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Introduction
 
Retail cost-to-serve has become a key focus for European energy suppliers to maintain margins. However, for many utilities understanding the relationship costs have from one part of the business to another remains unknown. This report uses Datamonitor's cost-to-serve model to provide cost-to-serve per customer, demonstrate these relationships, provide benchmarks and best practice opportunities.
 

 
Scope
 
Small, Medium and Large players are benchmarked against Datamonitor’s Adequate Practice Assessment (APA)
 

 
Datamonitor has used an inductive approach to identify those levers most able to deliver a 10% cost-to-serve improvement
 

 
Datamonitor has used the cost-to-serve model to deduce benefits associated with four best practice opportunities
 

 
A like for like comparisons to the UK average adds understanding but is not a fair comparison
 

 
Report Highlights
 
Scale impacts on costs when comparing Large, Medium and Small European suppliers, with a €4.82 difference between a Large and a Small supplier
 

 
AMR, staffing and number of bills sent are the key sensitive KPI levers that can deliver a 10% saving in cost-to-serve
 

 
Smaller European suppliers can see costs fall by €109k by shifting 10% of their cheque payment customers to paying online and direct debit
 

 
Reasons to Purchase
 
Quantify European cost-to-serve and examine its breakdown
 

 
Understand which cost drivers impact on cost-to-serve and by what degree
 

 
Benefit from the reports detailed examination of four best practice opportunities and what KPIs will be effected
 

TABLE OF CONTENTS
 
CHAPTER 1 EXECUTIVE SUMMARY 3
 
Determining cost-to-serve requires a clear structure in order to set precise definitions that enable accurate measurement 3
 
Datamonitor’s cost-to-serve model defines a comprehensive set of KPIs, drivers, and cost categories 4
 
The level of confidence for European cost-to-serve data increases when undergoing a three stage process of normalisation 5
 
Scale, maintenance costs, billing and staffing in the contact centre drive the variance between Small, Medium and Large players 5
 
Scale impacts on costs when comparing Large, Medium and Small European suppliers, with a €4.82 difference between Large and Small 6
 
AMR, staffing and number of bills sent are the key sensitive KPI levers that can deliver a 10% saving in cost-to-serve 7
 
Datamonitor has used the cost-to-serve to deduce benefits associated with four best practice opportunities 7
 
A like for like comparisons to the UK average adds understanding but is not a fair comparison 8
 
CHAPTER 2 COST-TO-SERVE FRAMEWORK AND MODEL 22
 
Cost to serve has increased in importance as fuel costs have risen 22
 
Determining cost-to-serve requires a clear structure in order to set precise definitions that enable accurate measurement 22
 
Datamonitor’s cost-to-serve framework defines a comprehensive set of KPIs, cost drivers, and cost categories 23
 
This report uses Datamonitor’s complete model of cost-to-serve, leveraging its performance measures, KPIs and cost drivers 24
 
CHAPTER 3 NORMALISATION 25
 
The level of confidence for European cost-to-serve data increases when undergoing a three stage process of normalisation 25
 
Determining a European cost-to-serve figure encounters a range of disparate problems when normalising data 25
 
Problems of normalisation 25
 
Datamonitor solutions to normalise data 26
 
Problems of normalisation was overcome by building a cost inflator and deflator tool and segmenting companies by size to achieve a Stage 1 and borderline Stage 2 normalisation 27
 
Currencies and conversion rates 27
 
With varying sizes of companies, does one take an average size for all, or can one segment suppliers? 27
 
The data is company specific, therefore which companies does one choose? Does the coverage includes all European markets or only liberalised residential energy markets? With over 100 European utilities, if one can not survey all of them how can a market average be determined? 27
 
Total labour costs are highest in Denmark, which also has the highest proportion of salary and wages costs. When indexed against the EU 15 average only Spain has a lower total labour and wages and salary costs 28
 
When inputting total labour costs by country there is a €11.95 difference between Denmark, the highest and Spain, the lowest 30
 
Average customer accounts range from 232k for Small suppliers to 4.91m for Large suppliers when assessing cost-to-serve across the basket of Energy companies researched 31
 
CHAPTER 4 BENCHMARKS FOR SMALL, MEDIUM AND LARGE PLAYERS 32
 
Scale, maintenance costs, billing and staffing in the contact centre drive the variance between Small, Medium and Large players 32
 
Small, Medium and Large players are benchmarked against Datamonitor’s Adequate Practice Assessment (APA) 32
 
Scale impacts on costs when comparing Large, Medium and Small European suppliers, with a €4.82 difference between Large and Small 33
 
Contact centre and billing drive the €8 differential between a Small suppliers cost-to-serve against Datamonitor’s APA 34
 
Maintenance costs form the majority of European suppliers’ cost-to-serve 34
 
Contact centre staffing is the largest individual cost component of cost-to-serve for the three supplier groupings 36
 
The widest variation in costs between small to large European suppliers is found in the billing and contact centre departments 37
 
Datamonitor’s appraisal of operational performance is based on 4 performance categories 37
 
Across continental Europe metering costs are controlled by regulation and prices have not been driven downwards from higher switching activity 39
 
Billing problems exists in inflexible systems, but low switching has not made this critical to action. 39
 
More frequent payment cycles has meant higher payment costs and the lack of penetration of ‘other’ payment options has prevented price pressures on banks to lower their rates 40
 
New technology and call centre development has prevented a widening of costs between Small and Large European suppliers 41
 
CHAPTER 5 UNDERSTANDING COST-TO-SERVE LEVERS 43
 
Datamonitor has used an inductive approach to identify those levers most able to deliver a 10% cost-to-serve improvement 43
 
Undergoing sensitivity analysis on Small, Medium and Large suppliers KPIs shows that there are four ways in which to reduce cost-to-serve by 10% 43
 
AMR, staffing and number of bills sent are the key sensitive KPI levers that can deliver a 10% saving in cost-to-serve 45
 
Billing call length volumes and cost of meter maintenance are the key cost drivers in delivering a 10% saving for Large a supplier’s cost-to-serve 46
 
For a Large supplier the KPI metric most sensitive to a 10% change is the number of estimated first bills sent to regular customers each year 47
 
CSA average annual wages are the most sensitive to a 10% cost reduction for a Large supplier across cost drive metrics 48
 
Medium scale suppliers show markedly different sensitivities to change in underlying cost drivers 49
 
CHAPTER 6 BEST PRACTICE OPPORTUNITIES 50
 
Datamonitor has used the cost-to-serve to deduce benefits associated with four best practice opportunities 50
 
Introducing AMR for Large European suppliers cuts opex by almost a third through lower metering and contact centre costs 51
 
Introducing an AMR penetration rate of 50% reduces the cost-to-serve by €46.4m, a 26.9% saving overall 52
 
There is a €7.6m overall maintenance costs saving from removing standard meters maintenance costs and accounting for AMR maintenance costs 54
 
AMR has obvious metering opex benefits, from removing the need for physical reads and staffing resource to support this 55
 
The level of AMR penetration reduces the number of estimated bills generated 56
 
As AMR reduces customer queries regarding physical meter reads and estimated bills thus the number of billing and metering CSA’s falls by 740 agents 57
 
Medium sized suppliers can reduce cost-to-serve by 1.0% by decreasing €0.01 on 3 core billing cost metrics and increasing first time bill payers by 5 percentage points 61
 
Increasing ‘payment without reminders’ and reducing bill related costs by €0.01 reduces the cost-to-serve by €0.46m, a 1.01% saving overall 62
 
The largest savings are gained through reduced postage and packaging costs, bill execution and bill staffing levels 64
 
This reduces by the total number of bills sent out in a year by 344,673 and lowers billing staff required 65
 
Prompter payment would reduce the overall number of telephone contacts and thus the cost of calls 66
 
Smaller European suppliers can see costs fall by €109k by shifting 10% of their cheque payment customers to paying online and direct debit 68
 
Shifting payment online and to direct debit would deliver an overall cost saving of €109,275, €0.47 per customer – a saving of 1.28% 69
 
The three largest savings come under ‘Total cost of wages for call centre agents’, ‘Total cost of credit staff wages’ and ‘Total cost of cheque based payment processing’ 71
 
Redistributing the method of payment metrics reduces the ‘Total number of bills sent’ by 27,698 72
 
The number of direct debit transactions would increase by 9.43% while the number of cheque transactions would fall by 55.95% 73
 
Consumer contacts would fall by 2.43%, lowering telephone costs by €18,304 74
 
Medium sized European utilities would realise a 1.36% cost saving from increasing call automation by 4 percentage points 77
 
A 4 percentage point increase in call automation reduces costs by €614,290, a 1.36% saving overall 78
 
80% of the total savings are attributed to a reduction in contact centre FTEs 80
 
Increasing automated calls by 4 percentage points would lower CSA staffing by 25 agents 81
 
CHAPTER 7 COMPARISON WITH UK COST-TO-SERVE AVERAGE 83
 
A like for like comparisons to the UK average adds understanding but is not a fair comparison 83
 
The following section investigates UK performance against European suppliers’ performance in each of the four service functions 84
 
The list of key metering performance indicators range from metering visits per day to percentage of switching read failure rates 84
 
A Large suppliers performance in the key metering performance measures matches the UK average, but for optimisation rates and failed in-cycle reads 85
 
Metering recommendations for European suppliers focus on increasing self meter reads to reduce service related calls in the short term and AMR in the long term 85
 
The list of key billing performance indicators range from total number of bills sent to percentage of billing inaccuracies 86
 
A Medium suppliers billing performance outperforms the UK average due to fewer estimated bills 86
 
Large or Small, large scale CIS billing systems or off the shelf system, suppliers need to get vendors to deliver the efficiencies they promise to achieve lower cost-to-serve 87
 
The list of key payment performance indicators range from managing non-paying customers to the type of payment method available 88
 
Small suppliers outperform the UK average due to a larger proportion of customers paying through their bank, but frequency of payment pushes up costs 89
 
Higher customer numbers paying via their bank indicates lower potential costs, but high merchant fees and customer apathy to online payment has maintained higher costs 89
 
The list of key contact centre performance indicators range from the total number of calls to the percentage of calls automated 90
 
Datamonitor’s research provides recommendations on improving contact centre performance 92
 
CHAPTER 8 APPENDIX 93
 
Datamonitor set a number of additional assumptions to ensure coverage and reliability of determining European cost to serve 93
 
Future readings 94
 
SPP writing team 94
 
How to contact experts in your industry 95
 

 

 
LIST OF TABLES
 
Table 1: Datamonitor’s rating of operational performance for Small, Medium and Large European players 38
 
Table 2: AMR scenario – Costs savings across 4 core segements of metering, billing, payment and contact centre 53
 
Table 3: Metrics impacted by introducing AMR for 50% of power customer base* - metering 55
 
Table 4: Metrics impacted by introducing AMR for 50% of power customer base* - billing 56
 
Table 5: Metrics impacted by introducing AMR for 50% of power customer base* - contact centre 57
 
Table 6: Bill cost reduction scenario – Costs savings across 4 core segements of metering, billing, payment and contact centre 63
 
Table 7: Metrics affected by shifting customer paying on first bill for MODEL_Medium, from 70% to 75% and a reduction of €0.01 for Postage and packaging cost per bill, Bill execution cost per bill (paper etc) and Capital cost of consolidating the billing system per customer - Billing 65
 
Table 8: Metrics affected by shifting customer paying on first bill for MODEL_Medium, from 70% to 75% and a reduction of €0.01 for Postage and packaging cost per bill, Bill execution cost per bill (paper etc) and Capital cost of consolidating the billing system per customer – Contact centre 66
 
Table 9: Payment change scenario – Costs savings across 4 core segements of metering, billing, payment and contact centre 70
 
Table 10: Metrics affected by shifting ‘other payments’ to direct debit and online payment methods - billing 72
 
Table 11: Metrics affected by shifting ‘other payments’ to direct debit and online payment methods - payment 73
 
Table 12: Metrics affected by shifting ‘other payments’ to direct debit and online payment methods – contact centre 74
 
Table 13: Contact centre change scenario – Costs savings across 4 core segements of metering, billing, payment and contact centre 79
 
Table 14: Metrics impacted by increasing the proportion of automated calls by 4 percentage points 81
 

 

 
LIST OF FIGURES
 
Figure 1: Framework of Datamonitor cost-to-serve model 4
 
Figure 2: Three stages of normalizing European data 5
 
Figure 3: Cost-to-serve per customer for the Small, Medium and Large European suppliers and Datamonitor’s Adequate Practice Assessment (APA) 6
 
Figure 4: Change required in lead KPIs to deliver a 10% decrease in cost-to-serve 7
 
Figure 5: Framework of Datamonitor cost-to-serve model 23
 
Figure 6: Illustrative example using audit tracking tool in excel to demonstrate interdepencies across performance measures, KPIs and cost drivers 24
 
Figure 7: Three stages of normalizing European data 25
 
Figure 8: Total labour costs and wages and salary costs for the 8 liberalised energy markets, 2004 28
 
Figure 9: Total labour costs and wages and salary costs for the 8 liberalised energy markets indexed against EU 15 average, 2004 29
 
Figure 10: Impact of Labour deflator to on Medium supplier cost-to-serve per customer across the 8 European liberalised markets 30
 
Figure 11: Total size of accounts and average number of electricity customers for Small, Medium and Large European suppliers, 2005 31
 
Figure 12: Cost-to-serve per customer for the Small, Medium and Large European suppliers and Datamonitor’s Adequate Practice Assessment (APA) 33
 
Figure 13: The relative cost-to-serve per customer for the Small, Medium and Large European suppliers against Datamonitor’s Adequate Practice Assessment (APA) 34
 
Figure 14: Share of overall costs broken down by labour, non-labour and maintenance costs 35
 
Figure 15: Share of overall costs broken down by sub component 36
 
Figure 16: Cost range of sub-components of cost-to-serve of Small, Medium and Large European suppliers 37
 
Figure 17: Change required in lead KPIs to deliver a 10% decrease in cost-to-serve 45
 
Figure 18: Change required in lead cost drivers to deliver a 10% decrease in cost-to-serve for a Large supplier 46
 
Figure 19: Change in cost-to-serve from a 10% change in KPI 47
 
Figure 20: Change in cost-to-serve from a 10% change in cost driver 48
 
Figure 21: Change in cost-to-serve from a 5% increase and 5% decrease on a Large and Medium suppliers cost drivers 49
 
Figure 22: AMR scenario - Actual and percentage change of overall, metering, billing and contact centre costs 52
 
Figure 23: AMR scenario - Total cost differential between original and new final values for MODEL_Large 53
 
Figure 24: Breakdown of cost savings when introducing the cost of running AMR for a Large supplier from 0% to 50% 54
 
Figure 25: Bill cost reduction scenario - Actual and percentage change of overall, billing and contact centre costs 62
 
Figure 26: Bill cost reduction scenario - Total cost differential between original and new final values for MODEL_Medium 63
 
Figure 27: Breakdown of cost savings on a increased performance on % of customer paying on first bill for MODEL_Medium, from 70% to 75% and a reduction of €0.01 for Postage and packaging cost per bill, Bill execution cost per bill (paper etc) and Capital cost of consolidating the billing system per customer 64
 
Figure 28: Payment change scenario - Actual and percentage change of overall, billing, payment and contact centre costs 69
 
Figure 29: Payment change scenario - Total cost differential between original and new final values for MODEL_Small 70
 
Figure 30: Breakdown of cost savings from a 10 percentage point reduction in cheque payment, with a 5 percentage point increase in DD and 5 percentage point in online payment 71
 
Figure 31: Contact centre change scenario - Actual and percentage change of overall and contact centre costs 78
 
Figure 32: Contact centre change scenario - Total cost differential between original and new final values for MODEL_Medium 79
 
Figure 33: Breakdown of cost savings from increasing the proportion of automated calls by 4 percentage points 80
 
Figure 34: Comparison of key metering performance measures for European Large against the UK average 85
 
Figure 35: Comparison of key billing performance measures for Medium against the UK average 87
 
Figure 36: Comparison of key payment performance measures for Small against the UK average 89
 
Figure 37: Comparison of key contact centre performance measures for Large against the UK average (1) 91
 
Figure 38: Comparison of key contact centre performance measures for Large against the UK average (2) 91