The right call: converging pressures point the way to outsourcing

With tough price limits for 2010-15, water companies can no longer afford the luxury of keeping customer service operations in-house, says Carrie Hancox.

Ofwat's final determination has left many water companies with a huge gap between predicted revenue and what they need to fund capital investment programmes, meet climate change targets and deliver a sustainable service to their customers. Most will need to develop innovative strategies. In the past six months, three of the largest water companies have looked to outsource all or part of their customer services operations. So clearly, one solution is in pursuing customer management outsourcing more aggressively than ever.

As an approach it has already proven its worth in other sectors by delivering cost savings and service benefits, so why has it taken so long for the water industry to take this seemingly obvious step? The reason might lie in the customer satisfaction component of Ofwat's Overall Performance Assessment score. This rating makes many water companies fiercely protective of customer service and willing to invest hard to improve. As a result, entrusting customers to a third party specialist provider is a significant departure and one that is not seen as risk-free.

However, the context has now changed and ways are having to be found to deliver the customer satisfaction component and reduce costs. For outsourcing to be successful, water companies must follow a number of guidelines.

Clarity of objective

First, they must be clear, from the start, on the precise nature of the objective to be achieved - particularly on the balance between service quality and cost. They must also spell out where they want the outsourcing deal to go. Are they looking for a "commodity" deal, whereby activity is delivered at a lower price or, as is more often the case, is it structured as a long-term strategic partnership - perhaps starting with simple business process outsourcing services, building up the size and scale of the deal as the relationship develops and mutual trust is gained?

Outsourcing works best when organisations are highly aligned and have a clear understanding of each other's strategic goals. Proactive management of the outsourcing relationship is as important as contract governance and the management of operational performance. It is recognised that organisations will never be 100 per cent aligned, but what matters most is ensuring that both parties are engaged in dialogue and work in collaboration. This requires an investment in time and should be evident from the outset.
A further consideration is sharing risk and reward. It is vital that outsourcing is established on the basis of "same side of the table" commercial agreements. This approach will drive the organisations to work together for mutual benefit, again supporting the development of a long-term partnership.

Track record

Of course, it is vital that any partner can demonstrate it has a proven track record in the utilities sector. Many outsourcers now address this by embedding sector expertise and employing people that have worked in and understand the water industry. With this insight, outsource partners can develop onshore and offshore service solutions that are tailored to each company, considering their customer, as well as regulatory and business objectives.

Now the water industry is opening up to outsourcing, it is important that the outsourcing industry responds. The best outsourcers will do this by providing the level of efficiency the water industry needs while delivering new levels of customer service excellence. In fact, the real goal for a water supplier is to engage an outsourcer capable of transforming its success in a given area, as well as delivering an immediate cost saving. By tapping into innovation and areas of expertise from other sectors, such as channel optimisation, data science, transaction automation and customer experience improvement, the outsourcer can drive further efficiency gains over the lifetime of the contract.

Carrie Hancox is a senior consultant at Vertex.

And it's not just the water...by Matthew Vallance

A multitude of pressures are converging on the wider utilities industry to fuel the rise of outsourcing in the sector. At a high level there are legislative and regulatory pressures from the European Union and UK government, aimed at ensuring customers maintain access to power and water at a reasonable cost, while safeguarding the planet. Smart metering will greatly increase the volume of data utilities need to process and considerably increase cost to serve. Meanwhile, customers are becoming more demanding. They want better service and cheaper prices, requiring utilities to up their game or suffer the consequences. This has been exacerbated by the proliferation of price comparison websites, such as Uswitch. Finally, the financial crisis and global economic downturn, which have led to tightened credit markets and reduced industrial demand, have added to the challenge.

Easing the pressure

Outsourcing to a specialist provider, using its expertise in front and back-office functions such as customer care and billing, can help energy and water companies respond to these pressures and assist in the change process that is being undertaken. It is time for firms to review their business models and ask themselves, what will the operating model of the future look like? What needs to be done to get there?

For most, especially in view of the economic downturn, cost reduction will be the primary driver for switching to outsourcing. Utilities can enjoy double-digit cost savings by outsourcing in the UK, more for offshoring. Like-for-like operating costs in India are in the region of 40 per cent less than in the UK. A form of best practice is beginning to emerge in the utilities sector, with key front-end functions being sourced from the utility's home market, with a growing number of back office functions being done offshore at reduced cost and improved efficiency.

Business transformation

There are other advantages to be had too. Utilities can devote more time to core functions, leaving specialist outsourcers to improve process efficiency and customer service, and perhaps assist with business transformation and innovation. For instance, incorporating an offshore element into an outsourcing model can provide a 24-hour working window, which can slash turnaround times on processes or enable a rapid increase in customer service capacity during times of heavy demand such as during a marketing campaign.

Outsourcing is set to become a crucial weapon in an industry where customer expectations are rising. It is up to each company to decide precisely which strategy will work best - a simple cost saving exercise or something fitting with wider ambitions - and to incorporate this into its operating model.

Matthew Vallance, president, Firstsource Solutions.

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