Commercial Management and Holistic Risk Mitigation in the Water Sector
Effective commercial and contractual management is crucial in the Construction and Infrastructure sector. Typically, it is seen as a key process to ensure that projects are delivered on time and at the cost negotiated during the procurement process. Whilst this is a key deliverable of commercial and contractual teams, its importance for organisations can extend far beyond these areas.
In our experience, effective contractual and commercial management can help enable effective risk management at an organisational level. The importance of risk management is critical across the Construction and Infrastructure sector, but particularly in the Water sector. Water is an irreplaceable commodity for human health, economic livelihoods and the environment. Yet, regardless of its importance in the UK, the management of this vital sector falls outside the public consciousness unless there is a disruption in service, flood event or drought.
Despite this, the UK Water sector faces systemic risks. Indeed, a recent parliamentary report [1] criticised the functioning of the UK Water industry and raised the prospect of water demand outstripping supply in certain regions of the UK. To understand how we can assist our Water sector clients to address key risks, Deecon recently undertook a review of academic articles that identified risks to the sector in one of the major river basin districts of the United Kingdom. This led us to identify 304 individual risks predicted for the next 30-years, split into the broad risk categories shown below.
It is clear that physical risks dominate the concern in academia. This ranges from an increase in multi-year droughts [2] to a 70% increase in surface water flood risks [3]. Additionally, numerous non-physical risks have been identified, such as the risk of water utilities’ credit ratings reducing and their financing costs increasing as a result [4].
Looking at the broad categorisation of risks, it may appear that commercial and financial management will only address a small subset. However, taking a holistic view and understanding the value of effective commercial and contractual management changes this perspective. Firstly, we must note that these risks do not occur in isolation, but are interdependent as shown below. For example, there is a strong connection between climate change and water pollution, water pollution and environmental regulation, etc. Therefore, a number of interrelated strategies are required to address these risks.
Web of Water sector risks - connection strength indicated by line thickness
Secondly, when we look at key mitigation strategies to address these risks, we see the importance of water companies’ supply chain performance and activities being aligned to organisational goals.
Eight pillars of effective commercial and contractual management
Aspects of commercial and contractual management (displayed above) are fundamental for this, for instance:
Supply Chain Management. A large amount of the work required to mitigate risks to the Water sector relies on skilled suppliers. Indeed, strategies to improve water quality involve upgrading individual sewage treatment works and undertaking major infrastructure build such as the Thames Tideway Tunnel. Good supply chain management is integral for water companies in order to develop collaborative relationships with their suppliers that deliver completed projects with valuable, high-quality results.
Performance Forensics. Analysis of suppliers’ performance enables water companies to ensure their contracts are meeting KPIs and regulatory targets that align with key business goals. For example, reaching net-zero carbon emissions by 2030 requires significant changes from the Water sector’s supply chain.
Commercial Reporting. The key to effective commercial and contractual management is increasing the level of automation. This improves the accuracy of reporting and provides standardised reporting metrics for leaders to make informed decision making. Crucially, the efficiency gains from increased automation increase the capacity of water utility individuals to focus on potential risks.
To put it simply, effective contractual and commercial management enables teams to look forwards and adapt to risks rather than backwards. To take an example of a ship with 100 crew members, with entirely manual commercial and contractual management you have 99 members looking backwards with 1 looking forwards. Effective automation enables you to have 1 member looking backwards and 99 looking forwards, enabling them to address upcoming risks.
The difference between manual and automated contractual and commercial management
In short, effective commercial and contractual management ensures that the work required to mitigate systemic risks to the Water sector is completed, that the supply chain activities support organisational goals and that Water sector professionals have time to understand and act on key upcoming risks. There is not one cure-all approach that will mitigate risks and ensure the continued provision of Water and Wastewater services. It is important to take a multifaceted approach across the Water sector and within Water and Wastewater, and a key strand of this is effective commercial and contractual management.
To find out more about Deecon’s experience in contractual and commercial management please contact us.
Words by Jack O’Callaghan
References:
[1] UK Parliament (2019) Water supply and demand management. Available online at: https://publications.parliament.uk/pa/cm5801/cmselect/cmpubacc/378/37802.htm
[2] Barker et al. (2019) ‘Historic hydrological droughts: systematic categorisation for a diverse set of catchments across the UK’ Hydrology and Earth System Sciences. Copernicus 23(11), pp. 4583 - 4602
[3] Jenkins et al. (2017) ‘Assessing surface water flood risk and management strategies under future climate change: Insights from an Agent-Based Model. Science of the Total Environment, 595, pp. 159-168
[4] Bayliss, K. (2017) ‘Material cultures of water financialisation in England and Wales’, New Political Economy. New political economy, 22(4), pp. 383-397.