How utilities can use data to manage customer debt

Utilities must strike a balance between absorbing customer arrears and chasing down payments and they are increasingly using data analytics to help, writes Rohit Gupta

Debt collection is one of the biggest challenges currently faced by utilities, particularly across energy and water, an issue heavily impacting firms’ financial performance.

Despite the rise of highly-organized and regulated debt collection agencies, the problem of increasing debt has not abated. On the contrary, write-offs and net outstanding debts are only on the rise with major utilities.

In fact, statistics from revealed that as many as 1.4 million people in the UK have utility bill debts, of which only 11 per cent have contacted their supplier and as many as 16 per cent of consumers thought their provider had been very unsympathetic.

Another 15 per cent said they were made to feel under pressure to repay the arrears. The solution? Suppliers need to provide the personalized treatment customers expect, particularly around such a sensitive subject.

Managing customer arrears, both new debt and recovering arrears, can be a challenge. On average, approximately 30 to 40 per cent of their total debt is over 90 days old, a significant portion of which is ultimately written off or offloaded to collection agencies to recover.

Unfortunately, this strained relationship between consumers and their suppliers has put the latter in a difficult situation, as they must strike the balance between absorbing customer arrears and chasing down payments. However, manage this process poorly and it could potentially push customers into the arms of a rival in what is a highly competitive market.

Many suppliers have built bad debt charges and provisions for write-off into operating overheads; in the case of some major companies, outstanding debt levels are as high as annual profits, highlighting the magnitude of the opportunity lost by utilities unable to manage debt levels effectively.

There is good news, however, in that some of the impending industry changes are expected to help suppliers overcome this predicament. For example, energy suppliers are set to benefit significantly from the ongoing smart meter rollout, as the improved accuracy of meter readings would enhance the billing process and give the supplier an opportunity to monitor customer consumption patterns and proactively manage them by moving them to bespoke payment plans.

In the case of the retail water industry, which will be opened up to competition in a similar way to the energy market, not only will this allow customers to have the option to switch suppliers, but utilities will also be able to treat customers based on their credit profiles.

Industry factors such as these are likely to make processes much more efficient in the long term, but it will take more comprehensive changes within suppliers themselves for the dividends to be realized in the short to medium term.

Time for an overhaul

When managing customer debt, internal processes can be challenging for utility companies. To counter this, suppliers have generally created specific sub-teams focused on handling aging debt, or alternatively outsourced debt collection to third-party service providers.

These problems have been magnified by increasing levels of price competition and customer churn, as suppliers take on financially high-risk customers to boost market share. Added to this, consumers are increasingly turning to digital platforms to manage their utilities, reducing direct interaction between customer and supplier, and making it difficult for the latter to cultivate ‘good’ customers.

Moreover, with most solutions decades old and debt levels rising steeply, business processes and the underlying IT systems tasked with delivering them are feeling the strain, with some unable to keep pace with demand for debt management.

To solve this issue, utilities are increasingly updating their infrastructure and adopting more technology-driven initiatives. However, it can be difficult for suppliers to integrate these, particularly if existing processes are highly ingrained into the existing business model. Furthermore, many of these typical responses, such as communicating with customers via digital channels, actually result in additional operations costs.

To combat these obstacles, suppliers should engage in a two-pronged approach. On the one hand, debt collection should be treated as a one-off exercise rather than a continuous mission. Therefore, instead of selling off debts to agencies based on age, suppliers would benefit by screening them more thoroughly, to recover as much debt as possible before passing them on.

Simultaneously, utilities should put new processes in place to prevent the formation of new arrears, fortified by a strong IT infrastructure. To do this, they are increasingly using analytics to fix the underlying causes of errors in their billing and CRM systems, often the root cause of debt formation.

Data science also allows utilities to sift through existing data platforms to select customers whose debt could be recovered more easily, such as those with good credit ratings who have gone into debt due to billing queries, incorrect contact details, or even those in financial difficulties who would be willing to settle partial amounts in return for closing the case.

The method of transforming the collection process itself will vary depending on the specific case of each company. More specifically, it will depend on the age profile of the debt, the causes such as billing errors, fraud, issues tracing customers and the customer profile, such as whether they need financial help or have bad credit histories.

For maximum efficiency, this would ideally be implemented as a one-off function, although suppliers can also explore the following areas to reduce bad debt and lower the cost to serve.

Early arrears management

The most critical period for utilities to engage with customers and collect debt is during the ‘early arrears’ stage, typically the time between a bill becoming overdue and the customer being classified as delinquent. During this time frame, customers are more likely to engage with the debt collection process as the amounts owed are relatively small. Furthermore, a significant number of customers in early arrears may have simply overlooked their bill, meaning the barrier to re-payment is low.

Therefore, many suppliers are enhancing their early arrears management processes, to ensure that engagement at this stage is targeted and personalized to the customer. This is a good place for utilities to begin, because the strategy can be customized based on the sophistication of the existing infrastructure.

In any case, more cost-effective cloud-based solutions are gaining popularity, as they enable omni-channel customer engagement, to apply the appropriate messaging tone for the specific customer demographic.

Alternatively, some suppliers are integrating automated solutions that use customer data to directly make risk analysis decisions. Providers can then drive tailored treatment strategies, enhance customer satisfaction and in turn, ease out the process of debt collection.

Customer rehabilitation

It is in the interest of most utility companies to get customers who are struggling financially in the habit of keeping up with their charges, to ensure they stay loyal. To do this, suppliers can advise customers on the most appropriate tariff or payment assistance schemes (such as arrears allowance, one-time grants or direct deductions). These specialized tariffs are key, as they help utilities rehabilitate delinquent customers and increase their lifetime value.

Today, a business’s most important asset is the data it possesses. By analyzing information from external and internal sources such as socio-demographic data or behavioural indicators from a credit reference agency, suppliers can segment customers as credit-worthy or credit-challenged and allocate appropriate collections strategies.

By using this data, utilities can prompt customers to agree to a re-payment plan by launching personalized and targeted campaigns via letter, email, or other digital channels such as text messages.

Based on the information held on a specific customer, these campaigns can promote certain tariffs or suggest other options to help customers reduce ongoing charges, such as free meters. Targeting customers using this kind of segmentation is more likely to garner a response from those in debt.

Traces and alerts

A significant portion of accrued debt is due to customers moving address without advising their supplier. As a result, the utility company loses track of any arrears owed by the customer, increasing the likelihood that they will never be repaid. However, recent market innovations have enabled suppliers to trace these ‘lost’ customers using their credit activity, allowing collections activity to resume.

Furthermore, it is also possible for suppliers to receive alerts on customers whose credit activity suggest they have either moved address, gone bankrupt, or been defaulted by another creditor. This information feeds back into segmentation algorithms, tying the whole process back together.

Despite the innovations transcending the industry, striking the balance between chasing down debt and ensuring continued customer satisfaction will always be difficult, with the regulatory challenges facing utility companies placing additional emphasis on having an efficient collections capability.

However, a combination of data analytics and careful market segmentation is going a long way to help suppliers track the financial status of their customers and personalize communications and the wider collection strategy accordingly.

While there is no silver bullet to counter the growing pile of debt, treating customers like humans using a more detailed understanding of their financial situation is a key step to recover aging debt and ensure that suppliers do not miss out on revenue.

Rohit Gupta is vice-president of Manufacturing, Logistics, Energy & Utilities in the UK and Ireland at Cognizant.

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