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A brace of IT outsourcing deals in the energy sector reveal an industry preparing for an uncertain future

The energy sector has always lived with a degree of uncertainty. Every stage of the supply chain, from drilling to distribution, is sensitive to the price of oil, which is in turn dictated by factors as unpredictable as international politics and consumer trends. Also, the past few decades have seen countries including the UK open up previously nationalised infrastructure to competition, with unpredictable effects.

But the industry’s future is arguably less certain today than it ever has been. Prompted by environmental and geopolitical concerns, the whole world is rethinking the way it produces and consumes electricity, and governments are experimenting with measures to reduce energy consumption and encourage the use of renewable sources.

The industry is also at the brink of a technological revolution, with so-called Smart Grid systems promising producers greater control over their distribution networks, and consumers greater insight into their usage patterns.

Thirdly, the political structure of the Middle East, so pivotal to the global oil and gas economy, is in evident upheaval.

And fourthly, the growing economic influence of China places another question mark over the sector’s future. “It is hard to overstate the growing importance of China in global energy,” said Nobuo Tanaka, executive director of the International Energy Agency, at an event in London in November 2010. “How the country responds to the threats to global energy security and climate posed by rising fossil fuel use will have far-reaching consequences for the rest of the world.

“The energy world is facing unprecedented uncertainty,” Tanaka said.

This uncertainty has been reflected in a number of IT outsourcing megadeals signed by energy companies in the past few months. Many of these deals have included measures to protect the buyer from uncertainty by building in a degree of flexibility, thereby reducing the risk that they invest in more IT than they eventually need.

In November 2010, European energy giant E.ON announced two large IT outsourcing deals, together worth e3.2 billion. It handed network infrastructure management to T-Systems, and desktop and data centre management to Hewlett-Packard. E.ON remarked that the decision to outsource had been prompted by a need for more “agile” IT systems to maintain leadership in the “ever-more dynamic energy market”.

Soon after, HP also won a $400 million contract from existing customer BP, which includes provision of flexible, ‘cloud-based’ hosting services.

Centrica, the parent company of British Gas, signed a similar deal with HP in February 2011 (HP seems to have been the main beneficiary of recent outsourcing activity in the sector). Under the seven-year, £250 million contract, HP will provide Centrica with utility computing services, ostensibly allowing it to scale usage and up and down according to demand.

In March, French energy giant EDF appointed compatriot suppier Capgemini to provide IT services and desktop support to its 15,000 users. The £100 million contract is for three years, with an option to extend it for a further two years.

And in April 2011, HP (again) won a seven-year contract with National Grid, which operates the entire electricity and gas infrastructure in the UK and is expanding overseas, to provide IT service management. As explained below, that deal is the first step by National Grid towards an entirely new operating model for IT, in which flexibility is one of the primary concerns.

This seems like a burst of outsourcing activity. However, the energy sector, alongside financial services and manufacturing, has long been one of the most voracious consumers of outsourced services. Outsourcing advisory firm TPI says the combined value of deals by energy companies has been stable for the past three years, and despite these high-profile deals it does not expect to see a marked uptick in the first quarter of 2011.

Nevertheless, the details of these recent deals reveal an industry that is attempting to plan for the unknown. With the future post-recession economy remaining uncertain, that is a discipline that businesses in all sectors would do well to perfect.

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