Addressing Your Bottom Line – Requires Understanding Your Cost-To-Serve

By James Braatvedt

UtiliPoint analysts summate these pressures and highlight the trend to negate these influences, titling this a ‘back to basics’ strategy. Some key elements of a successful back-to-basics strategy are reducing costs, improving effectiveness and customer satisfaction. Core to this strategy is understanding and dissecting cost-to-serve, which is the sum of costs associated with retailing energy to the customer, including labour and technology costs, divided by the number of customers.

Research suggests that cost-to-serve can vary from $10 to over $180 per customer per year. According to research conducted by Navigant Consulting in 2006, the average spend is $65 per year servicing each customer. Shaving a mere dollar of this cost-to-serve figure can amount to millions of dollars in annual savings for a large utility. Addressing each component individually is the first step to achieving measurable bottom-line savings.

Utility retail costs are typically concentrated in the call centre and in operating the large scale IT systems that automate billing and payment processes. As such, it’s not uncommon for utility accountants to break down cost-to-serve solely along departmental lines, thereby excluding not only cost structures that do not relate easily to operational processes, but crucially overlooking costs typically hidden in a percentage breakdown of overall cost-to-serve, such as bad debt and inaccurate metering.

A superior approach is to break down cost-to-serve into the five key operational processes: metering, billing, payments, collections and customer service. With this operational activity-based approach, underlying cost causes become more transparent and are more readily measured. For example, it can be determined that a portion of a customer’s calls relating to inaccurate bills should be allocated to the billing component of customer cost-to-serve. Deploying a better, more accurate billing system would translate into fewer calls about inaccurate bills, thereby reducing call centre volume and reducing overall billing costs.

Utilities in restructured markets, including those with competitive metering, have faced the question of whether metering falls under the retail or distribution network and, in most cases, they have determined that metering costs fall to the retailers, regardless of which party owns the meters. Therefore, metering is a component of customer cost-toserve. The Gartner Group reinforced this conclusion when it included metering as one of the top-level customer cost-to serve components in its groundbreaking benchmark study in 2006 of utility cost-to-serve in the US. Likewise, leading research firm Datamonitor included metering costs in its studies of comparative utility customer cost-to-serve in Britain, Australia and Europe.

As utilities work to lower costs and provide customers with new services, existing meters are working against them, with ageing utility meter systems requiring costly human intervention to manage. This is conpounded by the widespread rollout of interval meter reading and overall likelihood of increased metering costs, which has the potential to increase overheads and consequently increase customer cost-to-serve.

Billing inaccuracy compounds these costs, with the American Public Power Association’s 2005 Customer Service Benchmarking Study revealing a wide range of billing inaccuracy rates among its utility members, ranging from 0.004 percent to as high as 8 percent. Inaccurate bills drive up costs in a number of ways: more complaints to the call centre, repeat field visits to re-read meters, back-office staff time spent cancelling and rebilling, and the additional special run printing and postage to send a second bill.

It makes sense to take advantage of economies of scale in print and mail. But even more substantial cost savings can often be found by re-examining overall billing processes and the relationship between billing and payment and the consumer. Billing triggers customer calls, so it follows that sending fewer frequent bills (e.g. moving to bimonthly or quarterly billing), can reduce call centre volumes. The lower costs of e-billing are also well documented.

A major proportion of billing cost relates to the number of staff required to operate billing systems and resolve billing exceptions. For example, a business task such as a rate adjustment might require several staff to spend several days using one legacy billing system. But a large billing software package with more sophisticated automation might only require a 10-minute configuration and validation.

There can be wide variations in actual payment costs across a customer base, depending on the method of payment (cheque, cash, credit card, electronic) and the payment channel (over the counter, call centre, post, website, agency, bank, payment services). Utilities in the US have, in general, been slow to offer the convenience of wide-ranging payment options, with regulatory restrictions often cited as the barrier to implementing more expensive methods such as credit card payments.

Payment frequency is another factor to be considered. The annual payment processing cost for a customer that pays four times a year using an expensive channel can be less than the total payment processing cost for a customer that uses a cheaper payment method but pays weekly.

The relationship of payment processing to collections and bad debt costs also affects utility customer cost-to-serve. While some payment methods may seem expensive on the surface, they offer substantial benefits in reduced collection and bad debt expense. For example, in the case of credit card payment, the card issuer bears most of the bad debt risk. Furthermore, if a utility was to employ third party convenience fee services, the fee for accepting the credit card payment can legitimately be passed onto the customer, further reducing the cost.

Utility bad debt expense is most definitely a part of the cost of doing business with retail customers, increasing year-on-year in North America, with some utilities having seen their bad debt write-offs increase by millions of dollars to more than 0.5 percent of revenue. It is estimated by information services company Chartwell Inc. that more than $1.7 billion in revenue is written off by utilities in the US every year, an average of $8.50 uncollected per customer. In addition, up to 40 percent of call centre agent time is spent on overdue payment, payment arrangements or collections activities. Standard utility practice is to issue reminder letters when debt reaches a certain number of days past due, and these reminders are a major trigger of calls to the call centre. Legacy billing systems are often not designed to handle complex modern scenarios, such as multi-jurisdictional regulatory constraints on collections activity or tailored collection paths for different segments of a customer base, requiring extensive customisations to be put in place, reducing efficiency and in turn increasing cost-to-serve.

By installing modern Customer Information Systems (CISs), utilities can significantly improve receivables collection performance. Such systems initiate collection actions on overdue debt using tailored treatment paths and other best practice techniques to reduce bad debt, optimise cost-tocollect, and improve receivables cash flow. Including bad debt in the cost-to-serve equation allows collections managers to see how their receivables ledger fits into the bigger picture.

According to a data mining project, collections costs can relate to as little at 23 percent of the customer base. Improving customer segmentation through analysis can provide an even clearer picture of the cost-to-serve, down to the individual customer level.

In the absence of more sophisticated cost-to-serve analysis, a utility might simply divide its customer base by its number of call centre agents to gauge whether it has a high or low customer service cost-to-serve component. It is not unusual for some incumbent utilities running legacy systems to have 100 call centre agents for every 100,000 customers, while new start-up entrants with better technology and processes may have as few as 10 to 20 agents serving the same number of customers.

Poor customer information system usability will also drive up customer service labour costs. Some systems require users to traverse 10 or more screens to complete a common transaction, such as signing up a new customer, while others provide a single screen with relevant customer information consolidated to respond to 80 percent of calls. The best systems place a high priority on usability engineering and support utility-specific Customer Relationship Management (CRM) functions, thereby eliminating the need for separate billing and CRM systems.

Communications automation services also affect the call centre costs. By driving customer communications through automated channels such as online self-service and IVR, many frequent inquiries can be self fulfilled. Use of automated outbound messaging, SMS messaging and broadcast faxes can also be ways to automate communication. Increasing utilisation of automated channels reduces the call volume into the call centre, freeing up call centre agents for improved responsiveness and customer service while driving down the costs, as automated channels can be a mere 1 percent the cost of a call centre interaction.

For advanced cost-to-serve analysis, utilities can benefit from better customer segmentation. When evaluating from a call centre perspective it is interesting to note that on average only 7 percent of customers actually call into the call centre.

Chartwell and UtiliPoint report significant annual increases in the percentage of utilities considering outsourcing their customer operations, with a potential market of several hundred million customers expected to be outsourced by the end of this decade. A key driver of this trend toward outsourcing is the tremendous financial pressure to lower utility customer cost-to-serve through system and process improvements in areas of metering, billing, payment, collections and customer service.

While outsourcing offers cost-to-serve savings, an end-toend technology and application outsourcing approach integrated with business process optimisation and appropriate key performance objectives will yield greater benefits to the utility marketplace. This model for outsourcing provides a solution for utilities to improve efficiency and customer satisfaction while remaining in control of their vital call centre customer interactions.

To determine their customer cost-to-serve accurately, utilities need to approach the equation by looking at key operational areas, not by dividing costs according to department. It is from this perspective that they can identify new ways of achieving cost savings, streamlining processes, increasing efficiency, and gaining time to focus on core growth areas. Information technology and the correct type of outsourcing model are two fundamentals in helping utilities realise significant savings and start to make a dent in the multi-billion dollar cost-to-serve challenge.