This article first appeared in The Water Report
AMP7 is clearly going to be the most challenging regulatory period yet for the water industry. Ofwat has set out in the PR19 Final Determinations what it recognises are extremely stretching demands. Water companies are now grappling with the need to: increase resilience; make significant advances towards achieving net zero by 2030; and deliver step changes in customer performance around supply interruptions, bursts, leakage and sewer flooding, as well as helping vulnerable customers.
Alongside these expectations, the industry has been set targets to deliver lower bills requiring major operational efficiencies, while being set the lowest return on capital since privatisation. As if this is not enough, Covid-19 has caused major disruption to operations and revenue.
The sector has responded in a multitude of ways. Some companies have sought redress through the CMA to challenge their Final Determinations, but even the best outcome for those companies will still result in a challenging AMP7. The majority have accepted their Final Determinations, while stating their belief that they will be unable to meet all the demands.
Regardless, all have doubled down on planning how they will navigate their path through this AMP, as well as what avenues they can pursue to how their business operates. It is clear to all that they need to find a more innovative and long-term focus to deliver performance improvements and cost reductions.
Five steps to transformation
Many studies demonstrate that high performing business cultures outperform other businesses. By culture, we mean the way people in the organisation think, feel and behave – in other words, “how we do things around here”.
The question is, how can water companies, usually seen as quite inward-looking, yet having all the key ingredients, learn from others and make sustainable changes to their organisations and bring all of this together.
1. Connecting their purpose to the way they work – Water companies have developed laudable purpose statements that reflect important sustainability, resilience, and community themes. But are these statements a true reflection of how people at the frontline think, feel and behave (or aspire to), or simply part of concerted marketing campaigns to improve their standing?
Legal & General, a major UK insurance and pension provider, has adopted the purpose of “inclusive capitalism”. It now requires companies it holds shares in to meet diversity targets for their boards and set ambitious targets to achieve net zero.
From an employee perspective, a meaningful purpose motivates people. There is the powerful story of President Kennedy visiting NASA in the early 1960s and seeing a janitor working industriously cleaning a laboratory. Kennedy reportedly asked the person what he was doing, to which the janitor replied, “I am helping to put a man on the moon”.
Connecting people to organisational purpose drives performance. Businesses with engagement scores in the top quartile average 12% higher customer advocacy, 18% higher productivity and 12% higher profitability. The challenge is to ensure everyone from the contact centre agent, through to a technician in a sewage treatment works understands the business purpose and how it connects to the role they play.
2. Building on problem-solving and engineering excellence strengths to tackle challenges – Water companies demonstrate day-in-day-out strengths that are taken for granted. The water sector in England and Wales each day provides over 16bn litres of some of the cleanest water anywhere in the world, while also managing and processing of wastewater. This is even more impressive when considering the supporting infrastructure of over 416,000kms of water mains, 390,000kms of sewers, 1,400 plus water treatment works and 6,000 reservoirs.
During the first COVID-19 lockdown, where many other services struggled to operate, water companies continued to provide their services seamlessly. The sectors put into effect pandemic resilience plans, asking their workforce to be flexible, and making unambiguous statements to customers about the security of supply and support for the vulnerable. For instance, one large water company moved its call centre operation to the cloud in just four days.
The challenge is how to build on these strengths? In other sectors, we have seen asset-heavy, and engineering businesses take similar strengths and use them. They have brought together people from across silos to collaborate in agile ways to tackle their biggest challenges – often in partnership with others. In the pharmaceuticals industry, organisations have risen to the challenge of developing COVID-19 vaccines and achieved in under a year what in previous situations has taken years or decades.
3. Developing behaviours that enable innovation, inclusion and drive performance – It is not enough to for water companies to do more of what they do best. They need to bring to life behaviours that they do not display enough of.
For water companies to be successful, they require people to be more innovative – be it to achieve net zero targets, improve performance or reduce costs. There is a strong business case for inclusion of diverse voices, with evidence supporting the view that collective perspectives can identify blind spots and opportunities that will enhance results.
The starting point is to build out from existing pockets of excellence that already exist in organisations. In one telecom utility, ‘embedded’ innovators were empowered to drive mini initiatives that demonstrated innovative solutions to existing challenges which in turn led to improved services and significant cost reductions. These people who demonstrate the right behaviours must be recognised, and performance management approaches need to be changed to benefit people who deliver results with the right behaviours.
4. Enabling leaders to be empowering and inclusive – It should come as no surprise that CEOs consistently identify lack of leadership strength in their organisation as a top concern. Leaders of today were shaped by their formative experiences which often date back five, 10 or even 15 years. These experiences are often far removed from the leadership challenges of today, let alone the ones of tomorrow.
Leaders today find themselves dealing with technological change on an unprecedented scale, leading diverse people that for the first time ever represent four different generations in the workforce. The water sector cannot ignore the context of the #MeToo and Black Lives Matter movements, and the fact that the industry’s demographic makeup does not reflect wider British society. The workforce is over 70% white male and only around 10% BAME. Although this is shifting, it will take time, but today’s leaders need to be more inclusive and empowering in order to attract the best talent.
5. Attract new talent and skills to support sustainability, customer insight and diversity – To deliver AMP7, the water sector needs to bring in people with different skill sets than they have traditionally required. These skill sets cover a range of areas including digital, data analytics, cyber security, customer service and environmental sustainability. There are now new behavioural capabilities required to manage and lead in a more gender, sexual orientation, ethnic and cognitive diverse and multigenerational environment.
Given COVID-19 and the change it has demanded in working practices, most companies are asking themselves “what does the future of work mean”? However, some have looked at this narrowly in terms of updating working policies. Others have taken it more broadly to look at how they use their physical space.
Only a small number are using this opportunity to ask more fundamental questions, such as “how to bring in different talent”, “what sort of career opportunities can we offer”, or even “how do we change our operating model to attract and retain the very best”. The answer is not to apply existing old techniques.
Undoubtedly there is some exciting and well publicised experimentation going on. For instance, Thames Water in a successful initiative increased the number of women applying for roles as sewage work technicians from 8% of applicants to 46% by, among other things, changing the ‘masculine’ wording of its job adverts.
Rising to the challenge
For too long, the water sector has played around the edges of shifting organisational culture. As AMP7 demands fundamental change to achieve significant levels of performance across the industry, the culture of businesses must evolve and shift.
To do this will require water companies to take a serious and sustained look at how they maximise the potential of this key asset. To be successful they need to authentically connect their organisational purpose to the way they function, actively promote innovation and inclusive behaviours, strengthen their leadership capabilities and bring in and retain new talent. Whilst at the same time, applying and building on their engineering excellence and not losing sight of their experienced problem-solving capabilities.
Even those who already understand this and have started this approach will need to retain their absolute focus, as AMP7 progresses. It is imperative that they do not get drowned out by loud voices and potential shortcuts or get blindsided by tempting short-term objectives in achieving cost reduction to deliver cost efficiency.
This agenda needs to be a sustained priority for the executive team. They need to demonstrate daily how the organisational purpose is brought to life and delivered collectively. In turn they need to bring together their best people from across the business to focus on solving the challenges of delivering AMP7 collaboratively. They also need to recognise and reward the right behaviours at all levels, re-skill their leaders, and develop the approaches to bring in and retain the crucial skills required for the future.
Those that achieve this will be the true winners in AMP7 and will leave the others behind. The question is - who is up for the challenge, and who isn’t?