At no time is information on customers more vital to a business than when its entire industry undergoes deregulation. The events now unfolding in the utility industry are vividly demonstrating that customer information and the technology used to analyze it may well decide which utility companies survive deregulation and which ones don't.
Deregulation is coming to the worldwide marketplace for utilities much faster than most people had expected. Peter Munch, partner in the IT consulting firm Diamond Technology Partners, says that within the next five years, 80 percent of the electric industry in the U.S. will be deregulated. Meanwhile, industry leaders in Canada, such as Ontario Hydro and Hydro Quebec, are busily formulating strategies to compete in an open market. In Europe, knowledgeable observers predict that most, if not all, energy markets will be deregulated by 2006.
Unique Challenges for Utility Companies
Deregulation in any industry tends to promote new combinations of products and services, intense competition and a long stream of mergers and consolidations as major players position themselves for the future. Deregulation in the utility industry seems to be producing its own unique challenges that will favor those companies that can use information on customers to build strong and enduring relationships with them.
What are these challenges? First, today's customers of regulated power companies are enormously sensitive to changes in price. In a 1995 study by Missouri-based UtiliCorp United Inc., one-third of consumers who were surveyed claimed they would switch providers for a mere five percent reduction in price.
Second, most power companies are already making aggressive plans to distinguish themselves from competitors by diversifying their products and services. Certain power companies plan to offer energy consulting; home security; heating, ventilating and air conditioning services; appliance repair; and home automation the so-called "smart homes" that adjust themselves for optimum comfort and energy savings. Other power companies are forging alliances with telephone, cable TV and Internet services. By offering the right combinations of products and services with competitive prices, power companies hope to create distinctive identities or "brands" that will distinguish them from competitors.
A third, unique feature of deregulation is that government agencies are making it unusually easy for small competitors to enter the U.S. marketplace and challenge the utility industry's leaders. For example, when California's Public Utilities Commission (PUC) voted to open the state to competition, the PUC opened doors for so-called aggregators who get price-conscious customers to sign up for a reduced rate plan. Then the aggregators can negotiate with a power company to obtain the best rates for these customers.
The northeast U.S. already has dozens of aggregators, all of them hungry for detailed information on the most profitable customers to pursue. As aggregators and other competitors challenge the established leaders, competition will become very intense; in fact, recent articles in Business Week and Popular Science state that full-scale retail competition is expected to push down electric rates initially by 10 percent and eventually by as much as 20 percent.
Using Information to Energize Customer Relationships
Faced with this possible 10 to 20 percent loss of revenue, many industry leaders are aggressively seeking new ways to use information to strengthen relationships with customers who are increasingly price- and service-conscious. More specifically, industry leaders are beginning to explore or "mine" their customer data for three specific purposes:
- Uncover patterns and trends that indicate the types of products and services that would interest particular consumers;
- Predict future demand by finding previously undiscovered relationships among products and services so they can be bundled into new offerings; and
- Create innovative sales strategies based on the patterns, trends and relationships mined from customer data.
Many utility companies that have accumulated massive databases on customers' energy usage, payment history, length of residence, credit worthiness and geographical data have found that all this data has not provided them with meaningful information. Often the problem is not a lack of data, but the inability to access it or to be confident of its accuracy.
To transform their raw data into fact-based and meaningful business intelligence (BI), many utility companies have established special data warehouses on standalone computer systems. Before it's allowed into the warehouse, data on consumer transactions is "cleansed" for accuracy. Once this data is organized in the warehouse for rapid access, managers can use a BI solution to uncover the patterns and trends that will help the company create new products and services tailored to its most desirable customers.
Even the most casual contact with a customer can activate the process of building better relationships through BI. Let's assume you're a customer who phones your power company with a billing question. As soon as you identify yourself, the company's representative pulls up your file from the data warehouse. This file indicates that you live in an upscale neighborhood, drive a Volvo, have an income that may warrant home security and own a computer. Knowing these facts, the rep may ask if the company can send you information on its home security system or Internet service provider.
Suppose now you say that a home security system would interest you. The rep can send you sales literature, then follow up weeks later with a phone call unless your file in the data warehouse says you dislike sales pitches over the phone. Then the rep could follow up with more literature. This scenario could become common because many companies believe that if they provide security and Internet services to customers as well as electricity or gas, these customers will be more likely to resist sales pitches from competitors.
With each new customer contact, the amount of data to be mined through business intelligence increases. And once a utility starts building its home security or Internet business, BI from the data warehouse can send warnings if too many customers become dissatisfied and discontinue the service. BI can even predict which customers are most vulnerable to being scooped up by competitors and why. Then the utility can customize campaigns to "win back" these customers before they even leave.
Identifying Profitable Customers
Business intelligence may turn out to be a utility company's greatest advantage over new competitors. However, as mentioned earlier, making a profit from customers will require that utility companies deliver the right product through the right marketing channel and, most importantly, to the right customer. With BI, a company can identify precisely which customers are worth fighting for based on their profit-generating potential.
As deregulation looms over many states, utilities will be using BI to identify the most profitable customers to pursue and, in so doing, strengthen their financial positions before competitors enter the marketplace. In the early 1990s, for example, economic conditions in California were severely depressed, and Southern California Edison (SCE) was faced with having to write off millions of dollars in uncollected revenue. SCE is the second largest investor-owned electric utility provider in the U.S.
"People were running up huge bills, then disconnecting their electric service and leaving their bills unpaid," says Mike Sigal, president of Life Cycle Consulting Inc., who worked with the utility to find a solution. Life Cycle Consulting, Inc., a SPEC Group company, specializes in IT solutions for the utility industry. Sigal worked with the utility to build a data warehouse that would use sophisticated techniques for mining customer data to identify customers who didn't pay up and to collect what they owed.
Managing credit collection on a data warehouse, rather than a traditional computer system, enabled Sigal to develop data mining techniques very rapidly. Then employees from the utility's credit and collection department could extract data from the warehouse and very quickly know how much money a particular technique was bringing in and how long it worked before the rate of return began to diminish.
Since many of the delinquent customers stayed in the same areas under different identities, some could be found simply by matching the utility's customer data with data from California's Department of Motor Vehicles. Other data mining techniques were more sophisticated.
In their search for the best techniques to use, employees could not possibly know in advance all the questions they would have to ask. "With traditional computer systems, you have to know all your questions in advance," says Sigal. The data warehouse enabled employees to "query" the database with questions they had never asked before and then get immediate answers. "Based on the feedback they got from the data warehouse," says Sigal, "employees could change and refine their techniques for credit collection practically every month."
A report on Southern California Edison's data warehouse project, issued by the consulting firm IDC, conservatively estimated that within one year, the utility recovered at least $8 million in unpaid bills that otherwise would have been written off. Sigal puts that figure even higher. In any case, IDC calculated that the utility received a first-year return of 662 percent on its investment in data warehousing.
Technology as an Agent of Change
In 1997, a consulting firm called The Decisioneering Group interviewed senior executives from 12 major U.S. power, light and gas utilities on the many challenges deregulation will present. These executives stated that if they're going to prevent the loss of 10 to 20 percent of their revenues to competitors, they must find uses for business intelligence in areas they identified as vital to their future survival. These areas include the following:
- Customer risk assessment and management. Deregulation in the telecommunications industry brought a tremendous increase in losses from fraud, late payments and nonpayment. As Southern California Edison learned, to avoid such a problem BI must help utility companies identify and deal with delinquent customers and people who move from utility to utility without paying their bills.
- Asset planning and optimization. Installing, maintaining and repairing networks for transmitting power require enormous sums of money. BI will help utilities decide how to use this money wisely and how to determine if and when provisioning and repair operations must be "reengineered" in order to provide the power and the quality of service that competitors will not be able to offer.
- Customer and product profitability. Utilities must be able to view and analyze the profitability of customers and products on a timely basis. BI applications on profitability can be linked to applications for marketing, sales management, customer service and provisioning (in the data warehouse). Then the utilities can build reliable models for analyzing the costs and profits derived from specific products and customers.
Unanimously, the senior executives interviewed by The Decisioneering Group saw technology and particularly BI as a powerful agent for managing the upheaval that will inevitably rock their industry as they become deregulated. By using BI to identify these changes and then navigate skillfully through them, utilities believe they can transform themselves into more agile and customer-focused organizations that can deal with competitors and meet any challenges deregulation will present.
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