Structural changes made in the Brazilian electric power market, industry deregulation, the privatization of companies, the institution of free consumers and independent power producers have forced utilities to adopt a more competitive position in terms of efficiency. Therefore, Brazilian utilities now employ techniques to optimize technological, managerial, financial and commercial capabilities.
This competitive environment has prompted Companhia Energética de Minas Gerais (CEMIG) to develop a methodology for planning the contracting or outsourcing of engineering services. This strategic approach has enabled the utility to become more efficient in its processes and produce more effective results, with the objective to gain a competitive edge and be more cost-effective. The new methodology allows the utility to be more flexible in its activities and concentrate its energy and investments on enhancing and developing its core business.
CEMIG is one of the largest concessionaires of electrical energy in Brazil. The utility owns 54 generating plants, predominantly hydro plants, that supply more than 18 million consumers in 774 municipalities in the state of Minas Gerais. The CEMIG network spans 360,000 km (223,694 miles), the largest network in Latin America and the fourth largest in the world.
The planning phase is the most critical of any process for contracting services. This is the phase in which decisions are made regarding the activities that are feasible and suitable for outsourcing with a higher success probability. CEMIG worked to develop a standard methodology that, through the use of new ideas and management techniques, would result in a strategic and flexible approach for the decision-making process.
CEMIG selected a macro- and micro-ambience approach — the Strengths, Weaknesses, Opportunities and Threats (SWOT) approach — used by the Harvard Business School to perform the strategic diagnostics. This theoretical method simply analyzes all the issues that CEMIG management needs to consider for each activity that can be outsourced or undertaken by utility staff. The following elements are considered to determine the strategic level (SL):
Environmental opportunities and threats
Potentialities and vulnerabilities of the utility or the unit/activity considered.
For every activity being considered for outsourcing, a score is assigned to each aspect of all the elements of the SWOT analysis, according to the evaluation scale:
0 = Aspects assumed to be “neutral or independent”
1 = Aspects deemed to be of “medium impact”
2 = Aspects deemed to be of “major impact.”
Using these values, the SL can be obtained (see “Strategic Level Computation” on page 48 for how to compute the SL), the result showing the percent relationship between the aspects deemed to be positive (strengths and opportunities) and those deemed to be negative (weaknesses and threats). The application of this strategic approach is illustrated in the table, which shows the analysis for the activity employed to construct a rural distribution network.
To provide consistent decision making with respect to the use of CEMIG or outsourced personnel, a “decision matrix” has been developed that combines the strategic and relative cost levels of each activity. The matrix is divided into areas delimited by the strategic and cost boundaries, which are defined by CEMIG management (Fig. 1). Once the values for a given activity are evaluated, they are plotted on the matrix to establish the decision with respect to outsourcing that can be made in accordance with the four-sectioned matrix.
To simplify the managerial analysis, an applications program has been developed. The software allows users to modify scenarios and automatically determines the most suitable decision.
The strategy for contracting out services is conducted in a centralized form. In accordance with the model of the Brazilian electric sector, the concessionaires must comply with a model of business, the Business of Reference, which imposes the need to reduce costs, in line with the principle of reasonable energy tariffs. However, profitability of its distribution business is one of CEMIG's many goals. Seeking the “best” cost and most effective application of the available resources is CEMIG's commitment to shareholders. The analysis, conducted as part of the bidding process prior to outsourcing any activity, focuses on strategic importance and cost. If the strategic importance is elevated, the activity will not be outsourced, even if it could reduce costs. However, this contracting strategy is not disclosed in bidding documents and is reserved solely at the discretion of the managers.
The form of contract used clearly defines all requirements for executing the work, in addition to the indicators that will gauge the performance of the contractor. Payments are based on the quantity of services performed, with a focus on productivity. For each type of service, there is a specified unit cost. In instances where the contractor is requested to provide a response to an emergency, the contractor is compensated on the basis of hours worked, the values of which are described in the contract. The company may also require the contractor to have standby teams available. In general, CEMIG's rule is to hire the services on a fixed-price basis, but recently, unit-price, fixed-term, partial-contract work (materials and services) is being adopted for contracts linked to the construction of rural networks.
In accordance with the contract, the utility requires basic training for all linemen, in addition to specific training for the performance of certain tasks. In some cases, CEMIG provides guidelines to the contractors regarding work procedures and methods, although training is done by other approved organizations. Operational procedures and safety standards defined for CEMIG teams are fully disclosed and must be followed by contractors, as well as the utilization of similar and approved occupational safety equipment.
The proper execution of all such practices is constantly checked through inspections and service audits (legal, technical and administrative aspects), with penalty measures defined in the contract, such as fines, warning or even dismissal and exclusion of the contractor from the Supply Register in cases of very serious offenses. Currently, the main focus of the evaluations and inspections is associated with occupational safety.
Initially, it is important to stress that the basis of outsourcing is not solely linked to cost but is rather an overall review of contracting out services, in which cost is one of the highest factors. In a distribution utility, the various activities can be grouped into four categories:
Construction: activities involving construction, extension, reconstruction and improvement of distribution networks
Maintenance: activities involving inspection, preventive and scheduled corrections
Operational emergencies: nonscheduled activities for restoration of supply
Commercial: customer requests, routine services, reading and billing.
Currently, all activities involving the execution of construction are fully outsourced. The demand for these services is irregular and seasonal, which makes it unfeasible to hire company staff for these activities.
Maintenance can be divided into two stages: inspection and correction. Inspection requires qualified professionals who are capable of adequately identifying the faults and are able to schedule the actions for correction. The outsourcing of the second correction stage may be advantageous, as long as the process is coordinated and monitored by the company. The volume of these services also is irregular and is influenced by weather conditions, causing maintenance to be concentrated during the dry season. By outsourcing, the company does not require staff and equipment for these tasks.
Normally, the emergency category is performed by the company's own staff. However, the resources available may prove to be insufficient at certain times, because of the increased number of events taking place during the rainy season. Outsourcing provides a solution by strengthening or speeding up the service without increasing the costs of the company during the dry period.
The commercial category encompasses services involving connection, disconnection and reconnection, requests for small maintenance, reading and delivery of bills, for which it is advantageous in terms of cost and productivity to outsource. The regular inspection of consumer units for the purpose of detecting miscompliances and commercial losses are undertaken by the utility's own staff due to the nature of the inspections. There is a considerable productivity gain when outsourced teams are able to perform more than one category of activities — for example, multifunctional teams who are able to perform routine commercial services but can also be employed to support specific in-house personnel in servicing failures in the distribution system, in the event of multiple system failures.
To date, several activities have been successfully outsourced:
- Connection of new consumers
- Meter reading
- Maintenance of public lighting
- Disconnection and reconnection of consumers
- Corrective maintenance
- Pruning of trees
- Responding to power outages
- Construction of distribution networks
- Clearing vegetation beneath overhead line distribution networks.
The reduction of costs achieved with the execution of activities by contractors is significant, and a cost reduction on the order of 50% has been achieved when compared with the use of company staff, including the contract management costs.
It is essential that adequate planning to minimize problems precede the contract. In addition to a well-produced contract and well-conducted bidding process, there must be a very thorough contract management system in place to prevent, detect and block the causes of such problems. The company works with a large number of providers on its distribution business, all who provide different levels of quality. Although there are localized problems, in general, outsourcing has proven to be beneficial. The exception is the distribution of bills, which has a higher cost and is currently undertaken by the post office company, which in Brazil has the monopoly for this type of service.
The main positive points are:
Reduction of costs with labor-related charges
Reduction of costs with services through bidding
Reduction of costs with the acquisition and maintenance of assets: installations, vehicles and equipment
Reductions of costs in middle areas
Fast response for increased number of teams, in case of higher demand of services
Possibility for reduction of teams, in case of lower demand of services
Increase in productivity.
The negative points are:
A need to constantly evaluate the supplier
Turnover of employees from the contractors
Shortage of good training for professionals in the area, in the market.
It is important to emphasize that there are activities that are subject to external influences such as labor legislation and market conditions. Thus, the process for analyses and definition of the form of executing the activities is dynamic and follows the strategic plan of the company.
CEMIG introduced the outsourcing activities gradually, so there was no compulsory reduction of the company's workforce. However, there was a natural reduction in the number of linemen as a result of retirements, promotions and some leaving voluntarily. Company staff was redirected to work on activities that are considered strategic, such as the control and inspection of services, but overall there was no major reduction in the total number of company and contractor personnel; it was more a redistribution of CEMIG's workforce.
By adopting a theoretical approach and methodology, establishing management decisions on strategy and performance monitoring on approved contractors, CEMIG has demonstrated the economical benefits available from outsourcing selected distribution network activities.
Luiz Braz Francisquini graduated in electrical engineering in 1984 and received a bachelor's degree in law in 2004 from the Federal University of Juiz de Fora. He was awarded a master's degree in business administration from the Brazilian Institute of Capital Market. Francisquini worked in the area of railway signaling and traffic control before joining CEMIG Distribuição SA. In his 20-year career with CEMIG, he has been active in the areas of commercial relations, operation and maintenance, field services, and planning and expansion of the electrical distribution system. Currently, Francisquini is the manager of engineering and coordination of field service firstname.lastname@example.org
|Assured quality of services||1||Low productivity||2|
|Electricians are free to perform activities in other processes||1||Increased number of employees||2|
|Better management of services||1||Possibility of increase in on-the-job accident rate||2|
|No possibility of legal actions against outsourcing||2||Backlog of services, when electricians are not available, with possibility of delay in deadlines agreed to with customers||2|
|Better management of environmental risks||2||Requirement for making available transportation and specific equipment||2|
|Establishment of an electrician base for other activities||2||Recreation of decentralized warehouses||2|
|Liberty in the execution of services (project changes)||1||Possibility of generating overtime work||2|
|Maintenance and development of technical expertise||1||No helpers available for nonspecialized tasks||2|
|Greater confidence in clearing and receiving equipment||2||Higher risk of labor-related liabilities||2|
|Ease of communication — base/teams||1|
|Higher commitment of employees to allow company guidelines||2|
|Reduction of the contracts management structure||2|
|Freedom in relation to outsourced individuals||1|
|Voids joint responsibility of legal actions||2|
|Possibility of rendering quality-assured services to other companies||1||Interruption of work due to strikes||2|
|Walkout of service-delivers||2|
|Strategic Level||-8.33||Relative Cost||91.0|
STRATEGIC LEVEL COMPUTATION
The strategic level (SL) is obtained using the formula:
where VS equals strengths, VO equals opportunities, VW equals weaknesses and VT equals threats.
The relative level of costs is the percentage ratio between costs of utility staff and outsourced personnel. The cost comparison is based on the following five assumptions:
- Same productivity
- Same equipment and tools
- Same vehicles
- Labor with different costs
- Addition of the cost for management of outsourcing.
where RC equals relative cost (own/outsourced), Mho equals the man-hour cost for own personnel, Mht equals the man-hour cost for outsourced personnel and MC equals management cost.