In today’s political environment with the focus on the cost of living agenda, it is almost certain that the price review will focus on the need to achieve more for less, and this means companies will have to look at strategy and the management of outsourced partnering arrangements with suppliers.
Partnering is nothing new for the water industry. The 2010-15 asset management plan period (AMP5) brought greater collaboration in helping to deliver efficiencies through effective competition in the procurement process and greater integration of the supply chain – and incentivised new commercial models. However, AMP6 will require much larger, more complex and business critical relationships. There will be more areas where partnering will be an option; an increased focus on agility, efficiency and innovation; and contractors will need to develop collaborative relationships with their own suppliers.
However, effective partnering is often difficult, and studies conducted by PA Consulting across different sectors show failure rates are running at greater than 50 per cent. To prevent this, companies need to move away from confrontational relationships that have a strong emphasis on fixed price work, adherence to specifications and consequent battles over change. Instead they need to look at joint value creation, where all members of the partnership work to identify the best solution.
This means moving towards true strategic alliances that create value for both parties. Our survey of over 50 clients in multiple sectors showed that these alliances are rare and that there is real potential for improvement. In the case of one client, a better partnership reduced projected additional costs by 90 per cent (£300 million) and resulted in a direct saving of £40 million on infrastructure costs. One of the objectives was to strengthen the partnership between the client and the suppliers, improving delivery and driving savings, while safeguarding the commercial position of all parties. By listening to, and understanding, each other’s interests the joint project team transformed the relationship to a partnership of co-operation and trust.
A focus on joint value creation in AMP6 gives both parties the opportunity to combine innovation and expertise and achieve increased efficiency and savings for consumers. There are five broad categories that companies need to focus on if they are to seize these opportunities.
Entry and exit strategy. The first focus must be the entry strategy. This should identify where the value will come from during operations as well as the options for managing the implementation of partnering and the key milestones. It should also consider where some of the hidden costs and negative synergies may lie. An explicit exit strategy should also be prepared.
A common purpose. Each participant will have different goals and all parties need to recognise these differences and translate them into a common set of objectives. There is also a need to recognise the differences between strategic partnering and project partnering and to establish the right type of agreement. There is a danger that some will see the establishment of hard objectives as outside the spirit of partnering, yet these are essential.
Performance-driven commercial regime. One of the most important principles in partnering is that, ultimately, rewards will drive behaviour. This means that partners must carefully design and agree performance and commercial mechanisms that lead all parties to act and behave in ways that will drive delivery of the right outcomes. The partnering regime needs a hard commercial edge to ensure that, in the absence of competition within the relationship, innovation and cost efficiency are not reduced.
This commercial edge must also be driven into supply chain relationships. That means specific, quantifiable, outcome-based performance metrics must be agreed. The inherent complexity in many strategic relationships means this will be far from easy. Many outcomes appear at first sight too subjective and often a great deal of thought and effort is needed to establish objective and measurable metrics. However, measurement drives performance and you get what you measure. Each side should be careful to define the right outcome-based performance metrics.
Joint management framework and capability: Successful collaboration demands a different style of management on both sides. All parties will face the challenge of identifying, developing and supporting people who can operate successfully in a collaborative environment. Joint governance and management processes can help promote this. These must reflect the key principles of open communication and information sharing, and should recognise that the relationship will need constant and active management.
Driving change to build a collaborative relationship: Companies need to recognise that the benefits of partnering are difficult to realise. In part, this is because the organisations involved do not understand the effort and commitment that is needed, first to drive the change, and then sustain a collaborative relationship. The ultimate delivery of successful partnering is often down to the trust that develops between the individuals involved. Yet this is not enough. There is also a need to constantly review and enhance collaborative working, especially when new stakeholders are added to the mix.
There is an expectation from the regulator, the public and the media that water companies will achieve their business plans, deliver tangible efficiencies and demonstrate real savings to customers. AMP6 provides the ideal platform to achieve this by adopting strategic alliances. It is evident from the current procurement process that some are already aspiring towards this approach, but it is too soon to tell how far the partnering relationships will be taken. It is clear that success will depend on getting the right principles in place for collaboration, but more fundamentally success requires leaders who truly see the benefits and who are prepared to drive the changes in behaviour that will make true partnerships happen.
Jason Ryall is an energy and water expert and Steve Williams a government expert at PA Consulting Group