It's Not a Pretty Story. Nor is it unique to the quickly-deregulating power business. Revenue leakage is something our colleagues in the competitive telecom game have had to deal with for years, with no end in sight. And, according to Ed Tobia and Michael Hurle of PricewaterhouseCoopers' ERM team in Philadelphia, like the retail telecom sector, revenue leakage issues in the retail power space won't go away.

"We started focusing on this issue in the telecom space in 1993-1994. The main causes for leakage should sound familiar:

  • Implementation of unproven systems to address deregulation and customer-centric solutions;
  • Entrance of new retail players lacking technical skill sets and back office operations to address ongoing regulatory modifications;
  • Differing state-to-state regulations stretching the limits of technology;
  • Limited internal resources to address ongoing problem resolution;
  • Complicated rate structures and billing relationships.

"These issues have resulted in various pockets of revenue leakage throughout the telecom revenue process."

The revenue process itself, while similar in nature, differs in some respects. In the telecom industry, the data collection and billing process are very complicated as data packets are processed through various switches that in turn are collected, priced and billed in addition to settlement with various private network players. The utility industry, while also automated, involves several manual or off-system challenges peculiar to this industry. These include: EDI/Internet transactions between the EDC and EDS; settlement between the ISO and EDC or EDS; and complicated industrial calculations that often involve manual preparation to some degree. The deregulated billing world is dependent on a triangular relationship between the ISO, EDC and EDS in order to maintain billing accuracy.

There are also other non-technological factors that have contributed to the problem, Tobia says:

  • Revenue processes span several departments. No one department owns the end-to-end process;
  • A shortage of qualified and knowledgeable people within the current revenue departments;
  • A lack of effective performance indicators or reporting tools to identify leakage; and
  • Untimely identification and resolution of errors in suspense.

"All of these situations may correct themselves over time given the maturing marketplace and advancements in technology. However, given the recent initiatives seen in the utility industry, we don't expect a breather in the near-term. We've seen other factors that will continue to keep the train moving though, such as the recent flurry of M&A activity requiring some consolidation of billing functions and systems and convergent service offerings that will also have to be billed," Tobia says.

From the standpoint of Tobia and Hurle, and despite what you read about the increased sophistication of billing/accounts reconciliation systems and process interoperability, in reality, both vendors and users have little to boast about.

"The success factor of linking all these discreet systems together is not high. It is an enormously complicated task. There is a lot of lost data. And quite a bit of inefficiency in consolidation. It's fair to say that there probably isn't a single company, an energy supplier, that doesn't have some sort of billing problems, whether they realize it or not," Hurle says.

The latter point Hurle makes, that some companies have problems, but don't even know it, is something the ERM unit focuses on. Tobia notes several instances of unsettled generation between LDC and ISOs which went unresolved for several months or accounts not billed for several months after the installation of a new billing solution. In addition, there are also cases of lost opportunity as a result of marketing strategies based on flawed database information about the EDC/EDS's customer portfolio.

Other situations that rate rather high on the "lost revenue potential" scale include:

Marketing programs that were developed based upon a marketing database that is not in sync with the Customer Information Master file.

Low EBPP penetration and no ongoing marketing to increase percentage and thus fulfill original projections. This in light of the fact most utility executives now feel it very important to maintain an online presence with customers.

Lack of effective performance indicators related to new products such as home warranty, line insurance etc. This is one area where the utility industry can learn from the telecom space. Tobia submits that much of the billing and reconciliation that goes on in this space still involves quite a bit of manual processing, mostly because the back office systems that drive the majority of the businesses in the power space were never quite designed for a competitive market. Where many sophisticated "shrink wrapped" billing systems have come on the market in the past few years, in most cases they were somehow bolted onto the legacy systems, rather than actually replacing them. Or if these new systems did actually replace the older systems, associated systems and processes were not updated or replaced to properly integrate with the newer systems.

Thus the same leakage problems exist.

"In a lot of ways, the power business billing and reconciliation process is much more complicated that the telecom space because there is so much more manual processing going on and so many different systems that need to work together. This on top of the fact power companies are trying to operate as lean as possible. Since payroll and accounting are not viewed as profit centers, they usually see cuts, despite the fact these offices are overwhelmed. The mergers and consolidations don't help either."

Tobia says that as we've moved further into deregulation, the leakage has only increased, not decreased. New systems that were designed to meet the demands of competitive markets have in many ways added to the complications they were originally designed to ease. Where every state has different rules to follow, every new system has to be custom-coded to operate correctly. And every new state or territory a company might enter could mean added customization.

Hurle says the fact that many of these companies are actually investing in huge new CRM platforms should signal that the "customer is king" culture is finally sinking in.

"Companies truly want to be more responsive, because now it matters. But, here again, the problem isn't so much with the front end piece of a CRM system. The back office never really evolved to the same level. It's never caught up to the sophistication levels of the customer-facing processes."

Tobia thinks that now more than ever, the market might be ripe for the next wave of outsourcing of some of these critical functions. "IT budgets are out of control to try to stay ahead of the market. And few managers are able to value how much bang for the buck they get for this enormous investment. There are few usable measures for determining this."

Sure, it's a grim picture. But, the situation is always improving as well, Tobia says, and on many fronts. The culture of the industry is more customer-focused. The technology is getting much more sophisticated. Companies really are running smarter as time goes on. The problem is in the fact the market is such a moving target.

"Within the next couple of years, I think the most significant change, and one that will lead to a tightening-up of revenue leakage, is a general consolidation and a streamlining of who does what in the billing process. Companies will begin to realize that not everyone can deal with and face the customer at the same time. And now regulators are on top of customer service and billing issues. Billing problems will stabilize somewhat in the next two years, but, with the added pressure of mergers, progress in this area will again be pushed backward. This is how things played out in the telecom space...and to this day are largely unresolved because of new efforts like convergent or consolidated billing. With every advance in the billing process, there are many new areas of pressure to change," Hurle says.

The way Tobia and Hurle see it, billing problems will never be behind us completely, but much can be done nowadays in determining the problems that might arise in the process and how these problems might impact your long- and short-term revenue stream.

Tobia says that most companies address revenue leakage usually resulting from "significant or recurring irregularity." He says a more proactive and less reactive approach will likely solve the problem more effectively. He suggests that companies take these steps to become more revenue-responsible:

  • Understand and document the end-to-end revenue process.
  • Measure and focus on new technologies as these may introduce new opportunities for revenue leakage.
  • Develop effective monitoring tools and performance indicators.
  • Perform root cause analysis versus problem resolution.
  • Monitor and analyze line loss factors
  • Create timely reconciliations and management review.
  • Provide accurate information in determining marketing plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.