Outsourcing gains traction in power industry

Historically, the U.S. power industry has been gun-shy about outsourcing critical IT functions to third-party service providers such as IBM Corp. and Electronic Data Systems Corp.

But cost pressures and the need for increased agility, improved service levels and an ability to access hard-to-find IT skills are leading a growing number of energy companies to strongly consider outsourcing.

“I’ve been inundated with requests from energy companies that have been exploring outsourcing over the past few months,” said Kip Martin, a vice-president in Stamford, Conn.-based Meta Group Inc.’s outsourcing practice. Martin was one of the attendees at Meta Group’s 2003 Energy Information Strategies conference who discussed the outsourcing issues.

Although most companies view outsourcing as a way to cut costs, it’s important for them to weigh the risks involved – whether that involves onshore or offshore outsourcing, said Martin.

Those risks include the potential loss of key staffers. At many companies, said Martin, “if someone even mentions outsourcing, the top 10 per cent of your staff are preparing their resumes.”

Some early outsourcing adopters in the energy industry say they’ve had good results and have met their cost-savings targets. For instance, New Orleans-based Entergy Corp. achieved 20 per cent “upfront” savings on its base IT costs and another 5 per cent to 10 per cent in savings annually after outsourcing about 80 per cent of its IT operations to San Diego-based Science Applications International Corp. in 1999, said Ray Johnson, vice-president and chief information officer (CIO) at the US$8 billion-plus energy firm.

Xcel Energy Inc., a Minneapolis, Minn.-based natural gas and electricity distributor that outsourced all of its IT operations to IBM nine years ago, was able to cut IT costs by 20 per cent in the first phase of its outsourcing agreement. Xcel was able to meet those cost targets, in part, by “avoiding some of the shadow spend that occurs in IT,” said Ray Gogel, the company’s CIO.

This year, Gogel was asked by Xcel’s CEO to cut another 20 per cent from the company’s IT costs. He and his leadership team were able to figure out where to find those savings by including IBM representatives in the discussions.

In the end, said Gogel, IBM “picked up 15 per cent,” or the bulk of the needed cost reductions, by optimizing some of its systems and processes.