news Listed Victorian energy utility SP AusNet has signalled plans to insource its IT services needs, following a decision to terminate a wider management deal under which a variety of corporate services were being provided by a subsidiary of its part-owner Singapore Power.
SP AUsNet manages three key Victorian energy networks involving electricity transmission, electricity distribution and gas distribution. The utility used to be majority owned by Singapore Power, but the Singaporean giant has sold down a part of its investment in the company. Following that selldown, SP AusNet confirmed today that it had terminate the management services agreement it had previously had with Singapore Power subsidiary SPI Management Services (SPIMS), under which management services have been provided by SPIMS to SP AUsNet.
“Agreement has also been reached between SPIMS and SP AusNet to unwind shared information technology services provided to SP AusNet by Enterprise Business Services, a subsidiary of SPIMs,” the company wrote in a statement to the Australian Stock Exchange yesterday. “This agreement was put in place in September 2008.”
“SP AusNet intends to transition its share of existing EBS activities into the core SP AusNet IT function as soon as practicable, commencing on 1 April 2014. The costs associated with this restructure of IT services are not expected to exceed $7.5 million.” The wider termination of the management services agreement is expected to result in a termination payment of $50 million.
As part of the deal, each SPIMS employee will be offered employement with, “and is expected to transfer to”, SP AusNet, the company wrote.
The restructure will substantially affect Enterprise Business Services. According to the company’s website, the company commenced operations on the 1st of October 2008 through the consolidation of the Jemena (another Victorian energy utility) and SP AusNet IT divisions. The company currently employs over 250 staff providing IT services to the utility industry
The company’s site states that it provides an extremely wide range of IT services, including application Services, application support, application maintenance, managed services, data centre services, server management and support, data lifecycle management, network management, desktop services, voice communications, service desk, ITIL practice and asset management & procurement services.
The news does not represent the first time that a Victorian utility has conducted an insourcing exercise with respect to IT services. In December 2012, for example, iTNews reported that Yarra Valley Water had successfully switched away from an outsourcing model, bringing its IT support in-house. The project reportedly improved the utility’s IT project delivery and shaved $2 million off its annual expenditure.
This is a tricky one to comment on, because we don’t have all the facts here. Usually IT insourcing exercises are conducted where there is a very strong alignment between the CIO and the business, to the effect that the business becomes quite confident that the CIO will be able to deliver a stable, cost-efficient and effective insourced IT department.
However, by far the more usual practice — and I would go so far as to call it standard best practice — is for an outsourcing model to tackle all the non-critical areas of a major organisation’s business. It would be quite hard to argue in 2014 that SP AusNet can do a better job of its own desktop IT support than a much larger outsourcer such as Fujitsu could, for example.
The energy sector typically has higher requirements in terms of its IT support, because of the critical nature of its infrastructure, but then so do organisations such as the Department of Defence, which maintains extensive outsourcing relationships.
You can see why SP AusNet is going down this path. It needs to further separate itself from its former owner Singapore Power, and that’s a good thing. However, I would personally argue that the group is going too far down the opposite approach. If it was me, I would focus on switching away from EBS, a small outsourcer, to using commodity services from a larger and more standardised outsourcer, while insourcing critical components which are too close to SP AusNet’s energy generation and transmission business to be safely handed off.
This may not make sense in terms of SP AusNet’s internal wisdom. But over the long-term, I suspect it will provide higher levels of stability, while still ensuring decent cost levels. The alternative is that the next CIO to come into SP AusNet in five years’ time will look at the insourced situation and see it as a perfect candidate for saving costs through outsourcing.