Time for change: Thinking beyond regulatory periods

This article was first published in The Water Report

Globally, water companies are facing a period of unprecedented change as a result of economic, regulatory, environmental, and sustainability pressures. Digital capability, supported by complete and accurate data, is at the heart of the water industry’s ability to respond. This will enable it to operate smarter infrastructure and meet the challenges arising from climate change, population growth, urbanisation and intensifying regulatory and customer expectations for service enhancements. Yet many are struggling to make intelligent use of data. As artificial intelligence (AI), automation, Internet of Things (IoT), blockchain and 5G become pervasive, UK water companies need to change to embrace the digital transformation.

Initiating digital transformation

This has long been an overarching theme for water companies. However, most of them are either recreating the old world using new tools or applying a sticking plaster to old or broken technology and ways of working. As Dieter Helm said in Water – a new start “Reforming the water sector and its regulators needs to start with defining what “good” is, and then to work out how to get from here to there. It is a very different approach to asking how to make what currently exists a bit better.” It has been more than 30 years since privatisation, the time is right to set out the next 30 years and define what “good” looks like.

The next AMP period approaches

Water companies in the UK are beginning to prepare for the dramatic changes that will characterise the coming decade. Most are trying to become technology, platform, and experience companies. They are experimenting with multiple technological proofs of concept to evaluate the impact they will have on their processes. At the same time, they are tackling the difficult task of shifting their applications and infrastructure from legacy systems to new digital systems. However, water companies are finding that the biggest barriers to progress are their own people and culture. They need a different mindset and set of skills to take advantage of new digital capabilities and bring them to life by imagining intelligent business processes based on platforms which focus on human experience. COVID-19 has accelerated digital transformation and reinforced the importance of applying technologies that can produce more efficient, effective, and flexible processes. This means, in working out how to use digital technologies to meet the PR24 challenges and define what good looks like, water companies need to concentrate on four main building blocks.

Anticipating and adapting to uncertainty and change

According to PA’s survey of over 500 leaders from some of the world's largest organisations, the top financial performers were 30 per cent more likely to display agile characteristics​. Water companies have the additional challenge of an ageing workforce and attracting new talent. To define “good”, water companies need to adopt new tools and ways of working. COVID has accelerated the development of the human-technology relationship. It has shown that just adding new tools to old ways of working does not amount to a transformation. Yet we have seen new forms of leadership, inspiration, engagement, and connection. Water companies should adopt these across the business. Concepts like design thinking, humanising enterprise through a culture of agile innovation that embraces new skills, ideas and talent should not be just a one off. AI based technologies that can interpret and capture both explicit and tacit knowledge should be used’ not just to create and retain information but also to attract younger workers who can play their part in creating an innovative, diverse, and collaborative workplace.

Collaborating to transform performance for customers

Across industries, service providers are realising, however large they are, they need to create partnerships to maximise their value to their customers. These ecosystems of partners create value not just for end customers, but those who participate in them. As water companies look at platform strategies, they need to think about the wider ecosystem. This means looking at industry/cross-industry/mass consumer platforms and their role in defining “good”. For example, business platforms between energy, water, government bodies and charities can improve understanding of population growth, needs of vulnerable customers, density and water consumption. This then enables better planning and operational performance. Applying AI to this massive pool of shared data, will generate new insights, and dramatically improve processes. This approach can not only help in gaining economies of scale but can lead to frictionless engagement between UK water companies. Tapping into mass consumer platforms can also significantly improve understanding of the voice of the customer. This is key to both predicting SIM / C-MEX scores and working on them proactively. A water company of the future should learn from other industries where, despite operating in a competitive market, rather than fearing competitors, business platforms in an ecosystem can be one of the most important drivers of digital transformations.

Protecting and improving the environment in the context of climate change

Investors are increasingly demanding reporting and action on sustainability, punishing laggards with shareholder action and threats of divestment. Government is considering prison sentences for directors of the water companies responsible for serious pollution incidents, while OFWAT is investigating a handful of water companies regarding possible breaches of their licences in respect of sewage disposals in rivers. The growing risk of climate-related extreme weather threatens major disruption to supply chains, business models, and economies. This means investors will increasingly favour more sustainable enterprises offering better financial terms and support, while consumers and employees will increasingly demand that brands align with their values on sustainability. Water companies are in a position not just to protect, but to improve the environment. Collectively, they will invest around £1 billion per year on statutory environment programmes during PR19. They have made a good start by coming together to develop a 2030 road map to meet the goal of operational net zero by 2050. However, the definition of “good” should not just be restricted to reducing pollution and improving water quality. It will be incomplete without a clear plan for reducing carbon emissions through investment in modern asset design and operation, measurable substitution of fossil fuels, net-zero supply chain and significant increases in understanding about sustainability among their employees. Analysis of disclosure data from CDP suggests emission reduction initiatives increase from 38% to 69% from first to third disclosure, while companywide goals increase from 50% to 66% over the same period. Common sustainability platforms will significantly increase organisational understanding, and data led innovation will drive accurate goal setting and disclosure reporting. As with health and safety, water companies need to put sustainability at the heart of their business and use digital platforms to learn, report and generate insights that lead to action.

Innovating and achieving business commitments in the face of cost pressures

Developing smarter solutions presents several challenges, not least that the water management sector has been conservative about adopting new technologies in the past. Innovation tourism has also been prevalent where they end up trying new technologies and practices but fail to drive change and adoption at an enterprise level. However, innovation cannot be ignored, and at a time when demand for water is rapidly accelerating, data will drive new business models. This will enable differentiation, fuel innovation and accelerate the creation of ecosystems. Increased mobile connectivity and adoption of IoT within energy and utility organisations has led to a data explosion, enabling information to be extracted from a wide variety of sources. For water companies to seize these AI opportunities they must first address innovation tourism, embrace a data-centric approach to train the algorithms to give a sustainable solution, work with experienced partners to change the perspective that AI projects are expensive and use half-proven technology, build trust with end users, invest in the development of AI skills to ensure AI projects are well supported.

Defining good through a digital lens

Digitally transformed water companies will not just get through the PR19/ regulatory periods but will continuously adapt. Those who embrace technological change, business platforms in an ecosystem and the use of data-driven insights to produce actionable results will be better prepared to answer key questions. They will be better placed to manage the impact on water pressure, service levels and average bills if the population grows by 32% by 2030. They will be able to design customer engagement that meets the requirements of next generation and attract new talent while retaining the knowledge that the industry is about to lose through retirement or ill-health.

Defining good through a digital lens is the only way to safeguard the present and supercharge the future.