One company slashed costs by a fifth by bringing management of capital projects in-house. Is it the way forward?

As water companies and network operators come under pressure to deliver more for less, those delivering new capital assets and maintenance programmes are having to tear up the rule book in a bid to make their investment budgets work harder.

The heat is on particularly for water companies negotiating PR19, which will define the settlement for AMP 7, where Ofwat has set down tough demands for improved performance while keeping a tight lid on consumer bills. Leakage has to be reduced across the industry by 17 per cent, for example. Networks expect to be similarly under pressure when RIIO2 takes effect and are preparing the ground now.

Exactly what constitutes this holy grail of delivering more for less made for a fascinating  discussion at Utility Week’s latest roundtable, supported by Oracle Construction and Engineering Global Business Unit. Very much in evidence during the two-hour debate was the urgency to inject new thinking by the senior professionals responsible for this task – and to learn from those in the room who were further down the road.

It felt as though we were witnessing a change in the zeitgeist: tier 1 suppliers are being taken off the menu in favour of contracting directly with tier 2s; or as one delegate put it, tier 1.5. He was referring to medium-sized companies that are not the big household names of the contracting world, but not SMEs (small and medium-sized enterprises) either.

By working with smaller organisations, utility procurers are looking to become so-called intelligent clients, cutting out what is increasing seen as an unnecessary layer of costs. Tier 1 contractors tend to orchestrate the project, subcontracting out the construction work, and take a cut for their efforts – though margins are woefully small. This can cascade down a fairly long supply chain, with each supplier having to make a profit out of the work.

The time is right for this shift to work directly with tier 2s because it chimes with a move away from the construction of huge and complex new schemes, to a high volume of lower value maintenance projects, as our delegates made clear.

To outsource or not to outsource

But it was also evident from our guests that making this transition comes with challenges. In terms of deciding whether to bring the project management and administration in-house, there was a general consensus that for complex large schemes, tier 1s would still be necessary to provide an “integration” role. While for smaller projects (for one water company this was at a value of £5 million or less) it made for better value to cut out the middleman. One school of thought in deciding which direction to take was to start from the point of view of who is best served holding the risks – the essence of being an intelligent client.

As one put it: “Because we haven’t understood the risks, we’ve simply pushed these down the supply chain, and paid a lot of money to do that. It’s been the vogue to outsource everything but it’s given us false hope. We still carry the can when the leaks aren’t fixed.”

There was also a feeling from those in the room, from both smaller and larger clients, that tier 1s tended to reserve their A-teams for more glamorous infrastructure work – like Hinkley C or HS2, which also added to their clients’ frustration and perception they were not getting value for money.

That said, if firms are to take processes (such as programme planning, and scheduling) back in-house, it requires boosting internal resources, which should not be underestimated either, according those who had already started down this path.

Making it work

Moving to work directly with smaller contractors – tier 2s, or tier 1.5 – was not without challenges both in terms of being attractive to smaller firms in a sellers’ market and also excepting, at times, a lack of sophistication. “In order to reach tier 2s, you have to learn how to look past the sort of polished responses you get with the management contractors, and not scare them off by trying to offload too much risk,” was one piece of sound advice.

However, those present also reported that in moving to work directly with smaller companies they had not seen any deterioration in health and safety processes, or attention to customer service.

“You do have to be prepared to be more hands-on, provide more coaching and support – and again this adds to internal costs, which shouldn’t be underestimated,” was a nugget of wisdom brought to the table.

A key ingredient for success, said our delegates, was ensuring that all were using the same software to provide “one source of truth”. While it had been commonplace for tier 1s to take this approach, moving to smaller companies often meant supplying them with client software. The move to the cloud also facilitated sharing software resources.  “It is slightly easier with tier 2 in that you can set the rules in terms of how you set and present the data, so we all use the same hierarchy.”

Taking an “intelligent client” approach had paid handsomely for one water company, which reported savings of 18 per cent on the cost of capital programmes by taking the direct route. He expected to save another 10 to 15 per cent in programmes in AMP7. “But in taking more risk, you also have to expect that sometimes projects fail,” he said.

Network representatives taking part had gone as far as establishing direct workforces for some of their maintenance work, where they could be heavily fined if problems were not swiftly addressed. Employing direct workforces tended to reduce productivity, they said, but the upside of that is that quality and pride in the work is better. “It also allows you to grow your own talent in a market with an ageing workforce, and where skilled workers are in short supply,” reported one network asset manager.

Beware Trojan horses

One intriguing development, perhaps unsurprisingly, was that tier 1s, were also bidding for work that the clients were pitching at tier 2s – or putting in bids from other brands in their groups, perceived to be offering a lower cost and overheads.

What was apparent from our group was a clear determination to cast aside past assumptions, behaviours and habits. Delivering more for less is never easy, but on the evidence of this discussion they are up for challenge – and in good hands.

Is regulation taking a short-term approach?

A source of frustration for those round the table was that the regulatory regime was not keeping pace with the level of investment needed to upgrade infrastructure, and that problems were being stored up for future generations.

One example given was a planned pipe renewal of 0.5 per cent agreed with Ofwat, meaning it would take 200 years to go through the whole network and inevitably get to a point where repair was not keeping up with the deterioration. Though it was pointed out that companies were meant to have a long-term strategic plan, with the next price review period representing the next stage in the plan, it was felt that the five-year spending window for water, unlike those for networks, left no scope for innovation. And neither for simply doing what’s right. “Certain things that are the right thing to do technically get knocked back because they are not affordable in the prescribed period. There is just too much short-term thinking – we are putting huge pressures on the next generation,” was a general view round the table.

Opinion Geoff Roberts

Director of energy industry strategy,
Oracle Construction and Engineering

Tips for change

‘Put in place the systems you need to deliver on required outcomes.’

The roundtable discussion highlighted a trend for water companies to procure directly from the tier 2 and tier 3 supply chain providers rather than a small number of tier 1 suppliers. It’s a trend we’re seeing in the US too, and utility companies over there are watching closely what is happening in the UK and what they can learn.

In our view, this approach has three main consequences:

• The need to expand existing, and sometimes introduce new, capabilities (such as programme management offices) that are required to manage a complex portfolio delivery function;
• The need to review the processes and underlying systems to effectively manage, govern, and control a new approach to delivery, both in terms of data provision and engagement;
• The need to ensure that the service is scalable to help cope with a significantly higher number of supplier interactions.

The consequences to portfolio delivery means that water companies need to consider their operations to help ensure they deliver to required outcomes and ­determinations.

True vertical and horizontal alignment: This entails breaking down the siloed mentality and allowing contract and project-level data to be available in near real-time for effective long-term decision-making by programme and portfolio delivery teams.

Processes: Water companies need to eliminate manual processes and instead adopt automated, standardised reflections of “good practice”. Manual, inconsistent processes amplify the risks of error and omission, leading to a lack of trustworthy information with which to make effective decisions at the portfolio level.

Interface plans: A fully integrated interface plan is needed to delivering projects, programmes and portfolios. Over time, these can help drive the required outcomes, but more importantly, they can help ensure the utility company has a transparent delivery engine with which to collaborate to ensure successful outcomes overall.

Change: Change – in scope, cost, schedule, risk, etc – must be captured in near real time and integrated to the portfolio so that its impact can be measured. This helps ensure there is no significant detrimental effect on the expected outcomes.

Technology: Water companies must establish a collaborative, intuitive, ‘sticky’ platform that supports true alignment between the organisation and its ever-increasing supply chain. The platform should enable all manual, inconsistent processes to be automated to help reduce data handling, errors and omissions; and to eliminate data silos. In addition, data should be able to flow seamlessly ensuring the impacts of change, interfaces, schedule slippages, etc. are always visible and that program and portfolio teams can make effective decisions.

Innovation: As the supplier base increases so does the needed level of programme maturity, so any technology platform must support ongoing innovations. Currently on the horizon are tools to support resource and materials tracking for productivity purposes, as well as video progress measurement, among others. Water companies need to embrace innovations as they look to do more with the same or less.

The benefits of adopting the above are substantial, but achieving the needed change is no small feat for many organisations. Successful adoption will require executive sponsorship as a driving force, and the transformation must be thoughtfully planned to deliver incremental benefits in bite-sized chunks. This will take time, but such transformation is critical to meet the challenge.

This is the edited version that appeared in Utility Week magazine. Fead the full version here: https://bit.ly/2Gtmo0G