Utility Week

UTILITY Week 19th May 2017

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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UTILITY WEEK | 19TH - 25TH MAY 2017 | 27 Operations & Assets Market view W ater 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 liter- ally and figuratively, but this system is reach- ing 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 them- selves, 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 increas- ing 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 detri- mental 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 condi- tions. 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 short- age of STEM graduates there is a war for tal- ent 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 bet- ter 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 man- agers. For example, moving beyond ubiq- uitous "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, caus- ing more harm than good. Got right, this creates clarity when evalu- ating performance and promotes consistent decisions. It can be revolutionary for the middle managers who have become impos- sibly squeezed, trying to balance increas- ing 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 under- stand 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 opera- tional model to manage these competing pressures. Instead of focusing on each finan- cial 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. Think- ing 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 con- tinuous transformation. Agile and dynamic planning is needed rather than pushing all "strategic thinking" into a regular and regi- mented 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 main- tain historically high returns, there has never been a time when water company stakehold- ers 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. James Clement and Alex Graham, Egremont Group Making the right trade-offs Boards must look beyond vague 'vision statements' and articulate clear strategies for balancing the competing demands on modern day utility companies, say James Clement and Alex Graham. Key points People expect the same customer service from water firms as from other sectors. The environment is getting tougher for investors. Regulators are getting tougher with fines. Recruitment is a growing problem. Boards must formulate and pursue clear, concrete strategies.

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