ECM
Achieving financial returns from increasing customer satisfaction.
Every utility focuses on effectively managing infrastructure and capital assets. However, one important balance sheet asset may be overlooked and under-leveraged-the customer.
Most utilities believe that customers are "priority one," with customer satisfaction as a key performance indicator. These utilities define customer satisfaction as critical to competent service delivery. However, utilities that define customers that way go beyond basic customer relationship management (CRM) capabilities. They leverage customer satisfaction as a strategic asset with Wall Street investors and regulatory agencies-positioning customer satisfaction as a portfolio component of strong performance.
Using customer lifetime value as a guide and business process outsourcing as an advantage, utilities can enhance customer profitability without shouldering the cost and risk of internal development. Whether your utility operates in a regulated or competitive environment, customer satisfaction is a strategic asset that provides return on asset (ROA) results.
Influences on Asset Return
In managing infrastructure and capital assets, cost-to-serve reductions and return on investment are key drivers. Investment in new technologies, information technology (IT) integration, and process enhancement is balanced by capital-risk management, commodity hedging, and shareholder return.
However, while operational efficiency is key to protecting margins, cost savings and technology improvements have their limits, with quantum leaps in productivity decreasing over time. Shareholder return may be inhibited by the need for modernization and reliability investment, debt, depressed asset prices, commodity price volatility, and credit ratings.
Additionally, if the Public Utility Holding Company Act (PUHCA) is repealed, utility infrastructure and capital assets may be pressured by renewed merger and acquisition (M&A) activity, foreign investment, and asset buying and selling. Some utilities may go as far as choosing privatization to gain access to capital. (Tucson Electric Power is slated to gain $1.5 billion for operating and capital improvements through privatizing its assets.)
If PUHCA repeal goes through, the traditional cost plus/guaranteed rate of return financial model will give way to more sophisticated Wall Street asset evaluation and financial measurement. It makes sense that strongly performing utilities with high customer satisfaction will have an edge.
Customers as a Balance-Sheet Asset
Achieving financial returns from increasing customer satisfaction, leveraging customer lifetime value for increased profitability, and using customer equity for influence and gain turns customers into a balance-sheet asset.
For instance, being highly rated in customer satisfaction against other utilities plays well with Wall Street investors, as customer satisfaction is often an indicator of strong performance, increased stability, and greater profitability. This operational excellence may influence better credit ratings and a lower cost of capital.
In addition, some state regulatory agencies are tying customer satisfaction to rate-case allowances. "In terms of customer satisfaction, regulators are becoming more aware of defining and tracking business processes within utilities such as credit and collections, call center/Internet interaction, pay arrangements, connects/disconnects, and service restoration," says Jon Brock, chief operating officer of UtiliPoint International, a research-based consulting company that serves the utility and energy industry.
In other jurisdictions, strong customer satisfaction rankings have been a key driver in allowing utilities the freedom to offer optional pricing programs.
Implementing Customer Lifetime Value as a Guide
When customer satisfaction is considered an asset, this perspective fundamentally changes customer-service drivers and influences resource investment, product and service offering, and how customers are valued over time.
An example is General Motors' Cadillac division. Like many American car manufacturers in the 1980s, Cadillac realized it had to become customer-centric to compete successfully against high-end imports. Evaluating customer value, Cadillac quantified that a loyal buyer could produce $320,000 in revenue over his or her lifetime in repeat purchases. This perception of the customer as a strategic asset influenced GM's design decision-making.
Puget Sound Energy (PSE) is in the early stages of defining customer value through segmenting customers based on needs, types of product and service offerings, and purchasing power. Using segmentation, a component of customer value, PSE seeks to understand how best to provide services to its customer base, as well as mechanisms for accelerating customer value and satisfaction.
"At Puget Sound Energy, we try to look at everything we do in relation to how it can improve customer satisfaction," says Darren Brady, vice president of customer services for the Bellevue, Wash., gas and electric provider. "The value we create for our customers through our product and service offerings, and the value we receive from our customers for these offerings are key components for success in our industry going forward. This concept is relatively straightforward, but it is the execution of this, and the balance between the service, the economics, and customer satisfaction that proves difficult. It is those companies that architect a strategy that optimally balances these three factors who will put themselves in a leadership position going forward."
To discern customer value, many Fortune 500 companies employ customer lifetime value (CLV) methodology. CLV is the sum of the discounted net contribution margins over time of the customer-i.e., the revenue provided to the company less the firm's cost associated with maintaining the relationship with the customer.
CLV allows an organization to approximate the revenue or cash flow of its customer base, assess the overall "health" of its customer portfolio, identify high-value customers, and/or make informed choices about service offerings-even in regulated environments. Based on this model, the customer can be viewed as an asset to the firm.
Similar to the balanced-scorecard approach used to improve quality and profitability, CLV benchmarks the profitability of customer assets by segments.
Some of the downstream benefits of this type of analysis include identifying:
The highest and lowest value customers; The most effective product and service offerings; Critical business processes that affect customer satisfaction; Service levels that need improving; New initiatives that increase the value of the customer base; and The types of technology or services to deploy. However, implementing customer lifetime value can be complex. Few utilities know how much business they do with a customer today, much less what to expect in the future, due to being organized around meters and service delivery, not customers.
Even when based on a mandate from upper management, many of the actions needed to calculate CLV require a significant amount of time, money, and shifts in organizational values. Additionally, business processes that are trapped in silos in disparate functional organizations prevent the utility from:
Gaining real-time access to accurate customer data; Integrating customer service and billing records that drive CLV calculations; Accurately accounting the total value of each relationship; Effectively managing customer functions in an integrated way; and Exploiting the future business it could do with each customer. Business Process Outsourcing as Customer Asset Enabler
To address customers as a strategic asset beyond the commodity service, some utilities are collaborating with skilled billing and customer-care outsourcers to streamline and automate business processes that affect customer satisfaction-hence customer asset value.
UtiliPoint International's recently completed survey of outsourcing in 305 utilities in North America notes, "Originally using financial gains to justify outsourcing, utilities are increasingly stating business process improvement as a key factor in outsourcing a portion or all of a certain business process."
Utilities benefit from service companies that go beyond passive outsourcing to improve business processes. Through their expertise with customer-facing processes across the utility's entire revenue cycle, business process service providers have experienced the upstream and downstream effects of automating business processes.
They recognize that high-billing exceptions affect statement accuracy, which then drives up call-center activity that then results in late payments. By having access to the entire revenue cycle, versus isolated functions, business-process providers can streamline and automate these interconnected processes in an integrated manner.
These process improvements allow the utility to capture a lower cost of operation and higher internal efficiency. However, from a customer asset perspective, the utility has driven up customer satisfaction by reducing errors, decreasing cycle time, and increasing staff effiencies.
Engaging Customer 'Touch Points'
Every second of every day, utilities touch hundreds of customers. When customers are treated as an asset, every "touch point" presents an opportunity to know the customer better, to improve satisfaction through accurate and convenient transaction handling, and to increase profitability through cross-selling, up-selling, and programs tailored to their commodity needs.
By leveraging those specific BPO providers whose expertise lies in optimizing customer touch points, utilities are able to use their customer data more effectively due to real-time access, integrated transaction systems, and data analytics that provide business intelligence.
Meanwhile, many utilities recognize that the rate-case-driven, guaranteed-return financial model ended with the advent of the 21st century. New technologies, new economics, new investment players, and customers that are more demanding have changed the rules.
In the next few years, utilities that couple deep knowledge of customer lifetime value with high customer-satisfaction rankings and increased profitability will become the new powerhouses. Like their commercial counterparts who are rewarded with Wall Street confidence for high return on customer assets, these utilities will be seen as better positioned to exploit future opportunities.
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