As the water industry’s main players gear up to bid to be part of Thames Water’s AMP6 super-alliance, the company’s capital delivery director Lawrence Gosden tells Margo Cole about its new, radical procurement approach.
Just before Christmas Thames Water announced that it intends using an “alliance” model for a significant proportion of its 2015 to 2020 capital investment programme. Although the alliance will be working on projects in the next asset management period (AMP6), which does not start for another two years, Thames is keen to get the alliance partners on board by spring this year, so the tender process is already well underway.
Thames Water capital delivery director Lawrence Gosden says the decision to opt for an alliancing approach was driven in part by the response it got from a massive consultation exercise last year with the water industry supply chain. “It was highly successful, and coming out of it was a real understanding of what the pressures are,” he explains. “As a result, we decided to completely change the way we work, and to form a single, large alliance.”
This large alliance will consist of Thames itself plus four “design and build entities” - likely to be contractor/consultant teams, a programme manager, and a “technology innovator” with expertise in managing asset information. Firms that registered an interest in any of these posts at the end of last year are currently forming appropriate joint ventures and working up their bids.
“There is a short tender phase, which is fee and quality based, but this will very rapidly morph into team and behaviour based assessment work,” says Gosden. “This is not a traditional piece of tendering - we are moving towards behaviour-based procurement very rapidly.
“We can assemble all the right individual companies, but we need to form a team,” he adds. “So we are looking for companies with a real track record that can embrace working in a collaborative manner, and people who have an understanding of what that takes.
“This may be more about not pouring concrete than pouring concrete, and we need people who understand that. The challenge is to find really good professional excellence in delivery, but we also want them to advise on no-build solutions, and that’s a different way of thinking,” says Gosden.
Thames plans to sign early contractor engagement alliance agreements with the successful bidders in the spring, so that the full alliance can then work together to develop Thames Water’s business plan for AMP6, and to look at potential innovations - like standardisation and modular construction. “One of the biggest barriers to innovation is not having enough time,” says Gosden. “If you start two years early, then you can optimise, and prepare standard product lines.
“We are looking for companies with a real track record that can embrace working in a collaborative manner”
Lawrence Gosden, Thames Water
“That’s what the next two years is about. It completely changes everything.”
Gosden says the decision to “transform” the way it procures work in the next AMP is not a reflection on the incumbent framework contractors and consultants currently working on AMP5. “They are performing really well and have an exemplary health and safety record,” he says, “but the challenge going into the future is different. We have rising rates of asset deterioration, so increased investment is required; but we also have to face the affordability challenge from the customers’ point of view, so we need to get more bang for our buck.
“The way to get that is to innovate, and we think that putting an alliance together gives us the best opportunity to do that.”
He says it is no longer sustainable to work as Thames has been doing if the deteriorating assets are to be replaced and maintained at a cost that is acceptable to its customers, “so we have to turn things upside down and do things differently”.
The change in approach also reflects something all water companies are facing - a shift away from major capital projects and towards asset maintenance and optimisation. Although Thames still has massive new build projects on its books - like a new treatment works at Deephams, and the Thames Tideway Tunnel - these do not come within the alliance’s remit, and it will mainly be focusing on pipe renewal programmes, and upgrades to treatment facilities and sewers, with each project valued at around £500,000 to £1M.
In all, however, it these individual projects will make up a programme that could be worth as much as £2bn - or even £3bn if the alliance continues into the next AMP.
Alliance members will be incentivised financially on a risk/reward basis, but this will be based on programme-wide performance of the alliance as a whole, not on individual members or projects. “This is very much about the programme coming in under budget. If the alliance performs then everyone will benefit,” says Gosden, who hopes this approach will promote cross sharing of best practice between team members.
However, he adds: “Financial incentivisation only goes part of the way. A bigger motivator is doing something new, and doing something that is reputationally exciting.”
In addition to the main players in the alliance, Thames wants to bring firms further down the supply chain into the fold, as this is where it believes much of the innovation may come from. “Collaboration doesn’t stop with the alliance,” says Gosden, who says he wants to see a fully integrated supply chain that is given transparency about the work coming up.
“We got a lot of feedback about how difficult it is for tier 2 and tier 3 suppliers,” he adds. To make sure these firms have a voice, the alliance board of directors will include a representative from a tier 2 or tier 3 supplier, in addition to the seven alliance members.
“The alliance may choose to deliver a piece of work through one of the design/build entities or through the supply chain,” says Gosden. “There will be a lot of contracting talent for the alliance to draw from.”
Before committing to this alliance approach Thames has had a good look at successful alliances elsewhere, including the Anglian Water’s @one alliance and the team being put together by Network Rail to deliver the new London Bridge station. It has also learned lessons from its own foray into alliancing in AMP3.
“Two AMPs ago we had three big alliances working, but we moved away from it because we realised it probably needed more commercial rigour than a traditional contract approach,” explains Gosden. “It wasn’t done as well as it could have been, and when we got to the end of those alliances there was a big question around whether value for money had been achieved - we struggled to prove that.”
“This is very much about the programme coming in under budget. If the alliance performs then everyone will benefit”
One legacy, however, is that many of the Thames staff who worked on those alliances are still around, and Gosden says he has been “absolutely inundated with people embracing a more collaboratively way of working. I’m pushing against an open door internally,” he adds.
The approach Thames is adopting may also find considerable favour with water industry regulator Ofwat, which is prioritising affordability, and pushing water companies to move away from thinking about capital expenditure (capex) and operational expenditure (opex) as separate entities and focus on so-called “totex” - total expenditure.
This is likely to result in more outcome-based or output-based measurement, which allows the companies to work towards end goals, rather than individual targets and deliverables.
“An alliance gives us huge flexibility to deliver outcomes in a totally different way - for example an operational outcome,” explains Gosden.
“This is going to be less about pouring concrete and more about making really smart decisions. This is a really different way of thinking about how you go about delivering a capital programme.”