Working With Third-Party Companies

How utilities can outsource essential functions or services

BY ASBURY GAULT, Zenius LLC

In today’s business world with ever-increasing employee benefit costs, regulated utilities are challenged with reducing their costs for the benefit of all stakeholders. This force is driving utility managers to re-examine every function of their departments for cost cutting opportunities including functions and services that are essential to the operation of a utility.

In a regulated utility operating a distribution company, functional work falls into three basic categories: (1) the core competencies of generating, transmitting, and distributing electricity, (2) variable or incremental work or projects such as power plant and infrastructure improvements, and (3) essential services or functions such as facilities management, IT (information technology) support, tool testing, and rubber goods testing. This feature will address the strategic questions behind the due diligence necessary to determine if outsourcing is the best long-term management strategy for specific essential services or functions.

Essential functions are required to facilitate or support the core competencies of the business. These functions must be performed in order to comply with the rules of operation; rules that may be driven by regulatory requirements such as the U.S. Occupational Safety and Health Administra- tion (OSHA) and the Environmental Protection agency (EPA). The aforementioned functions must be performed on a continual basis, as the core competencies of a regulated utility they support are relatively constant and steady due to the technology of distributing and retailing electricity. Otherwise, incremental or variable demand function and outsourcing should be considered as one of the primary strategies to perform this work.

Utility managers of essential functions must constantly be aware of where their functional costs are positioned in relation to the marketplace. Management must not wait for the definitive “cost-cutting” directive to come down from the executives or board before they begin their due diligence. In the urgency for organizations to meet cost cutting objectives, due diligence can be short-changed and savings prematurely proclaimed. Unfortunately, outsourcing is routinely not studied for these functions until the directive is given. The Boy Scout motto, “be prepared” is appropriate here. However, this preparedness will not always circumvent the cost-cutting allocations.

As the marketplace is evolving, new service providers are creating a new and competitive environment for some of these services that have traditionally been provided “in-house” by the regulated utility. The challenge is for the utility to understand when the market is mature enough to offer a more fruitful alternative to maintaining the traditional in-house services.

Team

What is the right composition of team membership the utility must assemble in order to make the right decision and effectively implement the change?

Utilities must understand the importance of involving as many stakeholders on the project team as reasonably possible from inception to implementation before any outsourcing processes move forward. This point is especially true in the case of a service related to safety. A diverse team of stakeholder representation provides a couple of benefits: (1) unique views and perspectives on the selection of the vendor and their services as well as setting the groundwork for change management; and (2) the broader acceptance of this change across the internal customer base of this service. Since each vendor will have varying service practices, utilities must have as much experience on the project team as possible. Experienced representation can offer very useful perspectives on potential risks associated with procedural differences between the current practices and the different vendor operations.

Sustainability

What is the number of qualified, competitive vendors necessary in the marketplace to support a long-term outsourcing strategy? How many competitors can be expected to still be in this business in five, 10 or 15 years to help avoid placing the utility at a competitive disadvantage?

Once outsourced, in-house re-entry costs for this function can be high. Sustainability is the ultimate final assessment in making the best strategic decision for the long-term. That is to say, all of the due diligence necessary in making this decision is aimed at answering these ultimate questions.

Core Competency

What is the primary function of the vendor soliciting for the contract?

In making the selection of a service provider, utilities should consider if the service being contracted is a core competency of the provider. Core competencies are what give a company competitive advantages to creating and delivering value to its customers.

Market Success

What is the success rate of the potential provider’s offered services in the marketplace?

Choosing a proven provider in the market greatly reduces risks. Significant effort should be given by the project team to contact the vendor’s existing customers. Their clients should be willing and ready to recommend them in a positive light. There is no shame in taking advantage of other utilities’ successes. After all, utilities are not competitors and attempting to become creative, at this point, wastes time—especially with an essential service.

Best Practice Synergies

What additional or improved services are offered by the potential provider?

With a proven provider in the marketplace serving multiple customers with similar needs, the provider is able to offer new or improved processes or services to its customers. This is especially true for a vendor whose soughtafter function is a core competency. Vendors must continually strive to add value to an electric utility’s core business in order to be successful—both on their own and with input from their customers. There are inherent benefits to having a broader base of input to service and product improvements than the individual company can develop, implement, or finance themselves. These improved services should be apparent to the project team as it is examining the vendor’s processes.

Quality

What is the level of quality that can be expected from the vendors? Is it at least as good or is it better than the internal function is currently providing?

The team should review all of the proposed vendor’s handling and work processes with specific attention to quality control and interface processes with the customer. Otherwise, stakeholders might give considerable resistance during implementation. Regulated monopoly employees are generally not accustomed to change. Consequently, any discomfort can lead these employees to point out any potential deficiency imaginable.

Price

How many vendors offer competitive pricing necessary to make a compelling financial decision to move forward with any changes?

It is important that the majority of the vendors’ pricing in response to the request for proposal is competitive in order to assure sustainability. Otherwise, you will not be able to leverage the marketplace to sustain the compelling price.

Flexibility

How might choosing one of the vendors to provide this service offer the flexibility the utility will need to face future changes in its operations?

This is a driver that is often suggested as a reason for change with the underlying aim of reducing internal operating costs. Flexibility only applies in a regulated business to incremental and/or variable services or projects. The technology of generating, transmitting, distributing, and retailing electricity in the utility industry and the regulated environment in which these utilities operate provides for a predictable growth and workload—unlike market driven industries. An essential service must be maintained, that is, sustained to properly support a core competency of this business. Therefore, “flexibility” only applies to incremental and variable services. I only mention this here as an attribute not to be considered in the decision to outsource an essential function or service as it is the counter to our position on sustainability.

PHILOSOPHY IN PRACTICE

One of the last projects I was involved in just prior to my retirement from working in the regulated monopoly environment was the outsourcing of a rubber goods testing lab that supported 3000-plus internal users of this service. Since inception, this function had always been provided internally. However, the current marketplace and the financial forces driving down employee headcount made outsourcing of this function a viable option.

Initially, six companies responded to the request for proposal and attended the pre-bid meeting. Of these six, only one of these offered this service as a sideline to their core business; it was not a core competency for them.

Additionally, this test lab served to manage the new issue and replacement inventory of rubber goods. As the majority of new goods issued is directly related to test failures, this was the most efficient process. The scope of the request for proposal included the vendors’ pricing and provisioning processes of these new products. Vendors were also invited to include a proposal for the purchase of in-house testing equipment which my employer was looking to sell.

Interestingly, pre-bid meetings can provide the utility project team insight into the potential vendors’ operations and into their plans on implementing this additional work into their business. For example, this lab tested new rubber goods products from the vendor before sending them to the utility. This practice served to establish significant failure rates of new products from the manufacturer. Additionally, the pre-bid meeting is the ideal time to capture warranty-covered failures. In one pre-bid meeting, one vendor chose to debate this practice, as this step was not being performed in their current processing of new products being issued to their customers. Therefore, utilities must ensure that as many project team members and stakeholders are present in the pre-bid meeting as reasonably possible.

Our next step in the project was the team’s review of vendors’ responses to the request for proposal. While utilities must consider project attributes collectively when selecting a vendor, invariably pricing is the most accessible comparative data for the project team to consider in its effort to narrow the field of competitors. Therefore, this process is the starting point for the project team. This procedure was completed on a spreadsheet. This analysis revealed that, collectively, the vendors’ pricing offered savings over the current internal operations. Given the number of qualified vendors in the marketplace, the question of sustainability was answered by the project team. The next step was the selection of the vendor.

One of the bidders, while offering competitive prices, was considered by the project team not to meet the minimum requirement of this service being a core competency of their business. Therefore, the bidder in question was not given further consideration. Eventually, the project team selected a leading candidate who offered a competitive price for the testing services, shipping, and new rubber products along with a strong list of current clients. More importantly, the leading candidate was considered one of the largest stocking distributor for rubber products.

The project team’s next step was to visit the candidate’s operations onsite to review the quality of their work processes, their quality control, and their offering of best practice synergies. An example of this latter value offering was the broad suite of reports they were able to provide on a routine, upon request, or ad hoc basis. These capabilities were far beyond what our small, in-house Example of a glove sent in for testing lab was able to produce for itself. Another example was the improved cleaning, packaging, and labeling processes the candidate routinely provided for its entire line of handled products. Lastly, the project team observed during this initial visit that the visual inspection process was more aggressive than our own.

As anticipated, these failure rates increased during the initial testing cycle after implementation. Moreover, these additional failures cut into the initial anticipated, first-year savings of the project. In this instance, sacrificing some savings for improved quality control was worthwhile for the project team. This point cannot be undervalued, particularly for safety tools such as rubber products and acceptance of the equipment change by the users in the field. Upon returning from this visit, the project team made contact with several of the vendor’s customers, who, as a collective, responded favorably to questions concerning quality and customer service.

Ultimately, the leading candidate selected by the project team was able to provide a turnkey solution that met or exceeded the team’s requirements. This included the absorption of the lab equipment that offset some of the anticipated one-time, implementation costs for the project. The vendor’s position as a major distributor for the lone manufacturer of rubber products that met our utility’s standards, its shipping system and the quality and administration of its testing and replacement processes provided an efficient solution.

Subsequently, the selected vendor has used its extensive knowledge of the product and processes to work with the project team to offer solutions that will reduce failure rates in the long term, such as training on the care and keeping of rubber products. This was driven by the vendor’s practice of providing its customers feedback by photographing failures with particular attention to user-neglect or abuse. This added support contributed to the tangible value of the program while improving overall quality control.

Asbury “Sonny” Gault is the owner/operator of Zenius LLC, a one-person consulting firm in Little Rock, Arizona. Asbury recently retired from Entergy Corporation as the Director of Supply Chain Operations.