities are overextended by technical developments, either because they do not have the necessary human resources or because the skills and expertise is not available within the business.
In Germany, utilities have to adapt their IT systems to legal requirements – primarily unbundling and KonTraG (Gesetz zur Krontrolle und Transparenz / Corporate Sector Supervision and Transparency Act) which became operative in 1998 and which demands the installation of an efficient risk management system for capital companies.
This has resulted in additional costs and is therefore one of the main reasons why utilities are looking for cost-efficient solutions for their IT standards. It is important for companies to take factors such as the size of the company, the availability of in-house expertise and the capacity of their systems into consideration when deciding for or against a particular sourcing strategy. Service providers, on the other hand, have to modify their portfolios according to the changing influences in order to offer their customers suitable services and products.
AN INCREASE IN IT OUTSOURCING IS EXPECTED
The research report indicates that a majority of the utilities interviewed (almost 70 percent) expect a general increase in IT outsourcing in the German energy industry by 2010 (see figure 1). Only one third of the respondents assume that there will not be a rise. Service providers also support this – 64 percent anticipate an expansion of outsourcing in IT, whereas 20 percent have the opposite view. About 15 percent of service providers forecast a stagnating market development.
The total volume of the German IT market in the utility industry represents 1.9 billion euro. A scenario analysis based on assumptions suggests that the market for IT outsourcing will show an increase of 12 percent (80 million euro) between 2005 and 2010. Eighty percent of the utilities interviewed expect an increase in investment in this particular area; 20 percent anticipate that investment will remain constant.
COMPETENCE AND COST DETERMINE THE CHOICE OF SERVICE PROVIDER
In recent years, utilities have based the requirements they have of IT service providers on their own need for supervision of their IT processes, as well as on their previous experience of outsourcing projects. This is a challenge for the service provider, as utilities have tended to increase their demands on service providers generally. In the opinion of service providers, references and recommendations, specific expertise in certain processes, and a high level of flexibility are becoming more and more important for utilities (see figure 2).
The research study showed that utilities agree with the opinion of the service providers to some extent, but respondents said that the decision to appoint an external service provider for IT solutions is mostly determined by competence and price. They maintained that availability and the level of specialisation have little influence on the decision to opt for a certain company.
However, the notions of service providers and utilities about the requirements of energy com panies differ very significantly in some respects. For example, many service providers believe that utilities give more importance to references than to a low price, but this is not borne out in interviews with utilities. It became apparent within the interviews, though, that the requirements of utilities are very diverse. In addition to the main categories, the ‘miscellaneous’ category combines other individual statements concerning customer orientation, reliability, cost transparency, certain appointments, innovation and creativity.
Service providers must make every effort to identify and – if possible – meet customer needs. To win a customer even if the price of a service is comparably high, service providers should set out their calculations as transparently as possible, so that a potential customer is able to see exactly what he will get at what price. By pointing out added value, a service provider is often able to persuade a utility to accept the price quoted.
Although references are an important instrument for service providers to spark interest in their portfolio, they cannot be seen as a guarantee of success in the market, and therefore their importance should not be overestimated. If a service provider turns out to be a reliable business partner, an important part of the customer relationship is fulfilled.
INFLUENCING FACTORS FOR THE ENERGY INDUSTRY
Basically the influencing factors for the energy industry also affect the portfolio of IT service providers in this industry sector. Figure 3 points out that most of the interviewees (utilities and service providers) believe that unbundling has the strongest influence on the development of IT outsourcing. In this context, utilities consider the rate of customer change and the KonTraG requirements more important than do service providers, who expect a stronger influence by the “Bundesnetzagentur” (Federal Network Agency), the “EnWG” (Energie- Wirtschafts-Gesetz) and unbundling. (The EnWG is a German Act based on EU law, with the aim of ensuring a consumerfriendly and ecological gas and power supply, active competition and the longterm, efficient and reliable operation of power and gas grids.)
Some service providers explained this discrepancy on the lack of information about legal requirements and their impact on IT within utilities.
At present many utilities organise their IT as an in-house department, and outsourcing into a subsidiary company or to an external service provider only occurs in isolated cases. A complete outsourcing effort is unlikely to occur in the energy industry, as utilities generally prefer selective solutions (partial outsourcing).
However, the high level of specific know-how on the part of service providers guarantees utilities a functional and up-to-date IT standard. To fulfil the actual legal requirements it is helpful – especially for small utilities with few human resources – to call in an external IT service provider. By outsourcing individual processes, utilities are able to focus on their own core competencies. In addition, utilities may find that the costs of the IT function are reduced if they outsource, since it is no longer necessary to invest in hard- and software, or to pay a premium for staff with the necessary expertise. Before a firm decision is taken, however, utilities must have conducted a study to establish the resources at their disposal and the cost of these resources.
It is expected that an increase in the rate of outsourcing will particularly concern the billing, software and accountancy divisions, and this means that the requirements of utilities for optimum expertise, flexibility and individual solutions from their service providers will grow. At the same time utilities will demand more of their IT systems, for example regarding quality and cost, complexity or compatibility of systems. IT service providers should therefore be able to provide multifaceted skills in order to meet the actual legal requirements for utilities regarding IT. Only in this way will it be possible for service providers to meet customer requirements for consulting services, as well as range of products.
In the long term the only service providers who are likely to succeed in this market will be those that can develop individual IT solutions for utilities.