The future of outsourcing
Terry Povall discovers the decision to out- or in-source a capital project management is far from set in stone.
The water sector has experienced numerous radical transformations since privatisation. But the debate around in-sourcing and outsourcing has remained much the same in principle.
Capital delivery is generally outsourced, while operations are in-sourced. This is primarily because the owner is firmly accountability for asset performance and asset failure is invariably an operational issue, rather than construction defects. These are usually corrected prior to handover. There are also normally clear lines of accountability between construction, handover and operation, and owners feel more comfortable with operations being done in-house.
The rail sector made a positive move back to in-sourcing following significant breaches of health and safety by outsourced maintenance operators. This reinforced the generally accepted opinion that operation and maintenance should be carried out in-house.
Exceptions to this are rare. The most notable was undoubtedly Welsh Water’s introduction of the Glas Model in 2001. This saw the move to a not-for-profit business, and led to an industry first in the outsourcing of the whole of its operation and maintenance works and also their customer services.
So, since privatisation it has been common practice to in-source operations and outsource capital programmes Over the years, many clients have been comfortable in procuring the delivery of large parts of the programme from single entities.
Scotland provides a good example of the sector’s confidence in outsourcing. Three regional water companies merged into Scottish Water. Then followed another industry first; the development of Scottish Water Solutions (SWS). This joint venture by United Utilities and Thames Water was primarily established to deliver the Q&S2 programme. The success of this model is reflected in the fact that Scottish Water has reappointed SWS on its Q&S3 programme.
It is easy to see how confidence in outsourcing programme delivery developed. During the AMP1 period following privatisation, most water companies still procured their capital programmes on a single project basis.
But we quickly saw a move to procuring programme delivery on a single entity basis. A prime example of this was the Thames Water Extended Arm contact, which gave a large slice of their programme to Taylor Woodrow. This was followed in AMP2 by the Equip Programme, which split the programme into two delivery entities, while the Trident Programme in AMP3 split it into three.
These developments set the pattern for where we are today, with several examples of joint ventures delivering capital programmes, such as in Scottish Water and Southern Water. Even where we do not have single entity delivery, most companies have developed some sort of alliance approach entailing delivery by five or six contractors.
The question is: what will the future hold in this area?
Some water companies are beginning to question their partners’ abilities to manage programme delivery. They consider this can be done as well, if not better, in-house, and are now breaking down their programmes to enable parts to be delivered by their own managers.
This brings the benefit of developing and testing management capability. It also provides a useful benchmark against what is now perceived as the acceptable method of programme delivery.
A catalyst for this has been the change in the types of programmes. In the years following privatisation, the average size of a construction project was £1.5M. This figure was inflated by the major wastewater schemes being built in all the major coastal towns and cities in order to comply with Urban Waste Water and Bathing Water EU directives.
Over time, these bigger schemes became less of a feature. The average size of a construction project has now dropped to around £850,000, reflecting a reduction in large schemes and extra numbers of smaller ones.
As a result, we will need more small- to medium-size contractors to deliver such projects. Either that, or contractors who can reorganise themselves to deliver programmes that are continually changing in content and scope.
Some water companies are now saying the skills needed for this can be provided more efficiently in-house, and an in-sourced solution provides more sustainability. This argument is also fuelled by the change from capital schemes to capital maintenance.
If we do see more of a move towards in-house programme management, the water companies will face a major challenge. Will they be able to reinvent parts of their business to operate as sophisticated 21st century organisations? Will they be able to develop new skills and capabilities focused on delivering long-term value, managing supply chains and increasing reliability?
There are numerous successful examples. But many will counter that the business capabilities of several water companies have not changed in recent years. Also, can a move to developing in-house capability be sustained?
Overall, current business processes are constraining organisations and there is an urgent need to improve business capabilities. Will the addition of in-house programmes add to this burden?
Some are already giving it a try, and point to the following as areas where contractors are failing to deliver:
- Flexible delivery capability in the face of programmes that are changable in content and size
- Building long-term sustainable supply chains
- Acknowledgment that built-asset solutions will become more complicated as carbon footprints and whole-life cost issues are brought to bear
- A growing lack of clear understanding of the relationship between Capex and Opex; it is no longer just about providing an asset – there is a need to provide a solution that aligns with the user experience
Some will inevitably change, but this will probably only happen in part, and wholesale changes are not expected.
As we move into the third year of AMP3, the pressure on programmes increases. The use of non-framework contractors in conjunction with internal programme management is expected to increase to plug under-capacity hot spots. Their performance should provide an interesting benchmark.
Terry Povall is head of water at EC Harris. T: 0151 243 8490.
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