Winter Preparedness - Is it time for a Debt Health Check?

Given the recent warmer weather, the thought of winter will be far from the mind for most of us, but if this year is remotely similar to the latest industry data from H2 2023 - the energy market is in for further challenges.

Our previous insights highlight the scale of impact on both customers and suppliers:

• Total debt without an arrangement increased by £1bn in the past year to £2.3bn
• Direct Debit failures have increased by £0.5bn in value, up ~40% in the past year
• Both trends align with our analysis of real consumer inflation – showing Direct Debit customers faced peak expenditure throughout 2023, later than official figures suggest

Although energy prices are falling, it’s not yet enough to curb record levels of domestic debt.

Suppliers need to be reflecting on their internal debt management maturity in readiness for Winter 24 and understanding if it needs any interventions, while continuing to resolve the £000m’s of unsecured debt on the balance sheets.

The summer months when contact levels are historically lower can provide a great opportunity to invest in people, processes, and controls, in readiness for consumption levels rising back and affordability conversations increasing.

How well do you know your customers?

Refreshing not only payment data, but also commissioning new insight centred around future impacts of the cost-of-living challenges, will identify further areas of improvement and opportunities in delivering better customer outcomes.

Determining the quality of your customer interactions, objectively, should be a primary focal point when assessing internal debt maturity. Do the support options that are available to your customers still meet their needs? When was it your customers gave feedback on how easy they feel it is for them to make a payment? Are payment arrangements that separate arrears and ongoing consumption still working for the business and the customer as expected?

Asking these types of customer-centric questions, from a capability-based perspective, is the first step towards identifying areas of improvement. Our insights indicate that failing payment arrangements and increasing debt values will continue, unless suppliers can not only get to the root cause quickly and drive tailored solutions, but predict a level of anticipated need using a complete understanding of customer circumstances.

To deliver these outcomes, your understanding of customers should go beyond overseeing interactions. There’s a wider conversation to be had around customer data and its importance in building a holistic approach to credit management. It’s an impact we’ve already seen with a Water retailer, where internal changes were identified to enable better utilisation of customer data in collections, alongside improvements to customer journeys and the automation of Direct Debit adequacy, delivering ~£5m cash benefit.  

It’s important to recognise there are different approaches and levels of maturity across customer segmentation and treatment; rudimentary customer segmentation using limited variation in treatment and timing of communications, all the way up to a ‘best in class’, utilising a fully intelligent and dynamic segmentation approach.

To enable active segmentation and informed customer treatments, an infrastructure of systems and tech options must be continually adapted which may include:

• Reviewing the processes for two-way asynchronous SMS – ensuring it allows customers to initiate contact and respond at their convenience 
• Monitoring of Online landing page solutions – measuring performance and engagement for customers paying in full, part pay, or payment plans etc
• Testing of AI-enabled knowledge management systems - increasing accuracy of information and response times based on expected contact types
• Putting yourself in the customers shoes of your Omnichannel experience – are the channels integrated sufficiently to provide a comprehensive view of customer interaction and enhance CX?

Can you proactively respond to risk?

Establishing a deeper, active view of customer circumstances puts you in a stronger position to identify risks. But reviewing your internal capabilities to mitigate these risks, in advance of them arising, is equally as important to deliver the level of support required.

This can be achieved by taking key capabilities like planning ahead and knowing the process, and assessing these against importance, value add, and potential benefit. Outcomes of this assessment can help to inform strategic decision making, telling you where to act to drive positive customer outcomes.

For example, a customer experiences bill shock in the form of a direct debit spike, which the customer didn’t anticipate. Without proactive engagement, the customer’s propensity to pay is likely to drop, and our insight indicates customers in this scenario are more likely to cancel their direct debit, leading to increasing debts when they eventually enter the collections journey.

Instead, suppliers should review not only the £ thresholds for the early engagement capabilities they have in place, but also their customer data. These should be tailored to specific customer segments, with a bespoke contact strategy offering varied options for interaction. This accessibility makes it easier for the customer to understand the cause of the bill shock and, more importantly, the solutions available to them.

Are strategic objectives aligned to your operating model?

Consider whether your operating model is set up to support your strategic objectives, by asking capability questions that are customer-driven, aligning with the typical customer-centric nature of top-down objectives.

The findings from these questions, coupled with your observations from the front line, can help you to understand if operational activities ‘roll-up’ to deliver against strategic KPIs. Where gaps are present, this process of strategic assessment can help to ensure that key areas of priority are aligned to critical objectives.

Can your operating model flex and pivot when customer demand unexpectedly peaks, whilst still maintaining the strategic objective for being paid on time? How are you optimising the stages of the customer journey based on risk? Are communications being tailored to this risk level? Do you have teams specially trained to recognise escalation opportunities?

Alignment of objectives and the operating model also needs to span outside of your organisation, covering any third parties involved in the credit management process. Upholding these parties to your own internal standards is critical, to drive the operational activity required for achieving strategic objectives.

Adapting debt maturity to new challenges

Building a strong debt maturity model is a must for suppliers, in the wake of recent data on unsecured customer debt. This model is about more than checking how you stack up against industry averages – it needs to identify the foundational aspects of effective credit management and be leveraged to drive innovative solutions for customers.

Key points to consider:

• Does your customer data go deep enough to deliver innovative solutions in today's market?
• Are your teams equipped to utilise this data in early engagement, to prevent issues like increased DD failures?
• Are top-down objectives, like reducing unresolved debt, being driven by the operational activities you're prioritising?

If you’d like more insight on how to improve your debt management maturity, contact Rachel Littlewood.