Tackling Utility Customer Cost to Serve by Chris Trayhorn, Publisher of mThink Blue Book, May 14, 2007 Utilities in the U.S. stand to save considerable expense by evaluating their customer service operations from a customer cost-to-serve perspective. They spend on average $42.50 per year servicing each customer, according to research conducted by The Gartner Group in 2006. Shaving a mere dollar off this cost-to-serve figure can amount to millions of dollars in annual savings for a large utility. Utility customer cost-to-serve is the sum of costs associated with retailing energy to the customer, including labor and technology costs, divided by the number of customers. It’s distinct from other utility value chain costs like wholesale energy and energy transmission and distribution. Utility customer cost-to-serve generally includes all costs related to metering, billing, payment, collections and customer service (see Figure 1). Activity-Based Costs vs. Departmental Cost Structures Breaking down the utility customer cost-to-serve into individual components is the first step to savings. This is easier said than done, however, and most utilities struggle with accounting cost structures that do not relate easily to operational processes. Since utility retail costs are typically concentrated in the call center and in operating the large-scale IT systems that automate billing and payment processes, it is not uncommon for utility accountants to break down cost to serve along departmental lines: 1) call center IT systems and telecommunications; 2) call center staff; 3) billing staff; 4) IT staff; 5) customer information and billing IT systems; and 6) outsourced service costs. This breakdown is relatively easy to measure and is helpful to those departments managing cost with “blunt instruments,” such as headcount reduction. Unfortunately, it is of limited value in identifying cost-saving opportunities and implementing innovative process improvements because it doesn’t address the root sources of cost. For example, consider the process of taking meter readings and sending bills to customers. Part of the cost is the consequence of inaccurate billing, which includes the cost of fielding customer inquiry calls. Applying the accountant- style cost breakdown above, this part of the billing cost is buried somewhere in call center staff and systems costs. Conversely, when a call center agent fields an inbound customer service call, such as a question about moving to a different pricing structure, the agent relies on access to the customer information and billing system. So in this case, part of the cost of delivering customer service through the call center actually lies in the cost of providing the customer information and billing system. In other words, the call center systems and staff costs alone do not reflect the complete cost of delivering customer service. A superior approach is to break down cost to serve into key operational processes: 1) metering; 2) billing; 3) payment; 4) collections; and 5) customer service. With this operational activity-based breakdown, underlying cost causes become more transparent and are more readily measured. For example, it can be determined that a portion of customer calls relate to inaccurate bills, which 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 center volume and reducing overall billing costs. Is Metering a Retail Cost? When utilities separate their retail and distribution operations, the meters often fall under the distribution network as it covers field personnel that maintain the meters. Conversely, meter-reading personnel are often identified with the billing department as the billing process drives the need for timely meter reading. For calculating utility customer cost to serve, is metering a distribution cost or a retail cost? Utilities in restructured markets, including those with competitive metering, have faced this question 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 to serve. 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 U.S.. Likewise, leading research firm Datamonitor included metering costs in its studies of comparative utility customer cost to serve in Britain, Australia and Europe. Bad Debt – Part of Cost to Serve Several times a year, as a matter of policy, a utility may write off debts unpaid for more than 180 days. This can be considered a financial transaction irrelevant to customer service and, as such, could reasonably be excluded from the operational costs of running the customer service department. Nevertheless, bad debt expense is most definitely part of the cost of doing business with retail customers and, therefore, a component of overall customer cost to serve. The upside of including bad debt in the cost-to-serve equation is collections managers see how their receivables ledger fits into the bigger picture. For example, a collections department manager could achieve savings by reducing headcount, but it would be a false economy if the end result is less effective collection of overdue debt and an increase in bad-debt write-off. Similarly, utilizing a new technology- based service to improve collections performance might increase collections department costs but also yield much greater savings by reducing bad debt. In both of these cases, a cost-to-serve approach linking individual costs to the overall business process outcome would provide a sound basis for decision making. Percentage Breakdown of Cost to Serve Figure 2 represents a typical breakdown of overall cost to serve for a large North American utility. Next, we will walk through each operational area shown to see how some true efficiencies can be achieved. Metering Costs Likely to Increase Metering costs include: Regular field meter reading; Special reads/out-of-cycle reads; Meter service including meter installation removal, change, maintenance and testing; Amortized cost of the meter asset; and AMR/AMI and interval meter reading. The widespread rollout of interval meter reading has the potential to increase costs substantially and, consequently, to increase the customer cost to serve. The objective will be to decrease costs in other parts of the value chain, such as transmission cost and wholesale costs at peak times. Billing Inaccuracy Compounds Costs The American Public Power Association’s 2005 Customer Service Benchmarking Study revealed 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 center, repeat field visits to re-read meters, back-office staff time spent canceling 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. There are print shops that produce billions of pieces of mail per year; at those volumes, they can achieve efficiencies beyond even the largest utility’s bill-printing operation. But even more substantial cost savings can often be found by re-examining the overall billing process and the relationship between billing and payment and the consumer. Billing triggers customer calls, so it follows that sending fewer frequent bills (by moving to bimonthly or quarterly billing, for example) can reduce call center volumes. The lower costs of e-billing are also well-documented. A major chunk of the 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 billing software package with more sophisticated automation might only require a 10-minute configuration and validation. Low-Cost Payment Methods and Channels The payment cost component of utility customer cost to serve is an average across all of the payment methods offered by the utility and used by its customers. Utilities in the U.S. have, in general, been slow to offer the convenience of wideranging payment options, with regulatory restrictions often cited as the barrier to implementing more expensive methods such as credit card payment. Consider the high number of utility payments still made by check in the U.S. – up to 80 percent (UtiliPoint, 2007) – with associated costs of return postage and remittance processing. Contrast that figure with other industries or, indeed, utilities around the world where, in some cases, 100 percent of payments are made electronically, avoiding all postage and remittance processing costs. There can be wide variations in actual payment costs across a customer base, depending on the type of payment (check, cash, credit card and electronic) and the payment channel (over the counter, call center, post, website, agency, bank and payment service). Another factor is payment frequency. 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. An additional consideration is the relationship between payment processing and collections and bad debt costs. Some payment methods may seem expensive on the surface but 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. Combating Collections Costs It is estimated by information services company Chartwell Inc. that more than $1.7 billion in revenue is written off by utilities in the U.S. every year, an average of $8.50 uncollected per customer. In addition, up to 40 percent of call center 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 center. Legacy billing systems are often not designed to handle complex modern scenarios, such as multijurisdictional regulatory constraints on collections activity or tailored collection paths for different segments of a customer base. So collections efficiency suffers and bad debt grows, which both result in increases to the cost to serve. Customer Service Costs Reflect System Usability Absent more sophisticated costto- serve analysis, a utility might simply divide its customer base by its number of call center agents to gauge whether it has a high or low customer service costto- serve component. It is not unusual for some incumbent utilities running legacy systems to have 100 call center 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. This was the case for a European retailer with 2 billion customers. The government forced the retail department to cut all ties with its distribution affiliate, which revealed its high customer cost to serve of more than EUR100/customer. The newly separated retailer was forced to reinvent itself from scratch with advanced systems and business processes in order to compete effectively against lean, aggressive new entrants with much lower cost to serve. Poor customer information system usability will also drive up customer service labor 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. Driving Down Cost to Serve With Meter-to-Cash Outsourcing Certainly utilities can lower their cost to serve through system and process improvements in areas of metering, billing, payment, collections and customer service, but it is by outsourcing the full meterto- cash transaction cycle that utilities can radically reduce their cost to serve. There has been tremendous attention paid to major utilities outsourcing their customer service operations, such as TXU to Cap Energy and Nicor to IBM. But these business process outsourcing (BPO) deals tend to emphasize the financial engineering aspects in order to yield short-term financial benefit. Even though service-level agreements are in place, the metrics used typically focus on operational basics and motivate the BPO vendor to save costs in the near term rather than seek fundamental, long-term improvement. They tend to be motivated to do the same things more cheaply, rather than to examine whether the same tasks will actually be necessary as business objectives, the industry and technology evolve. Under a new transaction-based model of outsourcing, however, the outsourcer owns the technology assets and intellectual property underpinning its services. Thus, the outsourcer can combine the best technologies and processes in ways that achieve far greater efficiencies and cost reduction. This new model also provides an outsource option for transaction automation while allowing the utility to retain control of its vital call center customer interactions. If utilities are to determine their customer cost to serve accurately, they 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 then identify new ways of achieving cost savings and as well as increasing efficiency. Information technology and the correct type of outsourcing model are two fundamentals in helping utilities realize significant cost-to-serve savings and start to make a dent in the $1 billion waiting to be saved. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.