A new analysis by consultants Arthur D Little on the cost to serve per customer in the utilities sector – specifically the gas and power markets – has highlighted some key issues of interest to the UK water sector, particularly in the run-up to the opening of the competitive marketplace in 2017.

The Energy and Utilities Benchmarking Study flags up significant disparities on cost to serve per customer in gas and power markets.

The business of selling energy to retail consumers has been completely transformed as power and gas retail markets have been liberalizing in Europe in the past decades, the analysis says.

The utilities have launched new channels and ways to interact with their customers, with new products and services developed in many countries. Having an efficient operation is a “must-have” in the residential segment, particularly in a context where the underlying demand growth is modest or non-existent.

The consultancy says that the lessons and conclusions from its 2014 power & gas retailers’ benchmark of European incumbents indicate that there is a long way to go for many companies in improving their costs.

The study says that it is not uncommon to identify a difference in costs per customer of 35€ between the best and worst performers. Key findings contained in the analysis include:

• Economies of scale are relevant for retailers, particularly in the most massive segments. Most of the key activities in their processes gain from spreading their costs among a larger customer base – from building brands, putting in place new channels or IT systems.
• Efficiency of operations matters - acquisition costs represent about 25-30% of the total. Two main levers are found to have an impact: mix of channels used and unitary per channel costs.
• Cost to serve represents for most companies half the cost base and illustrates the potential for improvement in most companies. These are components that receive most of the impact of regulation.
• Great differences in overall productivity - in many companies overheads represent about a quarter of the total costs, areas where the biggest differences can be found. From one company to another there are factors of x5.
• Notable differences in productivity of total personnel - companies have an average of 14 employees per 100.000 customers but best to worst performer varies by a factor of 6.
• IT spend reflects a stable percentage of the cost base, suggesting that more efficient companies are also more efficient at IT – in demand management, in project management as well as in the structuring of its architecture.

The analysis concludes that in some markets, good retail margins might be enough to pay companies’ costs regardless of whether they are in the best performing group or not but says that this situation might not last.

It points out that most of the companies involved in the benchmark are local incumbents, meaning  that they have “followed a journey since the regulated days”, commenting:

“In this journey each one of them has had to invest in new IT systems and tools, put in place marketing and sales departments, create new products and offering and -in the current era of digitalization- build up new channels and find new ways to compete.”

The study also says that acquisition costs “tend to sky-rocket” when customer churn rates begin to grow and suggests that companies whose churn rate is above their new customer acquisition rate tend to have very high acquisition costs, with managers forced to use ever-more expensive channels to maintain their market share.

The benchmark finds that companies that lose market share tend to have acquisition costs that are 2.3x higher than for companies that are growing concluding that “there could not be a more clear case for companies to invest in the loyalty of their customers.”

"New entrants develop new business models without any legacies"

Finally, commenting on new entrants coming into the sector, the study says:

“In the current competitive context the number of new entrants is growing every day. Most of them develop new business models, without any legacies, and are born focused, with a segment and few products in mind. Most, if not all, are digital since the beginning or with organizations that as soon they reach a critical mass, they’ll become hyper-productive.”

Click here to download the Energy and Utilities Benchmarking Study