For more than 30 years Ofwat’s Asset Management Periods have helped transform the UK’s water services to the benefit of customers and the environment. The sector’s supply chain has played a vital role in making this happen – increasing efficiency, resilience, water quality and service levels.
However, as we now look towards AMP8, beginning in 2025, there are signs that continuing to deliver improvements is going to get tougher.
On one hand, water companies and their suppliers will need to face up to big-picture priorities such as the net zero agenda, affordability, tougher environmental targets and delivering social value. On the other, more practical concerns around rising costs, local and global supply disruption and ongoing labour shortages are also front of mind.
These dynamics are set to put pressure on supply chain margins – already slim in many parts of the industry – creating a significant risk that suppliers could move away from the sector.
If that happens, we could find that the market simply will not have the capacity or resilience to deliver on Ofwat’s expectations – which in turn will result in significant performance commitment penalties for water companies.
The key to overcoming these issues will be establishing an environment that enables and encourages innovation.
The recent report The optimal delivery model for AMP8 – A view from the supply chain, published by the Water Industry Forum and supported by Turner & Townsend, aims to set out how water companies should reassess their delivery approach to allow greater innovation and ultimately drive the productivity we need to successfully deliver AMP8.
Developing a supply chain ecosystem
At a strategic level, water companies should be preparing to take more direct involvement with their full supply chains.
Closer relationships with all suppliers will offer a better understanding of the whole chain as an ecosystem, allowing for clearer definitions of responsibilities that minimise duplication of effort, more creative incentivisation and a fairer balance of risk.
Tier one contractors still retain an important role in supporting the way the ecosystem works. However, by engaging the right members of the supply chain at the right time, utilities can better create an environment that encourages productivity and the right outcomes.
Previous AMP periods have taught us that strategic incentivisation can help drive outcomes.
In developing commercial models, water companies should be considering incentives creatively and building in clear, targeted KPIs aligned to corporate objectives such as ODIs – whether they’re based on, for example, innovation, social value or net zero – in a way that rewards successful innovation and investment by the supply chain.
We’ve seen this approach succeed already in the natural resources sector as contractual mechanisms are put in place to drive performance, and we’re unlikely to see the productivity gains we need without adopting a similar method in water.
Be clear on requirements
Above all, utilities need to be clear on the requirements of the project or programme, allocations of work and which delivery model will best support the supply chain to deliver efficiently and effectively.
Two delivery models are identified in the Water Industry Forum paper as being critical to the success of AMP8: the programmatic approach whereby fully integrated and aligned water company or supply chain teams are established at inception to deliver defined outcomes; and an approach which sees water company-side resources take the lead on project planning, then engaging directly with the supply chain at a later stage once the work is defined, risks clearly identified, and affordability tested.
Both models should be underpinned by committed work banks allowing the supply chain greater visibility of upcoming work. Depending on the nature and requirements of the project, firms should assess which model will be most effective – and crucially stick to that decision.
The pitfall to avoid is using delivery models which are not underpinned by the appropriate embedded behaviours, capabilities, and capacity.
With clear and appropriate delivery models, companies can position themselves as a partner of choice in an increasingly competitive market – attracting the best suppliers – while mitigating the risks of fragile global supply chains by creating a multi-tier ecosystem that is better placed to collaborate effectively.
Water companies will of course need to consider the capacity and capability needed to undertake these approaches and how they support a sustainable, resilient supply chain ecosystem. However, it is clear that business as usual in the water sector will not be enough to deliver AMP8.
A fundamental reassessment of delivery models is needed to create an environment that empowers and incentivises suppliers to innovate and collaborate to meet the growing expectations from the regulator, as well as customers.
Failure to do so not only will result in financial penalties for water companies, but risks undermining the important society and environmental goals that sit behind the next AMP.
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