Utilities should transfer the management of their inhouse staff to their allied contracting organisations if they are to make best use of them, argue Ian Harding and Mark Horsley.

Under regulatory and shareholder pressure to deliver operating savings, and customer pressure to perform well, utilities have adopted a variety of approaches to increase the use of their direct labour organisations (DLO), while at the same time leveraging their supply chains.

While we have seen different operating models appear across the sector over the past 20 years, these have evolved towards outsourcing high volume long-term capital and maintenance programmes of work, leaving utility DLOs to deliver more complex programmes such as reactive fault repairs and new connections. This has resulted in a streamlined and efficient approach to capital and maintenance programme delivery, but has also resulted in a high-cost, stranded DLO resource.

To better utilise DLOs, a blend of operating models across utility value chains will need to be developed. An approach that accepts that utilities' DLO and contracting organisations have different but complementary skill sets is alliancing. In recent years we have seen an increase in this approach, particularly in the power and gas sectors. By using the "best person for the role", man-marking and duplication can be cut and overheads reduced. However, this does not always fully address poor on-site productivity or ineffective operational practices inherent within the utility DLOs.

To make the DLO operate at consistently high productivity levels, an integrated supervision structure of the combined resource pool must be developed. Without true alignment across all delivery functions, operational interfaces will not be eliminated and high volume activity will magnify this inefficiency, jeopardising the achievement of utilities' business plans and regulatory settlements.

The overarching governance of the alliance should be based on a healthy commercial tension between the utility and the contracting partner. Clearly articulated goals and objectives should be aligned to take account of reducing unit costs and improving delivery performance in line with the regulatory settlement. Utilities that attempt to align higher-end goals or vision and values with their contracting partners should accept that differences do and should exist. Indeed, they underpin the commercial tension that is necessary for an alliance to succeed. Moreover, a contracting partner that has multiple alliance agreements in place with a variety of utilities cannot truly align their values to all of their clients.

Alliance structures that span multiple work streams and value chains will have the best chance of success when it comes to reducing unit costs. Compartmentalising or pigeon-holing resources will create stranded costs and increase response times across reactive programmes.

Utilities have strong engineering capabilities around asset management, design and engineering, and develop new technology to maintain and improve their asset base. Their contracting partners have developed the skills needed to manage large labour-intensive organisations over time and could be considered as better equipped to drive efficiency from the utility DLO, either through an alliance or co-sourcing alternative, than the utility itself. If this approach is followed, the utility would be free to concentrate on its core capabilities and could transition the management of the DLO to third party organisations whose skill set is specifically in this area.

Given the nature of how the asset base of utilities will change in a low-carbon future, those that focus their skills accordingly will have the best chance of becoming frontier organisations, both from regulator and investor perspectives. l

Ian Harding is a partner and Mark Horsley head of power distribution at EC Harris.