The first in a series of thought pieces on the implications of the ongoing water price control for energy companies
Ofgem and Ofwat expect customer insight to be at the heart of companies’ business plan submissions. Complete Strategy describes how energy companies can learn from the way that water companies engage with their customers.
Under the RIIO framework, Ofgem expects network companies to demonstrate effective engagement with consumers and stakeholders. Views on leading engagement practice have evolved since the initial RIIO price controls. The water regulator (Ofwat) embraced and extended aspects of the RIIO framework in its 2014 review (PR14), and companies now need to demonstrate a further step change in the quality and depth of engagement for the 2019 review (PR19). Ofgem’s consultation on the RIIO-2 Framework also includes ideas for increased engagement, such as Consumer Engagement Groups to review and scrutinise business plans.
In our experience, companies typically find four aspects of the engagement process particularly challenging:
- Choosing the right amount of contextual information to share with end-consumers
- Reconciling different (and sometimes conflicting) sources of insight
- Demonstrating how insight has influenced the plan, and
- Aligning engagement processes with internal governance and decision-making.
- Choosing the right amount of contextual information
Ofgem is still considering how it wants companies to engage with their end-consumers, meanwhile Ofwat has already set out its expectations for customer engagement.
Ofwat requires companies to engage with end-consumers on a raft of complex issues, These include their approach to delivering operational, corporate and financial ‘resilience’, and their financial structures and corporate governance. For complex issues, there is a tension between providing enough context to allow customers to engage properly with the issue, and providing too much information and unduly influencing customers’ views.
Some companies address this by undertaking more than one type of engagement exercise. This can involve comparing the results of engagement with both ‘informed’ and ‘uninformed’ customers. Other companies take the view that more complex topics require focused engagement with more expert audiences. The most progressive companies adopt innovative engagement techniques. For example, we have seen companies successfully using behavioural economics techniques to simplify the way that information is communicated and to make content more accessible. We have also seen companies undertake experimental trials to demonstrate that their customers understand complex matters.
- Reconciling different views and sources
In the water industry, the term ‘triangulation’ is used to mean the process of using multiple and independent measures to obtain a better fix on the engagement topic. Companies use triangulation to reconcile and draw conclusions which are reliable enough to use as the basis for business plan proposals. In the context of RIIO-2, we also expect there will be many engagement topics on which it will be possible to draw on multiple sources of information, for example, studies commissioned directly with consumers or stakeholders, academic or industry research, consumer complaints data, and findings from studies undertaken by other companies. Companies will need to decide how much weight to put on each source, and how to take account of conclusions in their plans.
Our experience is that companies who use a structured (but not rigid) process for ‘triangulation’ are able to quickly assimilate and apply conclusions from engagement in their plans. And, they are in a better position to justify how they have taken on board different sources without bias.
- Demonstrating how insight has influenced the plan
Gathering unbiased insight from end-consumers is difficult. But it can be equally challenging to feed this insight into the plan, and to demonstrate the way that this insight has been used.
Companies need to show how the priorities of end-consumers have influenced the choice of planned investments and their operational decisions. Customer insight needs to translate into information that can be used by engineers and operational staff.
We have found that companies often find it difficult to bridge the gap between their customer engagement and engineering teams – these have very different skills, experiences and perspectives.
- Aligning engagement and governance
Finally, companies need to demonstrate that engagement has taken place at the right point in the business planning process. It is also critical to allow time for internal stakeholders to influence and become comfortable with the emerging plan. A process which allows adequate time for engagement and internal review will require more time and more stages. The trick is to bring together a clear understanding of the scope and purpose of customer engagement with an appreciation of the nature and timing of decisions that need to be made by the company’s executive team and board.
Companies that start early have an advantage. We have observed that companies who start late (or who start without a clear view on which decisions require customer input) find it particularly challenging to run their business planning process in a way that properly brings together customer and internal views at the right time.