Drivers for Outsourcing - Provincial Utility Case Study: BC Hydro Shared Services

BC Hydro and Power Authority (BCH) is a provincial crown corporation, serving more than 1.6 million customers across the province of British Columbia on Canada’s west coast. More than 80% of BC Hydro's electricity is produced by hydroelectric generation. Home of the successful demand-side management Power Smart program, BC Hydro is working towards a sustainable future by providing integrated energy solutions in an environmentally and socially responsible manner.

The Winds of Change

In 2001, the provincial government conducted a core services review of all ministries and Crown corporations to focus scarce public resources where they are needed most.

As part of the review, BC Hydro examined all aspects of its operation and identified strategies to focus more effectively on the core business of generating and distributing electricity. One of the options already adopted by other utilities was the establishment of, and outsourcing to, a shared services organization. For BCH there were several key drivers and benefits that favoured this option:

• The business was becoming more complex and dynamic; outsourcing would allow more management time and energy to be focused on core activities.
• Increasing pressure on costs and speed to market. Non-core activities were not missioncritical, and an SSO might be able to carry them out more effectively, and at lower cost.
• Industrial, national and international agreements were forcing changes toward a more open structure, with clear separation and identification of key functions.
• Improved quality of service to the consumer, achieved through an SSO that would invest in new skills and best-of-breed technology.
• BC Hydro could learn from a partner with broad experience of serving utilities in different markets.

Risks were also evaluated, the most serious of which hinged on the nature of the relationship. Historic examples abounded of parties claiming to have entered into a "partnership" or "strategic alliance" perceived to be nothing more than a vendor/purchaser relationship – with the purchaser locked into a long-term contract with little negotiating power. The relationship must be perceived as, and structured to become, one of lasting mutual benefit.

Treading Carefully

After issuing a Request for Expression of Interest, in November 2001, BC Hydro received 19 proposals from a wide range of experienced and professional organizations. By early 2002, these were narrowed to a shortlist of two, based on three criteria:

• Could the proposer provide shared services more cheaply and effectively than at present?
• Would employees be fairly treated?
• Would the proposer invest in training and developing?

  A carefully structured two-year Due Diligence process followed, involving neutral third-party evaluation. In Spring 2002, Accenture was selected as the preferred partner, and a Memorandum of Understanding was signed. The final contract was signed in April, 2003.

  Under the ten-year contract, a Vancouver-based company, Accenture Business Services for Utilities (ABS-U), was created. Staff in BC Hydro’s shared services organizations were transferred to ABS-U, but BCH retained ownership of its physical and intellectual assets.
  
  The agreement supports BC Hydro's corporate objectives of costefficiency and customer-service excellence and will realize efficiencies of C$250m over 10 years; the goal is to help keep rates as low as possible for British Columbians. It is also consistent with the provincial government's Energy Plan to outsource functions where possible to improve efficiency. Core business activities such as dams, power lines and reservoirs are not included in the agreement and will remain in public hands. The relationship between BCH and ABSU is shown in Figure 1.

  Managing the Relationship

  Relationship management is integral to a successful outsourcing arrangement. A simplistic view of contract management ("meet the service level agreements (SLAs), contain the costs, or pay the penalty") is only conducive to confrontation and conflict. In addition to the obvious risks inherent in such an approach, the fact that the majority of ABS-U’s employees had been BCH employees would add another destabilizing layer of conflict for both organizations. Thus, careful thought was given to the day-to-day working-level relationships between the partners to assure the short- and long-term success of the alliance.

  The established governance model, which will continue to evolve, aims to ensure that the relationship is based on a rapidlycommunicated and common understanding of the problems that the partners face separately and together, and makes clear the lines of communication within and between the organizations. An important communication tool has been the establishment of a joint issue tracker system (see Figure 2).
  
  Relationship Managers (RMs), appointed to specific functions (e.g. Finance, IT, HR and Customer Care) as well as to Lines of Business (e.g. Distribution, Field Services and Corporate) are key to the success of the model. Disputes arise more often from misunderstanding and miscommunication than from any other causes, and one of the primary tasks of the RMs is to keep the lines of communication open and clear. Escalation processes, should they be necessary, are visible and understood by all employees in both organizations.

  Year 1 – Lessons Learned

  BCH and ABS-U are nearing the end of the first year of their contractual relationship. Some expectations have been met and some have yet to be fulfilled. On the whole, the experience has been positive for both, with both parties recognizing that it has been a transition year.

  Metrics, SLA conformance and financial achievement notwithstanding, the acid test of such a profound change must lie in the perception of BCH’s customers, and here the results have been gratifying: measured customer satisfaction has achieved or exceeded its target levels.

  Financial performance has largely been within target: operating costs have been reduced and capital has been conserved; for example, via the successful implementation by ABS-U of a customer information system, known as Northstar.

  Work still needs to be done in terms of a more disciplined and structured approach to SLA development: employees need to change their attitudes from "business as usual" to "managing key risks". More emphasis needs to be put on monitoring and managing SLAs, and the agreements need to be regarded more as performance metrics and incentives to achievement, than as targets which result in penalties if they are not met.

  SLAs are an important formal expression of the relationship between the partners. Their development and negotiation require commitment from small, dedicated teams from both sides; impartial advice from third parties; and strong support for the process from the CEOs. This negotiation must progress in a constructive atmosphere, not as a confrontation, with a clear intention to achieve a result that not only satisfies both partners, but has the overarching objective of benefitting the consumer.

  The importance of change management cannot be underestimated. Not only is change management required through the transition phase, but a sustained change management plan must be in place to continually identify, analyse and mitigate areas of concern.

  Change management tools, such as training, clear definition of roles and responsibilities and process definition, must be implemented and communicated consistently to all employees of both companies.

  Commitment at the executive level to open and honest communication is essential for employees to develop trust in the new business environment. The intent of the contract, what it states and how it impacts each audience, must be communicated clearly and the alignment between the two companies visible at executive level.

  Clear identification and implementation of the expected corporate culture and associated behaviors is required. In order to support this culture moving forward, a reward and recognition programme, implemented on an individual level for specific roles, must also be defined.

  Year 2 and Forward

  The alliance between BCH and ABS-U is more than one of immediate benefit to each partner. ABS-U seeks to extend its services to utilities worldwide, building on the experience gained from its relationship with BCH. As the reach of ABS-U extends across many utilities in many countries, BCH will benefit from ABS-U’s accumulated experience, economies of scale, and selection of best practices.

  This is the basis of a transition from a business partnership to a strategic partnership. The synergy of the relationship will create real value, of lasting benefit to both partners and, most significantly, to the consumers they jointly serve.