In a previous blog post on cost optimization for network utilities, I looked into the overall drivers of cost efficiency. I focused particularly on how utilities could drive costs down and raise returns by targeting three dimensions of cost and reshaping their people strategies.
In this article, I want to widen the focus from people cost and performance, and drill down into a powerful lever for extending cost optimization: offshoring engineering activities through partnership with a carefully-selected third-party.
Moving engineering offshore may sound like a challenging idea. Most network utilities—in common with companies in other industries—have become comfortable with offshoring mature, non-core business support activities like finance, procurement and IT. The resulting cost and performance benefits are well-known. But to date, many companies in the power sector have not yet extended this approach to areas more closely related to their traditional core business.
However, this is now beginning to change. A handful of early adopters in the utilities industry are starting to push toward a new performance frontier by changing their definition of “non-core” activities. They’re also recognizing the greater effectiveness and efficiency to be gained from working with specialist third-parties, who may be better equipped to deliver cost efficiency and transformation in areas like transactional engineering, and engineering data management and analytics.
For utilities considering this approach, we can cite a precedent: telecoms companies. In the face of a sustained margin squeeze, telcos have been ruthless in defining their truly “core” competencies—the sources of long-terms differentiation that are difficult to replicate.
Aside from these core competencies, telcos can (and increasingly do) transform everything else through partnerships and offshoring. This includes a wide range of capabilities that, while business-critical, are not strategic differentiators. They have realized that these capabilities could be handled at lower cost and higher quality by a third-party that has put the same capabilities at the core of its own business.
Utilities that adopt this strategy can realize two types of value. The first is direct cost savings on the offshored processes through cost arbitrage, process excellence and automation. Based on our own analysis, these direct savings could potentially take out 40 to 60 percent of the legacy process costs.
But that’s just the beginning. Offshoring can also release an array of wider benefits for the utility—gains that could be maximized through an outcome-based deal construct with the offshoring partner that drives investment in innovation and transformation. In our view, these wider benefits could potentially unlock a 10 to 20 percent TOTEX saving across the business, usually arising in four main areas:
CAPEX: Through initiatives like monetization of risk analytics, value engineering, project control services and EPC contract management.
Field OPEX: Advances such as immersive standard operating procedures, productivity and utilization analytics and reporting and optimized planning and scheduling.
Third-party spend: The likes of invoice analytics and contractor management, and unit cost reporting on third-party spend.
Connection and customer revenue: Orchestrated, accelerated and digitized connections processes, and capacity to support growth in smaller-scale generation and storage at lower cost and with more seamless regulatory compliance.
What’s more, the benefits grow over time as the relationship with the offshoring partner evolves, deepens and expands. And the long-term effect? The utility can use its own capabilities in areas where they are differentiated, such as regulatory management and deep power systems engineering. And it can leverage the offshoring partner’s capabilities in areas where those are differentiated, like data science, automation, digitization and process excellence; getting the best of both worlds.
For utilities looking to reach the next level of cost optimization, the message is clear. A large part of a utility’s cost base and business performance is driven by non-core engineering activities ripe for transformation through digitization, analytics and automation.
It’s time to take a leaf out of the telcos’ book and conduct a “no holds barred” review of which capabilities are truly core, and which ones a strategic partner is better placed to operate, transform and digitize. Several leading global utilities are already beginning this journey. Who will join them?