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European utilities need to ramp up cost reduction efforts

31 August 2005 – Reducing operating costs remains a core strategy for European utilities, large or small with full market liberalization looming in 2007, according to new research from industry analysts Datamonitor.

European companies still have some way to go to reduce costs across metering, billing, payment (collections) and the call centre if they are to meet Datamonitor’s adequate practice assessment.

New Datamonitor research reveals that current operational performance within residential supply attributes a ‘cost-to-serve’ of €31.96 ($39) for large suppliers with a customer base greater than 2.5 million, rising to €36.78 for a small supplier with a customer base of less than 500 000 accounts.

Further investigation discovered that scale, distinctly in billing and call centre functions drove this variance. The most sensitive key performance indicators (KPI) levers in reducing operational supply costs extracted from Datamonitor’s cost-to-serve model were determined to be introducing automated meter reading, staffing and the volume of bills sent by suppliers.

To allow for a standardized appraisal of associated operating costs in European residential energy supply, or ‘cost-to-serve’, Datamonitor has set a clear definition of what is included, excluded or omitted in its measure of cost-to-serve. It normalized the data through a three-stage process to enable the ability to then benchmark costs and metrics across European energy suppliers, and then segmented them under large-, medium- and small-sized energy suppliers.

The outcome of this research found that €31.96 for large suppliers – with a customer base greater than 2.5 million – rising to €36.78 for a small supplier whose customer base is less than 500 000 accounts, are the current average cost-to-serve levels, underlining the importance of scale in the residential energy market.

From the 621 metrics captured in Datamonitor’s cost-to-serve model, leading performance indicators were amalgamated from Datamonitor research to establish a benchmark for European energy suppliers, referred to as the adequate practice assessment (APA). Datamonitor’s APA cost-to-serve per customer stands at €29.01, €8 lower than a small supplier’s cost-to-serve.

When assigning costs across the four core service categories: metering, billing, payment and the contact centre (incorporating call centre, post and online communications), the difference in costs are driven by the contact centre and billing.

These four service categories can be further sub-categorized as labour, non-labour and maintenance costs. Under this sub-classification labour costs in the call centre becomes the single largest cost component for each class of large, medium and small suppliers. However, when regrouping these sub-categories and assessing the costs to just be maintenance, labour and non-labour costs, then maintenance costs form the majority of costs. Maintenance costs encompass costs such as replacing meters, sending out bills, processing payments or a unit cost of a call.

The most sensitive KPI for all three player sizes is the ‘total number of bills sent’. To reduce cost-to-serve by just 10 per cent would require a 67 per cent fall in total bills sent, totalling 25.8 million bills sent for a large supplier. This percentage sits at 66 per cent for medium and 60 per cent for small players.

For reducing customer service agent (CSA) staffing, the range reduces to 32-30 per cent for the suppliers. In contrast, as for introducing automated meter reading (AMR), the proportion of AMR meters has to rise to 18% for a large supplier, 19 per cent for a medium and 17 per cent for a small player.
Alternative ways of achieving the same saving for a large supplier are reducing the time taken to resolve a billing query by 1.02 minutes, or increasing the proportion of customers on direct debit from 44 per cent to 82 per cent.

The question facing most European suppliers is how they can reduce their current operating costs. Intuitively, a number of European suppliers may have some idea, however, as indicated above, Datamonitor’s model is able to perform the sensitivity analysis to determine what levers can reduce costs. The model has built in the interdependencies across service functions and calculates the decrease and increase in operating costs. For example, introducing self reads may lower physical meter reading costs, but a supplier would also incur higher contact centre costs from higher call volumes.

By 2007, the European energy markets will be fully liberalized. This competitive market will only increase the onus of cost savings as less efficient suppliers will lose customers to those that are able to operate at a lower cost and offer greater price savings to acquire customers. To retain a competitive presence in the residential market, European suppliers will have to do a lot more in reducing their cost-to-serve from current levels.

Source: Datamonitor