An introduction to Digital Operating Model

The Open Water ProgrammeTransforming to operate in a digital world

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1 Digital Masters – Companies that use digital technologies to drive significantly higher levels of profit, productivity and performance (previously referred to as digirati) – Leading Digital, p.g. 3

2 Leading Digital, p.g.4, Harvard Business Review Press, October 2014, A collaboration between Capgemini Consulting and the Massachusetts Institute of Technology, Authors: George Westerman, Didier Bonnet, Andrew McAfee

The Open Water Programme will transform the way water companies operate across the industry. Those who include digital at the heart of their operating models will lead the competition.

The regulatory impact of the Open Water Programme is a game changer for the water industry. It will drive change across the sector, creating a new market for retail water and sewerage services for 1.1 million non-household customers in the UK.

Figure 1.2: Digital Masters outperform their peers

Water companies who seek to compete and operate in the newly opened business and retail market will need to invest in operational changes that develop a number of capabilities, including; marketing, customer retention and channel management in their new retail arm. This operational change will also provide organisations with an opportunity to invest in digital technology and capabilities, which will enable them to gain a competitive advantage. A joint research programme between Capgemini and the Massachusetts Institute of

Technology over the past three years has led to the recent publication of Leading Digital, which shows that those companies who embrace digital and operate as “Digital Masters”1 are 26% more profitable than their competitors.2

Basket of indicators :• Revenue / Employee• Fixed Assets Turnover (Revenue /

Property, Plant & Equipment)

+6% +9%

-4% -10%

Basket of indicators :• EBIT Margin• Net Profit Margin

-11% +26%

-24% +9%

Revenue GenerationEfficiency

Profitability

Note: Average performance difference for firms in each quadrant versus the average performance of all large firms in the same industry for the 184 publicly traded companies in our sample. EBIT, earnings before interest and taxes.

Source: Adapted from G. Westerman, Mael Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders Outperform Their Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

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Figure 1.3: Digital mastery by industry

Consumer Packaged Goods

Manufacturing

Pharmaceuticals

Retail

TelecomTravel and hospitality

Utilities

Insurance

Banking

High Technology

Digital Masters

Conservatives

Companies that have a strong overarching digital vision and culture, and the digital initiatives they have are generating business value in measurable ways

Companies that have an underdeveloped digital vision and few advanced digital features, but are taking active steps to build digital skills and culture

Beginners Companies that are sceptical of the business value of advance digital technologies and have an immature digital culture

Fashionistas Companies that have no overarching digital vision, and the digital features (such as social, mobile) they have exist in silos

Capgemini’s cross sector research into the way that companies need to change how they operate in the digital age has identified four digital themes affecting organisations:

1. Business and Technical Alignment – increased usability is placing technology at the heart of the business, it is no longer the sole domain of the IT Department

2. Customer Centricity – increased customer choice and customer voice through digital channels are resulting in reduced customer loyalty and increased customer

expectations. Organisations need to meet their customers’ needs or lose market share

3. Data Driven – data is big and growing exponentially. Those organisation who effectively master this information to drive decision making see improved performance

4. Pace, Agility and Iteration – the pace of change is disrupting the business landscape on a daily basis. Organisations increasingly need to be flexible - changing the way that they operate rapidly

Over the last 12 months our experts have seen the water sector start to wake up to these drivers. Businesses that don’t respond run the risk of being left behind. There is significant scope and opportunity for water companies to embrace different aspects of digital and leverage the benefits of new technology, as they are forced to update their operating models and organisational structures in line with Open Water reforms.

Source: G. Westerman, Mael Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee, “The Digital Advantage: How Digital Leaders Outperform Their Peers in Every Industry,” Capgemini Consulting and MIT Center for Digital Business, November 2012.

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3 http://www.open-water.org.uk/about-the-programme/

4 Leading Digital, p.g.77, Harvard Business Review Press, October 2014, A collaboration between Capgemini Consulting and the Massachusetts Institute of Technology, Authors: George Westerman, Didier Bonnet, Andrew McAfee

Business and Technical Alignment leads to competitive advantage:

Digital technology is revolutionising industries and water utilities are not immune. Digital technology offers opportunities to overcome prevalent challenges in the industry and turn enforced changes into competitive advantage.

The coming Asset Management Period will bring with it challenges of increasing customer demands, leakage and water scarcity, energy cost management, aging infrastructure and deregulation of the market place, all of which can be impacted by available digital technology and tools. Operational change to meet the demands of Open Water should result in bringing this technology into the new retail business, which in turn can bring benefits to the whole organisation. Furthermore the pressure on price for both the wholesale and retail entities means that efficiency will become even more critical to profitability, driven by business and technical improvements across the value chain. With a number of potential initiatives across the business and a range of technical solutions that water companies may implement, from real time network control and state of the art SCADA systems, to single system virtualisations and smaller tactical solutions, it is essential that water utilities structure operational changes to deliver business and technical alignment.

Customer Centricity as a pre-requisite:

The Open Water Programme brings the separation of the wholesale and retail entities for business customers at a time when customer expectations are universally rising. Now is the time for water utilities serving the business retail market to put the customer at the centre of their operations. Creating a “customer focused” sector is a key part of the Open Water Vision3. Thanks to the activities of customer centric sectors such as retail, telecoms and banking, customers now expect to be able to engage businesses via a range of channels, including social media and mobile. Water utilities need to evolve their operations in order to meet these expectations, whilst exploiting technology to keep service costs as low as possible. The authors of Leading Digital make this clear: “using digital technologies to combine excellence in both operations and customer experience, weaved into a differentiated business model, pays dividends”4.

As the non-household retail market is opened up to competition, customer service will be a key market differentiator. By transforming non-household retail operations so that the customer is at the centre of everything the organisation does, water utilities can evolve to meet the more sophisticated customer expectations that market opening will bring. Putting the customer at the heart of the new retail business is a must for companies who want to compete in this new market – a satisfied and valued customer is more willing to settle bills and remain loyal in a competitive market.

Leveraging Data:

The Open Water Programme provides the impetus for water companies to invest in data analytics and utilise customer and systems data to drive operational efficiency. Customer data can be used to help deliver a personalised, customer centric experience, but also to help understand the risk of bad debt. As a result, data can be used to drive a good customer experience for the new business retail market and could then be replicated to bring benefit to the household market.

In order to drive insight across the wholesale and retail business, water companies require a change in mindset towards data analytics and should start to see it as a core capability. The opportunity to develop operational efficiency by using data effectively represents a huge opportunity for water companies to combat some of the key challenges in the industry. For example, the deregulation of the market will put more price pressure on the wholesale market, where the reduction of water leakages through the leveraging of asset condition and field force analytics would be beneficial and help to manage costs. As regulation will force operational changes anyway, now is the time to make the most of the restructuring by developing a dedicated data analytics capability.

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Pace isn’t a choice – operational change must happen before 2017

The Open Water Programme is bringing about rapid and substantial change to an industry which has largely been undisrupted for the past 25 years since privatisation. As the Government and Ofwat become increasingly assertive in deregulating the market, and as competition demands companies respond faster, water companies will need to continue to adapt their operating models and become more responsive to the new environment. The combination of opening up of the non-household water market to competition, and the availability of digital technology, decrees that water companies can no longer be protected from disruptive changes in the industry. Instead water companies must now be ready move with pace and agility in order to quickly acclimatise to the changing environment and keep up with their competitors.

Digital Operating Model:

Capgemini have an established and proven methodology to design Operating Models in a digital world. It is underpinned by an iterative approach that seeks to demonstrate value to the business quickly and then build in changes as the organisation learns and evolves. It recognises that there is more to digital than just the capabilities which interface with the customer, and that for full benefits to be realised there needs to be capability enhancement across the business. Our Operating Model experts are currently supporting water companies in a number of countries, and work hand in hand with sector experts to understand the specific challenges of the water industry in the UK.

Conclusion

In Leading Digital, one of the main pieces of advice is simple: “Consider how you might transform your industry before others do it”5. Open Water will bring enforced change to the way that water companies operate: why not use these enforced changes to leverage the power of digital and drive competitive advantage across not only the new retail business but the wholesale organisation too?

5 Leading Digital, p.g.94, Harvard Business Review Press, October 2014, A collaboration between Capgemini Consulting and the Massachusetts Institute of Technology, Authors: George Westerman, Didier Bonnet, Andrew McAfee

For more details contact:

Robert CadeGlobal Digital Operating Model Lead robert.cade@capgemini.com

Martin WellsVice President, Utilities martin.wells@capgemini.com

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