Interview: Graham Keegan, chief operating officer, Eight2O

“Trust can be destroyed in one silly email if you’re not careful… We watch out for how everyone’s feeling.”

You’ve got to be in it to win it, so the saying goes. Thames Water is taking this advice literally in regard to delivery of its sixth asset management plan (AMP6). It has ditched its traditional role as the ­“client” of the contractors employed to carry out capital and operating work in the period 2015-20. Under a new alliancing arrangement, Thames effectively becomes one of their number.

Eight2O is an alliance of eight powerful firms: Thames Water; two large design and build joint ventures – CVA (Costain, Veolia, Atkins) and SMB (Skanska, MWH, Balfour Beatty); technology company IBM; and a programme manager, also MWH. Thames holds a 50 per cent stake; CVA and SMB 20 per cent each; IBM 5 per cent and MWH in its programme manager role 5 per cent.

The companies are rewarded and penalised on the basis of collective performance, according to their stake size. Incentives are aligned to Thames’ PR14 business plan outcomes. And the board works by unanimous agreement, so no decision can proceed unless all parties agree. Eight2O will deliver at least half of Thames’ AMP6 programme, and it could end up being a lot more.

So how has this Musketeers approach to AMP6 delivery come about? Thames’ PR14 customer research posed a challenge that will be familiar to companies across the sector: how to maintain levels of service while keeping bills affordable. Thames opted to throw the problem out beyond its own walls.

Lawrence Gosden, hitherto Thames’ asset director (from next week he takes on a new role heading the company’s wholesale wastewater operation as part of a broader business reorganisation), explains: “We went out to our entire supply chain, right down to subcontractors – plus people we didn’t work with and industry bodies – and asked how we should tackle this conundrum for customers… We went out on the road… some of our contractors told us we were the first client organisation ever to have set foot in their offices, which is staggering. It shows something, doesn’t it?

“We badged the whole thing, ‘the listening phase’. It’s hugely therapeutic to stop for a minute and just listen. It’s powerful. But it takes a lot to be able to do that – a huge investment.”

You cannot write innovation into a contract, says Gosden, but you can “provide an environment to allow innovation to flourish”. He continues: “You need collaboration for people to feel able to put their best ideas on the table, and for everybody to succeed from that.”

Fast forward to May 2013 and Eight2O was founded. The alliance has a number of interesting features, beyond its basic structure and incentivisation package. First, it has swept away capex and opex boundaries and will work entirely on a totex (total expenditure) basis, in line with PR14 principles.

Second, embedding a technology innovator within the alliance is a departure from the traditional practice of tendering IT on a contract-by-contract basis. IBM will perform a number of roles, chief among which will be smart analysis of the billions of points of data Thames herds, plus other publicly available datasets. The objective is to generate insightful information to improve ­decision-making on the asset base and investment ­priorities. The alliance is already feeling the benefit of bringing this outsider in, Gosden says. “IBM has really mixed up traditional thinking… they’ve a different way of attacking problems.”

Third, the timing is interesting. Eight2O was set up two full years ahead of day-one delivery, which kicks off next April. Graham Keegan has been chief operating officer of Eight2O for a year now. He is a veteran of both the water industry generally, and joint ­venture-type delivery models specifically, most recently as chair of the Veolia/Costain/MWH joint venture 4Delivery. He says the early contractor involvement (ECI) phase (2013-15) is a real boon on a number of levels.

It has allowed him to “set up a culture, a new environment and get everybody into this new way of working”. Keegan admits it was no walk in the park. The supply chain was understandably sceptical about Thames’ commitment to true partnership working initially. But he says the company’s behaviour so far – the “listening phase”, the fact that supply chain-side ideas have been acted upon, the fact that Thames has formally thrown in its lot with contractors – has built trust.

Keegan knows this is a continuing challenge: “Trust can be destroyed in one silly email if you’re not careful… We watch out for how everyone’s feeling. What are people saying about us? Are we giving the right behaviours? Are people taking the right approach? Are people ­supportive of one another? Are there any factions building up?”

Another key advantage of the early start is that Eight2O can hit the ground running. Keegan is confident the inter-AMP dip that has blighted the water contracting industry for years simply won’t happen this time around for Thames. He says: “We’re looking at the AMP6 programme two years in advance and at how the work is falling away in AMP5, and we’re marrying those two differences… if you can have the build up at the same time as you have the drop off, that’s how you minimise the dip.”

Finally, Keegan says ECI has provided “thinking time ahead of the major delivery phase – to engage brain”. In fact, there has been a real push on encouraging supply-side partners to innovate, contribute new ideas and trust Eight2O to deal with them fairly. According to Keegan, the alliance is working through “literally hundreds” of ideas that have been pitched so far from the supplier community.

So, in Keegan’s expert view, does Eight2O really amount to a new approach to AMP delivery? It does, he says. “Alliancing is a word many people use. We’ve seen lots of JVs, lots of partnering, but the way we’re approaching this is unique.” He says there is a “real connection with being inside Thames – I’ve never seen that before… They include me and the team as a department almost, and that’s one of the cultural changes. So I think it is very different. I’m not sure there’s anybody who’s gone into this depth of alliancing.”

Eight2O will build on Thames’ AMP5 achievements, which include, according to Gosden: a fast-start (£1 billion of a £5 billion capital programme invested in the first year); four successful framework contracts responsible for delivering half the whole programme; a suite of on-time major projects including the £635 million Lee Tunnel; and the reinvestment of 100 per cent of capital efficiency gains for customer benefit.

For AMP6, Thames proposes a totex of around £7 billion: £3.16 billion for water wholesale and £3.8 billion for wastewater wholesale – plus £500 million to cover its Thames Tideway Tunnel investments (construction costs will be borne by a separate infrastructure provider). Particular highlights of its two wholesale plans (one for water, one for wastewater) include: 10 per cent leakage reduction by 2020 supported by the replacement of 880km of mains; reduction of supply interruptions; the installation of 900,000 smart meters; protecting 1,800 properties from internal sewer flooding; cutting pollution incidents; reducing odour risk for 6,600 homes; and supplying one-third of company power needs from home-grown renewables.

Contrary to the impression given by much of the media, average bills will fall slightly from £360 in 2015 to £358 in 2020, if the cost of the Tideway Tunnel is excluded. Adding in the £8 a year cost of the tunnel takes the average 2020 bill to £398, which is still among the lowest in the industry. Efficiencies deriving from Eight2O have already been factored in to these numbers. “So we’re already behind the plan by about £160 million,” says Gosden.

Thames did not get an entirely glowing report from Ofwat on its business plan. In particular, its wholesale wastewater totex was deemed too high (£3.8 billion compared with Ofwat’s threshold of £3.58 billion) and insufficiently evidenced. Gosden takes an optimistic view: “The best thing about the risk-based review is it has provided a view, and it’s enabled us, and all the other water ­companies, to commence a dialogue with Ofwat.”

The two main factors muddying the wholesale wastewater number are how Thames has incorporated Tideway Tunnel costs into its plan and uncertainty around spending on the national environment programme, which (helpfully) won’t be set by the Environment Agency until after final determinations. Gosden says it’s now more about explaining its numbers to Ofwat and working to resolve uncertainty than about reducing the numbers.

He does not anticipate a great deal of change in Thames’ broader wholesale plans: “We’re listening very carefully… to customers and to the feedback of the risk-based review, and we’re considering it. But we do really believe in our fundamental core plan. We put a hell of a lot of work into that plan to make it very evidence-based and connected very much to what customers were saying to us. So in the core part of the plan, would we expect to see a huge amount of change? That is unlikely.”

While it requires some management, Keegan says regulatory business plan ping-pong will not unduly hinder ­Eight2O’s start: “It is slightly in limbo but there’s a big core element of the work that we’re confident will go ahead and that’s what we’ll put our main focus on.”

Even excepting the tunnel, it is never going to be plain sailing for England’s largest, highest-profile, most-scrutinised water company. Gosden and Keegan are the first to admit that Eight2O has yet to prove itself, and that while they think its particular brand of alliancing is right for Thames, they can see the merits of other AMP6 delivery arrangements being drawn up around the industry.

That said, both are clearly excited and delighted by the alliance they have come up with to tackle the challenges of AMP6. Keegan concludes: “It’s really exciting when you think, we could actually get something different this time. We could do this. We could crack those problems we’ve been having for years.”