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Innovation, customers, and competition: a take from two industry titans

Nyree Scales

I posed the same questions to the CEOs of two the UK’s biggest Water companies, Heidi Mottram of Northumbrian Water and Steve Robertson of Thames Water, and this is what they said.

How do you personally define innovation and why is it so important?

Heidi: Everybody can recognise that the world is moving at a faster pace and that is exciting but it means that fundamentally, we need to be more agile.  In terms of defining innovation itself, for us it is something that’s almost part of your DNA, it’s your lifeblood, your culture. It’s not all about technology, inventions or the hard stuff. It’s about being curious and doing things differently, and that has to run through your people and processes.

I think there’s real sense that everybody and anybody can bring something to the party at Northumbrian Water. We feel that it’s everybody’s job to bring new ideas to the table and that belief is empowering people to come to work to make a difference. There are people inventing things in their garages and bringing them into work and trying them out! Some companies go along the lines of having innovation department but we feel very strongly that it should include everybody.

Steve: Innovation is one of these generic terms. I think the most important part of innovation is finding new ways of thinking and there are lots of ways of doing that. How do you attack a problem in a new way? Sometimes a key aspect of innovation can be learning from other people and applying something in a completely different context. An example from Thames Water is how we are using apple presses from cider factories in our sewage treatment works to help us extract moisture to maximise the value of the sludge product and minimise the processing costs.

Another way of thinking of about innovation is where we look at the raison d’ être of how a business works. This can have a profound effect; in the case of Thames Water we have undergone a massive sea change in the way we think about our business and it has opened up opportunities to do things very differently. Specifically, thinking about running a business with a long-term horizon has proved to be a real source of innovation. Suddenly, you are thinking about 30-40 years ahead and considering the things you need to do that are outside the traditional model.

A final aspect of innovation is to take a direction of travel and focus on the end solution, which is radically different from the traditional evolutionary approach. For instance, we would like our sewage treatment process to be completely recyclable. Using a technique called pyrolysis, the end goal will be to have nothing coming out of it except clean water, energy and carbon. We are investing a lot of money in this technology, however we have no idea whether it will work. The issue is, if we don’t try we will never know.

Everyone understands how important it is to serve your customers better, but what are the challenges in doing that for water companies in particular?

Heidi: The high quality of the UK water supply means that when we turn the tap on in the morning or take a shower, we often take those things for granted. As a result, sometimes it feels as though our customers aren’t especially engaged but equally they can become very engaged very suddenly if there is an impact on them locally. So, the question remains, how do you engage different types of customers? We have lots of tools like social media and our physical presence to work with. We also have a customer relationship management system which is vindicated in its level of sophistication by Atom bank, a new digital bank, also utilising its services. With this system we are able to see a whole view of our customers, including every transaction they’ve ever had, enabling us to give them a better service. For us, it’s all about how you make service truly personal and engaging with customers in the right way.

Steve: We need to move beyond a traditional view. Our customers are participants in our network; we have to recognise the fact that we do have a close relationship. We know that because if it breaks down, all hell breaks loose. It’s up to us to reach out, and there are lots of potential ways to do that.

We are going to do about 400,000 home visits over the next five years, physically visiting the house, looking at water consumption and giving advice on how to optimise water usage, installing smart meters and water-saving devices. I think more physical engagement is a good thing. We can also use social media and our digital channels much more adventurously in terms of creating and engaging with communities.

What do you think about the view that perhaps the competitive culture between water companies being encouraged by regulators is inhibiting certain collaborative advances?

Heidi: Collaboration and competition are in tension, but both are necessary. So, for me, it’s not an ‘either or’ scenario. What you need to do is try and find a sweet spot between the two. We sometimes might think that the pendulum is swinging too far in one direction. If you are overly competitive then yes, you will suppress collaboration. But if it’s the opposite, the pace of change will slow down and you run the risk of aiming for the lowest common denominator. So any clever ecosystem is one which creates space and time for both.

So, for example, when it comes to our innovation festival we make point about being open and invite all the other water companies to come along. There was cautiousness about that in year one, and a little bit less the year after. I think that’s a good example of where we’ll say ‘come along, bring some ideas and take some of ours’. But on occasion we might want to bring an innovation to market, get the benefit from it and then pass it on instead. For instance, when Northumbria Water was the first to market Anaerobic Digestion, we took a punt on doing it way before anybody else because we wanted to derive the maximum benefit we could.

Steve: Companies collaborate more than what is sometimes obvious. There are many layers to collaboration, there’s plenty between companies and across the business hierarchy. However, the regulating model, which inherently measures performance between companies, can militate against this. I think competition is an aspect of the regulated model, and ultimately you have to decide based on what provides the greatest benefit. Should we have the companies chasing up a ladder or working together mutually to achieve more absolute standards? I know that Ofwat is looking at its structures, and it will be interesting how they decide what the sweet-spot is.

Personally, I think that many aspects of what we do are natural economic bottlenecks and fundamentally water is very hard to regulate. Therefore, traditional ways of introducing competition are difficult. I do have a lot of sympathy for the dilemma Ofwat finds itself in but I think my personal bias is slightly towards a little bit less of the competitive ladders and a little bit more absolute standards and collaboration.

What are key lessons the water industry could learn from other sectors when it comes to innovation and improving the customer experience?

Heidi: I think for me, it’s to be constantly curious. Never close your eyes to anything new or think you’ve done it already. Technology companies continue to surprise us with new things and that’s an important lesson we can learn, don’t assume you should ever stop striving for something new. We provide a very important public service so we will always have social conscience and that sets us apart in some ways. But essentially, I think that water, like any sector needs to have an obsession with the customer.

Steve: Primarily, we need to learn the fact that water is different. We need to acknowledge that our relationship with the customer is different and mimicking market models from sectors such as finance and retail isn’t the right thing to do. We have a lot of things to learn and import from other sectors, but we must always remember our purpose.

Expectations are changing massively based on what is happening in other industries. If we don’t look out and judge ourselves against those expectations, we will be seen to be laggards. What we actually have to do is go beyond and re-invent what other industries are doing to fit the nature of our relationship with our customers, which is very different.

What would you say is the achievement you are most proud of since having started at your respective companies?

Heidi: I think we have had some fabulous external recognition, over the past few years we’ve won Utility of the Year twice and received an Innovation Award. It’s certainly important to be well respected by bodies who themselves are well respected.

We are being held up as leaders in innovation and we are set in our goal to be an industry leader across the board. But I feel as though we have taken on the role of leaders in innovation thanks to our ecosystem and the fact that we are open and inviting people to get involved. I think people are following that lead.

What does the term ‘ecosystem’ mean to you? A successful ecosystem is rooted in the idea that by bringing together a range of experts to tackle an issue, you get a more innovative and exciting outcome.  A key part of this is bringing in both those who have direct experience in the subject area and those who perhaps think differently or are not as directly involved. What’s really interesting is that when you get the ecosystem thing going, those people network with each other and start to learn off each other in ways you hadn’t anticipated. At the Innovation Festival, we often saw people picking up on connections that weren’t immediately obvious. You find out two or three months later that those people have gone away and created between them another work stream, one which hasn’t got much relevance to what you were doing, but has value to them.

Steve: Well, the thing about an achievement is that it implies an end state and I’ll be honest, I don’t think I’ve got an end-state. I think there are a lot of things we have done that am very proud of. We have completely reshaped the business, especially if you look at really important things like our dividend policy or the transparency that we’ve brought in.

For a long time, the people inside water companies had been crying out for a longer-term view on the running of the business. In particular, ensuring every investment is wise and that we think about the whole life cost of those investments. When we talked to our investors, they had a similar view about taking things forward with a long-term perspective. That’s very exciting for me. I have acted as a catalyst with customers, employees, investors and the board to reset who we are in a way that strongly aligned and sustainable. Having done that, I feel like the opportunity to do really cool things is with us.

We’re becoming a business that is hungry for external engagement, a business that wants to operate beyond what we have to do and recognise our social importance. We aspire to work in a way which respects the importance of our place in society. That intent is the thing I am most proud about. This runs from our shareholders, the board of the company, the executive team, and the people that work inside the business and most importantly our customers. That alignment that represents a redefinition of our business as a social enterprise.

A great example of how we’ve put these principles into to practice is the learnings we took from our Beast from the East experience in 2018. Traditionally, we’ve been able to pretty much predict how much demand you have for water over the course of the day. When the Beast from the East happened, we went from a state of normality and comfort to suddenly having to produce an extra 150-200 million litres of water in space of few hours. The traditional way of matching demand and supply was inadequate. So, we’ve now modelled every single water system under our jurisdiction and by the end of March we will match demand and supply every 15 minutes with a very sophisticated hydraulic system. If Beast from the East 2.0 should happen, we will be able to increase supply almost instantaneously. That is the application of a philosophy in a really practical way, and I’m proud of the fact that a change in the mind-set is beginning to show results.

So, if you were to make a prediction, how do you think the industry as a whole would look and be regulated 20 years from now?

Heidi: First of all I would say that Ofwat have done some fantastic things in its regulation over the last little while. I think that it has been really liberating the way they have worked on totex, innovation, comparative benchmarks, all of these things have been really good for the industry.  What we are trying to do at Northumbrian Water is think about what makes fantastic customer service and great value for money. Those are the things we want to do because we think they are the right things to do, which in turn is aligned with Ofwat’s agenda, which is great. So when I think 20 years ahead, I wouldn’t want to see the regulator move away from some of those good initiatives.

If I had to make predictions for 20 years from now, I would hope that the direction of the industry is driven by what society needs, what our environment needs and what our customers need. That’s what we should be thinking about. The future holds quite a large challenge in terms of the climate and the environment. We are going to have to adapt and be agile and make sure that we have the right amount of water at the right times. We need to ensure we don’t have any flooding and are able to facilitate economic development, rather than restrict growth. We are always very mindful of looking to what the Government’s plans are locally and nationally, always trying to make sure that we are facilitating that.

I think customer service will become even more digital, with an undercurrent of greater privacy around that. Customers have benefited from the cleverness of people understanding their wants and needs, but I don’t think you should be ever be in a position where you abuse that knowledge about your customers. It should always be used respectfully and in a way in which the customer is fully aware and in agreement. In my opinion, sometimes this is stretched by some technology companies.

There will be a need to manage water more wisely, although that has been the story for many years. If we are looking to combat climate change and facilitate economic growth, we need to look after this precious resource and make sure we are using it efficiently and wisely.

Steve: Firstly, what I would hope to see is that the long-term alignment of interests I was speaking about earlier is maintained between and within companies. I think one of the frustrating problems we have is that there is a misalignment between the outcomes we would like to achieve and some of the policy vehicles that have been put in place. Right now, as a CEO of Thames Water, I can feel that tension between the point where expectations would want us to be and the point we are at thanks to the processes through which I’m bound to go. I think Rachel Fletcher is helping us from an economic point of view to look at how we build the models. Equally, DEFRA are playing a key leadership role in the national framework, so that is really positive. Fundamentally, making ourselves safe now, and paying a little more to do so, is a small cost compared to the impact of failure in the context of climate change. For instance, the National Infrastructure Commission has embedded that approach to resilience into its thinking but it’s definitely not yet embedded into wider industry decision making.

In more practical terms, looking to 20 years ahead, I want to get out and take action when it comes to the region’s water security. Thames Water has been talking about making a reservoir for 25 years and quite frankly, we would like to get on with it now please. To do this we need support from all our stakeholders and wider support from society. I also want to look at water transfers. We have talked extensively with United Utilities, Severn Trent, Ofwat, The Environment Agency, and The Drinking Water Inspectorate about a Severn – Thames water transfer. We need to be looking at this issue with the real sense of jeopardy that climate change brings and I am absolutely committed to us doing that. We aren’t doing it because we being pushed to, we are doing it because if we don’t our customers will suffer in the long-term. I personally think we should have been on this years ago as it’s really urgent.

Our PR19 plan is very ambitious but we know that what we’ve proposed is fully supported by our customers. As a result, we are seriously prioritising investment in a way that a public company probably couldn’t commit to. Admittedly it involves spending more money compared to what would be spent under the older model. However, the reason we want to spend that money is not to pay our shareholders because as we’ve said, we are diminishing dividends, but because we want to prioritise investment. So, what we have done in this plan is a real step change compared to what has been historically done.

The world is changing and we cannot project the future based on the past. One of the issues for us as a company is some of the headlines that have been associated with our business are a jeopardy in their own right. If we can’t get over that, our ability to do what we need to do in the future will be constrained by an out of date view of this business. I’m very sorry about what happened 10 years ago, but can we focus on what we can do next? If we don’t focus on the future, we will all screw up and the mess will be horrendous, so let’s look forward!

How important is diversity within the workforce in encouraging cultural change and innovation?

Heidi: I would say critical, diversity is critical to business success generally. There are so many academic studies that demonstrate that wider diversity in any company leads to better, stronger overall results. Personally, I built my leadership team around diversity with a 50/50 gender split, and also a split between people who are well experienced in water industry and people who have come from different industries. When you bring people together from different backgrounds, be it from different geographical backgrounds, a good mix of genders or even if they’ve worked in different businesses, you ultimately get better ideas.

Steve: We need to reflect the society that we work in and, especially with traditional engineering businesses being typically male-dominated, it’s a sector that has never quite been truly reflective of wider society. At Thames Water, we’ve seen a lot more women coming through and we must continue to encourage that.  

London and Thames Valley has huge amount of ethnic diversity, so reflecting our customers and society in our workforce is really important to us.  If you look closely at the diverse set of people from different backgrounds who use our services, even how they relate to water is different. Different religious approaches or ethnic backgrounds for instance can sometimes mean a distinct relationship with water, so it’s important that we understand that.

Fundamentally, we need a friendly environment because if someone isn’t bringing all of their self and their personality to work, we are in essence denying ourselves talent. You need to be fully free to express yourself and that means you need to be comfortable.

The final point is that you must have true diversity of thought. If you are in uncertain world and you want to problem solve together, it’s crucial to have more rounded decision making. Therefore, we need to have the ability to have differences of opinion and put them on the table to discuss them in a respectful way.

I would say diversity is a non-trivial requirement. If you don’t reflect the society around you and make that a core part of the culture of the business, then what you have is an orthodoxy.

Nyree Scales, Conference Producer

Nyree Scales is a content producer for our Future of Utilities portfolio. She specialises in the water industry, following the latest developments and put together our conference agenda for Future of Utilities: Water. She’s been with the company for several months, having graduated from the London School of Economics last year.

Follow her on Twitter here: @Futureofutils

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