Outsourcing in a deregulated environment

The national electricity market (NEM) was launched in December 1998 by the Australian Capital Territory, New South Wales, Queensland, South Australia and Victoria after a seven year programme of reform. 

The arrangements for deregulation incorporate various trading markets, participants and institutions. Participating in the NEM involves creating and sustaining a considerable number of vital relationships. The reform of the gas industry adds further complexity to the relationships that retailers who wish to participate in the energy markets must maintain. Establishment of the national gas market has been facilitated by development of the National Gas Access Code. The aim of the code is to develop uniform regulation of an integrated national gas market – establishing right of access to transmission and distribution networks on fair and reasonable terms and conditions.

Disaggregation of the electricity and gas industries into separate generation, transmission, distribution and retail sectors has led to strong competition. Energy has become a commodity, and the power of choice of retailer rests in the hands of consumers. Retailers in the marketplace – in excess of 20 retail licences in Victoria alone – compete on price and customer value management. Margins for retailers remain critically low, in some cases as low as 1%.

At 30 June 1998 there were approximately 11.4 million gas and electricity connections nationally – 8.4 million electricity and 3 million gas (source: Australian Gas Association 1998).

THE CASE FOR OURTSOURCING

Outsourcing is the transfer of responsibility to an external organisation for the supply of an internal service or facility. For years organisations have been good at identifying areas of their business, such as premise management and cleaning, catering and printing, where bringing in a third party specialist (an outsource supplier) is seen as the obvious thing to do. It is only since the early 1990s that organisations have recognised the benefit of widening the base of outsourcing to other areas of their business activity. Utili-Mode has, for example, outsourced the provision of some of the technology platforms (such as the CISPlus+ billing engine) which underpin the delivery of its service offering to its clients. It has also outsourced the meter reading function and bill production.

Most retailers in the energy marketplace maintain in-house back office services (approximately 89% is retained in-house in Australia at present). The only company to provide a full end-to-end outsourced back office solution is Utili-Mode. Pulse Energy is one of three clients that Utili-Mode currently services under contract. 

WHY DID PULSE OUTSOURCE

  • To grow its customer base quickly – specifically to enable it to concentrate on the core activities centred around operating as an energy retailer in a competitive and volatile environment.
  • To focus on core business – the marketing functions associated with segmenting the customer base, managing energy load and profile, etc.
  • To make costs visible – transaction costs become much more clearly defined than may be the case when the service is provided internally.
  • To lower costs – both in investment of capital for infrastructure to deliver the services and in ongoing costs through leveraging off the scale that an outsourcer provides.
  • To have access to innovative new technologies – an outsource service provider is more likely to stay at the forefront of its field to remain competitive.
  • To benefit from specialisation – an outsource service provider brings a degree of specialisation ito its service offering.

THE SERVICE OFFERING

Utili-Mode provides a full end-to-end service offering to Pulse, including:

  • Revenue services (billing, collections and revenue management) –single and multi bill production, account consolidation, electronic bills, payment collection, credit management, final accounts and theft reduction.
  • Customer support – in and outbound mail, phone, fax and e-mail enquiries, queue management, service performance reporting, technical enquiries, return mail processing.
  • Customer care management – customer relationship management and reporting of customer contacts, management/resolution of customer complaints, regulatory reporting of formal complaints and personal customer liaison.
  • Campaign management telesales / telemarketing – design and manage campaigns, resource management
  • Consumption data management – smart and dumb meter reading, special meter reads and NEMMCO reconciliation.
  • Energy market services – wholesale and retail market settlement, contract administration, new connections and customer transfers.

These statistics provide an average of work flow for the 1.1 million Pulse Energy customer base:

Billing

  • 548,000 franchise electricity customers
  • 3,500 contestable electricity customers
  • 580,000 franchise gas customers
  • 22,000 bills produced daily
  • 5,500 collection notices produced daily

Settlements

  • $4.5 million per week
  • 32 wholesale counter parties
  • $120m distributed use of system (DUOS) payments p.a.
  • $17m transmission use of system (TUOS) payments p.a.

Contract Administration

  • 3,500 contracts managed 
  • 5 trades/day
  • 250-300 contestable contracts alive at one time

Call Centre (7,500 to 10,000 calls per day)

  • 4,000-4,500 account service calls per day (60% relate to bills, 25% to turn on/ turn off and 15% to payment arrangements)
  • 2,600-3,000 IVR calls per day (automatic bill payment)
  • 650 fault calls per day 
  • 180-200 business line calls per day

Diagram 1: Evolution of United Energy Limited

THE TRANSITION PHASE

The Pulse-Utili-Mode relationship is unique in that until the formation of the joint venture (Pulse Energy) between Shell, Woodside, the Energy Partnership and United Energy, the precursor of Pulse (United Energy Marketing Pty Ltd ) had back office services provided in-house by Utili-Mode (a United Energy Business Unit). Diagram 1 explains the evolution of United Energy during the deregulation process.

Diagram 2: The Process

On completion of the Pulse transaction, the relationship moved to that of commercial, outsourced provider. The process of outsourcing and transitional activity can best be described through diagrams 2 and 3.

Diagram3: The Transition

THE OUTSOURCING OUTCOME

The key to a successful outsourcing relationship is the idea of building a partnership. For Pulse and Utili-Mode this involved moving from an in-house, largely reactive relationship with unclear boundaries, roles, accountabilities and responsibilities, little or no priority setting and predominantly systems focused, to a commercial partnership based on an understanding of business problems and issues. A relationship with clear roles, boundaries, accountabilities and responsibilities that interface at the right levels and involve the right people has been established, with shared visions, clear expectations and ownership. The result is services that not only meet but exceed expectations 

CONCLUSION

The continued trend towards further deregulation and privatisation of the Australian energy industry will provide both challenges and increased opportunities to retailers operating in the market. Prospective buyers of outsourced services should look first for a provider who can integrate into the operations of the outsourcing company. Outsourcing is not simply buying goods or services more cheaply than they can be produced in-house – it is about developing a partnership. Although still in its transitional phase, the relationship between SPL, Utili-Mode and Pulse is one based on a win-win partnership between client and service provider – SPL to Utili-Mode and Utili-Mode to Pulse.

Outsourcing of the non-core back office function to a service provider well versed in the importance of customer relationship management will enable energy retailers to focus on winning market share and increasing customer loyalty through customer value management.

This is an extract from a paper presented at the Metering Asia-Pacific conference, held in Kuala Lumpur, Malasia