Water & Wastewater Treatment

www.wwtonline.co.uk | WWT | OCTOBER 2014| 11 Comment O ffering the right financial mix of products and services is a challenge to any business, but can be critical for small and medium enterprises (SMEs) in the water industry. The five-year regulatory cycle has unwittingly produced a well-documented cycle of 'boom and bust' for the supply chain. This can mean few or no utility sales for three to four years, then one or two years' worth of sales in six months, all with very tight delivery times and thin margins. The impact of exposure to this flux on cash flow can be catastrophic and has led to significant consolidation within the supply chain and subsequent reduction of competition over the years. This is certainly the case with companies that are over-reliant on large capital plant sales. However, businesses relying too heavily on lower value, higher turnover parts and consumables can also get into difficulties. The model is demanding on labour and administrative resources and commoditisation can put prices and margins under pressure. Beating the AMP cycle boom-and-bust blues The regulatory AMP cycle can be devastating for SMEs, but is a service-based offering the key to so ening the blows of 'boom and bust'? Though product-focused companies oƒen shy away from offering service and maintenance, balancing the plant, parts and service business components is the way to survive boom and bust. Yes - service is labour intensive. Yes - service does not directly deliver the margins that capital plant can. However, it does have some genuine merits: • It keeps you close to your customers • It gives you a channel to sell parts, consumables and additional plant • It helps to keep your competitors out of your customers' sites • It delivers steady and foreseeable revenue • It is scalable • More predictable service contracts and margins are a genuine benefit to your company's valuation Turnkey service packages are becoming more common in the industrial and commercial water treatment sectors. The packages on offer can include reduced labour rates, discounted margins on spares, parts and consumables right through to full asset responsibility. A 'premium' service package may require the provider to replace an asset, at their own cost, within a specified time period under a detailed Service Level Agreement. Currently, utilities' asset managers are wary of fixed and long-term service contracts and are only slowly emerging from a time where 'asset sweating' was the norm. Many companies in the water sector are currently benefiting from increased opex spend from the utilities, but premium preventative maintenance service packages are still likely to be some way off. The objective for selling service should therefore be to sell at whatever level you can and then gradually build on that relationship and knowledge of the assets your are servicing. Still not convinced? A recent study of service revenues has revealed that a £10,000 annual service contract typically delivers £20,000 of revenue due to the sale of additional spares and consumables. Based on my experience, over a 2-3 year period it is not unreasonable for a small/ medium-sized capital plant sale to be identified and contracted off the back of the service contract, delivering, say, £50,000 in that year. Over a five-year period, a large capital plant sale could well arise, valued at a possible £200,000. In other words, over five years, a service contract with a face value of £50,000 could deliver £350,000 in total revenues – whilst simultaneously providing the right mix of steady, sustainable revenue and growth and of course, a buffer from cyclical sales. Matthew Wheelock is the founder and chief executive of sales and business development consultancy Wheelocks, specialising in the water sector. MattheW Wheelock ChiEf ExECuTivE WhEElOCks

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