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The visitors’ book at Welsh Water reveals a steady pilgrimage from around the globe, all coming to find out more about the company’s unique collaborative operating model. As a £600m company, it only employs 150 staff yet has the lowest costs and some of the best performance in its industry.

“We have been consistently in the top quartile of the industry regulator’s performance league tables, we have reduced our debt and paid our customers a dividend,” says Chris Jones, finance director.

Welsh Water is a water and wastewater company operating in an area that covers most of Wales and some adjoining parts of England. All of its day-to-day activities are outsourced to specialist service partners selected through a competitive tendering process. This includes operating water and sewage networks and treatment works, billing customers, collecting debt and managing information technology.

Following privatisation of the water industry in 1989, Welsh Water had a chequered corporate history. Then in May 2001, Glas Cymru, a not-for-profit company limited by guarantee, was set up to acquire Welsh Water, using bank and bond finance. “With 93 per cent debt, we wanted to have as much certainty as possible about our cashflows, particularly in the early years,” Mr Jones explains. “By outsourcing key parts of our service under fixed-price contracts, we got a predictable cashflow which would bring the debt back down to a more acceptable level.”

The company’s long-term strategy is to partner with suppliers to benefit from the best practice use of technology and processes that have been developed elsewhere. This improves Welsh Water’s delivery and increases its value for money more than the company could have achieved on its own.

“That is particularly important for a non-profit business,” says Mr Jones. “We couldn’t risk becoming too comfortable in the long term and not delivering… to our customers. We now have profit-making companies competing to provide services to us and constantly having to demonstrate that they are providing the best value for money. Competitive service delivery fits very well with our low-cost/low-risk financing strategy to give the best possible value to our customers.”

The first major hurdle was to manage the tendering process. A timetable had to be drawn up and information made available to bidders. The next problem was to address the people issues. “It is absolutely crucial to take with you the people on the ground who are delivering the service,” explains Mr Jones, “and to ensure that they are well looked after during the process. We had to be convinced that our new partners would be good employers, so that our employees didn’t lose out. United Utilities and Thames Water, who took on the bulk of the workforce on day one, have treated them very well and their terms and conditions have slightly improved.”

The company also sought partners with the right culture, who would be prepared to work in a very open and transparent manner. Relationships were then built up over the long term through regular meetings and performance benchmarking.

What surprised – and pleased – the company most was how well and how quickly service performance improved after the initial contracts commenced. It went from being towards the bottom of the industry league tables to near the top in the space of about a year. “That rapid turnaround in performance was largely due to the fact that the new contracts brought a very clear focus on service delivery,” says Mr Jones. “They incorporate key performance indicators that give absolute clarity on how each part of the business is performing.”

Welsh Water has reduced its costs more than any other water company over the last five to six years and debt is now down to 78 per cent. The company has recently paid its first dividend to customers of £25m, by reducing each household bill by £19. “No other water business in the UK is doing that,” says Mr Jones. “We can do that because of our financing efficiencies and the very strong and efficient performance of our service partners.”

The longer-term benefit is that the company gets best practice ideas and experience from its dozen or so partners, which include United Utilities, Thames Water, Kelda Water Services, Capgemini, LogicaCMG and Tata Consulting Services. In return, some of the company’s partners have used their success with Welsh Water as a “shop window” to win other business.

“We have the ability tap into a ‘gene pool’ within the organisations that we work with,” argues Mr Jones, “to draw on best practice elsewhere. It is great that we are used as a reference, because not only does it show that we have a win-win situation, but the reputation they are building keeps them motivated to continue to perform on our contract.”

The company has learned that it is critical to remain closely engaged with the business. It has also become an expert purchaser of outsourced services. Mr Jones also says that it is important to work hard at the all the things that support an open and collaborative working style, such as systems, behaviours and reporting, to get a common view of what is happening on the ground.

“Outsourcing isn’t a panacea for everybody everywhere and can just as easily go wrong as right,” he admits. “However, we think that outsourcing is the right strategy for us. We are consistently delivering top quartile performance at a significantly lower cost than when everything was done in-house. Because of our unique structure, the benefits go back to customers as part of the customer dividend. We hope that in the future our partners will help us to reshape our business to take service and efficiency even further.”

Copyright The Financial Times Limited 2017. All rights reserved.
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