Jim Myatt

Today we are talking with Jim Myatt, chief executive and founder of small energy retailer Australian Power & Gas. In just two years the company has signed up more than 140,000 residential customers in Victoria, with revenue set to jump from $72 million in 2008-09 to $135 million in 2009-10.

The company has been built using a clever model whereby a number of functions that many businesses would consider to be key – such as sales and billing – are outsourced, to give the company maximum flexibility on costs. It’s a thought-provoking strategy for any small company taking on the big guys.

Give us an explanation of what Australian Power & Gas does, because this is a little bit of a David and Goliath story in that you are a small player in a sector with some absolute giants.

Australian Power & Gas is basically an energy retailer, that means we sell to the retail market electricity and gas. When you talk about David and Goliath, I think that’s sort of an apt description, except the interesting thing to remember from this model is that energy is a very low involvement product. No one sits around at home thinking about switching energy companies, it’s not a real topic of conversation, it’s not high on people’s agenda. So the company is very much around the channel strategy rather than the product strategy and what that means is that as long as you’ve got the right channel structure in place, it’s not a lot about the brand and it’s all about the main product.

The product is very generic, it’s a commodity type market, we compete mainly on price but people don’t necessarily know who their energy provider is. So if you’re a Goliath in this case like an AGL or an Origin, people don’t have a natural association with the brand, so the fact that the channel is important was one of the critical elements when setting this up.

I used to be the sales director for one of the bigger energy retailers Energy Australia, which was a government owned retailer in NSW and we had 1.5 million residential customers. But when I was there and building business outside of NSW, my main sales channel was a company called the Cobra Group. Now Cobra is one of the world’s biggest direct sales companies, they are in 25 countries around the world, the have 10,000-12,000 people out in the field in any one night. But that’s what they do, that’s their core business and they are on the same scale, if not bigger than any organisation that does that same sort of sales function in Australia.

So from a channel perspective, I compete on the same terms as AGL and Origin in that I have access to the same channel strength as they do. Now Cobra is on a 10-year exclusive contract with Australian Power & Gas. They also own 30% of the Australian Power & Gas business, so that’s the trade off that we have. They earned equity into our business but I got access to their channel.

So when you look at it as a David and Goliath we actually compete the same way for organic growth and that’s why we are the fastest growing retailer in the Victorian market, we can open up the firepower to the same level as what they can.

But there’s a deliberate model in the way you’ve set the business up, in that a lot of the functions that would be in-house at those bigger companies have been outsourced by Australian Power & Gas to get advantage around variable costs.

Absolutely, I set my business up to be 95% variable costs and that was to reduce risk. Where a lot of other smaller players get into trouble is they put a lot investment up front into billing systems and things which you have to compete in the market and what I did was to actually outsource some of those things.

So, say on a billing system which is a key part of your business and on your customer service side, we outsourced that to an Australian provider and at the end of each month we only pay for the number of customers we have on the system at the end of each month. And so that means we don’t take any investment risk into IT systems, we outsource that risk and that’s really where we’ve driven the model from. And really the only fixed costs that we incur are our overhead staffing costs in the business which we’ve tried to scale as the business has grown.

But it still remains a very small team given that a lot of those functions are outsourced. What’s the primary focus of the in-house team?

We run about 50 staff internally. We have a sales and marketing team, looking at channel management and on the marketing side, we look at the marketing collateral that supports all our sales, we look at the customer communications, the website, the product pricing and setting the pricing structures for the market. And so we then have a team that looks after finance which is basically a normal finance function, sort of CFO, accounts payable, receivable and then also settlements of the contracts.

And then we have a team that looks after what’s called commercial operations which is really managing our outsourced contracts, so making sure that they’re all delivering to their set service levels. And then we have a small wholesale team that buys wholesale energy and then we have some legal support internally.

And probably one area that we do look at a little bit, we have a small customer service team which deals with our outbound sales enquiries. So even though we outsource customer service, we do have “in-sourced” sales, where we’re training people on different product types and dealing with the more specialised product enquiries.

The model of outsourcing requires you to put a lot of trust in those providers. Some entrepreneurs would sort of baulk at that a little, but how do you get that balance right?

On the back office and customer service side, I think you’ve got to go into it with a partnership approach and I think the key is finding a service provider where you’re a similar standing to them, so you’re both building each other’s business together. We haven’t gone with the world’s biggest back office services provider, we’ve gone with a company that’s trying to build the same position.

And then I think you’ve really got to articulate the contract. We’re just into our second contract with them and our second contract is vastly different to our first contract in that we’re far more aware of the areas that we want to manage and control and have a quality assurance around. So I think we’ve evolved as well as far as our standards are concerned so our second contract is definitely different to our first contract.

But what happens when things go wrong? Where does the responsibility and I guess the blame fall?

Look, it is an issue and there’s no easy answer for it. The main thing that we can do internally is to have the staff to manage the contract so we don’t divorce ourselves from it, and our staff do get absorbed in their outsourced company’s performance. It’s also important to have contractual rights around making sure there are some penalties if they don’t deliver as well.

You guys have been growing extremely quickly over the last two years, any challenges in managing the pace of growth?

Absolutely. The biggest issue we’ve had is really working capital management. We’ve been through a very tough time on the financial markets. The company has had very limited access to debt and also equity markets have been poor, and when you’re a listed entity like we are, you can dilute yourself very quickly by issuing equity out unnecessarily, so we’ve had to be very conservative around our capital structure as well. But we have a couple of levers that we can pull around our business about how fast we can grow and we’ve really pulled those levers to say, look, we’re just not going to grow above this pace because we’ve got to manage the working capital in the business and make sure that we don’t have to draw too heavily on other financing facilities outside our capability.

So in a GFC free world you might have been able to grow a bit quicker?

Absolutely, no question about it.

The next stage of growth is Queensland. Victoria has been the focus as it’s completely deregulated, but Queensland is now opening up for you. How big is this opportunity?

If you look at the Victorian market opportunity, the biggest thing is that it’s a very big gas market in Victoria. While there are about three million electricity customers in Victoria, there are about two million gas customers. In Queensland there’s not quite the same opportunity for the gas side, but there’s about two million electricity customers. So we don’t plan to dominate the market, we plan to take an 8% to 10% market share in each market that we operate and we think that’s realistic for us. So we think the opportunities in the order of 150,000 to 200,000 customers in Queensland over three years and I think that’s the sort of scale that we’re looking at. So we combine that with Victoria, that takes us to a position of about 450,000 accounts in the next three years.

Will there be much internal work needed to be done to support that extra scale?

No. A lot of the business is already to scale. We have put on some additional staff to deal with that growth but when you look at our model, once the base model is operating, adding additional states is really fairly incremental. So we get much more efficiency from our model as we grow larger. It’s really just doubling our growth with probably about 10% increase in internal labour costs.

That’s going to keep you pretty busy for three years or so. After that are you hoping other markets will open up or do you need to be looking for other growth opportunities?

Eventually. So I think the next three years are focused very much on organic growth and then I think past that, we’re into potential exit strategies or diversification strategies. We’ll be at a scale where we have 450,000 accounts which is a $500 million a year revenue business. Then there are acquisition opportunities, vertical integration opportunities, and there’s about half a dozen or more smaller retailers out there that are potential acquisition or merger opportunities.

Just picking up on something you said before about creating a bit of a selling machine in your business. Do you ever think that other products would be suited to this model, perhaps telco services or other utilities that might fit into that channel model?

Electricity and gas go together very well and everyone will put those together in their mind, they sell well together, no problem about that. I think if water ever became deregulated then water would slot straight into it. I think they would be fine. The only thing, and we do sort of watch the global markets as well, is potentially how broadband services fit in with it, that’s something that’s billed on a regular monthly basis.

Look, telco is a very different market and there are very, very few examples globally of any energy companies that have made telco work. But certainly like a fixed broadband or a fixed something like that is a potential. But at the moment the focus is just on organic growth. And like our billing system is compatible for billing broadband and it’s because it is much more of a monthly usage type thing, where telco is very much a different billing mechanism.