NiSource outsource: will the lights burn brighter?

A host of questions on NiSource's massive outsourcing of jobs to IBM was answered last week when the utility company announced details of its $1.6 million deal with the computer giant.

At NiSource operations spread across nine states, 572 white collar and technical workers were told they will start working for IBM July 1 or shortly after. Another 445 were told they will be let go by the end of 2006.

Workers at the Northern Indiana Public Service Co. call center in Merrillville were told their jobs are safe -- for now.

One question remains: Will it work?

That question gains added urgency because NIPSCO has ranked at the bottom of J.D. Power and Associates annual utility industry customer satisfaction surveys for the past several years. It also has battled consumer groups over the closing of service and maintenance hubs.

"Obviously both they and IBM are over a barrel; they need to show an improvement in how things are done," said Jeff Kaplan, managing director at consulting firm THINKstrategies. "And it's in both their best interests to do so."

NiSource's effort in managing the relationship with IBM will be the key to getting the job done right, Kaplan said.

Kaplan has written on a trend dubbed "backsourcing," a process where companies outsource services, become dissatisfied with the result, and bring the work back to their company.

One of the most prominent instances of backsourcing was JPMorgan Chase's canceling of a $5 billion outsourcing contract with IBM last year. In May, Sears Roebuck said it had ended a $1.6 billion technology services contract with Computer Sciences Corp.

In the utility industry, the wholesale outsourcing of business processes, such as was done by NiSource last week, has a shorter track record, Kaplan said. The biggest deal so far is Dallas-based TXU Energy's outsourcing of 2,700 jobs to Capgemini.

In one utility outsourcing snafu, Tennessee natural gas distributor Atmos Energy two weeks ago was fined $40,000 by state regulators for a subcontractor's failure to read customers' natural gas meters. At NIPSCO, that work still will be handled by its own employees.

Some analysts see a slowdown in outsourcing in the industry as a whole, but most agree there will be more outsourcing in the utility industry.

"You will definitely see more of these outsourcing deals, despite these little foobahs, because it's the easiest, quickest way to cut costs." said Rodney White, an associate editor at Platts' Gas Daily.

NiSource estimates it will save $530 million over 10 years in operating and capital costs.

So far, TXU reports its outsourcing deal is going well.

NiSource officials say the same will be true of their outsourcing deal with IBM.

The utility company, with headquarters in Merrillville, will spend $5 million per year to manage the contract with IBM.

"We continue to manage our company, and we manage the collaboration with IBM," NiSource spokeswoman Kris Falzone said Tuesday, when the outsourcing deal was announced.

"We still maintain control over strategy, policy-making and decision-making around all our activities."

The Citizens Action Coalition, the state's largest grass-roots consumer group, thinks controversy over NIPSCO service and rates may have influenced NiSource's outsourcing decision.

"I think they went a little softer on NIPSCO, because of public anger at the whole situation up there in Northwest Indiana," said Grant Smith, Citizens Action Coalition Executive Director.

He pointed in particular to NiSource's decision to keep the NIPSCO call center in Merrillville. Other NiSource call centers will be consolidated to a call center in Pennsylvania.

NIPSCO officials say their utility has a unique profile among NiSource's family of companies, because it serves both gas and electric customers. That is one reason the call center will be kept where it is, according to Colleen Reilly, a company spokeswoman.

NiSource officials long had said call center jobs and others where employees interact directly with customers would not be shipped overseas.

On Tuesday, they stuck to that pledge while confirming "a small portion" of the overall outsourced work will be done overseas.

Overseas outsourcing stirs passions in Northwest Indiana, a region battered by foreign competition in steel and other industries. White said there is nothing to stop utilities from shipping some types of work overseas to cut costs.

"If the job requires customer interface where someone has to answer questions in English and know the nuances of the language, then it will stay here," White said. "But if it can be done digitally, it's going far, far away."