Outsourcing the management of commercial IT systems can bring cost savings.
Endesa’s [ELE.MA] contracting of Accenture [ACN] and Sadiel to manage and support the development of its commercial IT systems earlier this month follows similar deals with Capgemini [CAPP.PA], Indra [IDR.MA] and IBM [IBM] for the development of its distribution, generation and internal management systems. These contracts, set to run for five years, are designed to realize cost savings of E52 million for Endesa.
Outsourcing has always been an attractive strategy for deregulated utilities to pursue. This is because of the inevitable fragmentation and duplication of internal systems that is driven by the M&A activity which has characterized the deregulating European energy market. Outsourcing the management and integration of systems allows companies to re-engineer processes and achieve cost savings.
Indeed, Endesa had previously commissioned IBM to integrate and manage its range of disparate systems in 1998 in preparation for competition (it was running up to 10 legacy end user management platforms as a result of M&A activity).
Utilities must, however, be aware of the dangers of poorly designed and implemented outsourcing initiatives. Detailing aims and objectives in a strong set of service level agreements is crucial to the ultimate success of the outsourcing agreement. Failure can leave the supplier with a costly and protracted mess. For example, in 1998 Scottish-Hydro had to cancel a GBP5.5 million contract to have an outsourced billing system installed when its service partner could not deliver on time.
With debts of E17.3 billion, cost cutting remains a priority for Endesa. Its tactic of outsourcing different parts of its core systems infrastructure is an important part of this cost cutting strategy. With Endesa’s latest five-year agreement worth E84 million, failure would be a blow to its cost reduction effort. However, its extensive outsourcing experience, combined with its long-term partnerships with trusted service partners, suggest that it will be a success.
