Why Private Equity Rollups Are Killing Utility Billing Service Quality

In the past three years, small, independent utility billing service companies have regularly been rolled up into larger conglomerations (sometimes known as commodity utility billing companies or CUBCs). For example, Metergy acquired QuadLogic and EMS and Conservice acquired RES, both in the name of "efficiencies."

These acquisitions allow CUBCs to expand their service portfolio by adding new expertise and products. Think of the synergies, they say in their pitch for your billing business.

At the same time, 70%–90% of all mergers and acquisitions fail, according to the Harvard Business Review. Since billing company buyouts are no different than other M&A events, there's not a lot of reason to get excited about these big purchases. But let's not dismiss these commodity offerings just because the stats aren't promising. Instead, let's dismiss them on the evidence.

Why Private Equity and Venture Capital Are Interested in Utility Billing

The appeal to private equity and venture capital firms is straightforward. Small utility billing companies typically enjoy that unicorn in business – high client retention rates – which translates to predictable, positive, long-term cash flow. This is chum for circling investment sharks.

At the same time, many of our fellow billing company founders are reaching retirement age with no young bloods to take the company forward (not us – the second generation is already well in place at utiliVisor). Add the looming costs of AI-driven software development and a lot of investment capital waiting to be placed, and you have the perfect storm for motivated sellers.

How Utility Billing Acquisitions Impact Property Owners

Here’s how these roll-ups really go down:

• The commodity company wants the founder(s) to stick around 2–3 years, but only as an “advisor” to a younger MBA with no real business or industry experience. In addition, personal expenses and other perks that founders used to enjoy are reduced. And, with minimal understanding of the business, staff who don’t immediately present as high performers in the minds of the MBAs, are eliminated, even if they’ve been with the founder for 30 years and know the business inside and out. Meanwhile, the founder becomes disgruntled with requests to “roll with the bros” and often leaves early, taking their industry and institutional knowledge with them.
• CUBCs will maximize the newly acquired assets by pushing out payables, reducing inventory any way they can in order to maximize cash flow, and ruining vendor relationships that impact customer service.
• In short order, the purchaser restructures the original billing company, supposedly reducing costs but somehow always placing additional debt and fees on the acquisition. (That's how they make money.)
• The CUBCs pay themselves healthy special distributions with any extra cash, rather than investing it back into utility billing services.
• The CUBC usually insists on locking customers into a single metering product (theirs, of course). This saddles the building owner with a 15- or 20-year contract that costs them 3 to 4 times their meter costs, with 100% less service. (See our article on contract scams to see how this works.)
• CUBCs give their roll-ups ridiculous market valuations, because that's their exit strategy. Then, in 5–7 years, when those values aren’t realized, you’ll hear a lot of excuses and see an immediate sell-off of divisions or the entire company as the purchasing entity moves onto the next deal. Unlike the founders and the original team, CUBCs don’t need every deal to make money, and they’re not motivated to make customers happy. They can write a bad investment off, and they get paid plenty for their rare successes.

Real Customer Problems: What Happens After a CUBC Acquisition

How do we know how commodity utility billers behave? Because property owners and managers come to us fed up with shenanigans like these:

• One property signed with a CUBC last January for billing services. They came to us in December because they still hadn’t received any billing packages.
• Another property got the promised billing packages, only to discover they were ridiculously inaccurate (with invoices for literal pennies), and the billing company hadn’t even noticed that the amounts were impossible.
• Many properties tell us that they can’t get anybody to come on-site, even to scope out projects for bidding.
• CUBCs only want to sell new systems and lengthy contracts to show the path to unrealistic market value. They’re not interested in servicing older equipment or helping properties work with what they already have.

Simple properties like this don't need sophisticated billing. Is your property this straightforward?
Photo by Thomas Tastet on Unsplash

Why Independent Utility Billing Companies Outperform Commodity Billers

If you own or manage a commodity property, such as a trailer park, military housing, or garden apartments, you probably don’t need sophisticated technical support. Commodity submetering companies, which include short-term collections services, are a reasonable choice for these cookie cutter properties.

But complex mixed-use properties don’t fit any mold. Each one has its own particular setup involving multiple types of utilities, vast and complicated systems, fiddly rates and fees, and condo boards representing their specific interests. These buildings need real engineering and billing support to resolve meter issues and billing disputes, which the commodity billers aren’t set up to handle.

In short, there are two types of properties when it comes to billing: the cookie cutters and sophisticated mixed-use/detailed businesses. There are also two types of billing companies:

1. Commodity utility billers, whose business model means they take your data at face value
2. Service-focused utility billers, who believe nothing until utility usage is accounted for forward, backward, and sideways (because that’s how you avoid disputes on high common area costs and recover everything you’re allowed).

A commodity billing company can make a good pitch for their new entity, but don't be surprised if the truth looks different. All together, the lack of owner involvement, an overestimation of synergies, and a lack of financial support for the actual business offering create an inflexible offering with high hidden costs and suboptimal service.

If these mergers and acquisitions of independent billing services were working well, we'd know about it. Instead, these deals have only increased awareness of utiliVisor in the market and opened the door for us to meet new long-term clients. So we don't mind if the CUBCs stick with what they're doing. But you might be interested in more.