Improving the outcomes-based approach to delivering infrastructure
With busy periods approaching across a number of sectors, it is vital to ensure the right approach is in place, Stantec technical director of programme management Paul Taylor writes
Next year marks the start of the AMP7 period of regulated water infrastructure. Other sectors are also investing at this time, including CP6 (rail), RIS2 (roads), Q6 (airports) and RIIO2 (energy), as well as HS2, Crossrail 2 and Tideway.
The investment scale means the infrastructure sector will be at full stretch. So how to deliver these requirements while preventing cost and time overruns due to overheating?
One approach emerging from AMP6 was to deliver outcomes and benefits instead of pre-defined outputs. This was to encourage innovation, so the business needs and outcomes were still achieved but sometimes avoiding capital investment by changing operational approaches.
The next AMP cycle is going to see this increase, so it’s important that we learn previous lessons.
This means water companies, consultants and delivery organisations will need to update their methodologies – and possibly strategies – to make the outcomes model work.
IMPROVING BENEFITS AND OUTCOMES UNDERSTANDING
There needs to be a clear understanding from all parties on the definitions of benefits, outcomes, capability and outputs. This is especially important from a delivery organisation perspective when signing up to provide a benefit or outcome where external factors are outside their control.
Each benefit level can act as a value transition point, meaning requirements and responsibilities between the parties must be explained.
TRANSFERRING OUTCOME RISKS
A problem in the last investment cycle with outcomes is transfer of risk. A water company would prefer the risk of achieving the outcome to be managed by the delivery organisation but, in practice, it’s more complex. The reasoning is that delivery organisations handle capability, but the asset owner’s post-handover operations achieve the outcomes (with the delivery organisation supporting).
Before AMP6, a water company held a greater proportion of risk, both on achievable outcomes and output selection, but had regulatory control. This transactional process provided prescriptive outputs to the delivery organisations. Savings and opportunities relied on the water company’s internal design consultant’s value engineering and the delivery organisations looking for timescale reductions or product concessions to make savings. This was a combative structure with all parties protecting their positions, sometimes at the expense of the programme or project.
In this model, the delivery organisation increases its proportion of risk in deciding the outputs required for the water company’s programme outcomes. Its responsibility includes providing the capability of the combined outputs, and in some cases takes ownership of the outcomes. If interactions are carefully choreographed the model works well; if they are not well designed it results in parts of the model failing.
CHANGES TO MANAGE OUTCOMES NOT OUTPUTS
Traditionally, the water company’s asset management team translated the required benefits into programme outcomes, then project outputs. The design consultant was brought in to optioneer the solution based on a need’s requirement.
In an outcome approach, asset management only defines the required outcome, causing it to sometimes encroach into the delivery cycle. This has resulted in downstream pressures and is still a work in progress for AMP7.
Delivery organisation changes are also required, as they identify the outputs needed to deliver the overall capability and outcome requirements. This must be carefully managed as outcomes are not down to the delivery organisation. The delivery organisation provides the outputs (plus the programme capability), but external factors can prevent outcomes being achieved. In AMP6, there are cases of delivery organisations signing up to outcomes while unable to control the external factors – these are lessons that need to be heeded.
There are changes required in adoption by asset operation. Their role is to take the capability delivered to the required outcomes, supported by the delivery organisation.
There are several negative impacts that occur when moving to an outcome model:
• The design consultant must develop outputs that satisfy the required outcomes using a totex hierarchy, which can prolong the needs and optioneering stages
• Delivery organisations work on revenue, with turnover being critical. The potential longer timescales to the start of the solution implementation causes difficulty in year one of a programme, impacting already competitive margins
• The totex solution could increase the operations effort and reduce the capital effort. In principle, this might increase overall savings and profit share but reduce the revenue for the delivery organisation
• If the design consultant is not part of the delivery organisation, there are potentially conflicting drivers
• Totex increases the cost to serve from the design consultant in relation to the asset capital cost
There are several positive impacts that occur when moving to an outcomes model:
• Totex solutions mean the overall cost to the water company reduces in the longer term
• Reduced transaction points in the project lifecycle
• Risk is apportioned to the best athlete to deal with it
• Collaboration towards the overall outcome, not outputs, leading to more innovative solutions and savings for all
• Working in outcomes reduces the scope time and cost impact of changes to specific outputs
• Minimises management double handling
THE VALUE TRANSITION POINT
Subject to the type of project or programme and contract, the value transition point (VTP) changes between the asset owner and the delivery organisation. The position of the VTP should be based on accountability and responsible capability. The graphic below simplifies this.
Project 1: Project replacing a pump that is carried out by an internal minor works department. Therefore, there is no value transition point to the delivery organisation.
Project 2: A water company is using several SMEs providing project management training. The value transition point is at outputs due to the water company using several companies and only when the effort is combined does it provide the capability.
Project 3: A delivery organisation is to build an energy-from-waste plant for a water company that can achieve 10MWe generation. The value transition point is at capability as the delivery organisation cannot control the water company’s sludge feedstock.
Programme 4: A water company appoints a turnkey electrical contractor to replace all the external lighting to reduce the energy used by works lighting by 50 per cent. The VTP is at outcomes as the contractor can ensure the design not only achieves the capability required but is able to take on the risk that the outcome can be achieved.
Programme 5: In this instance, an asset owner and a delivery organisation form a company to provide a pumped storage reservoir. The delivery company will build and maintain the assets and the asset owner will operate. Both companies own the benefits.
DO OUTCOME DELIVERY MODELS ENCOURAGE ALLIANCING?
Outcome delivery models can encourage alliancing, but a more integrated approach is required if additional risk beyond the output or capability VTP is required. The implications around VTP routes need to be more widely understood with flexible approaches that, in turn, will increase trust between all parties.
This article originally appeared in the March issue of WET News
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