Is C-MeX fit for purpose?

The introduction of a new financial incentive mechanism for customer service in water was meant to drive improvements across the industry and allow comparison with other sectors but could be ignoring complaints handling and failing to provide the necessary incentives to drive improvements.

After a decade of measuring customer service through the Service Incentive Mechanism (SIM), regulator Ofwat decided to relaunch the mechanism in the form of the customer measure of experience for residential customers (C-MeX) in 2020.

Now, as Ofwat prepares to reveal its framework for the PR24 price control, consumer groups are asking whether C-MeX is fit for purpose or whether major changes will be needed in the next price control.

Evolution not revolution

The new C-MeX measure is determined by two surveys, one measuring satisfaction among customers who have recently contacted their water company, and the other measuring it among a random selection of customers to give a broader picture of how the company is viewed.

How much standard financial reward, or financial penalty each of the 17 water companies receives is decided by the combination of the two surveys with each having equal weighting.

Previously 75% of a SIM score was based on a survey of customers that had direct interaction with the company recently, with the remainder based on the number of complaints and unwanted contacts received.

While there was widespread agreement that SIM contributed to significant improvements in customer service in the water sector, and a 60% reduction in written complaints, Ofwat identified several areas that it felt could be improved.

Juliet Young, chief economist at Ofwat said SIM didn’t allow the regulator to make comparisons with other sectors and was only able to rank the companies against each other.

“There was a worry that we were giving a company an outperformance payment, where as the industry as a whole were not doing particularly well, things got better with SIM but we didn’t want to reward a company for being the best of a bad bunch,” she says.

Ofwat was also seeing convergence at the top end of the table and wanted to push those companies further.

The Consumer Council for Water (CCW) was very welcoming of C-MeX when it was first introduced, but thinks the time is ripe to make the measure “sharper and a bit more effective”.

Steve Hobbs, senior policy manager at CCW, says it has not seen a step-change in customer service since its introduction, saying it is more of an “evolution rather than a revolution”.

“We’ve seen companies at the top end improving, and we have seen some companies go up, and the fact that it measures customer satisfaction in the round is making companies think differently.”

CCW has identified several areas that it feels could be improved, such as the level of reward available, the attention given to complaints and the lack of a formal follow-up process on feedback.

Ofwat says it is too early to judge the effectiveness of C-MeX, but points to the improvements made by the four poorest performing companies in 2020-2021 over the previous year as early indication that C-MeX is having positive results.

However, one of the main differences between SIM and C-MeX – the ability to compare water companies with companies outside the sector – has yet to yield the desired improvements in the sector.

In 2020-21 none of the 17 companies achieved a high enough score to place within the top 25% of companies in the UK Customer Satisfaction Index (UKCSI), barring them from accessing higher performance payments.

Despite it being only two years into the new mechanisms, the regulator will release its methodology for PR24 later this year and believes C-MeX will largely be retained as it is.

“If people raise large issues that might be something we have to think about. I think most stakeholders have been broadly supportive on C-MeX, that doesn’t preclude us making changes but nobody has suggested starting again,” says Young.

Level of reward

One of the key areas CCW believes needs addressing is the level of reward and penalty that can be awarded to water companies depending on their performance.

Currently C-MeX is of less value to companies than other incentives, but CCW believes it should be comparable to keep pushing companies to keep up with changing customer expectations.

Companies can receive reductions in household retail revenue of up to 12% and increases in household revenue of up to 6%.

The highest percentage achieved by a company in 2020-21 was by Northumbrian Water, resulting in a payment of £2.9 million.

Higher payments can also be achieved if companies achieve one of the three highest scores, have above average customer complaints handling and place in the top 25% of the UKCSI, but this will require significant improvement even amongst the best performing water companies.

Despite being a stretch, Joanna Causon, chief executive of the Institute of Customer Service, which runs the UKCSI, believes it is not unrealistic for water companies to be able to achieve the necessary scores in the future.

She says water companies should be aiming to achieve such scores as customers will inevitably benchmark their performances against companies outside the water sector.

While Hobbs acknowledges that companies are motivated by reputation, he believes this in itself is not enough.

“We know companies are very motivated of the availability of financial rewards and penalties so it does need that extra carrot and stick, albeit reputational incentives can be strong by themselves, but for something as essential to customers as receiving a good service and making sure your complaints are dealt with effectively it does need that extra financial clout.”

Although reputation alone may not be enough of a driver, Causon points out that the evidence shows that where companies outperform on customer service they see much better returns and this should be a motivating factor as well.

One of the risks Hobbs sees of lower payments in C-MeX is that companies choose to focus their efforts on other areas where the rewards are greater.

Young says that the payments for C-MeX are relative whereas the rewards and penalties for many other incentives are not, making them difficult to directly compare, but adds that they are not insubstantial, with Portsmouth Water receiving nearly a third of its outperformance payments in 2021 from C-MeX.

She doesn’t believe companies will focus on the more profitable areas at the expense of others.

“Achieving more payments on C-MeX doesn’t stop a company achieving more payments elsewhere.

“Whether the ranges are right is another question, these are carried across from SIM and one of the things we will be consulting on is whether we should be expanding or reducing that range.”

Complaints given more clout

One of the main reasons for changing SIM was to remove the complaints element in favour of a second survey assessing a company’s wider reputation.

This was to avoid incentivising companies against receiving complaints, says Ian Bannon, the Ofwat principle in charge of the day-to-day running of C-MeX.

Now under C-MeX, complaints handling acts as a gateway to higher payments, meaning companies with only average complaints handling can still qualify for rewards payments, which is a concern to CCW.

Rather than using complaints as a gateway, CCW would rather see the quality of complaints handling given weighting within the score.

“We think there’s an opportunity now to raise the bar higher on the complaint element side of it, maybe not have it as a gateway but have it as an additional third component so the two surveys and the complaints are used to set what score you need to get to achieve rewards or penalties,” says Hobbs.

As well as being given proper weighting, he would like to see the bar being raised over time so potentially only the top four performing companies could qualify for rewards to help prevent complacency creeping in over time.

However, with fewer companies in line to receive reward payments, such a move would need to be accompanied by an increase in the value of payments and be brought in over time to ensure that poorer performing companies are not completely disincentivised.

Causon says that compared to other sectors complaint handling in the water sector is “not bad”, but would only score around a six out of ten, while the leading companies such as Amazon receive far fewer complaints and are known for responding much better.

She says the speed of response and taking a proactive approach such as phoning a customer to make sure the issue has been resolved in a satisfactory manner are key.

Currently there is no formal process built into C-MeX to ensure that water companies are following up on feedback from customers to the surveys, or from complaints themselves, which Hobbs believes is a missed opportunity.