CIS Pricing Considerations
By Greg Galluzzi; President (September 2003)

An initial meeting was conducted with a customer information system (CIS) selection team for a utility serving 80,000 customers. During the course of this meeting the team was asked how much they thought a new CIS would cost. They indicated a budget of $300,000 based on what vendors were telling them. I asked them to add another zero to the figure as they would be spending more like $3 million on a new CIS. The final project installation figure was $2.86 million.

Historically, it has been very difficult to identify standard CIS solution market pricing. Changing market conditions, dynamics of the deal, and reluctance by vendors and consultants have all contributed to this issue. However, as the installation model has moved from one of total customization to at least some level of acceptable configuration, and ultimately to all configuration, it has become a little easier to develop project metrics.

TMG over the course of a large number of CIS installation efforts has developed basic numbers which are used to provide high-level estimates of what it will cost to implement a core CIS product solution with minimal modifications and a commitment to moving onto the new system as quickly as possible.

The following pricing figures are for product solutions only. We do not believe custom development of CIS solutions for the residential marketplace has a place within today's market, unless it is being developed with the intention of ultimately offering a CIS product to the market.

• In-house Managed Application. Utilities will spend between $20.00 to $30.00 per customer service for vendor hardware, software and services, and another $5.00 to $20.00 for payroll and other out-of-pocket costs. For example, a utility serving 100,000 customers will spend between $2.5 million and $5 million to install a core CIS solution.
  
• Hosted Application. With this solution the application is licensed, and the server environment is hosted by a third party with connectivity provided between the hosted data center and the utility's network. Depending on the negotiated deal, installation costs may be reduced by up to 10 percent for services related to the hosting solution. For example a utility serving 100,000 customers would spend between $2.25 million and $4.5 million to install a hosted CIS solution.
  
• Outsourced Application. An outsourced solution may be installed for approximately 40 percent less than the cost of an in-house product solution. This savings is attributed to outsourced hardware, application software (renting the software), and a reduction in related service dollars. To further reduce initial investments outsourcing vendors may offer to finance installation costs through the ongoing monthly per click charge. For example a utility serving 100,000 customers would spend between $1.5 million and $3 million to install an outsourced CIS solution.
  
• Application Service Provider (ASP). True Application Service Provider or ASP solutions have not yet evolved into standard offerings for CIS billing solutions. Instead, ASP solutions tend to operate vendor software within an outsourced environment. Therefore, the implementation costs tend to be similar to outsourced solutions.

While there are variations, in our experience these metrics are the rule rather than the exception.

License Fees
Application software license pricing has standardized on number of customers, however, a utility may encounter the following pricing methods.

• Customer Based Pricing. Pricing based upon the number of active customers billed regardless of number of accounts or services. The larger the customer base the lower the per customer charge.
  
• Service Based Pricing . A base price for number of customers plus a charge for additional services or meter points.
  
• Revenue Based Pricing. This model utilizes the organizations revenue as a price determinate.
  
• Component Based Pricing. Utilizes the type of organization and the CIS components to be implemented as the price determinant.

A few vendors are trying to obtain higher license fee pricing to reflect more complex and configurable software. Product vendors are relying on installation service dollars decreasing to accommodate the associated increase in software prices, however, this is not occurring. Instead, installation dollars are remaining the same or are increasing to accommodate the need for change management, business process redesign, etc. In addition, those vendors that have increased their license pricing are finding it difficult to sell the product in comparison to competitors who retain a more standard pricing model.

Utilities can expect to spend between $3.00 and $7.00 per customer for a new CIS solution.

Ongoing Costs
The following ongoing costs for operating a CIS solution consist of new CIS environment costs only, and do not include stranded infrastructure costs or debt service costs.

In-house Managed Application

The ongoing costs for a new CIS environment will increase operating costs by $0.15 to $0.30 per customer per month.

It includes the maintenance and licensing costs associated with all hardware and operating software with contracts signed for a period of 1 to 3 years for various components.

Pricing for ongoing training and application services (e.g. maintain custom modifications with new product releases) are not standard and usually negotiated on a project by project basis.

Pricing for the application software license has increased to a standard 20 percent of the market value of the software license. This will vary by vendor, with a few still offering 18 percent and others as high as 24 percent.

Hosted Application
The ongoing costs for a hosted CIS will increase operating costs by $0.13 to $0.25 per customer per month. Ongoing hosting costs include the following three price components:

Fixed Charge
Consists of the cost associated with assembling the necessary hosted facility divided by the number of contract months.

Variable Charge
Consists of charges for actual usage times a contracted rate for items like storage space, number of reports produced or number of system restores.

License and Software Maintenance paid to Vendor
Since the customer owns the software, the hosted solution includes the annual maintenance.

TMG Consulting completed pricing negotiations for two similarly sized hosting solutions. The pricing for a 238,000 customer water utility was $34,000 per month plus communications charges. The pricing for a 330,000 customer utility was $75,000 per month plus communication fees.

Outsourced Application
The ongoing costs for an outsourced CIS environment will increase operating costs by $0.50 to $1.50 per customer per month.

Outsourced or ASP solutions may include several cost components such as application based charges, bill production based charges, additional service charges, and pass through charges.

Ongoing application outsourcing and ASP agreements are being signed for periods of 5 and 7 years. There are exceptions with contracts signed for 3 years and as long as 10 years. Ongoing hosting costs include the following two price components.

Per Click Base Charges
Pricing based upon the number of actual bills produced for the month. These figures vary based on vendor market position and strategy, the customer situation and strategic importance, etc.

TMG contends that to be truly competitive with an in-house or hosted product solution, the outsourcer or ASP must provide a solution in the $0.30 to $0.50 range rather than the $0.50 to $1.50 range found in today's market. We believe the economy of scale is not present because customer volumes remain low.

Per Click Additional Fees
Variations exist by vendor and may include additional per click pricing based on number of inactive customers maintained on the database and/or number of metered service points for each customer.

Bill Production and Distribution Charges

Tightly coupled with the application contract, bill production costs are very much dependent on the amount of printed materials, bill inserts, notices, etc.

Postage and consumables are usually pass through costs with no administrative uplift charge, although a few vendors attempt to place such charges in the contract.

TMG Consulting has found these costs to be as low as $0.20 cents and as high as $0.30 cents.

Consumables are generally billed on a pass through basis.

Remittance Charges

Costs for the in-house cashiering function average between $.20 and $.30 per transaction.

Outsourcer costs for low to moderate volume averaging $.15 to $.30 per transaction with moderate to high volume averaging $.08 to $.25.

Customer Service Charges

Customer service charges average between $2.00 to $3.00 per transaction. The lowest price found is $1.00 and the highest is $5.00.

Meter Reading Charges

In-house meter reading function average between $.35 and $.45 per transaction. Outsourcer costs for low to moderate volume averaging $.30 to $.50 per transaction with moderate to high volume averaging $.20 to $.40 per transaction.

The information provided in this document is valid for utilities serving 20 thousand to 3 million customers. Pricing for utilities serving less than 20 thousand customers may be greater, and pricing for utilities serving over 3 million customers may be less.

Greg Galluzzi is the President and Senior Consultant with TMG Consulting. Greg has 25 years of information technology, and consulting, experience across 200 CIS projects. experience across 200 CIS projects. Greg can be reached at gregg@tmgconsutling.com.