IT has emerged as a key enabler in improving the efficiency of power utilities. Companies are increasingly deploying IT applications for customer relationship management (CRM), internal decision-making and commercial management. While most sector players have become aware of the benefits of IT deployment, utilities need to make a choice between using in-house and outsourced models. Smart Utilities seeks the opinion of experts on the financial and operational aspects of the two models…
Which functional or operational domains in power utilities are more suited for in-house IT adoption as against outsourced versions? How can utilities balance these two different routes of IT deployment?
Outsourcing an IT function is always a strategic choice and one which depends on the business dynamics of an organisation’s IT environment. Hence, the relevance of any outsourcing decision will often be specific to the organisation in question. Skills that are not critical to the utility domain and are difficult to retain would necessarily be the first options for outsourcing. Factors that are unique to the business models of electricity utilities, like the fact that they are asset focused and opex averse, do not make opex-based outsourcing models a more attractive option by default. Moreover, because of the levels of automation still applicable in the utility sector in India, it is not easy to relate IT outsourcing performance targets to business goals in all cases. Finally, the scale of outsourcing often decides the level of value-add, and at lower levels of scale, the extent of value-add through outsourcing is not attractive enough. Thus, hardware maintenance and facilities management appear most suited for outsourcing, whereas the outsourcing of information system architecturing, software application implementation and support and enhancement decisions are driven by a number of IT- and business strategy-related factors.
Given the introduction of smart grids with different levels of maturity at different geographies, the definition of IT for a utility is getting redefined, not only in India but around the world. IT, until recently, was limited to all computer applications and their related areas but it has now moved into functional domain applications which were predominantly part of operational technology (OT). We are now seeing the convergence of OT and IT. Applications on the operation side such as supervisory control and data acquisition system, distribution management system, data analytics, gas-insulated switchgear and outage management system are now necessary and have a strong integration with IT applications like systems, applications and products (SAP), CRM and billing systems. This is important as data needs to flow across all functions for business operations to be effective.
The second important aspect in terms of technology adoption is adapting and assimilating the same to the local context: the Indian context in our case. It becomes desirable for utilities to build competencies in the areas of IT and OT for effective deployment.
Given the two imperatives, it is important for utilities to develop their own competencies and manage the flux associated with technology implementation. Therefore, outsourcing would depend on the competence and ability of utilities to manage technology, the maturity and complexity levels of the utilities, and the repeatability and security of operations. Management of infrastructure can be easily outsourced; for example, the maintenance of communication networks.
The outsourcing model requires a high degree of faith in the vendor since assets, data and processes are shared and co-hosted. There is no edge over competitors in case a company uses the same outsourced vendor as another. An organisation can look into outsourcing a process that is insensitive or moderately sensitive for building confidence.
What are the advantages and challenges involved in adopting either route of IT implementation?
The advantages of IT outsourcing are multiple. They include the ability to rely on partners who employ skills core to their business and are hence expected to be more efficient, protection from the risk of high employee attrition rates that are typical to the IT industry, and the ability to balance focus between investments in capex and opex as per prevailing business needs.
On the other hand, the challenges associated with the outsourcing model relate to managing the quality of services delivered, especially at lower scales of involvement. In addition, if the outsourcing models are not carefully structured, they are not always agile enough to respond to rapidly developing business needs.
The advantages of in-house IT adoption include flexibility and agility of response to business needs, the leveraging of in-house skills to propel IT-enabled enhancements in business processes, and the creation of an IT skill base which can be melded with domain knowledge to deliver unique value propositions in the case of external business opportunities.
The challenges of in-house IT adoption relate to attracting resources with appropriate levels of skill and thereafter retaining them as well as managing the maturity of in-house engineering processes in accordance with the scale of involvement.
The advantage of doing everything at your own end includes enjoying better control and opportunities for creating a strategic advantage. But this requires building competencies over and above core competencies, which could be expensive initially but are needed for developing resources and bench strength. Outsourcing would mean one can focus on core areas of operation while creating dependencies on a key driver of business, that is, technology. Though both in-house models and outsourced models have their pros and cons, we need to wait for some more time to really understand if outsourcing is a good option for the power sector.
The major challenge faced by an in-house IT team is to retain efficient technical staff. There was a sudden surge in the SAP utilities (IS-U) and customer care and service (CCS) skill sets in the market since many states opted for SAP IS-U/CCS under the Restructured Accelerated Power Development and Reforms Programme. The outsourcing route may not offer flexibility in changing processes very fast but it does safeguard the company as far as technology changes are concerned.
What are the cost implications in the deployment of vendor-based solutions?
Cost implications are always related to the value delivered through vendor-based solutions and the extent to which fits the value desired by the client.
In today’s times, there are many good options for vendor-based solutions as there have been constant improvements and new upgrades that require dynamic support. One must clearly understand that what is needed from the utility perspective is going to be used in day-to-day operations from present and future perspectives instead of buying all the components of the application. One needs to be really smart to buy and negotiate, or else one may end up paying for what is not needed or cannot be implemented. Care must also be taken regarding the solution’s capital cost and operational costs. Vendor-based solutions give you more options but with limitations in customisation.
The industry standard solution would turn out to be much cheaper compared to tailor-made solutions. The standard solutions available on cloud are the best examples of low-cost applications. They are very suitable for small- to mid-size companies which do not have a full-fledged IT department.
How does the utility ensure adherence to service level agreements (SLAs) by the outsourced agency?
Apart from the usual tools of incentives and penalties, a partnership model where the vendor and client engage at multiple levels, including benchmarking, process audits, and a collaborative approach in process design, can bring about a better realisation of the outsourcing objectives.
It is important to understand the success factors associated with expected solutions and relate them to the key performance indicators (KPIs). One needs to work on this and arrive at SLAs with defined associated processes. This should form part of the contract. The SLA should also include the associated guarantee and the time taken to restore a service. There has to be a performance guarantee with clearly defined timelines which should be part of the contract. It is imperative to consider all these factors when the order is finally placed, with no hidden costs.
SLAs should be defined clearly with measurable KPIs in a simple language without much technical or legal jargon. The objective of SLAs should not be win-lose but win-win.
What has been the industry experience? What trends do you expect in the near future?
The IT outsourcing experience has often been blighted by gaps between expectation and delivery at lower scales of engagement, which can be attributed to the gap between the demand and availability of key IT skills in the country. However, as IT industry trends point towards an inexorable shift towards cloud and mobility, many forms of outsourcing will become increasingly viable, with some becoming default options. The adoption of higher levels of automation in utility operations will also increase the congruence between technology and business strategies and make IT outsourcing more attractive to the business.
There are very few utilities which have their own products. If you talk about India, Tata Power Delhi Distribution Limited has developed its own CRM system, Sambandh, analytical tools for aggregate technical and commercial losses, a solution for integrating multiple meter head-ends into one common application, etc. All this has been strongly driven by business requirements. We have recently used the best of technologies in the areas of IT and OT. In the future, we see the co-creation, collaboration and co-innovation of solutions related to technology. For making this co-creation successful, it is important to have a utility partner which dynamically, proficiently and professionally understands the entire process, the changing customer and environment requirements to create dynamic, sustainable and efficient products and solutions for the industry.
The trend in the near future points towards the outsourcing model. This could be cloud or software-as-a-service or platform-as-a-service, which would give better leverage for employees to be available to customers 24×7. Most utilities (power, water, gas and waste) would prefer to focus on their core businesses to provide improved services to customers.