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Open Water: The Impact of Market Change

The Wave of change

For the last 25 years, since it was privatised in 1989, the UK water industry has been stable, heavily regulated and much loved by investors, with the so called “big ten” enjoying the relative mill pond calm of a monopoly environment.

2017 however sees this come to an end, not with a mere ripple of change but more with a tidal surge: 
Under the aptly named “Open Water” programme the regulator Ofwat aims to facilitate the implementation of market reform in the sector. This involves the creation of a new market for retail water and sewerage services for non-household customers (some 1.1 M of them), effectively echoing the Scottish Water Market which formally opened for competition in 2008.

The present market is a monopoly with the incumbent water company owning everything from source to tap and sink to sea:



The new market will remove business customers from the water business, leaving an asset owning wholesale business and a solely customer focussed retail business:




Time to earn your Water wings?

With the industry on the verge of change on the scale not seen since privatisation it is little wonder that the sector is attracting intense focus.  The size of the challenge to separate the retail arm of the businesses and adhere to Ofwat’s “Level Playing Field” rules is substantial:
  • New retail focussed operating models need to be created
  • Existing non-regulated arms amalgamated
  • Capabilities such as customer retention and aggressive marketing need to be grown or acquired to stand up against new competitors. 
The retailer owns no asset, makes no product and does not safe guard public health: instead they are agile, fleet of foot, responsive to changing customer needs, technologically advanced and savvy marketers.  Imagine if you can Virgin, Tesco or Google entering this retail space bringing their superior abilities in marketing, customer retention, digital and channel management.
These new benchmarks present a significant challenge to the retailers who spawn from their wholesale counterparts – skills sets of this nature are alien in a world where a utilities pedigree and strong operational capabilities were previously king.
The companies that will thrive in this new world will be those who break free from their wholesale counterparts and who embrace thinking and technology from way beyond the sector.

 

Don’t let the mother ship sail

Whilst the separation of the retail arms to serve the business market, is undoubtedly highly attractive to those with Operating Model and Process engineering skills, it would be a huge mistake to underestimate the impact of the changes on the remaining wholesale business.

For many of the twenty wholesale businesses left, sojourning into the retail arena is not attractive.  For many private equity owners a water company was purchased to be a safe, reliable and relatively risk free investment – attributes which competing in the retail space is somewhat at odds with.  For many, being an excellent wholesaler is a much more attractive proposition but several key challenges still must be overcome:
  • Every customer facing process in the wholesale business must be changed to reflect the new market code.  Processes must be leaner, more cost effective and most importantly, factor in the true cost of the product to protect margin.
  • Poor data flows and quality must be corrected as these become not an irritating internal issue but one of contractual importance, whilst financial reconciliation of meter and usage data becomes less a paper accounting exercise and more the driving force of real bottom line performance. 
Remaining focussed on the wholesale business should not be seen as taking the “easy way” out.  Margins will be tight, control over the cost to serve imperative and smooth processes to handle an as yet unknown number of retailers, vital.


Riding the Wave

In summary, are these exciting times in the industry? Sure. Are there great opportunities for those with a thirst for the sector? Undoubtedly.
But it is worth always remembering that to not focus attention on wholesale as well as the more obvious retail arena, would be to miss the boat entirely.

About the author

Karen Thompson
Karen Thompson
Karen is a managing consultant in the Operating Model and Performance Improvement capability of Capgemini Consulting UK specialising in the Utilities sector. She has been with Capgemini for 5 years having previously spent 12 years as a senior manager for a leading Water Utility in a variety of operational and strategic roles. Specialising in large scale business transformation projects, with both Capex and Opex drivers, Karen brings both a deep sector understanding and a strong consulting skill set to her clients. Karen is currently the Capgemini Lead for Open Water market reform

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