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-
(OSHA) and the Environmental Protection agency (EPA). The aforementioned
must be performed on a continual basis, as the core
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.
What is the right composition of team membership the
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
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.
What is the primary function of the vendor soliciting for
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.
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
at this point, wastes time—especially with an essential service.
Best Practice Synergies
What additional or improved services are offered by the
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.
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
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.
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.
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.