Mapping Ofwat’s Innovation Fund portfolio

Over the last three years more than £100 million has been distributed to 46 projects by the Ofwat Innovation Fund (OIF), but what types of projects have been funded? And what sort of returns should we be expecting to see? Writing for Utility Week Ian Small, lead innovation consultant at Expedition Engineering, maps out Ofwat's Innovation Fund portfolio.

There are many statistics bandied around of the number of innovations that fail; anything from 75% to over 90%. This percentage is reduced by companies actively managing their innovation portfolio and understanding that projects failing (for the right reasons) is a positive outcome.

OIF supported projects are a significant and welcome boost to the water sector, which is notoriously slow and risk averse. The projects are well distributed across four themes:

OIF Annual report

Understanding the portfolio of projects funded to date is an important aid to the shaping of projects for future rounds of the competition. Especially with the upcoming consultation on the OIF’s future shape for the next five-year Asset Management Period (AMP).

An innovation portfolio is a collection of innovative products, services, or processes an organisation is or has developed, or in this case funded. It aims to help organisations keep track of their progress and ensures investment in a diverse range of new ideas.

By diversifying innovation activities and applying principles like the 70-20-10 rule for distributing projects from small to large innovations, organisations can achieve a balanced approach that ensures both short-term competitiveness and long-term sustainability.

Equally, understanding the portfolio’s mix of projects is important when looking to enter the sector; assessing what level of innovation is supported and where the gaps are.

A typical portfolio is assessed against the potential return of ideas and innovation risk of failure (technical or team failure is normally considered elsewhere). They are also typically split between the explore phase (prior to scaling) and Exploit Phase where they are deployed commercially.

Producing the Portfolio Map

Using data from the decision documents, I have estimated the following for each of the 46 Water Breakthrough Challenge funded projects in the first three rounds:

• Expected return if they achieve scale – not always financial, some of the projects generate social capital. This is based on a simple 1-3 scale where 1 is 1-2x return and 3 is greater than 10x (y axis on the Map below),
• Innovation risk – similarly, on a 1-3 scale where 1 is low risk of failure and 3 is high (x axis). This considers desirability, viability, feasibility, and adaptability risks.

These were then categorised within the following standard innovation horizons:

• Incremental – small steps forward, often efficiency improvements in a core service or function,
• Adjacent – a bigger step forward, often bringing solutions from a different sector or use, but built on an existing business model, or
• Transformative – a significant leap that can disrupt or eliminate existing businesses.

Finally, I estimated each project’s overall Innovation Readiness Level (IRL). IRL is broader than technology readiness level and includes a full assessment using the SOAR (Strengths, Opportunities, Aspirations, and Results) analysis model; considering 11 criteria across nine levels.

The IRLs are mapped against three broad levels of readiness:

1. Seeking (low),
2. Optimising (medium), or
3. Growing (high).

The size of the map’s data points is relative to the funding received. Data points (apart from the funding amount) have been generated using my industry knowledge and experience, subject to personal biases, which were audited by volunteers on a small sample of projects.

All this data is captured on Expedition’s OIF Portfolio Map, 2024:

Map showing all data points for innovation risk and expected return as of January 2024. Projects are anonymised. Source: Expedition Engineering.

Ofwat’s Portfolio has different goals to a typical corporation innovation strategy. The OIF aims to support projects that are too risky for water companies to invest in individually. It also looks favourably on collaborative projects that are addressing industry-wide issues. It aims to complement existing R&D and innovation funds and functions that are in place to support water companies e.g. UKWIR, internally funded projects, and Horizon2020 etc.

Our map shows few projects in the Rising Star quadrant when returns are highest and innovation risks are lowest. This is as expected because these types of projects will be self-funded by water companies, or the supply chain based on the expected returns and low risk.

Transformative projects received the highest funding and are mostly grouped in the Promising Concept quadrant, where the OIF support is required to mitigate the higher innovation risk.

The IRL split is 63% low, 37% medium, and 0% high. This area shows the biggest discrepancy from the original OIF aims, supporting the rapid roll out and scaling of innovations – which would mean supporting high innovation readiness ideas. This outcome can be explained by the competition structure and innovation maturity of the companies taking part.

The Portfolio mix is currently 35% Incremental, 37% Adjacent, and 28% Transformative, based on the funding goals. I believe this to be reasonable but would have hoped for a greater skew towards Transformative innovations. There are more projects in the Safe Play quadrant where both the risk and rewards are lower than anticipated.

Expected returns are 52% 1-2x, 46% 2x-10x, and 2% 10x or better. While there is an ideal for more 10x or better, it is no surprise. Higher return projects are likely to be delivered by individual companies outside of the OIF. The fund’s support helps to justify investment in more marginal projects, and the potential return will hopefully increase because of this.

I will be looking with great interest at how the projects evolve as they are delivered. It is yet to be seen if any of these projects will generate the predicted returns and whether the next AMP drivers will accelerate them into the Exploit Phase.