When natural gas giant Centrica learned all that FAO has to offer, it was more than enough to get company finance leaders energized about outsourcing.

by Jay Whitehead

Energy-wise, the British are a gas. In fact, the island nation started its natural gas addiction in 1966, after it discovered a huge North Sea reserve. During the next 10 years, every heating appliance in the country—about 34 million of them in 13 million homes—was converted. Today, about half of Britain’s 60 million citizens get their energy, mostly natural gas, from Centrica .

Remarkable, considering that the £16.2 billion company, which also serves continental Europe and gets one-quarter of its revenues from North America, has been around only since 1997, when it was spun off from British Gas Plc. And with 15.8 million customers, the business is growing rapidly in Great Britain, recently adding an average of 65,000 new customers per week.

Complexities have followed all these increases in size and scale. For instance, in 2004, the company popped for a long-needed upgrade in its customer billing systems with a new SAP implementation. The changeover process necessitated a large influx of new, temporary staff to support the migration. Initially, the company chose to offshore those backfilling resources, investing significantly in training the temporary workers. Then a funny thing happened that led to outsourcing.

“We were meeting one day, and someone asked the question ‘Why are we training these temp workers during the installation process and then losing their skills once it’s done?’” recalled Stuart Beeston, Centrica’s co-director on the project. “Why don’t we just bite the bullet, outsource the entire function, and leave the work with the outsource supplier?”

The question spurred heated discussion on both sides. Yet after consulting top management, the company decided that full-scale outsourcing of several finance and accounting functions was exactly the right way to go.

By New Year’s 2005, the scope of the project had been outlined. And when the systems leader was looking for someone to manage the outsourcing relationship, Beeston and his colleague Betsy Bassis raised their hands.

The Twin Drivers
Beeston recalls there were two main drivers behind the outsourcing initiative. The first was to cut costs, especially to avoid the significant run-up to re-train all of the company’s own staff once the system implementation was complete. The second was to get the process improvements that would necessarily flow from an outsourcing relationship.

On the cost side, Beeston predicts that by the end of this year, the company will have almost halved the per-capita cost of back-office operations compared with his former in-house costs. “Since this was not a directly customer-facing function, there’s always cost pressure,” he said. “And fortunately, using offshore providers, we have been able to reach our cost-saving goals as fast as we predicted.”

On the operations side, Beeston is clear that he never would have been able to complete the project with in-house staff. As he explained, the amount of work generated by the new system is higher than for the legacy system.

“I have 30 to 40 percent more agents on the new system than I did on the old,” he said. “That has to do not with outsourcing, but rather with the much larger amount of information to be managed by the new system. Sure, it was risky to both change our systems and outsource at the same time. But if we had not outsourced with the offshore resources we are now using, we would be way under water. Our former major customer service back-office locations were near Birmingham and Manchester. By the end of June, 2007 we will have shut three of these sites.”

The most controversial part of the initiative, Beeston acknowledged, has been the offshore aspect.

“When British Gas started looking at outsourcing, there was nobody here who had much experience in offshore outsourcing,” he recalled. “There was lots of nervousness about it. But we took a bullish view. We sent 70 percent of the work offshore. And things have gone well. Most of the remaining roles onshore will now move to India, resulting in strong cost savings.”

Beeston does note, however, that getting the headcount right is quite tricky in offshoring. “We had no benchmarks for the number of staff required to run the new applications, as compared with the legacy apps. Nobody could tell us what the volume of work would be.”

Buy-Partner-Train
Once the process of scoping the outsourcing contracts was complete, it was time to select providers. For Beeston, the process of hearing all the vendor pitches was painful. “By the time you’ve seen the sixth marketing presentation,” he said, laughing, “you’ve lost the will to live.”

In the end, Centrica selected two providers—WNS to handle the pay-as-you-go customers and correspondence, which is 40 percent of the job and involves 1,000 offshore FTEs; the other 60 percent went to EXL Service for the credit customers and outbound debt trail, which involves more than 1,600 offshore FTEs. In the U.K. side, the contracts involve another 2,400 FTEs between the two suppliers, front-line customer service agents, which the company predicts should rise over time.

Rohit Kapoor, president of EXL Service , noted that Centrica was a unique client, not only because it planned to switch systems and outsource simultaneously, but also because of the speed and size of its requirements.

“Originally, we understood that 700 FTEs would be involved, and in the end it was nearly three times that count,” Kapoor said. “In addition, nobody in India had ever done work in the British utilities market on this scale before, and we knew very little about the space.”

As a result of the ballooning project size, the burden on the provider to manage the growth was significant. “When we realized that our headcount was going to be so much larger than originally forecast, we knew our management skills were going to be tested,” Kapoor acknowledged. “We also wanted to respect Centrica’s objective of managing its risks by partnering with two providers rather than one. This put additional requirements on us to coordinate with another company, a process to which we have now adapted.”

One of the biggest surprises came when Centrica started training the offshore staff. The training material presupposed familiarity with the local U.K. gas market. But in India, nobody has ever even heard of piped gas. As a result, the job required remedial and background training to wrap around the onshore training material. According to Rohit Kapoor, “Not only were the systems going to be different from the ones used before, but we had to overcome this significant cultural gap between the Indian worker and the U.K. worker. It was a two-part revamp of the training. To make it all more complex, the timing was so tight that there was no option other than to execute superbly.”

Despite the hurdles, Beeston is pleased with the outcome of the training. “Although we could have trained our agents onshore,” he said, “we’ve leapfrogged a number of years because of the overall package. Service is on par with the incumbent staff, but the extras are way ahead of what we could have achieved ourselves in the time.”

EXL’s Kapoor noted that Centrica’s utilities outsourcing program involves predominantly exception processing. Agents get involved when there is something wrong with a customer’s service, a resident moves, or a meter breaks. “These are transactions that are not automatable and require judgment, which fits right in with our strengths,” Kapoor said.

Taking A Punt
When the contracts went live, both the company and EXL were uncertain about how much work the new system would require.

“We had no meaningful data with which we could estimate the actual work that would be required. It was unprecedented for us.” Rohit Kapoor conceded.
“We were largely in the dark,” Centrica’s Beeston said. “At first, there was a honeymoon. Then the work really started flowing in. It was like drinking from a fire hose, and backlogs started building up. When customers were being migrated, there was no time for reengineering, we just had to ramp up. We had to bring on more staff than we thought.

“It causes a huge amount of stretch on middle management. Recruiting locally is pretty easy, but the management effort is very intense. In India, there’s not a pool of local managers, unlike in U.K. or U.S., where there are lots of grey-hairs hanging around with skills. The local managers lack the intuitive management experience that comes with time. And it takes a while to see that’s true. We’ve been developing mid-management skills locally, partnering with local colleges.”

Another big surprise was that the company simply did not anticipate the cost involved in re-skilling its onshore managers, most of whom have many years experience. “Hey, we changed their world in one year,” Beeston said. “No longer were our onshore managers managing people, but they were managing a third-party supplier a long distance away. That’s a much different skill set. And we did not particularly anticipate that it would take so long for them to adapt.”

On the improvement side, Beeston said Centrica can be very pleased. “We’re also reducing our inflow of work,” he noted. “As the EXL folks get more experience, they are improving their own processes and there are aggressive plans to reduce headcount over the coming year to 18 months. For our part, the job of the next 12 to 18 months is to drive the processes a lot more intelligently and work toward an additional one-third reduction in headcount over that period.”

EXL’s Kapoor agreed, saying “The transformational process for us at Centrica has just begun.”

Centrica has introduced another significant initiative by including EXL executives as participants in British Gas’s management development program. Once they have been through the program, they can join up with BG’s culture and processes and even take responsibility for customer metrics. Beeston called that the “soft skills” part of the provider’s integration process.

When asked what grade the CEO of Centrica would give his team for its efforts, Beeston is circumspect. “I think he would give us a 7 or 8 out of 10,” he said. “Why it’s not a 10 has to do with how hard it’s been to get productivity up as fast as we wanted it. You know how CEOs are—they want everything all at once. But it’s pretty impressive for us to have completely transformed four sites in three cities using two suppliers and managing 200 Centrica FTEs in just one year.”