Restructuring an IT Outsourcing Contract for a Large Utility

Executive Summary

A large North American electric utility needed to achieve cost reductions and service improvements seven years into its 10-year IT outsourcing (ITO) contract. The client’s situation was complicated by factors including its complex ownership model and the usage of unionized workforces both by the utility and its service provider. Everest Group developed and executed an end-of-term strategy that guided a successful restructuring of the contract with the service provider. The restructuring accomplished the utility’s 15 percent cost savings goals, without disrupting current operations or having a negative impact on labor union agreements.

The Client’s Challenge

The utility company was seven years into a 10-year full-service ITO agreement. Its key challenge was to avoid increasing risk as it moved to significantly reduce cost and gain access to additional services. The company needed a plan with a long-term view on savings as it acquired additional delivery capabilities. The client’s outsourcing agreement with the provider had undergone numerous changes throughout its lifecycle, both in the ownership model and in scope. The utility was faced with decisions on end-of-term options, its ownership model, and shareholder value. These decisions were further complicated by the macroeconomic environment, political pressure regarding offshoring and the use of unions by both the utility and its provider. The utility needed to reduce IT costs but could not utilize offshore labor arbitrage, even if offered via the provider delivery model.

Insight to Action

Everest Group and the utility had a long-term relationship involving multiple aspects of managing the relationship with the service provider. Familiarity with the client, combined with Everest Group’s expertise and research in the applicable process areas, enabled unique insights into the client’s current challenges and available solutions. Everest Group developed an actionable plan, addressing all aspects of strategy and implementation, to take the client through a full-cycle end-of-term process.

The plan reviewed the current sourcing relationship, evaluated options, and provided a sourcing strategy. It included key components such as a fact-based assessment of the current relationship and its performance against initial and evolved objectives and changes in the market. While the plan analyzed all viable options (renew, renegotiate, restructure, recompete, and repatriate), Everest Group recommended that the client restructure the relationship with its current service provider, including adjustments to scope, current services and pricing model to achieve the client’s targeted cost savings.

Everest Group subsequently designed and led a series of joint design workshops with the provider that resulted in a restructured services model. The new model moved some additional services to the provider, while others were retained or repatriated.

Everest Group then assisted with negotiations of the new services model and pricing and the crafting of contractual changes that benefited both the utility and its provider.

Impact

The end-of-term strategy that Everest Group developed recommended that the utility adopt a low-cost, low-risk approach. The embraced strategy and its implementation through a joint design and interest-based negotiation process allowed the utility to achieve its key objectives, which included:

• No disruption to current operations
• Immediate step improvements in pricing and services levels, to achieve cost savings prior to scheduled contract end
• Targeted savings of 15 percent, which the utility was able to exceed as a result of the restructuring
• Avoidance of switching to another provider
• Minimal impact to labor union agreements