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Tech Biz: outsourcing advances in the utilities sector, GDF SUEZ signs with Orange Business Services



Tech Biz: outsourcing advances in the utilities sector, GDF SUEZ signs with Orange Business Services
As the economy continues to recover, big IT outsourcing deals are coming back.

Recent contracts appear to be better thought out, as compared to numerous pancky cost-cutting deals in 2009 and first half 2010. This reflects both improved market conditions and increased confidence among decision makers who have decided to get on with the business of managing their information systems.

Private clouds are also becoming part of the picture, even though the concrete business benefits, for the most part, remain to be proven.

Even in the traditionally conservative utilities sector, leading companies have begun to sign big contracts with service providers to help modernise their information system management. A case in point : the recent IT outsourcing deal between GDF SUEZ and Orange Business Services (OBS).

THE FACTS

In early March 2011, GDF SUEZ signed a large, six-year contract with OBS “for the management of its information system”. OBS will deliver standard facilities management such as hosting, infrastructure operation and running ERP applications via a new next generation “green” data center currently being built in Normandy. On this basis, the Information System Department at GDF SUEZ will offer the energy group’s entities in France “a unified catalog of operating services” on a “shared internal services platform”.

In addtion, GDF SUEZ and OBS intend to work as partners through “a common engineering team” composed of experts from both companies, with joint governance “from the operational to the strategic level”. In this way, they expect to continually enhance GDF SUEZ’s catalog of information system services, in particular in terms of private cloud solutions.

According to Véronique Durand-Charlot, Director of Information Systems at GDF SUEZ, this approach is intended not only “to find new sources of synergy” but also to help deliver to the group’s Business Units “the competitive tools they need to reach their objectives.”

Financial terms were not disclosed.

DUQUESNE GROUP ANALYSIS

This is an important and interesting deal.

On the supplier side, it’s a big win for OBS in its battle to establish credibility as a major player in IT services. On the client side, it suggests that both outsourcing and cloud computing are becoming part of what one might call the “CIO toolkit” in the traditionally conservative utilities sector, at least at leading companies such as GDF SUEZ.

Finally, the deal raises – but does not answer, at least not yet – a key question for big corporate IT users: just exactly what is the point of a “private cloud”?

Orange Business Services wins a major IT services reference

Orange Business Services (OBS), the enterprise branch of France Telecom, is an aggressive challenger in IT services, notably in cloud computing. As a telco, it intends to take advantage of what it calls “the convergence of IT and networks” to reposition itself as an “IT operator”. It aims to build a €500 million cloud-related services business by 2015.

While the deal with GDF SUEZ is much more about outsourcing than about cloud computing, it is still a big and very important win for OBS. In the corporate market, success in IT services depends in large part on credibility, and in particular on having prestigious references. The new contract with the world’s largest energy company certainly fits into that category.

Given the past role of the French state in these companies, the announcement may well have raised some anglo-saxon eyebrows, with the usual muttering about dirigiste decisions and French economic nationalism. Why not choose, they might say, a more established IT player?” In our opinion, such concerns would be misplaced.

On the contrary, there is every reason to think that OBS won the contract on the technical and financial merits of its proposal. The two companies have a solid business relationship going back to the “carve out” of the GDF information systems at the time of the separation from EDF. At that time, OBS won the tender offer for network outsourcing together with an option for some IT facilities management. In this context, it already manages 1000 outsourced servers for GDF.

The new and expanded deal suggests that contract performance was essentially satisfactory. We would also speculate that OBS made a very aggressive financial offer, given the importance of the contract as an IT services reference.

Concerning the cloud computing aspects, OBS is better positioned than many might imagine. Last year, Duquesne Group published a competitive evaluation of the provider under the title “Will the cloud turn Orange?” (See http://goo.gl/lG8D4 ) and we intend to do an update shortly.

For the present discussion, we would simply observe that, as a big telco, OBS is well positioned to leverage control of its networks to deliver secure, cloud based solutions, with end to end responsibility from the user to the data center. In addition, it has lots of technical expertise as well as lots of money to invest in building the new business. Crucially, it now seems to understand that it should not directly compete with companies like Amazon in the low end of the rapidly commoditising IaaS ("Infrastructure as a Service”) market where fierce competition, capacity auctions, cloud brokers and even a spot market are driving a "race to the bottom." It should play to its strengths and focus on cloud based services and solutions with high added value.

Leading utility companies continue to modernise information system management

Traditionally, utilities have been among the most conservative of industries in terms of business practices, including those that concern information systems. Companies are heavily regulated and many, at least in Europe, are still at least partly state owned. Strong unions can also be a factor.

In this context, it is not surprising that the market for large outsourcing deals is somewhat underdeveloped in the utilities sector.

In the past, many companies aiming for operational efficiencies have preferred a “shared services model”. For example, the German utility group RWE has a group-level IT company providing services to all its subsidiaries across Europe. UK utility SSE has a particlarly large shared services company, providing IT services among others. German energy giant E.ON - prior to the outsourcing contract described below - deployed a four year shared services initiative called “One IT” in which it consolidated data centres from 26 locations to three sites in Europe.

This may be starting to change, however, as companies face up to the dual challenge of improving current operational performance while leveraging information technologies (including cloud computing) for the new needs of their business units.

E.ON of Germany

In November 2010, German utility giant E.ON announced a large infrastructure outsourcing deal, with HP for data centers and PCs and T-Systems for networks. The contract with HP will include the provision of ‘private cloud’ computing. According to reports in the Wall Street Journal, the contracts total €2 billion, an all time record for the utilities sector.

The German group cited an increasingly difficult operating environment as the driver for the contracts, which are part of E.ON's “Perform-to-Win” program. The group also stressed the need for “consistent, innovative and agile IT services to operate in a competitive global industry”.

In terms of cost reduction, at least, the deal is already considered a success. In presenting its 2010 financial results, E.ON stated that the “PerformtoWin program delivered more than €1.1 billion in permanent savings by year-end 2010 and will achieve the full €1.5 target by year-end 2011, thanks in part to the successful outsourcing of its IT infrastructure under an agreement reached in late 2010 with Hewlett-Packard and T-Systems.”

Centrica (British Gas) of the UK

On February 28, 2011, UK based utility Centrica announced a data center outsourcing deal with HP that will include a “private cloud and utility-based computing environment”. The contract runs seven years and is valued at $400 million.

The new deal is part of a change program at Centrica intended to lower costs, make it more reactive to market changes and lower its carbon footprint.

Within the utilities sector, Centrica is an outsourcing pioneer, with somewhat mixed results. In 2007, it signed a record making $793m data center and desktop contract with T-Systems. The new deal suggests that the previous contract was not entirely satisfactory and it has now been restructured, leaving T-Systems mainly with responsibility for cloud-based SAP services. Since 2008, Centrica has also been involved in a legal dispute with Accenture over a billing system.

The GDF SUEZ deal

In its new deal with Orange Business Services, GDF SUEZ has also taken a big step in outsourcing, although the scope of the contract is significantly more limited than in the previous examples.

The deal also includes a strong shared services component. A key responsibility for OBS will be to help the group’s recently launched shared services center (also called “One IT”) to define, market, sell and deliver a unified catalog of operating services to GDF SUEZ entities in France. As noted earlier, the common engineering team is expected to continually enhance this catalogue, in particular in terms of private cloud solutions.

As in the previous examples, the deal should be put into the context of a change program, in this case the group’s “Efficio” 2009 – 2011 plan for improving operational performance, with a total cost savings objective of €1.8 billion. The plan concerns all of the business lines but also includes the optimisation of support functions (including IT) through the use of external service providers and the establishment of shared services centers.

Unlike the contracts of E.ON and Centrica, there has been no indication concerning possible transfers of personnel or assets, the usual sources of up-front, structural economies in IT outsourcing deals. While there is no publicly available information on this point, one might speculate that any residual over-staffing could be dealt with, albeit more gradually, through natural attrition.

Even so, GDF SUEZ has in this contract other important sources for IT cost reduction, which we would presume have been carefully analysed by the two parties.

On a technical level, we would cite the rationalisation and progressive consolidation of much of the group’s IT infrastructure within a modern, highly efficient data center, with big economies of scale. In this context, we would expect that major savings can be achieved through the virtualisation of the related application workloads. This is a domain in which OBS has unquestionable expertise and experience.

Leaving aside technical optimisation, one might wonder whether OBS, a relativly recent player in big IT outsourcing deals, has in place the expertise needed to "wring out" the other types of cost savings typically associated with these contracts, in areas such as operational procedures, software licenses and so forth.

A final point on cost reductions: “One IT”, the new shared services center, is intended to be in competition with other providers for the business of the different entities of the group in France. In the short term, any “legacy costs” may need to be handled in a way that does not unduly penalise the new organisation. In the medium to long term, however, we see this type of internal-external competition as a key factor in keeping permanent pressure on costs.

On a more general note we should probably add that, in outsourcing contracts (as everyone knows), “the hard part” starts next. Managing a deal of this size and importance requires specific organisational structures and skills, together with ongoing management attention, not only from the supplier but also on the client side. In this context, the effectiveness of the “joint governance structure” will be a critical success factor.


Taken together, these deals suggest that the traditionally conservative utilities sector has begun to modernise information system management, typically as part of an overall effort for performance improvement and in particular cost reduction. Outsourcing is clearly becoming part of what one might call the “CIO toolkit” of leading companies, to be used in ways and to the extent that are appropriate for the situation of each company.

In addition, as CIO’s and their teams strive to meet the fast changing needs of the business units, they are looking to use private clouds as a tool for innovation and reactivity. What is entirely less clear, however, is just how this can be done.

The private cloud is the answer ... but what is the question ?

Private clouds are the object of much interest in the IT industry as well as among large corporate IT users. They are perceived as somehow promising the best of two worlds – the reactivity and cost savings of public clouds with the reassuring control and security of a company’s own IT infrastructure. As might be expected, the subject has provoked the usual interminable disagreements among experts, complete with dueling definitions and the skillful splitting of technical hairs.

From a managerial perspective, private clouds are (so to speak) in the middle of a "competitive squeeze": On one side, public clouds offer more scalability and much better economies of scale. On the other side, the underlying virtualised infrastructures are the real source of the operational economies and technical flexibility that are claimed for private clouds, rather than the visible functions of end user provisioning, usage based billing and so forth. Virtualisation can deliver most of the technical benefits, without necessarily deploying a cloud.

In this context, some might be tempted to write off private clouds as "a solution in search of a problem". In our opinion, this type of reaction is (at the least) premature.

From the point of view of the IT department, a private cloud – and in particular a private cloud hosted in a service provider data center - can be an interesting option in various usage cases. A company with “spiky workloads”, for example, may find that a hosted private cloud – integrated with the internal IT infrastructure - provides a reasonably cost efficient solution for absorbing variations in its capacity needs. We also think that a hosted private cloud can be a useful option (depending as always on the circumstances) as part of a business continuity strategy.

What is really at stake, however, is on the end user side, where the private cloud is seen as a potential vector for business innovation and reactivity. Putting technological tools in the hands of people often leads to surprising results. No one can really predict what empowered end users will do with private clouds, but then the same was true of the PC revolution and the explosion of business creativity unleashed by PC LANs in user departments.

The most striking thing about these deals is that CIOs in a traditionally conservative sector are putting up prudent but serious money to see if the private cloud can do the same thing, but hopefully in a better controlled and more standardised way.


CONCLUSION

Assuming successful execution, Orange Business Services is emerging as a credible challenger for the short list in big outsourcing deals, especially in geographies where it has strong presence and network assets.

More broadly, recent outsourcing deals (and not just in utilities) suggest that private clouds are becoming part of the picture, at least on an experimental basis.

Pragmatic CIOs should keep an eye on how these deals turn out, especially in terms of potential applications and business benefits of private clouds.

Wednesday, March 30th 2011
Duquesne Advisory
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Duquesne Advisory

Duquesne Advisory Ltd is a European firm, headquartered in the UK, dedicated to researching, understanding and advising clients worldwide on opportunities and trends in Information and Communications technology.

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Duquesne Advisory delivers in-depth analyses of Information and Communications Technologies, their implementations and their markets. Research is based on critical observation of the market by the analysts and their on-going contacts with the vendor community, together with hands-on, practical experience in consulting engagements.

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The analysts of Duquesne Advisory leverage the Firm’s ongoing market and technology research to undertake high added value consulting engagements for both ICT users and ICT providers. Focused on client service, their approach is rigorous and methodical, and at the same time pragmatic and operational.