Utilities must take urgent action now to help their customers avoid or escape escalating debt, otherwise they face at least a three-fold increase in typical bad debt charge write-offs. For some – particularly energy and water retailers where margins are low to negative already – such costs could tip them into administration.
Economic indicators suggest we are facing the “worst recession for 300 years” (FT), with a direct correlation to customer debt in utilities:
- Utilities saw bad debt charges (BDC) increase by c. 200% in 2008, with a strong correlation to falls in GDP and unemployment
- The fall in GDP as a result of Covid is expected to be three times worse than in 2008
- The unemployment claimant count is already three times that of 2008 levels, even before the end of furlough
- High street banks have increased impairment rates for loan defaults by circa 300%
In utilities, we are in the early stages of realising the impact, and the worst is yet to come
- With 9.4 m (31% of the workforce) on furlough at the end of June and the scheme running out by the end of October, the full economic impact has yet to be fully realised.
- In the early stages of the crisis, most utilities paused debt collection activity and some stopped billing – whilst this was an understandable response, it also exacerbated future debt risk.
- Regulators have taken targeted actions to deal with the most immediate challenges, for example debt protection to B2B Water retailers, and provisions for energy network charges to be deferred, but given the scale of the challenge further measures are likely to be required going forward.
Given that the impact of Covid-19 on GDP and unemployment is expected to be three times worse than the 2008 crisis, the prospect of three times current bad debt charges (or worse) is likely. Some utilities have already provisioned for this level.
Three ways in which utilities can mitigate the scale of the debt impact
It is imperative that utilities act now and help customers avoid debt. Any action should be underpinned by a revised end-to-end collections strategy and operating model.
The yard stick of the past is not a good measure for what is in front of us; insight, customer segmentation, journeys, channel strategy and financial modelling will all need to be overhauled.
Proactive intervention is required now to support customers and mitigate the debt risk, with a focus on three parallel activities:
1. Clear the backlog by proactively targeting pre-Covid debt book challenges:
- Follow a risk-based, customer-led re-mobilisation of collections to balance customer protection and financial risk.
- Leverage analytics spanning both internal and external data sources to proactively target key segments through campaigns.
- Deploy a meter-to-cash customer support team and work accounts end-to-end; include upstream issues to help resolve any long standing billing and collections challenges.
2. Help customers avoid future debt through addressing root cause issues:
- Get the basics right by enhancing billing and payment processes and controls.
- Proactively identify B2C customers that are potentially financial vulnerable by using a variety of internal and external data analytics. Help them avoid escalating debt through measures such as payment plans, smart prepay and energy efficiency advice.
- In B2B markets, with insolvency on the rise, proactively and continuously manage credit risk by using data analytics to identify and engage with businesses likely to struggle to pay their bills and debts.
- Adopt an end-to-end approach to debt prevention spanning the entire customer journey and support the program with a suite of KPIs to guide management focus across key areas.
- Take a segmented approach to ensure customers are on the right payment plan and payment method for their circumstances, and keep under review based on latest data.
3. Help customers get out of debt faster:
- Improve effectiveness of collections journeys and extend the use of internal and external debt recovery channels.
- Evolve dunning journeys and align them with customer segments.
- Improve customers’ options as to how they pay and manage their own debt.
- Right-size the billing and collections operating model.
Based on all macro-economic indicators, the debt crisis ahead of us will be unprecedented, so it is vital that Utilities (and other businesses) take a front-footed approach. This means building robust capabilities, designed to support their operations over the course of several years to come. Effective collections improvement will be iterative, outcome-focussed and underpinned by a customer led, analytics-enabled approach.
Baringa have helped utilities companies and their customers extensively over the last twenty years to avoid and escape debt, and have delivered a 10:1 return on investment in the process. Contact us to find out how we can help you mitigate the impact of the recession on you and your customers.
About the authors:
James Cooper is a Partner and Will Lewis is a Director in Baringa's Retail Energy and Utilities practice. The authors would like to thank Prashant Kachhala for his contribution to this article.
The authors would like to thank Prashant Kachhala for his contribution to this article.