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Three-step plan of action to respond to OFWAT 12 OCTOBER 2017

Three-step plan of action to respond to OFWAT

Recently OFWAT released their Affordability and Debt document and it has made interesting reading.

There has been a significant increase in the debt burden across the water industry, with outstanding bills jumping by £300m over four years. Collectively, supporting unpaid bills is now adding £21 to everyone’s bill, which of course also hits those already in financial difficulty.

What is also interesting is how the water regulator has clearly listened and taken note from other UK regulators, in particular the FCA. Affordability and vulnerability feature prominently across the document, and there is a small sense of frustration that more can still be done.

Clearly there is a compelling financial argument to improve performance and, with the news that there will be no glide-path in the next price review (PR-19),  improvements in customer treatment and performance are essentially being mandated which is good news for customers.

Accepting bad debt as ‘just a cost of doing business’ is no longer going to be acceptable.

Getting ahead of the game

Just as OFWAT has been guided by other industry regulators, so can the industry itself be guided. In fact, although the guidelines may seem tough in many ways, they are in line with what we observe elsewhere. Knowing this can provide a huge gain in setting out a plan of action and response which can provide companies with a competitive advantage.

Here are three steps to think about.

1          On-boarding process

A response we often hear is ‘we have to accept everyone’, so why does this matter? As a universal service this is true; however, understanding your customers’ circumstances as early in the lifecycle as possible (i.e. acquisition) is critical. It allows you to develop and sell appropriate propositions which better meet customers’ needs. It also informs and provides insights that enable effective collections strategies to be developed for different customer segments, including the use of affordability schemes. It’s important that customers are encouraged to embrace these schemes and manage within their means.

2          Gathering and maintaining high quality data throughout the customer lifecycle

Customer service and collections are in the data business. In every interaction we need to gather data that can help us inform and improve the level of service provided from onboarding customers to the collection of debts. This data is also invaluable in developing and determining which collection strategies to deploy, when to deploy them, anticipating problems and presenting solutions early before they come unresolvable. This scientific approach as used to a great extent across the wider industry is also applicable here. The emphasis needs to be on prevention rather than cure.

3          Tailoring solutions

A significant theme over the last nine years in financial services has been one of treating customers fairly (TCF). More recently this has been referred to under the headings of Affordability and Vulnerability, the terms used in the OFWAT report. On every call, affordability needs to be discussed, potential vulnerability assessed and appropriate solutions found. These can range from product switches, pricing changes, forgiveness of additional fees to sign posting of free debt advice, the objective being to find the right affordable solution to mitigate the risk of the customer spiralling further into debt.

Identifying, assessing the customer situation correctly and presenting the best options is not always easy; now, however, with many years’ experience in this area we have implemented some great solutions that are well worth considering and discussing.

A change of approach

From what we have seen, from our direct experience in the water industry, there has already been some great progress. See for example our case study with Thames Water where we reduced the bad debt charge by around 35%! We have influenced and observed substantial investment by some companies and facilitated the execution of good practice including the use of scoring, segmentation and indeed some robust practices in Account management/Collections which have assisted various stakeholders and delivered improved customer outcomes.

This being said, there is also opportunity. Some of the best in class practices/process we routinely see implemented in other sectors are also applicable in water and with the latest guidance from OFWAT will need to be implemented to maintain and hopefully improve performance and customer outcomes.

OFWAT’s direction is one of a number of good reasons why water companies who are already performing well in debt would wish to improve in addition to those who are performing less well.

Looking further ahead, full, open market competition in the consumer water industry is not yet in place, although this is likely to be another step on the path to it.

Implementing improvements in debt makes sense, helping customers and shareholders in turn. Arum specialises in collections and recoveries and has a depth of experience in the Utility sector including in water. We would be delighted to hear from you to allow us to elaborate and engage with you regarding the changes you could take to mitigate the risks and maximise the opportunities to improve profitability and improve customer outcomes. Please do contact us.

Chris Warburton – Lead Consultant

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