by Saurabh Gupta, Everest Group
Utilities operate in one of the most complex, challenging business environments. Progressive deregulation is intensifying competition, and consumers are growing more demanding. Smart meter adoption is no longer an “if,” but a “when.”
Operational issues such as outdated technology, inefficient and manual processes, cash constraints, and price and cost pressures increasingly are plaguing utilities. The need for robust and future-proof underlying business processes is stronger than ever, particularly when it comes to the meter-to-cash (M2C) process. While some utilities struggle with myriad challenges and cringe at the thought of emerging issues, others optimize their M2C processes by outsourcing to third-party service providers.
The M2C Value Chain
The M2C process is an integral part of the downstream value chain for most utilities, except for those that focus purely on upstream functions such as generation or trading.
In many respects, M2C is similar to a horizontal order-to-cash (O2C) process cycle. But the M2C process has nuances unique to the utilities industry, such as metering, field services and meter data management. In addition, as customer billing is linked directly to meter reading–with the advent of smart metering making the linkage even more critical–the supporting systems and business processes must be deeply embedded and flawlessly interconnected in the M2C process environment. These differences make the M2C process more daunting than standard O2C. A typical O2C process cost as a percentage of revenues is approximately 0.2 percent, but the cost of the M2C cycle can be as high as 1 to 2 percent of revenues. This higher cost base is largely a result of expensive metering and field services activities.
Outsourcing M2C to Address Challenges
Everest Group analyzed more than 200 publicly announced outsourcing contracts signed by utilities between 2000 and 2010 across information technology outsourcing (ITO) and business process outsourcing (BPO).
Nearly 40 percent of these contracts have parts of M2C BPO in scope. More than 40 percent of these M2C BPO contracts were signed during the past three years. There are three main reasons why increasing numbers of utilities are considering M2C BPO: business optimization, staying competitive and smart metering. These are different business issues, but M2C BPO helps address all of them together, which makes it more attractive for utilities.
Emerging Drivers of M2C BPO
Support business optimization. Most utilities have numerous operational issues such as multiple legacy systems, inconsistent meter reads, billing exceptions and delayed billing, poor receivables management and significant bad debts. BPO providers’ in-place technology platforms enable utilities’ M2C processes to be delivered via a modern infrastructure with minimal upfront capital expenditure. Service providers also possess expertise and best practices in business process management that enable standardized processes, improved efficiency and enhanced process performance. For example, by leveraging targeted collections practices, a specialist service provider can help improve revenue realization that leads to better cash flow for a utility.
Staying competitive. The progressive deregulation of retail utility markets worldwide has created intense competition among utilities to maintain their customer base. This is compounded by evolving consumer demographics that have resulted in customers’ demanding more from their utility providers in accurate billing, improved self-service capability, faster issue resolution, etc. Utilities have little choice but to comply to retain customers. As a result of offshoring and productivity-related benefits passed on by the service provider, utilities can reduce their overall cost to serve per customer, which improves their price competitiveness. In addition, as utilities that outsource the M2C process also leverage their providers’ technology and process expertise to improve the overall customer experience, they can improve customer retention. For example, many service providers offer new platforms such as Web-based portals for customer interaction. This enhances customer self-service and reduces the customer query load on the utilities’ contact centers.
Support smart metering implementation. Beyond regulatory mandates such as the EU’s Third Energy Package, factors such as rising competition and the numerous business benefits from smart meters also are pushing utilities to automate their metering infrastructure. For example, remote monitoring and meter reading leads to savings in field service costs, billing can be more accurate based on real-time meter reads, visibility into consumer consumption patterns increases, thereby enabling a more accurate load forecast, and dynamic pricing in variable peak and off-peak tariff structures can be offered. Benefits notwithstanding, smart metering, however, is a disruptive technology that impacts a utility’s M2C function in many ways. Utilities must modernize and streamline their underlying processes to support the requirements of a smart metering infrastructure.
Realizing the growing adoption of smart meters worldwide, several new service offerings are emerging to support utilities at all stages of a smart metering initiative.
Pre-implementation services include advisory support for conducting a feasibility analysis and helping build an execution road map. Implementation services include program management services such as meter provisioning support, case management, work order management, device and meter data management and customer management, etc. Finally, service providers offer smart metering analytics support such as network, operational and customer to enable utilities to manage the explosion of data that travels through a smart meter network.
M2C BPO Value Proposition is Attractive; Challenges Must be Managed
While the outsource ability of M2C is relatively high, several challenges impede full realization of its potential. Everest Group estimates the potential of M2C BPO to be nearly $50 billion to $70 billion globally, but current penetration remains in the low single digits because of the following reasons:
- Barriers to offshoring. Cost arbitrage continues to be a key aspect of any BPO solution to reduce operational costs and to gain access to new talent pools. Most M2C subprocesses can be delivered from offshore locations, except field services and parts of meter data management, which will come down in the smart metering era. Language barriers, however, especially in Europe, and a unionized environment pose the biggest challenges related to offshoring.
- Lack of standards. Regulations are not the biggest threat to outsourcing, especially given increasing deregulation in the utilities industry. The lack of standardization in myriad regulations among countries and the United States creates the need for a high degree of customization in BPO solutions. In addition, standardization among smart meters is lacking as each meter manufacturer has different communications modes.
- Lack of outsourcing culture. Penetration of BPO beyond voice-centric work is low in utilities. With fewer success stories, the perceived risk of outsourcing M2C processes is high.
The challenges are surmountable. Critical success factors include:
- A BPO relationship must operate in the spirit of partnership: one team and shared goals;
- Use of a central program management office for coordination, key performance indicator and service level agreement collection and reporting; and
- Organizational exposure to compliance-related risks can be eliminated by working with a provider that is ISO (International Organization for Standardization)-compliant with the necessary standards, frameworks and policies in place.
As outsourcing service providers with strong utility industry practices are investing in M2C process expertise, it is becoming increasingly viable to outsource the process to a third party. The different M2C BPO service providers can be classified into four broad groups:
- Global majors (such as Accenture, Capgemini, CSC, IBM, Hewlett-Packard Co.),
- Offshore majors (such as Cognizant, ExlService Holdings Inc., HCL Technologies Ltd., Infosys Ltd., Tata Consultancy Service Ltd., Wipro, WNS Holdings Ltd.),
- Voice-centric players (such as Vertex, Stellar, Sykes, TeleTech Holdings Inc.), and
- Technology-focused players (such as Atos S.A., Fujitsu, Fiserv Inc).
Each group has a different go-to-market strategy in product offerings, client segments and solution components, but all contribute toward creating more options for utilities.
Whether to streamline operations, deal with competitive pressures or manage the impact of disruptive technologies such as smart metering, utilities can outsource to overcome business challenges. But they must be prepared to address the challenges along the way.
Saurabh Gupta is vice president of BPO research at Everest Group and leads its research related to F&A outsourcing and procurement outsourcing. He has an MBA from IIT (Indian Institute of Technology) Bombay and a Bachelor of Mechanical Engineering from University of Delhi. Reach him at firstname.lastname@example.org.