Energy Retailers: Elevating service standards while controlling downside risk to margin

Graham Mathie - 11/01/2024

Can suppliers deliver an improved service for consumers while remaining profitable in current market conditions?

The Challenge

As discussed in an earlier blog in this series, there is an undeniable need for marked improvement in the level of service provided across the board in the U.K energy sector. Long wait times, substandard complaint handling and convoluted processes have all been cited as contributing factors to erosion of consumer trust in the sector and triggered reform by the regulator. While the customer should be at the heart of the drive for improving standards in the provision of service there is, or should be, another motivating factor for suppliers to transform customer operations – reducing operating costs and in turn erosion of already tight margins.

Margin Erosion - The Reality

In lieu of innovation in the sector and genuine commitment to change, the downside risks to margin within customer operations for a supplier is truly unlimited. The provision of service is often where the largest margin leakage occurs, with operating costs being the main controllable within the cost cap for retailers. In our opening blog of the series, we presented analysis that demonstrated a ‘model’ supplier both in terms of efficiency and service provision would have margin erosion of approximately 20%, this encompassed several downside risks such as external complaint costs, back billing and guaranteed standards payments and assumed that all external complaints incurred an ombudsman fee and the average goodwill cost.

If we take for example, external complaint costs, the exceptional 5-star supplier would have 5 complaints per 10,000 customers escalated to the ombudsman at a cost of approximately £340 (Full fee) per case, naturally this is not accounted for within the operating cost methodology and any service failure costs are impacting the bottom line- this performance would see 1% margin erosion on external complaints management costs alone. The reality is that no supplier is currently operating anywhere close to this 5-star performance. Using the most recent citizens advice rating we have completed analysis that shows, by failing to handle complaints through internal processes:

• The top performing supplier is potentially losing ~3% of margin
• The lowest performing supplier is potentially losing ~15% of margin

This does not account for other complaint associated costs such as goodwill payments when complaints are closed internally or cost of repeat contact, Table 1.1 and 1.2 outlines the methodology.

External Complaint Margin Erosion

The wholesale gas crisis effectively closed the market for switching, this further reduced the levers suppliers could pull to recover margin leakage- for context to cover the cost of one single ombudsman complaint you would need to acquire c.10 customers not accounting for the cost of acquisition itself- therefore, the only real option is to transform customer operations to be leaner and truly customer centric and this will go a long way in inspiring consumer trust in the industry and reducing operating costs to protect margin.

Drivers for Transformation

With the new consumer standards reform stating that suppliers must now publish their quarterly CAB rating, there is likely to be increased consumer and media interest in levels of performance suppliers are delivering. The reputational risk coupled with the gradual reopening of the switching market, means it is likely that there will be an enhanced strategic focus on performing well in these metrics. The CAB service KPI's of ease of contact and external complaints escalation are a good measurement of provision of service as a headline but what they don't recognise are the disparate processes, the nuances of the energy sector and fail to give credit to the management of the details that deliver top performance in these metrics. That is where Clyde Ventures vast operational experience can support your transformation, our teams have borne the scars and delivered innovative solutions to your problems of today. We specialise in achieving this while delivering cost benefit to the business through reducing operating costs.

Effective management of CAB is key, we can support your strategic approach to achieving top level bandings both from a ‘mind the gap’ perspective and from an operational transformation perspective to deliver exceptional service for your customers and begin to build trust in the wider industry.

For more information on how we can help you reduce your cost while transforming your customer operations for excellence, contact Graham Mathie or Ross Bern.