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The 21st Century Water Utility Initiative: how to boost operational performance of water utilities by up to 20% G. Gage, S. Helmcke and O. Prigent

ABSTRACT The 21st Century Water Utility Initiative is a powerful and innovative approach to help water utilities assess their current operational performance, identify improvement actions and track impact year after year. First success cases suggest that cost reductions range from 10 to 20% within 1–3 years, with improved customer satisfaction. This approach can help water utilities in three ways. First, its benchmarking module focusses on cost drivers at a granular level, not only at an asset level, but also by profit and loss line or activity. Second, it is coupled with onsite diagnostics to understand the causes of underperformance and identify improvement ideas. Third, its transformation programme makes operational changes stick through a combination of measures that address management infrastructure and mindsets and behaviour. In short, the Initiative helps utilities identify improvement potential, seize the prize, and translate it into a transformation programme to drive sustainable

G. Gage (corresponding author) McKinsey & Company, 1 Jermyn Street, London SW1Y 4UH, UK E-mail: [email protected] S. Helmke McKinsey & Company, Inc. Austria, Herrengasse 1–3, 1010 Wien, Austria O. Prigent Leebierg 13B, 5359 Schuttrange, Luxembourg

implementation. This highly structured, standardised approach addresses the needs of both small and large utilities. Key words

| benchmarking, change management, operational improvement, operations, performance management cockpit, transformation, wastewater utilities, water utilities

INTRODUCTION Operational excellence is at the heart of how water and wastewater utilities create value and provide great service to customers. But water utilities face ever greater cost pressure as they strive to improve their quality of service. Water tariffs are under scrutiny, especially in the context of financial austerity. At the same time, water standards are tightening and the cost of raw materials, chemicals and energy is rising. The 21st Century Water Utility Initiative helps utilities address these challenges. First, its performance booster benchmark is designed to foster rather than just assess operational excellence. Traditional operations benchmarking methods provide useful insights into performance gaps utilities face compared with ‘best-in-class’ performers (Alegre et al. ). Some benchmarking exercises complement reports with workshops at which participants can share best practices. Other approaches compare utilities at a process level, providing more granular findings (Bertzbach et al. ). The benchmarking method embedded in the 21st Century Water Utility Initiative helps boost performance by aligning findings directly to line items in doi: 10.2166/wst.2013.210

financial profit and loss statements and by verifying and extending the findings through local onsite best practice diagnosis. The over 100 performance metrics account for more than 90% of operational costs. In addition to producing a comparison ‘mirror’, the benchmarking effort also works dynamically as a performance management tool. The Initiative gives the tool ‘arms and legs’ in the form of a reliable process for acting on the findings – with steps to identify and rank specific cost reductions and design them into a change programme. The 21st Century Water Utility Initiative thus helps multi-plant operators quickly assess performance, and design and manage a transformation programme. It answers questions such as: How does the performance of each plant and network compare with that of global peers, taking into account the specifics of our utility? By how much can we realistically expect to improve our operations? Of the possible improvement initiatives, which specific ones should we prioritise, where, and in what order? How should we set up and run the transformation programme, and how should we track impact to ensure sustainable improvement?

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This combination equips utilities to drive step-change improvements in an operational transformation programme. One European water utility has reduced its costs by over 20% over the last 4 years, amounting to cumulative savings of more than US$150 million per year, while also improving its operational performance and customer service significantly.

APPROACH The 21st Century Water Utility Initiative has three distinguishing features: it offers a distinctive benchmark, conducts an onsite diagnostic, and develops a tailored transformation programme from design to implementation. These are building blocks of a whole, but can be drawn upon separately. Stage 1: ‘Apples to apples’ benchmarking aligned with profit and loss statement The benchmarking focusses on cost drivers by profit and loss line (such as labour, energy, or chemicals) or activity (network repair, leakage detection, pumping station

Figure 1

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maintenance, etc.), with over 100 metrics that drive economic performance and are specific enough to identify improvement actions. Traditional approaches tend to focus on operational costs (opex) at a high level only (total opex per cubic metre, for example), without providing much insight into what is driving the costs. The performance booster benchmark is granular enough to also serve as a performance management tool (Figure 1). The approach provides very granular findings because it compares assets site by site and network by network – rather than at a utility level only – for all major cost elements. Finally, it compares like with like. It accounts for energy and labour cost differences, as well as normalising for size effects and clusters by local conditions and technology. These adjustments are essential to get valid comparisons and – crucially – show utility management and staff the validity of the results because they demonstrably take into account the specifics of their operations. The performance booster benchmarking approach incorporates operational and water industry expertise from McKinsey & Company and has been developed and tested in partnership with leading water utilities. All in all, the global benchmark database now includes more than 160

The benchmark is a performance mirror and supports performance management (source: McKinsey & Company).

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water and wastewater assets and around 40 networks and 20 customer service units. Stage 2: Onsite diagnostic Onsite best practice visits and interviews are held to verify the data provided (see Figure 2), identify additional improvement opportunities and understand the root causes of underperformance. This is a fundamental shift. Where traditional benchmarking typically identifies only the strengths and weaknesses of water utilities compared with peers in a top-down assessment, the nitty-gritty onsite verifications and root cause analysis are far more eye-opening than data comparisons only. In practice, they are tremendously energising and informative, enabling the utility to follow up effectively and to start realise the savings. The 21st Century Water Utility Initiative approach devotes considerable time – from two weeks to multiple months – to identifying and verifying improvement opportunities through ride-alongs with operations crews, site visits of treatment plants and management interviews. The savings

Figure 2

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Example of improvements through expert visits (source: McKinsey & Company).

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identified via this bottom-up approach complement the benchmark with observations that are instrumental in defining concrete improvement actions and persuading management that the savings are achievable. Once the observations are complete, specific improvement ideas are agreed with the utility’s management team. These site visits have resulted in a library of best practices and improvement levers from around the world, e.g. savings ideas in the field of water production and distribution include condition-based treatment, portfolio optimisation, and improved leakage detection and repair or support processes. Ideas for sewage networks and wastewater treatment relate to contractor incentives, avoidance of unnecessary visits, condition-based management, and shifting to lower-cost sludge processing, including energy recovery. Customer service initiatives have focussed, for example, on increasing support service efficiency and revenue collection, and reducing contact centre costs. In the end, participating utilities receive detailed guidance on improvement levers and financial impact as well as a catalogue of best practices (Figure 3).

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Figure 3

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Detailed reports help utilities effectively use the performance booster (source: McKinsey & Company).

Stage 3: Tailored transformation programme After the diagnostic phase, the next steps are to design a transformation programme, prioritise improvement areas, and draw up a plan to implement improvements. To ensure a successful and sustained transformation, three components need to be in place (Figure 4): first, an optimised operating system that focusses on creating customer value at minimised cost; second, a management infrastructure needs to be set up to support effective implementation of the changes, including tracking of key performance indicators, visual tools to manage performance, and incentive systems that encourage and reward desired behaviours and results; and last but not least, mindsets and behaviours that are conducive to improvement need to be fostered. Transformation needs to be a priority for the organisation and communicated as such. Top management and shareholders need to make the decisions required to enable transformation, and they must also ‘live’ the changes from the top down, with management leading by example.

The 21st Century Water Utility Initiative offers further support. One option is to engage in a performance partnership with a leading private operator to access best practice and transfer knowhow. Without any outsourcing or privatisation this model offers the accountability of service provision of a concession and at the same time the advantages of consulting support (Figure 5). Together, the partnership and the utility identify improvement levers and design a transformation plan. During the implementation phase the partnership continues its support by transferring expertise and building capabilities. This new model is increasingly being picked up by US water utilities. Contracts with the partnership could even be structured based on performance.

RESULTS AND CONCLUSIONS Utilities benefit in many ways from the Initiative, yet two results stand out. The performance booster benchmarking to date has revealed that no single utility is consistently a

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Figure 4

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Transformations change the operating system, management infrastructure and mindsets of the organisation (source: McKinsey & Company).

Figure 5

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Partnership model between a private water operator and a management consulting firm to transform water utilities over a multi-year period (source: McKinsey & Company).

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top performer across all steps of the value chain, and every utility can benefit from best practices in one area or another. Also, there are often bigger differences within one technology cluster than between different technology clusters, which means that the way the utility operates potentially has more impact than the choice of technology. For example, optimising the production portfolio by systematically selecting lowest-cost production sites depending on demand level does not require technology changes and can still bring operational expenditure savings of 2–5% in water production. Second, and most importantly, the results of the Initiative reveal that a huge improvement potential is available. Cost reduction opportunities range from 5 to 40% along the various steps of the water value chain (see Figure 6), typically with an average of 10–20% for the utility as a whole. Examples The approach has proved extremely successful with 17 utilities participating over the past 3 years. One major

Figure 6

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European water utility reduced its costs by over 20% over the last 4 years thanks primarily to a 30% decline in customer complaints and a reduction in leakage of 30%. Another project identified an operational expenditure reduction potential of 15–20% for another water utility, and implemented a pilot that has already saved US$10 million. This utility has also optimised its capital expenditure portfolio, saving 15% for the year under analysis and identifying a further 15–20% capex reduction opportunity for the project execution. A further example was identifying and validating around 30 levers for a major US water and wastewater utility to reduce its operating costs by approximately US$110 million to 150 million per year. Some of the levers have already realised the savings targeted. When a utility makes use of all three elements of the 21st Century Water Utility Initiative – benchmarking, onsite diagnostic, and transformation programme – one full cycle to complete its footprint-specific action plan might run for 18–36 months.

Overview of main operational levers and typical savings achieved (source: McKinsey & Company).

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Table 1

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Levers by area

Lever

Initiative

Result achieved

Water production

Increase labour productivity: reduce travel time to remote sites by consolidating activities, reducing non-necessary inspections, optimising maintenance Optimise production portfolio by systematically selecting lowest-cost production sites depending on demand level Reduce and optimise chemical dosing via automation, depending on raw water quality and seasonality Implement energy conservation measures

3–5% of water production cost base

Consolidate laboratories and improve sampling by reducing paperwork and optimising route planning Optimise sludge disposal Water distribution/ wastewater collection

Wastewater treatment

2–5% of water production cost base 1–2% of water production cost base 1–2% of water production cost base 1–2% of water production cost base 1% of water production cost base

Increase labour productivity: right-size repair crews (from 3 to 2) when possible, improve activity-scheduling system, employ route optimisation software and GPS, optimise processes to reduce aborted jobs, dry holes and maximise first-time reinstatement Optimise maintenance to reduce vehicle downtime, aborted jobs due to inadequate equipment, delays in loading/unloading trucks Reduce subcontracted excavation by deploying mini-excavators operated by utility staff Reduce energy consumption by identifying the most efficient pumps, lowest-cost transfer routes and maximising pumping in off-peak tariff periods Optimise chemical dosing in networks and tanks

2–5% of network operations cost base

Recover energy from sludge

1–5% of wastewater treatment cost base 1–3% of wastewater treatment cost base 1–2% of wastewater treatment cost base 1–2% of wastewater treatment cost base 1–2% of wastewater treatment cost base 1–2% of wastewater treatment cost base

Optimise dissolved oxygen levels Improve maintenance efficiency Improve labour productivity, e.g. by optimising shifts Increase the dry solids content of sludge, optimise sludge transportation and disposal routes Reduce and optimise chemical dosing via automation, depending on load base

Typical levers Levers that reliably enable positive impact of this kind are listed in the following table (see Table 1). Most of these levers do not require fundamental technology changes or significant investments. Many of these levers are also linked to increases in labour productivity. The savings make it possible for employees to focus on other value-creating work, some of which utilities today typically outsource, such as excavation and trenchless

2–5% of network operations cost base 2–3% of network operations cost base 2–3% of network operations cost base 1% of network operations cost base

pipeline replacement, potentially in partnership with a private civil engineering firm. The granularity and end-to-end approach of the 21st Century Water Utility Initiative’s performance booster benchmark make it a valuable addition to other benchmarking efforts. Its detailed onsite diagnostics and handson transformation programme can provide additional value. The operating cost reductions of 5–40% that participating utilities have already realised combined with multiple optimisation initiatives have yielded an average

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operational performance increase of some 10–20%. These are not just one-off improvements. Impact has been tracked year after year, and found to be sustainable, making this a ‘win–win’ approach for all stakeholders – customers, governments, the environment, as well as for the utilities themselves.

ACKNOWLEDGEMENTS Olivier Prigent, currently Auditor with the European Court of Auditors, co-authored this paper when he was a Sr Expert with McKinsey & Company. For more information about the

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McKinsey water practice, please see http://www.mckinsey. com/client_service/sustainability/expertise/water_and_waste.

REFERENCES Alegre, H., Baptista, J., Cabrera, E., Cubillo, J., Duarte, P., Hirner, W., Merkel, W. & Parena, R.  Performance Indicators for Water Supply Services, 2nd edition, IWA Publishing, London. Bertzbach, F., Franz, T. & Möller, K.  How to achieve and prove performance improvement – 15 years of experience in German wastewater benchmarking. Water Science and Technology 65 (4), 661–668.

First received 10 November 2012; accepted in revised form 19 February 2013

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The 21st Century Water Utility Initiative: how to boost operational performance of water utilities by up to 20%.

The 21st Century Water Utility Initiative is a powerful and innovative approach to help water utilities assess their current operational performance, ...
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