Customer service: cost versus quality

Historical approaches to service improvement in utilities are failing to deliver the radical uplifts in quality the sector requires. Simon Harvey sets out a scientific approach to balancing cost and quality.

September 2015 was a bad month for utility customer services. The big six energy retailers, and specifically Scottish Power and RWE Npower, once more found themselves propping up the Which? customer service league table. In the water sector, the Consumer Council for Water named Southern Water as the most complained about company for a third year in succession.  

How can this be? We know that utilities are passionate about improving their customer experience and service performance. This is backed up by investments in new billing systems, call centre technologies, digital channels and staff training. As a result, there is a positive, upward trend in improvement, which was noted by the Institute of Customer Service in its latest report on UK customer satisfaction. But, as this report pointed out, “despite its improvement, utilities remains the bottom-ranked sector”.

To compound the problem for energy retail incumbents, Energy UK has revealed that August was a record month for switching, with independent energy retailers now serving 11.2 per cent of the domestic market, according to Cornwall Energy’s market share report for September 2015.  

In water, the story is different, as decisions are taken regarding the cost to serve/quality balance and how best to leverage customer experience in the future non-household retail market.

Given this backdrop, how can utilities grow margins while delivering the highest levels of service quality and a differentiated customer experience? At Newton, through our experience in transforming customer-facing operations, we believe we have found an answer: driving efficiencies at the front line through a forensic, rigorous and prioritised focus on the fundamental points of failure.

In utilities, with all other things being equal, service levels are directly influenced by the resources deployed or investments made. For example, increasing the number of call handlers in a call centre will reduce call waiting times. Therefore cutting costs, especially through headcount reduction, must have a negative impact on service quality.

Improvement in efficiency is the only way to break this link, but there is still a trade-off between monetising the efficiency gain through reduction in resources or using it to increase service levels.

A standard cost versus quality model that takes into account the costs associated with failure or poor quality is useful for showing how to make improvements, reduce costs and improve quality. The graph shows how costs grow exponentially as a business tries to maximise quality or reach a particular service level, for example, by answering calls instantaneously.

The cost of failure can result from various things: lost sales; demand failure, where failing to provide a full service to the customer first time leads to additional demand; service fines and penalties; compensation; rework; and more. Quality will fall to such a level that the service is no longer fit for purpose.

Aggregating the two, there is a point at which a business should aim to operate (point C on the graph), which is the optimum trade-off point between the cost of quality and the cost of failure. In reality, few businesses operate at this point, because while it is easy to measure the cost of service delivery, assessing the full cost of failure is often not easy and is usually underestimated. By improving operational front line efficiency, the cost of service delivery can be shifted down and to the right, illustrated by lines A and B. Essentially, with the same resources, the business can deliver a higher service level, or reduce the cost of delivery if maintaining the service level is the requirement.

When the cost of failure is factored in, and assuming this is unchanged, there is a new optimal operating level for the business, highlighted by point D (which is lower in cost and higher in quality).

This approach can yield impressive results, for example: a 30 per cent improvement in cost to serve for out-of-hours GP services; an increased responsiveness of 300 per cent and a 30 per cent reduction in headcount for a property management company; and an increased remote resolution of 170 per cent with a 25 per cent reduction in field engineers for a national printing services business.

We believe utilities require a fundamental rethink in the way they tackle customer service improvement. Whatever is underpinning today’s incremental improvement is not working quickly enough. As Einstein said, “Doing the same thing over and over again and expecting different results is insanity.”

Simon Harvey, Energy & Utilities team, Newton Europe