Historically, water utilities have been slow to adopt new digital technologies fearing uncertainty in their value propositions and lack of support and guidance from oversight bodies. Fortunately, this behavior is changing. Global regulators and policymakers who play a key role in setting standards for technology adoption are recognizing the proven, game-changing results from real world digital innovation – and they’re taking action to seize the opportunity. At the same time, technology providers across the water industry have been accelerating the use of digital to differentiate and scale current offerings. As the water industry continues to embrace these technologies, digital platforms will next emerge with the potential of true industry transformation. Companies will need to change, strategies that delivered value for customers will shift to new strategies orchestrating value across platform participants. These platforms will first play out on company hosted cloud servers bringing interoperability within the platform ecosphere (web 2.0), but then will be built on public blockchain environments (web 3.0) that brings data ownership, transferability and interoperability across all platforms.
Today, the digital water market is one of the fastest growing segments across the global water industry, growing 3 to 4 times faster than traditional mechanical or non-digital solutions. According to Bluefield Research, the total global spend on digital water technologies and services will scale at an 8.8% CAGR from US$25.9 billion in 2021 to US$55.2 billion in 2030, for a cumulative 10-year total of US$387.5 billion.
While this is a positive trend reflecting the technology companies’ ability to deliver digital solutions and utility buyers’ willingness to adopt these offerings, it falls short of the possibility for true industry transformation – and the extraordinary benefits that come with it.
The evolution of digital value creation across the water industry, similar to other industrial markets, has played out first with smart & connected products (example - Xylem’s Flygt Concertor™), then has moved to intelligent systems (example – Buffalo, NY Smart Sewer System). As these first two waves progressed, cloud computing also evolved allowing the flow of massive amounts of data to be processed through software applications and artificial intelligence/machine learning (example - Xylem Accelerates Solution Innovation with Data Lakes on AWS). More recently, concerns about cybersecurity and/or the cost of transferring large amounts of data have brought the emergence of edge control, which essentially redefines traditional controllers like PLC’s (programable logic controllers) and RTU’s (remote terminal units). Edge control brings together OT (operational technology) and IT (informational technology) in a single solution capable of logic, data management and analytics (example - Xylem’s Edge Control set to cut energy use by 25%).
As these digital technologies evolve, there have been, and will be, dramatic shifts regarding standards, accessibility and transferability.
- Standards- The technologies have gone from being initially intraoperable (customized solutions between two parties) to now interoperable (applying standards shared amongst all industry participants). This has improved the ability for participants to share with each other via standard APIs (application programming interface) and other computer/network protocols to gain entry to the systems/software/data/etc.
- Accessibility - Many digital offerings even today are closed, meaning you need special access to the APIs or other protocols to gain entry. Third party entities cannot easily access, and more importantly, be supported with capabilities like SDK’s (software development kits) sandboxes (isolated testing environments) and other integrations. Therefore, transactions across these digital technologies are typically between one selling entity and one buying entity. Industry transformation, however, will not play out over such a narrow market participant lens, but rather through co-innovation fueled by mass cross-company collaborations. This requires an intentional approach managing digital technologies to be both interoperable and open, allowing third parties access and support (without compromising security and privacy).
- Transferability- The final shift will occur when users have more freedom to take their data, content, etc. created or purchased on one platform and transfer them to another platform. This is possible because new platforms will be built on interoperable standards in public blockchains, leveraging “smart contracts” that are auditable and immutable. Instead of being in a private company’s coded platform (web 2.0), these next generational companies will build on a public blockchain giving the ultimate power/choice to stay or go to the user (web 3.0 environment).
Leading companies who execute standards, accessibility and transferability across digital platforms will not only lead the transformation of water, but in doing so, will be rewarded with outsized profitable revenue growth and enterprise value.
Digitizing the Water Sector: The Need for Mature and Scalable Digital Platforms
The water sector has traditionally lagged other industries in adopting digital technologies. One of the primary factors is that urban water infrastructure around the world was built 50-100 years ago. As a result, the assets that constitute these infrastructures often keep data in silos, making system integration and interoperability a major challenge. Also, utilities have been extremely conservative in adopting new technologies until they have been repeatedly proven out given the low acceptance of technology not delivering on its value proposition in such an essential industry like water supply. Fortunately, with the Internet of Things (IoT), technology companies can now leverage cloud-native platforms to seamlessly integrate new capabilities and help build a sustainable digital water utility for the industry to see, trust and scale. Concurrently, policymakers and global regulators are also pushing for digital transformation.
Recently, support for digital adoption has been accelerating around the globe, as utilities, commercial users of water and regulators increasingly recognize the powerful financial and sustainability benefits of digital solutions.
- In August of 2021, the US Environmental Protection Agency acknowledged South Bend, Indiana’s wastewater network optimization system as an acceptable alternative to traditional gray infrastructure to protect the city’s local waterways.
- Ofwat, the UK regulator, has been encouraging utilities to adopt digital technologies to help with customer satisfaction and leak reductions.
- Australia has incorporated digital water strategies at the state planning level with a focus towards improving customer service.
- Israel's Water Authority steadily and increasingly support digital technologies to maximize water availability in one of the most water scarce regions in the world.
These are all clear examples of a regulatory catalyst taking hold to accelerate the adoption of digital solutions around the world.
Technology providers across the water industry have also been accelerating the use of digital to differentiate and scale current product offerings to customers. This is taking place across multiple product categories, including smart meters, intelligent pumping solutions, accurate leak detection and insightful residential water use, to name a few.
The Platform Imperative
Accelerating the adoption of digital solutions is not enough to drive the step change needed across the water sector. That’s where digital platforms come in. Digital platforms play a key role in our economy, either disrupting established markets or creating all together new industries. These platforms typically bring together more than two stakeholder groups (participants) who connect or transact with each other and leverage online workflows to solve an industry or participant pain point with high transparency and low friction (easy to engage and transact). Examples of digital
Twitter’s solution to connect millions of global citizens through their microblogging service that allows registered members to broadcast short posts to share knowledge and information.
- Fiverr created an online marketplace to remove friction from the process of buyers needing to find affordable freelance services.
- PayPal disrupted the financial services industry with its mobile-first digital platform that removed friction in high frequency financial transactions.
- Schneider Electric’s EcoStruxure platform brings together multiple participants and IoT (Internet of Things) devices to maximize energy and process efficiency, as well as sustainability across the infrastructure industry.
The ability to architect and scale a digital platform at the same speed as seen in other industries still eludes most companies in the water industry. Achieving scale is what transforms digital pilot programs from interesting demonstration experiments into true drivers of significant value creation. Companies that can see the possibility and bring the right stakeholders together to solve an industry pain point faster than their competitors will gain a considerable long-term advantage.
Achieving scale is what transforms digital pilot programs from interesting demonstration experiments into true drivers of significant value creation
Stepping back and observing how digital platforms scaled in other industries reveals a few lessons. In the first 10 years from initial adoption, there is exponential growth in usage of the digital platform itself, and after this period significant ecosystem value creation and market capitalization appreciation for the digital platform company.
Key Strategies to Build Successful Digital Platforms in Water
Winning digital platform companies broke through by building unique capabilities and executing direct platform strategies to orchestrate exponential value creation for all stakeholders. Other companies have benefitted from not launching a platform itself, but rather, played a critical role enabling the platform through indirect strategies. These are outlined below:
A network effect is when one additional user of a service makes the service more valuable for every other user on the network. As more users join, the network gains in value due to its sheer size. Companies that have been able to incorporate network effects within their core business model or offering have produced the vast majority of all the value created in tech across several industries. Value is being exponentially generated in direct relation with the number of users on the network. Therefore, this strategic pillar is by far the most powerful.
In the water sector, companies that can envision the challenges utility leaders face coupled with the workflow process and stakeholders who play a role in creating value will be in an advantaged position to launch a successful digital platform. The water industry is ripe for network effects to emerge as it is cluttered with manual processes and high transactional costs, and is incredibly fragmented, all factors that strongly lend themselves to the importance of this strategic pillar.
Economies of scale
You need scale to make networks valuable, and you get scale by focusing on designing a ‘multi-player game’ vs. a ‘single player game’ across a digital platform. To make adoption easy, water tech companies should focus on building out the hardest side of the network first. Using some of the digital platform examples mentioned earlier, this could be PayPal’s choice to ensure that external banks had the ability to easily and safely connect to their platform to ensure frictionless financial transactions for their members on the platform. When digital platform companies ensure they are orchestrating value and experience for all participants, accelerated adoption takes hold across all users.
Companies that can see across the entire cycle of water and can bring together buyers and sellers on a digital platform are best positioned to deploy this model. Successful digital platform companies understand they maximize outcomes not from what they do alone but rather how they orchestrate value and experience across the platform. Leadership teams move from building functional capabilities to ecosystem capabilities. These can include new participant relationship management resources (attracting industry players to the platform), participant product management (standard API’s and SDK’s), participant governance and overall platform transparency and trust guidelines. Leadership teams must learn to engage and motivate participants, whom they don’t know, to share ideas they don’t have and actions that they can’t control. Companies need to learn how to be good custodians of data rather owning all the data. This will require a significant culture change for established leadership teams and company operations.
Edelman is a leading global communications firm that partners with businesses and organizations to evolve, promote and protect their brands and reputations. They have studied trust for more than 20 years and believe that it is the ultimate currency in the relationship that all institutions — companies and brands, governments, NGOs and media — build with their stakeholders. Trust defines an organization’s license to operate, lead and succeed. In their most recent trust barometer report, they again found challenges that societal entities including governments and technology/social media companies have in earning trust from many different stakeholders.
Brands play a critical role connecting with customers and allowing them to be a part of something bigger than themselves. All respected brands pursue and prioritize trust, which is at the heart of all decision-making criteria between a brand and their stakeholder base. Brands earn trust by focusing on being authentic, credible and empathetic with their stakeholders. Done well over time, this transforms into resilient trust that holds up in the most challenges times, when you need it the most.
Digital water platform companies that bring together multiple stakeholder groups must prioritize trust in both their platform and their brand that participants connect to. Investing to build a brand that is well known and trusted across the industry needs to be as important as investing in the technology to build the platform.
Professor Scott Galloway, NYU Stern Marketing Professor, coined the term rundle a few years ago. It’s the combination of maximizing reoccurring revenue through subscriptions on a bundled offer. The rundle will not be the only business model deployed through digital platforms, but it is likely to be a dominate one used to create more stickiness with customers and distance from competitors. Unlike traditional business models, it maximizes annual reoccurring revenue, a key metric for all digital companies.
There are many reasons why tech companies are shifting to this business model, one being they tend to be accompanied with higher market capitalizations. Investors like seeing larger predictable cash flows from platform companies and therefore can discount those future cash flows with higher confidence, lower risk and lower discount rates, all of which yield higher equity prices.
Tech companies will need to help water utilities navigate this transition to a reoccurring billing model
Tech companies will need to help water utilities navigate this transition to a reoccurring billing model. Typically, utilities leverage CapEx to invest in new or replacement asset programs and OpEx to drive maintenance and ongoing operations. Across investor owned utilities, CapEx is predominately included in rate case increases that are charged back to consumers allowing utilities to earn a rate of return on such investments or it might be included as part of a bond offering from publicly owned utilities. OpEx is not included in rate cases and so utilities try to improve operational productivity and transfer the savings into retained earnings as a source for future investments.
Digital platforms commonly take what was historically purchased with CapEx to now being purchased through subscriptions and the bias to use OpEx budgets. This can be limiting for utilities and something that can certainly slow the adoption of digital platforms. Changes in consumer rates need the approval of public service commissions or civil service oversight bodies or equivalent, and they have a bias for OpEx as a source of funds for subscription type services.
The National Association of Regulatory Utility Commissioners (NARUC) realized the benefits of Software as a Service (a traditional OpEx budget item) and the rapidly changing technology landscape occurring across the industry. They passed a resolution encouraging State Utility Commissions in the US to consider the use of Cloud Computing Arrangements (i.e., Software as a Service) in rate cases, making SaaS eligible to accounting and tax benefits of CapEx. This now needs to be adopted by state and local public service commissions or equivalent to better enable utilities the full potential of adopting digital platforms and the business models that support them.
Embedding & bundling
There are several choices and subsequent strategies companies deploy to either lead with digital platforms or support them in some way. When it makes sense for companies to play a supporting role, they will deploy embedding strategies to achieve that objective. That is, they will permanently embed their technology into a digital platform to elevate the experience participants have when using it. In some circumstances, it might not make sense to fully embed a technology, but rather bundle the technology through partner programs on digital platforms. Here, the enhanced feature or experience doesn’t apply to all platform participants and so it is offered as an option to be turned on by some participants for a fee.
Turn the Digital Tide in Your Favor
The future winners deploying full-scale digital water platforms will certainly embrace the strategic pillars outlined earlier. Leading companies need to work on reorienting their firms to serve not just customers but all stakeholders or participants engaging on their digital platforms. This will lead to long-term value creation for all platform participants, but also significant market capitalization appreciation seen by platform companies in other industries. There will not be one company who will dominate the digital water platform space, but for those who see the opportunities, there are exciting times ahead.
Now is the time for large-scale adoption of digital water solutions, to benefit public utilities, commercial users of water, the environment and thousands of communities who depend on sustainable water supply and infrastructure. Not all digital technologies are created equal, platforms will redefine the playing field across the water industry in the years to come. Those companies who boldly act, will capture the opportunity of a lifetime.