water companies must make the right trade-offs between stakeholders

Boards must look beyond vague ‘vision statements’ and articulate clear strategies for balancing the competing demands on modern day utility companies.

Water companies are under pressure like never before, torn between the competing, conflicting demands from their key stakeholders – customers, regulators, investors and employees. As government-sanctioned local monopolies of a precious natural resource they have always existed in a complex eco-system both literally and figuratively, but this system is reaching breaking point.

Competing demands

Used to levels of customer service set in sectors far outside of utilities, people are presenting these same demands to water suppliers. If we can get a washing machine installed any day of the week with 24 hours notice why does it take several weeks to get an appointment with a network technician? The answers are clear enough to those of us within the industry who understand the complexity of the supply chain, but not so for the average consumer.

Then there are the investors and private equity owners of the water companies themselves, keen to maximise the return on their investment. The outlook here is not great. They are being told they have had it too good for too long. Cathryn Ross, the Ofwat chief, has set a punchy target of a 5 per cent real term price drop by 2020 with more cuts expected to follow. Investors will be pushing hard for greater internal efficiencies to make up the gap if they are to continue to enjoy their historic returns.

At the other end of the pipe, the increasing regulatory pressure from a zero tolerance approach to pollution events is combined with the well documented steep increase in fines. The regulators are baring their teeth and operational risks will need to be closely monitored and managed to avoid the detrimental financial impact of ever larger fines.

Closer to home, some water companies are seeing a rise in industrial unrest, with workers demonstrating against further reductions in benefits and changes to conditions. Keeping existing workers happy is not the only problem; attracting new employees is getting harder as the UK heads towards a crisis in science, technology, engineering and maths (STEM) education. With a shortage of STEM graduates there is a war for talent brewing with the most likely result being rising wage cost pressure in order to attract those critical to the long-term success of the company. But more money spent on salaries means less money for everything else.

The solution

So how can the competing needs of these four powerful stakeholder groups be better managed? First, the executive board needs to define specific strategic objectives and choices. This needs to go beyond broad vision statements that provide a rallying call but offer little real direction to pressed managers. For example, moving beyond ubiquitous “customer delight” aspirations in to clearly defined service offerings that enable people to focus on what they need to deliver. This clarity informs the framework so people understand their role and know when they are straying too far beyond boundaries, causing more harm than good.

Got right, this creates clarity when evaluating performance and promotes consistent decisions. It can be revolutionary for the middle managers who have become impossibly squeezed, trying to balance increasing demands for better service for less from above while trying to maintain employee motivation and supplier relationships below.

To support this, a review of the structure, roles and decision rights is needed to understand where trade-off choices (essentially organisational tensions) are managed. Are the right people empowered to make the right decisions for the risk and timescales involved? For example, the boardroom needs to be clear on how much money to invest versus. how much to give to shareholders, middle managers have to determine the right capabilities to outsource and at the grass roots, frontline colleagues need to decide whether they are repairing or renewing assets.

Looking to the future, bold long-term thinking is needed across the whole operational model to manage these competing pressures. Instead of focusing on each financial year and AMP cycle it is time to look further ahead. How will customer needs evolve? How will the regulatory landscape change? How will the workforce have been transformed? Why will investors choose water over any other utility? From this, start to consider what the end to end operating model should look like in 2030/40/50. Thinking from a “future back” perspective, use this insight to cut through directorate silos to work out how the processes, organisation, assets, technology and management system need to change to deliver for all stakeholders in the future.

The process of actively looking further ahead stimulates a necessary state of continuous transformation. Agile and dynamic planning is needed rather than pushing all “strategic thinking” into a regular and regimented AMP review cycle. In a perfect storm of regulators demanding more and offering less, customers clamouring for high-street style service and investors pushing to maintain historically high returns, there has never been a time when water company stakeholders have competed so hard. As we go in to AMP 7 these competing demands reach fever pitch. Only by facing the future head on and putting a plan in place now can these unchartered waters be navigated safely.

This article first appeared in Utility Week on 22nd May, 2017.

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