Shaping the right experience: The customer conundrum in the utilities industry
As the U.S. utilities industry continues to operate in a lower-growth cycle, it is also dealing with growing costs, stagnating demand, and regulatory pressure to keep rates stable. Meanwhile, getting and keeping customers is quickly becoming more expensive. Developing a customer experience strategy starts with this vision of the right customer experience. This vision will define the optimal operating model of the customer-facing organization as well as the high-priority activities to focus on.
Shaping the right experience The customer conundrum in the utilities industry
About the authors
Dallas Donald Dawson Partner +1-214-746-6503 donald.dawson @strategyand.pwc.com Tom Flaherty Partner +1-214-746-6553 tom.flaherty @strategyand.pwc.com Todd Jirovec Partner +1-214-746-6525 todd.jirovec @strategyand.pwc.com Earl Simpkins Partner +1-214-746-6571 earl.simpkins @strategyand.pwc.com
DC Joseph Vandenberg Partner +1-703-682-5710 joseph.vandenberg @strategyand.pwc.com Houston Mark Hoffman Senior Principal +1-713-650-4171 mark.hoffman @strategyand.pwc.com
Earl Simpkins is a partner with Strategy& based in Dallas. As part of the firm’s energy, chemicals, and utilities practice, he specializes in helping companies address strategy and operational issues, including planning and performance, business transformation/performance improvement, customer operations, mergers and acquisitions (including merger integration), and supply chain operations. Josh Stillman is a senior associate with Strategy& based in Dallas. As part of the firm’s energy, chemicals, and utilities practice, he specializes in helping companies with corporate strategy, business transformation, and enterprise planning.
Utility companies in the United States still face mounting pressures. As the industry continues to operate in a lower-growth cycle, it is also dealing with growing costs, stagnating demand, and regulatory pressure to keep rates stable. Meanwhile, getting and keeping customers is quickly becoming more expensive — utilities are facing a customer conundrum. Consumers have become accustomed to a certain level of service from other industries, but utilities haven’t kept up. For years, consumers have been satisfied with stable power costs and avoiding power outages, but now they demand better and more tailored service. Whether large or small, regulated or unregulated, utilities must ask themselves how they will define the right experience for their customers, balancing customer needs and financial limitations. Developing a customer experience strategy starts with this vision of the right customer experience. This vision will define the optimal operating model of the customer-facing organization as well as the high-priority activities to focus on. Strategy&’s framework for developing a customer strategy provides utility companies with the steps necessary to meet their customer experience goals.
The customer experience challenge
Utilities are facing a consumer conundrum. Customer expectations for more and better service are growing, but so are utilities’ cost pressures. Although there are some ways to improve customer service while also being more efficient, these two requirements can be at odds with each other. Whether you are a regulated integrated utility pondering how regulators will value higher customer-related spending to achieve higher satisfaction levels, or an unregulated retail energy provider fighting to differentiate yourself from your competitors in order to capture market share, the responsibility for meeting customer needs comes with two questions: How much customer service is enough, and what should it cost? Consumers have become accustomed to a certain level of service from other industries, such as their favorite e-tailers. Some regulated utilities, however, have been lagging behind, likely because they can’t afford to spend money solely to improve customer satisfaction levels. Unfortunately, they are still forced to compete with the various engagement channels seen in more competitive environments — and these channels are setting (or resetting) customer experience expectations. For years, utilities have been asked merely to keep the lights on and power costs stable, but now customers want better responsiveness, along with services targeted to their specific needs — from programmable thermostats to “smart meters” that help them better tailor their electrical usage. They want a utility to act like their partner. Meeting these needs requires more resources, which often means a higher cost.
How much customer service is enough, and what should it cost?
Unfortunately, the industry is currently moving through a low-growth cycle. As regulators hold the ground on rates to protect the customer in tough economic times, costs continue to escalate as demand has stagnated. Costs related to getting and keeping customers have been growing the fastest. Based on recent data from utilities, customer costs represent 9 percent of total nonfuel operating costs and have been increasing an average of 6 percent per year over the last 10 years, a rate three times higher than the 2 percent growth in other nonfuel operating costs (see Exhibit 1).
Exhibit 1 Regulated electric nonfuel O&M cost trend
US$ in billions 300 250 200 150 100 50 0 Other nonfuel 2% O&M costs Customer costs 2003–12 CAGR 6%
Note: Customer costs include customer account expenses, customer service expenses, informational expenses, and sales expenses. Source: Federal Energy Regulatory Commission (FERC) Form 1
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
As we look across the utilities industry, it is clear that there are multiple paths forward in the balancing act between cost and service. Utility cost and service performance is all over the map (see Exhibit 2). Some utilities have high customer satisfaction ratings, but seem to spend more to get them (“customer-motivated”). Others are able to enjoy the same level of customer satisfaction, but at a lower cost (“best-in-class”). Some have chosen the low-cost route at the expense of customer service (“lean”), while others are behind in both cost and customer satisfaction (“laggards”). A given utility’s business model plays a key part in how the company faces decisions regarding the level, capabilities, and cost of its customer experience. Regulated utilities must meet certain agreed-on performance standards or face potential sanctions from regulatory agencies. Concurrently, if the utility does not provide the experience customers are looking for, someone else will and the utility will find itself losing customer “share of mind” and, ultimately, revenue. Companies in deregulated markets leverage customer experience as a source of competitive advantage as they seek to increase retention and reduce customer churn. In the end, utilities should be asking themselves if they want to be a premium provider with great customer service and a portfolio of add-on services, or a bare-bones provider with the lowest overhead. There is no one right customer experience for the industry. The best customer experience offering will depend on the specifics of the company’s strategy, its business model, and the environment in which it operates. In other words, a company must tailor its customer strategy to its own realities.
There is no one right customer experience for the industry.
Exhibit 2 Custom cost and service matrix for major U.S. utilities1
Total = 89 companies
680 670 660
2012 Customer service index2 Max Score = 1,000
650 640 630 620 610 600 590 580 570 560 550 0
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
160 170 180 190
2011 Cost-to-serve per customer is US$3 Utilities with electricity customers exceeding 125,000.
As rated by J.D. Power and Associates, 2012 Electric Utility Residential Customer Satisfaction Study.
Cost-to-serve includes account expenses (less uncollectible amounts), customer service expenses, and sales expenses.
Source: FERC, J.D. Power and Associates
Defining the customer experience
Before utilities can determine how to develop the ideal customer experience, they must decide what that term means to them; customer experience means different things to different industries. Take e-commerce as an example: In the early days, customers were happy to have the convenience of shopping from their couch, have an infinite selection of products at their fingertips, and pay lower prices than could be found at the mall. As the e-commerce market has evolved, however, customers expect benefits such as free shipping, free returns, detailed product information, responsive customer support, and intuitive and easy-to-use shopping interfaces. For power companies, the customer experience is defined a different way. At a minimum, customers expect reliable power to keep their air conditioners blowing in the heat of summer, or keep their power on in the middle of a storm. Some customers want better information on their energy use, some want help with energy efficiency improvements, some want to learn how they can become “green,” and some want to pay their bills using their cell phones. The needs vary tremendously based on the individual customer. Sometimes customer needs extend beyond the energy itself. For example, a high-end programmable thermostat created by Nest has enjoyed noticeable success in the home energy device market. Sure, Nest provided a way to reduce energy use and better optimize home air-conditioning use, but it also gave households a cool-looking gadget and an app for controlling home temperature through a mobile phone. The experience is not just what customers get, but how they feel. Security companies, such as ADT, offer similar services — for example, by bundling remote-controlled and programmable thermostats with home security packages.
The experience is not just what customers get, but how they feel.
Part of the feeling of the experience is how the customer interacts with the company. Do customers want the power company to be knowledgeable and responsive when they call it, but leave them alone otherwise, or do they want the company to proactively reach out to describe what products and services it offers? Is it more important to customers to know a serviceperson or to experience an intuitive interface when they go to the utility’s Web page? Do they want one-stop shopping or are they happy to go to several different vendors to fulfill their energy-related needs? Indeed, there is no one right customer experience because customer needs are not homogenous. What one set of customers wants can differ significantly from what another set of customers prefer. While defining the ideal experience for the customer is the ultimate goal, it must be balanced with what a company is willing, and able, to provide.
Developing the customer strategy
Once a given company decides what customer service means for its business, the work of developing a customer strategy begins. Customer strategy not only sets the direction for the organization, but also defines the capabilities and skill sets required to pull off a cultural transformation related to the customer experience. An effective customer strategy must answer four questions (see Exhibit 3).
Exhibit 3 Customer strategy framework
Establishing our purpose
What do we do?
Defining our blueprint for success Embedding our management framework
Vision Strategy Governance Organization Processes Capabilities Performance
- Aspirations - Mission - End state - Objectives - Priorities - Targeted outcomes - Decision making - Accountabilities - Measurement - Alignment - Roles - Decision rights - Activities - Policies - Standards - Skill sets - Resource mix - Infrastructure - Rewards - Culture - Key performance indicators
How are we organized?
Structuring our relationships
How will we work? What do we want to accomplish?
Designing our execution framework Building our core talent base Achieving our plans
Source: Strategy& analysis
• What do we do? Defining the intended customer experience is the first step. The vision articulates the company’s aspirations and defines priority initiatives to execute. The strategy should be visionary, yet grounded in a set of data or facts that can be easily translated into actions for frontline employees who materially influence the customer experience. All levels within the marketing and customer operations groups must be able to understand what outcomes senior management expects, and which areas to focus on in order to fulfill those expectations. • How are we organized? The existing organizational framework may need to be reevaluated in light of the defined customer experience vision. Often, customer-facing groups are spread across multiple areas within the utility organization. Meter reading may be in distribution operations, while marketing is held as a corporate or customer service function. Call centers and pricing may be in operations, but customer analytics is grouped with marketing. There are many reasons for a given organizational structure, but even if the various customer-facing groups are not structurally aligned, a common governance system can help improve coordination to attain customer experience goals. • How will we work? Once a clear operational plan is derived from strategic aspirations and priorities, the company then needs to lay out the activities to be performed, and the processes, tools, and people required to execute the vision. These operational plans should support the customer strategy and customer experience in a way that does not create confusion between those within the customer organization (such as call center agents) and those who help enable the customer experience, some of whom may reside outside the customer organization (such as field operators). All of these things are ultimately tied together by a tight, thoughtful, and thorough financial plan and budget that encompasses both the required investments and the ROI to successfully implement the vision.
The strategy should be visionary, yet grounded in a set of data or facts.
• What do we want to accomplish? Finally, a customer strategy must include performance expectations that support the operational plans. Clear metrics to gauge performance and a culture to reward success (formally and informally) are foundational to ensuring that the organization is oriented around common goals. These metrics should be clear enough for frontline employees to understand how they affect the outcome, enabling those workers to successfully execute against the goals and objectives of the organization. As part of the assessment of processes and capabilities, companies should scour their operations for no-regrets improvements where efficiencies can be gained with little to no adverse impact on the desired end-state customer experience. For example, there may be activities that are cumbersome, complex, and manual, presenting opportunities to simplify and automate, which will create savings and ultimately add to the bottom line. At the same time, de-emphasizing certain areas may require transferring and redeploying resources to suit new priorities. In some cases, additional investments may be required, such as a new customer information system to more effectively manage energy efficiency programs. In other cases, there may be opportunities to better align resources, such as decreasing the time that call center agents spend answering billing questions to increase their focus on selling additional products and services.
Translating strategy into action
Having a firm understanding of the elements of the customer experience strategy is the first step — successfully implementing them is another. There are five keys to successfully translating a customer experience strategy into action (see Exhibit 4).
Exhibit 4 Five keys to successful implementation
1. Start with an unconstrained view.
5. Pilot, obtain feedback, and modify as needed.
2. Support the strategy with data.
4. Ensure that processes, technology, and organization support the strategy.
3. Align capabilities with the strategy.
Source: Strategy& analysis
1. Start with an unconstrained view. Allowing for creativity to take hold and unleash a world of possibilities is the key to stretching beyond the current view of the customer experience. Considering alternative futures and taking a long time horizon allow teams to contemplate views that represent a significant step change from the current state. Apple is famous for predicting what customers want before they know they want it. Disruptive products like the iPhone transformed the use of handsets, reshaping the industry and leaving behind many old-school players that had been innovative in their time (such as Palm and BlackBerry). For power companies, will there be an innovator to stake out a position in creating a customer experience that will not only meet current regulatory requirements of customer satisfaction, but also push innovative new ways of thinking about the customer? Will there be another disruption altogether that won’t let the old ways of doing business survive? 2. Support the strategy with data. Thinking innovatively is important, but understanding current realities is just as necessary. Any customer strategy should be deeply rooted in data that supports a firm understanding of the current needs of the customer and is crystal clear about tangible changes to be made as well as an understanding of the customer interactions. This should not be a theoretical exercise about “the experience.” By understanding the customer through interviews, panels, surveys, and other tangible means of gathering customer feedback, companies can establish a data-backed view of current customer perception and unmet needs. Mapping customer interactions highlights the processes that need to change. Instead of just thinking about an inside-out view — what services are already provided and how to force them on customers — the company can use an outside-in view to put itself in the mind of the customer. With that outside-in perspective, the company can build the processes, technologies, and organization that will better support a seamless experience. 3. Align capabilities with the strategy. As companies develop new views on the customer experience, they will need to question whether their existing capabilities are sufficient to successfully take them to the next level. Skills and requirements that have gotten companies to the present point may be different from the skills and requirements of a more customer-focused organization. Facing the brutal truths of existing capability levels is critical to reshaping and redefining what will be required to reach the desired end-state vision.
The company can use an outside view to put itself in the mind of the customer.
4. Ensure that processes, technology, and organization support the strategy. Understanding customer needs and developing a vision is worthless unless the operating model, processes, technology, and organization are ultimately aligned to enable the successful execution of the strategy. Creating a vision without fully understanding the implications of what process changes are needed — many buried deep within the organization — is a recipe for creating the flavor-of-the-month customer experience strategy that does not last. Digging deep within an organization to fix the structural elements needed to successfully execute against the strategy takes time to adequately understand the details of the process, and patience to build the case for change, modify processes, and enhance the enabling technology. This means results will not change overnight; this type of transformation takes time. 5. Pilot, obtain feedback, and modify as needed. To maintain organizational and executive commitment to a chosen path, the implementation plan should clearly show and demonstrate progress. Using pilot programs allows success to be proven and celebrated from the onset, which drives stronger buy-in and confidence before commitment to large-scale changes is required. Breaking down the implementation into well-defined phases — where the organization can gather internal and external feedback and iterate — is critical as well. The organization must remain flexible and have the right mechanisms in place to modify plans based on the feedback collected and on changes in the environment.
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