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Outsourcing Experiencing Peak Demand in Utilities Sector

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by Bob Lutz

Information technology outsourcing in the utilities industry is up. Way up.

According to the 2015 ISG Momentum® Market Trends & Insights® Report, the aggregate annual contract value (ACV) for outsourcing engagements in the utility industry in 2015 jumped 24 percent since last year. In fact, utilities outpaced the outsourcing growth rate of the next closest industry by more than double.

Is this a one-time blip on the charts? Not exactly. Here’s why.

Because utilities are regulated entities, they benefit from either operating model or service area protections on the consumer-facing side of the business. In turn, they face a significant governmental oversight burden that influences nearly every business decision they make. Today’s social discourse about climate change and homeland security has had a direct impact on the way utility companies generate power, manage facilities and introduce new consumer programs. Power plants are expected to shift and change in response to the demands of regulators, elected officials and voters, but they are large, complex facilities—packed with turbines, pipes and valves—that cannot turn on a dime.

In this instance, accounting rules make a difference. In spite of the additional regulatory scrutiny regarding the treatment of capital expenses, utility companies continue to favor the metric of cash flow from operations. Investment analysts following this sector consider company valuations through this lens as well. The resulting preference for capital expense (CAPEX) vs. operating expense (OPEX) is putting added pressure on utility CIOs to lower IT operating costs, generating greater interest in pay-as-you-go, as-a-service operating models.

For CIOs of utility companies to continue to have a seat at the executive table, they must take part in maintaining a company-wide focus on core business issues while they address industry-specific challenges. What many utility company leaders are finding—and what 2015 numbers reflect—is that one tried-and-true way of doing this is to shift the daily management of non-strategic activities to expert service providers. This enables in-house resources to focus on the business, lowers IT operational costs and eliminates the challenge of hiring and retaining hard-to-find talent that possess the right technical skills.

In particular, utility companies are finding it difficult to build their own in-house application development teams. Even core legacy applications are at risk as ever-increasing numbers of in-house teams near retirement. In the face of talent shortages, utilities, like most other sectors, must leverage emerging technologies to meet changing customer demands and enhance the employee experience. And they need to do so now. This is why we are seeing many utility firms tap service providers that offer deeper talent pools that know how to rapidly apply new technologies and understand how to manage portions of a client-owned infrastructure.

It is a tall order that means the utility CIO must manage a long list of priorities. At the top are these three: how to do more with less, how to support the core business and how to increase agility. Board rooms have little tolerance for hearing about the barriers and details. They want solutions, lower costs and results.

ISG works with companies to sort through and solve the complex needs unique to the utilities industry. Contact me to discuss how we can help.

About the author

Bob Lutz is a technology-centered leader with deep experience in outsourcing, shared services, managed services, vendor management, BPO, integration, cloud computing and SaaS. He has hands-on project experience in strategy and IT negotiation/re-negotiation for the utility industry. He has led IT benchmarking, application maintenance and support, infrastructure and cost-performance projects, managing everything from the quality of client deliverables, client satisfaction, stakeholder management, project status management and reporting, to business solution development, business cases and delivery and governance matters.