How IT can allow utilities to invest in customers-and even improve returns-without breaking the bank.
A high quality customer information system (CIS) at a utility company can build revenue streams and promote customer loyalty. But while those are admirable goals, it is not that simple to wade through all the various CIS systems and figure out what a company needs in order to achieve those benefits.
Of course, the state of the economy plays a large part in the decision of whether or not to invest in CIS. But since CIS is vital to the survival of the utility, it cannot be ignored. Over the last few years, when the economy was dragging, many utility companies adopted a wait-and-see attitude toward new investment in CIS. But that could be changing.
Before spending lots of cash on CIS, it is important to know what factors to examine in deciding what systems need to be implemented. spoke to the experts to help decipher key challenges confronting companies as they make CIS selections.
Jay Jerrier, vice president of client services for Alliance Data System's Utility Services Group, says investment in CIS is beginning to open up as utilities start to look at where they can maximize their investment dollars. Jerrier sees utilities starting to examine whether they want to continue to invest in legacy systems or upgrade. "I think most utilities are getting to a back-to-basics philosophy, where they are looking to drive efficiencies and help show the commissions that they are doing their part to help support rate case decisions, or to just drive the overall improvement in their business," Jerrier says. He attributes that philosophy to lower credit ratings for utilities and poor financial performance. The result is that they have to get creative and look for new alternatives.
As one analyst reports, utilities have repaired their balance sheets in the last few years and are looking for ways to address the long-term growth outlook. "I think things are starting to really heat up," Jerrier says.
Furthermore, while deregulation was the driver for such technology in years past, some say utilities now want CIS to improve return on investment (ROI) and help address specific problems.
The IT Conundrum: Why Buy?
Jerrier says his company's deregulated customers are expressing greater interest in value-added services. They already have a sizeable customer base, and now they want to dissect that customer base to distinguish between the high-value customers and low-value customers. The reason: Utilities may want to treat the high-value customers a little differently, or incent the low-value customers to behave like high-value customers. "We have a lot of our deregulation clients coming to us and asking, 'Help us look at the data and customers we have and figure out how we can treat people differently,'" he says.
But Charles Craven, director of strategic consulting for Excelergy's new EPIC consulting practice, views the scenario differently. He agrees it is important to look back at the big thrust in deregulation in 1998 and 1999, which caused a series of CIS changeouts because there was a technology shift.
Craven says that looking back at the development of the typical domestic CIS system in the United States, the monolithic tools that were built in then are slowly changing. "What we did back then was we built huge, all-encompassing systems, and the technology was state-of-the-art for its day. But rather than modularize these systems, they were built to handle a whole gamut of different processes-their life was really expected to be the 20-year, 30-year time frame," he says. Market models weren't changing and the industry was fairly stagnant. The systems were built in such a way that the ROI was relatively good, and there were long project times-some took seven or eight years to build. "These systems were designed to support a full range of functionality, and their life was such that they really didn't do a lot of interaction outside of the utility," he explains. "We built a series of large mainframe legacy systems and they handled their job, but they lacked the main thing, dominant today, which is flexibility."
Craven believes CIS changes today are market-driven, and a wholesale change of the system does not seem to satisfy utility needs. "The architecture in and of itself has changed and is tremendously better, but deregulation and emphasis on customer service was not considered then," he notes. "In the old days we really looked at things from a premise of market model uncertainty," he notes. "I still see no cohesive market model-ERCOT or PJM-that we know five to 10 years from now will be there.
"Now it is not a static environment, they are not a vertically integrated utility; they are a group of operating units that has to operate not only externally but also internally," Craven says. Over the past two or three years, he has seen a huge slowdown in wholesale replacements of systems. What Craven sees today is really augmentation of systems-a modularization-that favors replacement systems that increase customer satisfaction and improve process efficiency.
He realizes that utilities, at the end of the day, found they never had best-of-breed of anything, but instead were making tradeoffs. "A few years ago, when utilities had margins … and commissions were more liberal, you could get away with that," Craven explains. Then it was possible to send out five percent of all bills by hand because that constituted "complex billing." Now a company looks at that situation and sees a potential to save money.
Reliability, cost of maintenance, and integration of external and internal systems are all being examined. "We are changing out systems from yesteryear to today. We are just not doing it in wholesale fashion," he explains. "What you find is that companies like Excelergy are adding modules to these large systems, and so five years down the road the modularization would actually become the whole, rather than having the piecemeal effect."
CIS Investment: What Should You Expect?
When a utility invests in CIS, it anticipates increased efficiencies and a return on that investment, which can take the form of dollars or even non-monetary benefits. The dollars saved can be easier to count, but experts say that non-monetary dividends are just as important. A good CIS system also helps cut down on regulatory scrutiny, as happy customers help make for happy regulators.
Jerrier gets to the heart of the matter. "The benefits of outsourcing we see are 30 to 40 percent reductions in ongoing transactional costs in relative dollars and cents," he estimates. He adds that analysts are predicting an uptick in outsourcing from smaller utilities to larger utilities.
But he believes the bigger benefit comes from the more non-quantifiable side-from the qualitative improvements. For example, by upgrading a utility's billing system or partnering with a respected outsourcer, the result is stabilization of the billing system at the core. The trickle-down effect of that is correct bills that go out on time and fewer customers calling to complain. "The calls that do come in are generally revenue-generating calls," Jerrier observes, "not 'Why are my bills so high or wrong?' Instead, it's, 'Hey, I want to buy something else from you.'"
Less scrutiny by state regulators is another positive. Jerrier points to one of Alliance Data System's clients, a larger, deregulated Texas utility that experienced about a 75 percent reduction in the number of complaints to the PUC in the time his company took over their call center. Another example-a deregulated gas provider in Georgia-dropped from more than 300 complaints to the PUC per month to only 28 last January.
"A huge qualitative impact is obtained just by upgrading the core of CIS, because the CIS is the engine that drives the [customer's behavior]," Jerrier says. But some things a utility never will be able to control, such as commodity price fluctuations. "What utilities need to be looking for is a company that can guarantee the bill will go out on time, the bill is correct, the payment will be processed in a timely manner, and the phone will be answered when somebody calls," he emphasizes.
SAP's Gary Johnston, U.S. director of solutions, says his company has seen "dramatic reductions in the interface costs from the best-of-breed solutions, where you move from multiple pieces to one solution." Johnston also touts less regulatory scrutiny. He says such systems can allow the ability to provide better reporting for regulatory requirements by having all the data in one system versus going out and pulling out data from multiple systems into a report and then massaging that report for regulators.
Johnston also found efficiencies where some of the newer CIS applications eliminated a number of third-party requirements existing in the smaller applications. That means pulling data specifically from meter-reading equipment directly into an application, instead of having to go through another third-party application for aggregation and checking of the data. The benefits are elimination of some of the application cost, the maintenance cost, and the interface cost.
Excelergy's Craven says the first CIS benefit is process efficiency-the ability to do the job with less people or to maximize those people. Other examples include the ability to satisfy customer requirements, for example in a single call, and the ability to gather information from disparate systems. "If you call in with a complaint, now in the modern CIS systems they can bring the service modules, outage information, and talk to the customer and say, 'I know you are out and we anticipate it will be another two hours,' instead of saying, 'We have no idea when the lights will come back on.'"
Craven also points to a revenue-efficiency component. He says that time-to-cash is very critical and has a number of factors: satisfaction that the bill is accurate and timely, and how the customer is looked at by the utility-the credit management issue. This is a "sore spot" for the utilities, he says.
Charles Goodman, vice president of strategic business development at Indus Utility Services, explains that CIS replacement by itself focuses on technology improvements, call center efficiencies, or improved customer service. He calls for spending on flexible technology and open architecture to allow utilities to run the business the way they need to, using one call center versus many, and centralized versus decentralized customer service. He predicts a return on investment within five years.
Goodman touts optimization of the service delivery supply chain, which is where companies can achieve attractive ROI. He also calls for integration of asset management, plus CIS and workforce management to enable business optimization. He projects one- to two-year returns on investment with a holistic service delivery management (SDM) model. But he cautions that the rate of ROI may be affected by the commitment of the organization to update its manner of operating and to capitalize on the opportunities made available, rather than merely to implement a new system to do the same functions.
Your Competitors: Who's Spending?
Exactly what market segments are spending on CIS? At the moment, it is the water utilities, municipal utilities, and cooperatives, while investor-owned utilities have been biding their time. According to Stefan Wolf, manager of field services at SAP, deregulation in the IOU market a couple of years ago drove some of the CIS investment, but that was really not a significant driver for the water market. Water utilities did not have a need at that time, but now their systems are aging, which explains their current investment. Johnston agrees that water utilities are motivated by the need to catch up. "I think the water segment hasn't spent money for so long that their systems were antiquated, and they were missing out on a lot of the basics-some of the current applications we take for granted," he argues. Specifically, he points to lack of the seamless interface to the meter read, AMR equipment, customer self-service, and Internet.
Johnston also notes that even the municipal and cooperative utility markets have been investing in CIS in the past 18 months.
Jerrier finds that demand for CIS is also coming from regulated markets, the municipal market, and some corollary markets like sub-metering.
Wolf says SAP is willing to spend money to improve what utilities already have in-house. He says utilities want "to build on top of the solution that they have, not replacing the whole suite, but adding or exchanging functionality for more efficient functionality, newer functionality, and more reliable functionality."
According to Charles Goodman at Indus, spending in the CIS market has been fairly flat. But he is optimistic and sees strong interest building with top-tier accounts that need to replace large legacy systems. Goodman believes that to some extent, utilities have been waiting to make a move until they find a solution that provides a better alternative than what traditionally has been offered in the past. He finds feedback from the market (utilities, analysts, and consultants) that the SDM paradigm can provide the answer, by offering a new alternative for approaching the management and optimization of all the aspects of the utility's business of delivering service to their customers. That SDM paradigm encompasses a holistic view of the organization, with information flows and processes facilitated across traditional "silos."
Upgrade or Replace?
What factors do utility companies need to consider when deciding whether either to upgrade or replace their CIS systems and software? Cost is always a factor, but so are the utility's goals, either short- or long-term.
According to Alliance Data System's Jerrier, utilities need to look at risk-mitigation, overall strategic direction, quality of service, and reputation of partners. "Those are the decision criteria we find most people run through," he says. "Cost is always a driver, and then speed, simplicity and self-confidence." How quickly can you get to market? Can you not over-complicate the issue and be confident in your decisions? SAP's Wolf agrees that it is important to look at reliability of the vendors. Especially in the past couple of years, he says, the customer has to investigate reliability when trusting someone with the core business and find out how long they can rely on receiving a response when they have a need for it.
SAP's Johnston believes the answer depends on the strategy of the utility. Some utility companies aim to improve their customer service, reduce their cost of ownership, interface costs and system support costs, and offload a lot of their operating costs onto some of the customers for the customer self-service application. He argues, "Depending on the segment, you will know whether they are interested in upgrading or replacing their CIS." Deregulation also remains a factor. "I know deregulation is low, but still we have had some customers that are still moving ahead to prepare for deregulation even though they are in a non-deregulated state," he notes.
Mergers or acquisitions are another reason for upgrading or exchanging CIS software. "Companies that recently acquired other companies, with other IT solutions for example, may want to go to other platforms-either just one vendor or just one strategy in order to decrease redundancies they have and to harmonize the whole landscape they have to maintain," Wolf explains. Johnston agrees, noting that mergers and acquisitions are driving utilities to think about whether they should replace or merge their CIS systems into one platform. "We have several customers right now that are actually going through that," he notes. "They are merging and eliminating three-plus CIS applications into one application and rolling that out to their different divisions."
Goodman believes it is important for the utility company to have a plan in mind before making big changes. "ROI is highly influenced by the way that some utilities are managing their merger and acquisitions," he says. He finds utilities that are adopting the "banking model-pre-determining the specific systems and processes that will be the organization's standard, and then immediately transforming the merged organization to those standards"-are "enjoying significant economies of scale and accomplishing rapid financial benefit to the merger."
Self-help can work to a certain degree, as can sticking to an old-fashioned run-the-numbers approach. SAP's Johnston says upgrading CIS has two sides. One is the technical upgrade, which some of SAP's customers do themselves, reducing their costs. "The other side of that is the functional upgrade, so when they do the technical upgrade they want the benefit from the functionalities within certain areas of their business," he explains. But the upgrade still must be justified from a business case or an ROI approach, which is standard business protocol. And while the company uses the business case to justify the upgrade, it also uses some of the third-party service providers to help them understand and implement some of the new functionalities. "A lesson learned is that the upgrade needs to be very tight," Johnston says, and "if the scope of the upgrade is very well defined and measured, based on specific goals and requirements, then it is more successful than not."
But Excelergy's Craven believes in fixing only what needs to be fixed, and a utility often can find out what needs to be fixed by simply asking the customer. He points to a present-day emphasis on component replacement with the highest payback. He says that utility commissions are very cost-sensitive and time-sensitive. They no longer are willing to adhere to a six- or eight-year timeframe to implement new CIS, so utilities aim to replace components that have the highest return.
As an example, he looks to a utility's credit management system. Craven explains that in the past, credit management was handled in a very seamless way or in a very static way. "Today you may look at credit management and say, 'Well, I have a got a charge-off rate of X, and if I can cut that by half, then I can garner margin out of that,'" he explains. "So that is a very good place to go in and add a module that does a little bit better job at credit management."
Craven also points to complex rate scenarios. He says that five years ago complex rates really were not in vogue; a utility had three standard rates-commercial/industrial, residential and wholesale. But now a utility has time-of-use rates, and a whole series of complex commercial and industrial rates, which many of the old systems cannot support. There also are non-commodity products and services. Many utilities didn't really think of selling anything other than core commodities until just a few years ago. Now they are selling some real supporting non-commodity products and services to bundle those products and services.
Craven also looks to increased customer response for efficiency and customer satisfaction. The utility can't look at an address as a premise anymore; it has to look at the customer. What options does the customer want? A classic example is asking the customer when they would like to pay their bill-perhaps on the first of every month instead of on the 12th, which is when the utility reads the meter. Craven foresees a whole host of changes coming about. If the state then becomes deregulated, the company is prepared. Regardless, the company has a more satisfied customer.
But Goodman prefers to look at a bigger picture. He says that utilities need to find ways to actually transform their organization, to be more efficient, and to do more with less. "We've done quite a bit of research and have determined that updating or replacing a traditional system in isolation-just the CIS, just the work/asset management system, or just the workforce management system-can yield marginal efficiencies/improvements/benefits," he explains. But to achieve real transformation, a more holistic view of the organization must be achieved, and information flows and processes must be facilitated across all the traditional silos, he says. That overall service delivery management strategy yields significant levels of improvement in customer satisfaction, a reduction of operations/maintenance costs, increased system reliability, decreased cost of service delivery, and a better overall use of limited capital, Goodman concludes.
But Craven sees uncertainty. He believes utilities are not making wholesale CIS replacements because there is no clear direction on where the market is going. He believes that "until this market calms down-and I don't see that for 10 years-until there is a market model that is prevalent across this country, we are going to be in a state of flux."
Craven notes that utilities are being quite prudent right now, and not just with wholesale CIS replacements, but because it is impossible to predict which market model is going to win. He points to the ERCOT model, PJM model, and the 48 contiguous states each run in a different way. "Until FERC's RTO vision comes through and the underlying wholesale markets are in place, until the retail and/or regulated markets become fairly standard in migration and movement, utilities probably would not be prudent to say, 'I'm going to build a brand new XYZ, and spend five years doing it,'" he says. "Quite honestly, in five years you'd be facing a different set of issues."
North American CIS Market In Transformation
Deregulation is the stimulus for a larger CIS footprint.
By Dr. Zarko Sumic
The traditional integrated energy utility CIS functional footprint (see Figure 1) centered on revenue management, extending into customer relationship management, commodity management, and asset management areas just enough to support its primary meter-to-cash business process focus. Energy retail deregulation created unbundling and bifurcation of the distribution utility value chain, forcing companies to pursue either energy retail or distribution businesses. Two distinct sets of business drivers forced the CIS footprint to diverge, resulting in products with "CRM full" and "CRM light" functionality that met the needs of retail and network companies, respectively.
Leveraging deregulation as the main catalyst for legacy CIS replacement and addressing immediate market needs, vendors extended the functional footprint into the CRM space and created a new set of customer-centric CIS products. To address commodity risk exposure introduced by vertical unbundling, CIS vendors also extended the product footprint into the commodity management space. Network companies with no requirements to retain existing customers or acquire new customers mostly opted to stay within the perimeter of the traditional premises-centric CIS systems, eventually retrofitting them to support required retail market interfaces.
The virtual standstill of retail market restructuring and the consequent trend toward rebundling the retail and distribution businesses has created a misalignment between the current commerical off-the-shelf (COTS) CIS functional footprint and the requirements of most North American (integrated) distribution companies. This misalignment is the real culprit for the low CIS product demand among North American energy companies. Without deregulation as the main driver for customer centricity and improved energy product and service time to market, CIS products, currently offered on the market, provide regulated energy companies with only incremental performance improvements and cost reduction in customer care and billing-not enough to justify costly CIS replacement.
Integrated energy distribution companies require CIS products with functionality that will extensively expand into the asset management area (e.g., EAM, WMS, OMS, mobile field service), which will enable them to achieve significant performance improvement by optimizing complex business processes (e.g., service order management/scheduling and optimization). To achieve optimal utilization of the distribution asset (including loss minimization), energy usage information should be included in the asset optimization process (e.g., transformer load management). However, these functionalities should not be integrated into current COTS CIS products by inclusion on the data model level; that would create an even larger monolithic CIS footprint.
Driven by financial adversity, companies are reluctant to invest in large enterprise systems and are considering how to reach excellence by leveraging legacy IT investment.
In 2003 we witnessed a record-low demand for CIS products among Tier 1 energy companies in North America following the virtual standstill of retail deregulation and the disappearance of unregulated retail market demand for customer care and billing during 2001-2002. Burdened by untenable debt load and, in many cases, failed unregulated business ventures, energy companies have signed only three significant CIS contracts during the past 24 months. With high legacy CIS replacement costs (averaging $50 per customer), energy companies facing low credit ratings and reduced access to capital cannot make the return on investment (ROI) equation work. This is placing extreme pressure on vendors and forcing them to seek new opportunities by offering aggressive discounts or pursuing prospects in smaller mid-tier and municipal utilities markets.
Market dynamics and industry trade shows in 2003 reconfirmed following major trends in NA CIS market:
Scaling down: With North American Tier 1 markets virtually at a standstill, vendors (of both products and solutions) are starting to scale down and pursue municipal and non-energy utility opportunities. Although both markets have similar functional requirements (e.g., revenue, customer, and order management), significant differences in business drivers, technical infrastructures, and product implementation models-combined with complex governance in the mid-tier and public power markets-will force vendors to reassess their current go-to-market strategies.
In addition to extending preconfigured products to address specific CRM public-power market needs and multiservice billing requirements, vendors must focus on lowering total cost of ownership by providing delivery/implementation templates, hiding architectural complexity, and simplifying product maintenance support and operation requirements. An increased number of vendors in mid-tier markets will exert additional pressure on incumbent vendors, forcing consolidation and raising vendor viability concerns.
Componentization: To alleviate customers' buying reluctance and make their solutions more affordable, vendors continue to tout CIS product componentization, which can enable phased implementation or offer an ability to extend the lifetime of legacy systems by addressing main deficiencies (e.g., complex billing, credit collection, call center productivity). Marketed by vendors as the new modular approach, componentization is achieved by partially configuring and packaging a portion of the existing product, rather than re-architecting/modularizing products by breaking them into pieces that can collaborate in a composite application environment using service-oriented architecture.
When considering current offerings, users need to be aware of the shortcomings of pseudo-componentized solutions, such as complex integration issues, the difficulty of disabling legacy products' functionality, and increased product life-cycle costs.
Outsourcing: High costs and complex IT infrastructure continue to make customer care and billing frequent outsourcing candidates by energy companies focused on operational excellence. Despite the existence of numerous external service providers, low product maturity and tenuous financial models continue to be key reasons for low acceptance of externally sourced CIS solutions. Alliance Data Systems, the largest outsourcing provider in the customer care and billing space in energy, has reached leadership status via acquisitions rather than organic growth, and subsequently has numerous CIS platforms (e.g., Indus Banner, Excelergy, ConsumerLinx, Peace, Soluziona).
The new business transformation outsourcing (BTO) model touted by major IT service providers (e.g., Accenture, IBM BSC) introduces a new value proposition by taking a holistic view of the entire business process, including process improvement. However, its complexity, high risk, and long-term proposition make BTO applicable only to relatively mature energy organizations, making companies that most need it the least viable candidates. Wipro is a leading outsourcing and offshore development vendor that has infused its energy domain expertise by acquiring the AMS energy practice. Wipro offers a wide spectrum of outsourcing options for customer care and billing, ranging from operation of the sunset product to full BTO.
Process integration: To achieve operational efficacy after harvesting the low-hanging fruit of cost reduction in customer care and billing, CIS products will need to integrate the complex business processes that cross the borders of several enterprise applications (, CRM, ERP, EAM). Depending on the market, vendors are focusing on business process integration that requires incorporation of the functions within the enterprise CRM systems (, Excelergy/Siebel CustomerPoint) and commodity management environments. In a regulated segment, to support the needs of energy companies that manage both customers and distribution assets, the focus is on integration with EAM (, Indus). To support energy companies' quests for operational excellence, CIS products will need to go beyond current integration strategies (, user exits, API, enterprise application integration) and create an integration infrastructure that will support composite application environments capable of integrating business processes by using a combination of native and external functions invoked as Web services (, SAP NetWeaver, Siebel Universal Application Network).
CIS Trends: A Snapshot
According to Harry Debes, CEO of SPL, the need for CIS systems is driven by:
- Need for cost efficiencies in all markets (this is the main driver in the United States)
- Regulatory compliance in all markets
- Competitive market requirements-the ability to differentiate from competitors with products and services (e.g., ability to offer product and services tailored to the individual business in the C&I market; the ability to make attractive offers to retail customers and service them efficiently)
Companies are looking for these types of solutions:
- True product - a commitment to development processes, commitment to upgrade, commitment to support, commitment to staying with current tech trends
- Low cost over a 5-10 year period
- Fast implementation (often 3 months)
- Low risk
- Ability to maximize existing investments, hence frequent requirement for "fixes" (or component solutions)
Changes compared with two years ago include:
- Increased focus on cost efficiencies rather than innovation, particularly in the United States, where deregulation has mostly come to a halt
- More practical approaches to system requirements
- A requirement for cheaper, faster project
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