Sharing the leakage risk
Steve Tooms, Jim Reynolds and Simon Dray assess the advantages and disadvantages of using contract partners for leakage management
Using contract partners for leakage management is part of the continuing trend for outsourcing services in the water industry, which has seen some companies entrusting up to 85% of activities to external partners. While this has proved to have substantial advantages, there is still room to improve procurement methods - to improve the use of leakage performance indicators and also to use forms of contract that share the risks with contract partners.
The influx of external partners in to leakage management activities began in the 1990s, when most water companies made significant reductions in leakage and distribution input by implementing a policy based on the principles outlined by the Managing Leakage reports. Faced by stricter mandatory leakage targets year on year, the companies often found in-house resources were unable to find the balance between fully addressing leakage issues and other operational duties. As a result, many companies introduced a mix of in-house and contractor/consultant teams for most leakage management activities.
More recently, procurement of leakage management services has bifurcated into T&E contracts with ever-reducing fees and some companies taking a more active interest in partnering with leakage management consultants and contractors.the pros and cons
Experience to date has shown most water companies have found the advantages of partnering for leakage management outweigh the disadvantages. Advantages include:
Ofwat efficiency targets are placing increased pressure on water utilities and thus recent procurement processes have applied this pressure to its supply chain. This pressure has led to the constant reduction in professional fees for traditional contract forms. This can force a reduction in training, salaries, investment and opportunity for those involved lower down in the supply chain.
Are lowest negotiated costs really necessary when partnering can achieve similar outputs for similar prices and share the risks? Experience, quality management, health and safety, environmental policies and cost are the principle components for procurement teams' assessment of contractors. The weighting applied to each component is critical to procurement but should the weightings differ for true partnering initiatives?
In an outsourced environment, health and safety policies, quality management and environmental compliance are rightly expected to be well-established and practiced - but the supply chain is caught up in a complex game and a matrix of scoring systems when potential partners are being considered. Maybe it is time utilities adapted their own policies and processes for use by its partners to improve integration. This may allow assessments to concentrate on practical experience and technical ability. Site visits, staff interviews and technical references are key to this process - audits of practical experience, training policies, salaries and staff retention should have a high priority.
Successful procurement also requires the correct blend of technical experience with the support of professional supply chain or procurement teams. However, the input from experienced technical staff appears to be reducing and service provision now appears to be led by procurement teams rather than being supported by them.FORMS OF CONTRACT
Despite the operational gains, an unresolved question is how to improve current contract arrangements. Leakage management has a measurable output (leakage saving) with a measurable value. This makes a range of contract forms available. The range of forms of contract (Figure 1) reflects a range of amount sharing of risk and a range of drivers to encourage the required behaviour. To date, the UK water industry has been markedly conservative in adopting suitable forms of contract. For most leakage management activities, most water companies have used time and expense contracts.
Detection contracts based on reductions in night flow are also popular but these tend to be very short-term - payments are usually made on one-off reductions rather than sustained reduction or maintenance of a leakage level. There appear to be four key issues that prevent more advantageous forms of contract being used:
These problems can all be mitigated by a suitable type of contract and a form of procurement process that selects suitable partners. Even the uncertainty in measurement can be dealt with. In those companies where leakage still has not come under control, there is an even more compelling argument for transferring some of the leakage risk to specialist contractors, which are able to focus exclusively on the problem.
A suitable form of contract for this may be a target cost contract for a joint venture responsible for the whole leakage management activity, where the target cost includes the value of the water saved. The control of partnering contracts will be through performance indicators and the industry is making some efforts to standardise these indicators and benchmark them between companies.
Standardising these performance indicators, and standardising applying them, will be one of the main ways of improving efficiency in this area in the next few years. There is no doubt integrated partnerships prove to be more successful than typical contractor/client relationships or outsourced operations. A partner that can integrate, influence policy and recommend improvements is being effectively utilised. Utilities receive added value and a trusting learning and developing relationship can be established whilst individuals can flourish. Those that adopt the provision of the cheapest typical contractor/client relationship carry the highest risks.
There will be little personal development, staff retention will be poor and the contractor is practically being encouraged to cover cracks, to increase costs and to extend timescales. Fortunately for all involved, the water industry appears to be slowly adopting partnering initiatives that will achieve its aims in leakage management over the long-term.