Analysis from PwC reveals a 60% rise in bad debt levels across the energy utility sector over the last five years with water utilities not far behind with an increase of 44%.
According to the research, bad debt across energy utilities rose from £400m in 2011 to £640m in 2015 with UK Water firms showing a similar trend from £263m to £379m. Only the Telecom sector showed a marginal improvement with debt levels dropping by £20m to £560m over the same period.
However, when DSO (days sales outstanding) levels are analysed, all three utility areas saw a drop in performance levels. DSO levels for both Telecoms and Water utilities reached a five year record high in 2015: from 26 days of revenue in 2011 to 28 days for Telecoms and an eight day uplift for Water to a peak of 41 days. Energy utilities DSO levels have also risen from 27 days in 2011 to 32.
When set against a backdrop of rising household debt – with unsecured lending expected to reach record levels of £10,000 per household in 20161 and economic consensus that this will rise again in 2017, driven by increasing house prices, static wages and a real decline in household income – PwC’s working capital team suggests that now is the time for utilities to re-think their consumer collection strategies.
Stephen Tebbett, director in PwC’s working capital team, specialising in utilities and industries, comments:
“With pressure on household incomes steadily increasingly, the likelihood is that utilities will continue to experience further deterioration in their DSO and bad debt levels. The impact could also spread to other areas, for example, with numbers of customers on prepayment meters and use of vulnerable tariffs escalating.
“And while Telecom firms have more leeway than other utilities to truly choose their customers - being able to cut off those who can't and avoid those who are unlikely to pay – and the ability to cut their losses early and sell delinquent debt, a move that can result in an earlier impact on bad debt, they are not immune to this challenging economic landscape.
“If they are to successfully tackle this issue, utilities can no longer rely on the age-old strategy of sending more collection letters in the hope that hitting customers quicker and harder will boost collection rates. This approach simply doesn’t take into account the different reasons why customers have fallen into arrears or the range of motivations that will encourage them to prioritise paying debts.
“If firms are to successfully tackle this bad debt challenge, it’s crucial that they invest in a high tech and tailored approach to collections – a move that will not only reap much better returns, but strengthen customer relationships and boost stakeholder trust.”
The PwC research team believes that collection strategies must become more dynamic and be able to flex the debtor’s agenda – this means putting as much effort into ensuring that it is easier for customers to stay current as is invested in the collection and recovery of arrears.
Employing a more complex and tailored tech-enabled approach, supporting multiple automated billing, payment, collection and recovery paths for different types of customer, will also lead to significant improvements in collection rates.
By enhancing efficiency and flexibility across the collection model, expensive letters, doorstep collections and litigations would ultimately only be targeted at those customers where there is a realistic expectation of success.
And for vulnerable customers, the likelihood is that they could be taken out of the routine collection process early on and offered options to make it easier and more affordable to pay bills, reducing bad debt and improving DSO performance.
Niall Cooter, a working capital specialist in PwC’s energy team, added:
“While it may appear that this tailored, tech-enabled collection strategy points to a more expensive billing and collection approach, this needs to be considered alongside the inevitable increase in the cost base due to increasing levels of non-payment.
“Using a multi-channel strategy that recognises different customer dynamics and respond with the most effective communication method, from text and email for the tech-savvy to field visits for more vulnerable customers, will improve engagement and response rates.
“Those firms who recognise the range of debtor drivers and can tailor their collection strategies accordingly, will ultimately reap the rewards and break this upward trend in bad debt levels.”