Jeff Hazel
Convergys Corp.
Gregg Ridderbusch
Utilities International Inc.
A new unit cost methodology has been developed to advance the understanding of customer care costs and performance. This approach has been validated through a recent research project involving six utility finance and customer care organizations in the United States. The model was developed for Convergys Corp. (a provider of managed billing and call center services) by Utilities International Inc., a management consulting firm serving utility industries and their service providers. Using this model, utility executives can evaluate the cost performance of their customer care operations and the financial value of new customer service business models, and better manage their operations.
Developing the new model
The need for a common, robust model to support internal cost analysis for customer care has risen out of several market forces-namely, new retail market competition; changing expectations of shareholders and analysts; merger and acquisition partnerships looking for synergies to create value; new service launches; and a strategic imperative to understand internal cost performance in order to evaluate alternative customer service business models.
Industry benchmarking studies to date have been based on surveys and data from the Federal Energy Regulatory Commission (FERC), which have reported varying results. Utility customer care organizations differ in so many respects-such as dispersed or centralized structures, selected facility and functional outsourcing, internal shared service organizations and regulatory driven practices. Cost modeling is further complicated by differences among utilities in cost accounting (charts of accounts, allocation methodologies, overhead rate structures, etc.). Moreover, due to these issues, FERC account level data cannot be used to create precise results without additional drill-down analysis and other post processing of data. Finally, most studies are challenged to incorporate total costs, including capital assets and cost of capital.
To address these issues and limiting factors, a new unit cost model and associated methodology has been established. The model integrates two dimensions, namely business processes and financial components (see Figure 1).
Business Processes: From customer consumption through remuneration, the unit cost model aggregates costs into five business processes. The first three are sequential; 1) acquire usage data-metering, 2) create and render bill-including bill processing, and 3) collect revenue- remittance processing and credit and collection. The last two provide a crosscutting resource to the first three; 4) manage customer accounts-call center and 5) maintain and operate CIS. This model is customer-centric, and therefore it is not material how the customer service operation is deployed organizationally.
Financial Components: From a financial standpoint, the unit cost model considers three components; 1) O&M labor and non-labor costs, 2) the capital employed and 3) the cost of capital. Most often it is the O&M costs that receive the primary attention in cost analysis. However, O&M is an incomplete picture of total customer care costs. Capital amortization and the cost of that capital must also be considered.
Validating the model
From November 1998 to March 1999, a primary market research study was conducted to implement this unit cost model. Six utilities agreed to participate on a confidential basis with Utilities International Inc. [UII] to populate and then validate the unit cost model with live utility data. Primary cost data, extracted from the general ledger and other cost reporting applications, were screened and validated so they were assigned appropriately into the model. This screening was augmented by interviews, so that as a result, a true apples-to-apples assignment of cost data was achieved.
Statistical measures are also collected during the unit cost model analysis. A unit cost result has no value or meaning if not interpreted in the context of related performance measures. For example, when considering the cost of collecting revenue, the net-write-off as a percentage of utility revenue is a critical performance metric. A low unit cost of revenue collection might not be acceptable if the net-write-off metric is too high.
The six utility participants serve approximately 5.4 million customers in more than 10 state jurisdictions. The average size is 900,000 customers with the largest participant not exceeding 1.5 million, and the smallest about 400,000.
The compiled total unit cost from the research study is $4.10 per customer account per month. The next level of detail is the breakout of this total figure into the two model dimensions: business processes and financial components (see Figure 2).
Considering each of the business processes, it is also illustrative to interpret the high and low results relative to the compiled average for each process. The spread relative to each business process provides additional insight into the diversity of utility practices embedded in the underlying data, and their impact on cost. Notably, except for the CIS, the study results are reasonably tight between utilities of different sizes, service territories, regulatory environments, organizational structures, etc. The CIS spread represents a range of different CIS situations including legacy systems through state-of-art client server solutions.
Recently reported results from other research methodologies range from $25 to over $100 per customer account per year, or a high:low ratio of 4:1. The corresponding ratio for the results reported here is 1.9:1. The compiled average is $49 per customer account per year.
However, key differences exist relative to prior survey methodologies. The differences include the granularity of the primary cost data, analyst investigation on a per line-item basis, on-site data mining and interview-process and participant-results validation. Perhaps most importantly, the detailed definition of this unit cost model helps assure costs are precisely input to the model, and that subsequent benchmarking is readily comparative.
Lessons learned
The process of demonstrating the model yielded lessons regarding the challenges and value of implementing a unit cost analysis process for customer care activities. A few include the following:
– Participant feedback suggests the model`s contribution to understanding internal costs and cost drivers is as valuable as the ability to confidently benchmark with the results.
– Huge differences exist in cost accounting systems and charts of accounts. Cost reporting and budgeting disciplines vary widely, so line-item data mining and validations are essential for accuracy.
– While cost center managers control O&M costs well, few can manage from a total cost perspective.
– Unit cost analysis is particularly useful within multi-jurisdictional utility structures to identify synergies, state regulatory impacts, and best practices.
– The unit cost analysis helped all gain an improved perspective of the interrelationships among the customer care value-chain activities, cost impacts and performance. Few analytic tools exist to manage customer care from a complete value-chain perspective.
With the input of six utility finance and customer care organizations, this new unit cost model provides utility executives and customer care leaders with a robust total cost perspective of their customer care operations. It enables confident benchmarking between companies, and most importantly extends the internal understanding of customer care operating costs and associated performance.
Jeff Hazel is a utilities market manager at Convergys Corp., and Gregg Ridderbusch is a vice president at Utilities International Inc.
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