Business transformation outsourcing: What's going on?

Under pressure to grow revenue, cut costs, and respond to competition, changing market dynamics and economic uncertainty, CEOs around the globe are seeking to rapidly transform their enterprises. A recent global survey of CEOs, however, revealed that while 50% of them believe they have two years or less to achieve their transformation goals, nearly nine out of 10 fear their organisations are not up the challenge.1

Energy and utility industry executives are no different. In addressing the challenge to continuously get better, faster and cheaper, their traditional approach has been to secure consulting services to design and implement new business processes, upgrade application portfolios and selectively leverage global resources. Now, as they rethink how they can improve focus and gain flexibility in their businesses, executives are increasingly outsourcing their business processes to providers who can manage, operate and even transform those processes.

Major BTO processes.JPG

Analysis of various estimates of the growth rates in this area shows business process outsourcing (BPO) growing faster than 8% per year, reaching approximately $132 billion worldwide in 2008. The highest growth will take place in the Americas, followed by EMEA (Europe, the Middle East and Africa) and AP (Asia Pacific). The transformational portion of the overall BPO marketplace – known as business transformation outsourcing (BTO) – is growing even faster, estimated at about 24% annually,

The evolution of the BTO services marketplace now affords executives an alternative approach to procure transformed services to support their business. Providers maintain many key support services for the industries through institutionalised business process and technical solutions. Pre-architected global delivery models leverage the provider’s network of delivery centres to obtain the skills, capabilities and labour arbitrage advantages of global resourcing. Finally, building transformation into longer-term operating services contracts allows the provider to underwrite transformation investments required while delivering contractually agreed service levels for the ‘in scope’ processes.

Leveraging BTO approaches from leading providers can be a vehicle to provide:

  • Improved returns and accelerated timing of those returns.
  • Increased management capacity, as the service provider will provide services management oversight at agreed service levels.
  • Additional sources of available capital to underwrite transformation investments.
  • Mitigation of transition and transformation risks managed from one external provider within a customised governance framework.

In summary, integrated service providers in the BTO marketplace are providing a holistic offering that has traditionally been procured separately by clients.

A number of recently completed and highly publicised transactions have been executed in the marketplace. Companies such as TXU, NiSource and Williams Energy have embraced BTO solutions to transform their businesses.

MANAGING EXPECTATIONS

As energy and utility industry executives who are contemplating embarking on a business transformation project look at BTO solutions, a number of early issues are raised. Chief among them is expectations management.

Enterprises that have internally agreed upon their objectives and priorities for the BTO programme are better prepared to evaluate recommendations that come from providers. The more solidified and better communicated the programme objectives and priorities are, the better a service provider can ‘adjust the dials’ to customise a solution to meet the requirements. This fine-tuning of a solution does not happen in a vacuum. The service provider is an integral participant in helping to shape solutions, and having a solid starting point can accelerate the process. In addition, a clear statement of programme objectives will allow the provider and the organisation desiring transformation to ‘test’ solution alternatives against the programme requirements.

What does it mean to suggest a clear understanding of objectives and priorities? Take the better, faster, cheaper example mentioned earlier. While generally each of the concepts is important, can the key overarching criteria that the programme has to meet be highlighted by the transforming enterprise? Can the organisation define what success means? Having a clear picture of aspirations and trade-offs is imperative to being able to judge the success of the initiative.

OBJECTIVES AND SERVICE DELIVERY AREAS

Another dimension is the enterprise’s appetite for transformation. Often, service providers must distinguish between business process outsourcing (BPO) – taking over operations of the existing processes with incremental process improvements – versus business transformation outsourcing (BTO), or fundamental changes to the business processes, people and underlying technology supporting the client’s business. If companies are looking more for BPO – a ‘lift and shift’ strategy to obtain labour arbitrage benefits – certain providers may be better suited to provide such a solution. If the goal is more fundamental transformation, other providers will have the relevant industry, transformational and technical capabilities. While these are not mutually exclusive objectives, an organisation will often lean one way or the other, or have some preconceived objectives on a process-by-process basis.

RESTRUCTURING

Typical business transformation outsourcing.JPG

Another key area of exploration is determining where organisations would prefer their solutions and services to be delivered from. Is there a particular concern regarding the extent of onshore versus offshore delivery? Are they comfortable with near-shore solutions, or are they accustomed to global and offshore delivery of services? Many of the large BPO and BTO providers can tailor solutions to address client desires, recognising that this fine-tuning may have some tradeoffs in other dimensions of the overall solution.

As providers work to address the process orientation of what should be in scope, they generally start with the assertion that more value can be achieved through a broader scope. Enterprises that are not as mature in the use of outsourced services generally tend to be more conservative in their initial efforts. However, they should consider the breadth of the process, and engage the provider to explain how its solution can address their overall needs. Figure 1 depicts the major processes that energy and utility companies usually assess for prospective outsourcing initiatives.

Here’s the scope of these processes and how they might fit into a BTO initiative:

• Procure to Pay – This process covers key supply chain, sourcing and some payment processing. Benefits are strategic sourcing to drive down overall supply chain direct and indirect spend, and tools and analytics to provide companywide visibility to sourcing compliance.

• Hire to Retire – Primarily within the human resources function, these processes support virtually all of the major steps required from on-boarding new recruits to managing the benefits and retirement processes for retiring staff. Key features of BTO solutions include added transformation across virtually all business processes, including providing high levels of self-service, which generally enables customised services at a lower transaction cost.

• Account to Report – Within the finance function; these processes warrant extensive dialogue, especially given the recent Sarbanes-Oxley legislation and Section 404 reporting requirements. In addition to technologies, controls and tools that have been implemented to support globally resourced finance processes, a key focus on these processes involves the enterprise’s control environment and how the provider’s solutions integrate within their overall risk management framework.

• Meter to Cash – This area extends beyond the back office and is the primary connection for energy and utility companies with their customers. Meter to cash comprises the processes that extend from usage collection through payment. Some companies break the scope down into subprocesses such as billing, credit and collections or call centre management, and consider outsourcing them on a stand-alone basis.

• Common Processes and Information Technology Infrastructure – Solutions in each process area are often accompanied by outsourcing initiatives within the IT function. Many of the leading BTO providers are also longterm traditional IT strategic outsourcing services providers and can often supply an integrated solution.

While there is no prescriptive model for the number or breadth of processes to be included for a particular company, as mentioned earlier, the greater the breadth, the greater the opportunity for a provider to generate more value in its solution. Also, the more scale in a transaction, the better the solution provider can provide access to capital as part of transformational investments. This should not be dismissed, especially if using the programme to assist in defraying investment capital is one of the client’s key objectives.

As the transforming enterprise contemplates a particular programme it should consider that many organisations that start out on a single-process-tower, best-of-breed approach move toward a prime-aggregated or single-provider model. The reason is that the incremental benefits erode when the organisations consider the multiple solutions, procurement, negotiation, transition and governance processes that they will need to establish to address multiple providers. Instead, having a more strategic relationship with the primary provider allows the service relationship to withstand the inevitable transition hiccups, and also allows it to blossom into a strategic asset for the organisation.

Figure 2 highlights what a transforming organisation should look for in a service provider’s BTO portfolio, and provides an example of the typical business processes supported through outsourcing. Note that there is a high degree of correlation between the core offerings and the key energy and utility industry processes that were mentioned earlier.

For providers that have integrated BTO and strategic outsourcing capabilities, virtually all of these processes and sub-processes are supported by applications transformation and technology transformation. Additionally, some providers also leverage financing services, which accelerate value to the organisations they serve.

There is increased interest from the energy and utility industries in how BTO can provide a unique solution to address their performance, shareholder and transformation challenges. BTO is a new way to engage a full-scope provider to support the transforming enterprise’s objectives and priorities. Having a clear view of the objectives is a critical starting point. Developing the scope of the programme is also important as the company solicits and reviews offerings from providers.

As the energy company or utility engages with a provider, it should explore the creative dimensions that a larger-scale BTO transaction can provide. For example, investment capital, joint go-to-market opportunities and specific community initiatives are topics that can be addressed during these transactions. BTO provides today’s energy and utility executives with a powerful new tool to help enhance overall business performance and address specific objectives.