In the first of a series of Expert Focus articles for WaterBriefing, John Lillistone Director of Water at Arqiva, global digital communications specialists for critical infrastructure,  takes a look at how a move to outcomes-based contracting for smart metering can help water companies to reduce costs, streamline operations, enhance efficiency and help to foster innovation.

John Lillistone: With Ofwat’s final determination published in late December, it will be all systems go for water companies in January. As they look at how they will address the new standards outlined in the determination throughout 2025 and beyond, one area for consideration should be how they go about selecting the right partners for the next stage of their smart metering journey.

This is an area ripe for improvement. In fact, I’d go as far to say that the existing practice of engaging separate partners for the roll out of smart meters, networks, and installations is unsustainable – it is neither accountable, nor cost-effective and is resulting in fragmented and inefficient operations. As the smart energy meter rollout has shown, customers want assurance that their meters will function as promised, and having multiple (un)accountable parties can leave huge gaps in both responsibility and reliability.

In 2025, I anticipate that Ofwat’s determination, wider market needs, and the ongoing transformation in the water industry will necessitate a shift towards more outcomes-based contracting. This type of approach seeks to move contracting beyond the completion of individual tasks, and instead awards contracts based on the achievement of tangible, collective outcomes. Through a consolidation of responsibilities and therefore parties, water companies can use outcomes-based contracting to reduce costs, streamline operations, enhance efficiency, and help to foster innovation.

With these goals as the target, here are some key considerations for any water company looking to pursue an outcomes-based approach to contracting in the coming year.

Performance measures for smart metering

When selecting a contractor for smart metering, measurement is one of the main factors that water companies need to consider. More specifically, the current determination for success in smart metering relies on two sets of performance measures for its contractors:

1. Outcome Delivery Incentives (ODIs): These high-level measures focus on the vital task of reducing leakage and per capita consumption. While smart metering is a significant contributor to these measures, it is not the sole factor. Elements such as asset age and maintenance also play a key role in achieving these targets.

2. Specific allowances and price controls: These allowances standardize the costs associated with buying, installing and running smart meters. At its most basic level, this involves allocating a defined amount of money to each successful activity. Performance definitions specify that a smart meter should connect weekly and provide data, including meter reads to a minimum level of completeness. If these performance levels are not met, the water company must return all the allocated costs to its customers.

Ofwat’s draft determination looked to set a performance target of 95% connectivity for smart meters – which would have allowed for 1 in 20 meters to not connect. However, this appears to have been felt too much of a stretch for the industry. The final determination has reduced the target to 80%, 1 in 5, which has in turn lowered both the parameters necessary for a meter to qualify as ‘smart’, and the penalties for a meter not achieving that status.

Again, learnings to date have illustrated that the public expects, and importantly, deserves a smooth rollout and for installed meters to function correctly. Put frankly, 80% connectivity will result in considerably higher rates of non-functioning meters, which is simply not good enough. Ensuring that any contractor, therefore, can overdeliver on the above two factors should be the first questions asked at the start of an outcomes-based procurement process. Water providers need to think long term and ensure their approaches are future-proofed against the potential for performance measures to change in the future.

Understanding contracting complications

Taking a step back, contracting for smart metering involves a series of crucial stages – from procurement to delivery, installation, connection, and maintenance – each of which must be carefully managed to ensure the performance measures outlined above are met.

At the moment, water companies may choose to manage these stages themselves or procure each element from separate entities with whom they have long-term, trusted relationships. This second approach is fine in theory – provided the water companies act as an entity in the middle, determining whether performance issues are due to broken meters, poor installation, network problems, or external factors such as flooding or obstructions – and assigning responsibility to resolving the issues accordingly.

In practice, with multiple unaccountable parties failing to take responsibility, the process can fall foul to inefficiencies and missed targets.

Transferring risk and removing complexity

The truth is, many water companies do not have the expertise or desire to manage these central roles. This is where outcomes-based contracting – and the consolidation of the smart metering supply chain comes into its own.

Take the installation stage, for example, where the aim should be to work with meter manufacturers that have their own networks, rely on standards-based networks, or use publicly available networks. In the UK, most meters are installed underground and ensuring reliable connectivity to a battery-powered device that must last 15 years is challenging. In fact, installation depth significantly affects radio strength, with only 1/20 of the signal availableat a three-foot depth. This is where the main contractor and the right network providers – who have far greater oversight into connectivity, and whose payment is dependent on delivering successful outcomes – can take the lead on installation efforts to ensure performance levels.

The ultimate benefit of outcome-based contracting is the transfer of risk, which can then be aligned with performance penalties. With the water company no longer acting as the arbitrage partner, the impetus lies with the overall contractor to select the correct partners, and through collaborative risk-reward sharing contacts, aligning on agreed outcomes. Though the lead contractor would become accountable for achieving targets, and therefore liable for penalties as per Ofwat’s final determination, essentially, this move away from a devolved approach ensures that all parties are committed to – and are responsible for – achieving the desired performance levels and driving value for water companies, their customers, and the environment.

Challenges of outcome-based contracting, and how to overcome them

Despite the clear benefits of moving to an outcomes-based contracting approach, there are still a few distinct challenges to consider. Take partner selection for instance. Here, it’s critical that the overall contractor develops a deep understanding of their network of partner’s capabilities, so that they can deliver new value for water companies and end consumers now, and also over the 15-year lifespan of a meter.

Achieving this two-fold value requires that the party overseeing the contract has a wealth of experience in this area, adopts an innovation-first approach, and properly understands the tools at their disposal, while simultaneously remaining curious about what new tools may emerge in the future. To ensure that partner relationships remain positive, and that each party is working in unison towards a common goal, water companies should establish a set of shared outcomes. These must go further than simply detailing the parameters for working together, and instead accurately reflect what is expected by the ultimate customers.

Conclusion

As they look to act on Ofwat’s final determination, it’s vital that water companies manage their smart water meter rollouts as efficiently and thoroughly as possible. Currently, the practice of engaging multiple stakeholders is hindering this process. Instead, water companies should look to take an outcomes-based approach to contracting, transferring the risk to one central party and ensuring that their targets are linked to success across the broader supply chain. It is the only way to guarantee these projects will deliver for the water companies, their customers and the environment.