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Adaptive Outsourcing Solution by Canada's OPG and Capgemini via New Horizon System Solutions

To address outsourcing needs, Capgemini and OPG set up a new company known as New Horizon System Solutions.

Upon full market liberalisation in the Canadian energy sector, Ontario Power Generation (OPG) needed to divest between 20% and 65% of its former generating capacity in order to comply with the new regulations.

OPG needed to reinvent itself in order to trade competitively in a new marketplace, and sought to leverage fixed costs of large scale IT systems across other companies. Following a detailed review of suppliers, OPG selected Capgemini as their chosen partner.

The strategy, announced by both partners via creation of a joint-venture - New Horizon System Solutions - has become one of the most innovative and truly adaptive outsourcing strategic partnerships to be found anywhere in the energy and utility marketplace, world-wide

Client Profile

In common with many other energy markets around the world, the Canadian power industry is in the process of large-scale liberalisation.

Ontario Power Generation (OPG) based in Canada’s most populous province was part of a provincially owned, former vertically integrated monopoly. It is transforming itself in order to thrive in an open market environment, one in which new competitors are being encouraged to enter and provide a wider range of choice to consumers.

This new regulatory climate is bringing massive changes to all participants, both in their scale and in a sharp focus on being competitive. The former monopoly, Ontario Hydro, has already been separated into a power generation company (OPG), a power transmission and distribution business (Hydro One), and a systems operator (IMO).

Business Issues

The first and most obvious challenge for OPG was that it was actually becoming smaller. This, in turn, meant that much of its infrastructure, both in terms of administrative processes and systems, was no longer relevant to the new reality. The former company possessed its own in house IT and systems support tasked with achieving efficiency for a massive utility business, where processes involved were complex and the scale of the operation was vast.

In the new marketplace, OPG is one of several potential competitors aiming to win business from consumers, now able to pick and choose their provider. In service terms, the emphasis for OPG was to move towards:

• building customer relationships
• managing risk
• facilitating wholesale trading
• achieving higher standards of efficiency
• enabling it to market new service offerings.

Above all, OPG needed to reduce costs. The administrative framework needed by OPG was clearly far too costly for a business regulated to become a much smaller, more market driven and more agile business.

Management at OPG recognised that fixed costs invested in large scale IT systems could be better leveraged across other companies. In addition, since OPG was in the process of selling generation facilities, an external partner was required to operate OPG’s systems and sell services to potential new owners of plants sold.

After reviewing a range of potential partners, OPG concluded that Capgemini had both the capability and the innovative approach needed to be its chosen partner.

Solution

The strategy, jointly agreed by OPG and Capgemini, was first announced some 18 months prior to full market liberalisation. It has become one of the most innovative and truly adaptive outsourcing strategic partnerships to be found anywhere in the energy and utility marketplace, worldwide.

The key to its success has been the inventive and aggressive determination shown by both partners to leverage the partnership not just to achieve efficiency gains on existing business (vital though this was) but to create a growing business for the future. The relationship was structured with this goal very much in mind. Key features of the plan included:

setting up NHSS as a new company
Both parties set up a new company as a vehicle for IT outsource services. Known as New Horizon System Solutions (NHSS), the company was jointly owned, with Capgemini as the majority shareholder (51%).

outsourcing to NHSS
Former IT employees of OPG were offered employment at NHSS, which then agreed to supply service to OPG at an appropriate level. The level of the service had to be flexible, commensurate with OPG’s changing business requirements brought upon by a reduction of its size in Ontario.

outsourcing from NHSS
Consistent with the strategy, NHSS sold related IT outsourcing business to Bruce Power, new owners of the Bruce nuclear power facility. The latter had been sold by OPG under the terms of the new regulatory framework.

The key element of the approach, and the factor that takes it to a different level from standard outsourcing deals, is the way that both partners built service and financial incentives into the relationship from the outset. NHSS is challenged to achieve increased efficiency gains for delivery to its clients by a benefit-sharing contractual arrangement.

For OPG it means that a former fixed overhead cost is a potential source of continuous value-added benefit. For Capgemini, it creates a strategic partnership with a strong and fundamental incentive to seek cost reduction, jointly and mutually.

New Horizon System Solutions offers a vast range of application and infrastructure management solutions to their customers through pre-determined service level agreements (SLAs).

From an applications management development and support perspective, NHSS provides application portfolio management, maintenance, design, and user support services in areas such as finance, HR, work management and data warehousing. With over 500 staff, NHSS supports and develops on numerous systems and platforms including SAP, PeopleSoft, Indus Passport, web applications, B2B applications, Microsoft tools, middleware solutions and more.

NHSS also provides extensive IT infrastructure support and management via two state-of-the-art Data Centres with 7/24 monitoring and innovative disaster recovery configurations. Employees also support over 300 custom applications and serve 600 to 1,000 calls per day through their help desks. From planning and infrastructure architecture to service and quality management, NHSS is a predominant infrastructure provider to the energy industry.

Benefits

The announcement of New Horizon System Solutions was greeted with great interest, both in the North American outsourcing market as well as in the global energy and utilities industry. The challenges faced by OPG, dealt with in innovative fashion through the New Horizon System Solutions approach, are virtually universal in their significance.

Large utilities all over the world are seeking ways to create value from the non-core and unreasonably large internal support functions. The partnership between OPG and Capgemini has created a model that has much to offer many other businesses. That model, however, is of its nature dynamic - change is constant.

OPG has now transferred its interest in New Horizon System Solutions entirely to Capgemini. OPG will remain New Horizon System Solutions’ largest customer and continues to benefit from performance gains. New Horizon System Solutions has complete freedom to extend its services across the marketplace.

Customers of New Horizon System Solutions will see the power of a fully integrated service from Capgemini’s end-to-end solutions, ranging from strategy to process management and from applications management and infrastructure solutions to New Horizon System Solutions’ separate service.

With emphasis on the energy and utilities sector, and with a working model based on truly adaptive outsourcing, this approach is proving hard to resist. Significant new contracts have followed OPG, and as the business grows, so the clients, themselves, continue to gain in terms of service efficiency and financial return from this increasingly strategic relationship.

New Horizon System Solutions has already extended its footprint in the energy industry to serve the IT requirements for not only a generation company, but also a transmission and distribution business.

The justification for an adaptive enterprise approach can be seen with stark clarity in market sectors worldwide. Commercial and regulatory changes, alike, make both an innovative vision and an adaptive approach a basic necessity in many different areas of business.

The New Horizon System Solutions story demonstrates how flexible outsourcing can be a key ingredient in helping large enterprises to transform themselves fast, efficiently and successfully into the competitive, agile businesses likely to be winners in the years ahead.

A senior member of OPG’s management team illustrates real benefit of the partnership:

“OPG faced a critical business requirement at the outset - to shrink business operations, grow IT capabilities without a corresponding increase in technology support costs.”

“The direct result of this unique partnership with Capgemini is that we have divested about 65% of our operations, turned a huge technology cost into a new revenue stream, and still saved about 20% in IT costs.”

“We are delighted with a partnership that offers genuine value to all parties involved.”

Written in co-operation with Ontario Power Generation, Inc.