The current reality of the market
Like many other business leaders, Chris Johns is facing up to the difficult reality of the current market environment: “One of the key issues we are grappling with at the moment is the cost pressure caused by inflation. This can be seen most markedly in FY22 in the price of fuel and rising energy bills. Those current cost pressures have probably added about £14 million to our operating costs over the last three to four months. Looking ahead to the current year, that is already growing exponentially, given the conflict in Ukraine and the impact that it is having on the energy markets. Trying to deal with those cost pressures is a major priority for us currently.” Despite this, the organisation is still able to stay focussed on what will drive long-term value.
Taking a more holistic approach
To remain resilient and continue to provide, remove, and recycle water to a growing population at a price they can afford, Yorkshire Water must consider all forms of capital. “Resilience is essential for us to maintain our operational performance,” Chris Johns says.
Increasingly severe and often extreme weather events leave the water services industry exposed to the natural world. Johns explains, “The impacts of these events and the resultant complexities can be huge. We are heavily reliant on power companies and, if there are power failures, our works shut down. It costs us millions to get things back up and running, particularly over the winter months, coupled with impacts on our regulatory service standard targets.”
Yorkshire Water must therefore be highly resilient to ensure that it can continue to deliver essential services amid the rapidly developing intensity of climate change impacts. Yorkshire Water has adopted the “six capitals” approach, which considers the financial, manufactured, intellectual, human, social, and natural capital an organisation in the supply chain may use or effect.
“These six lenses ensure businesses look beyond the financial ROI and do not dismiss a scheme when it does not pay back financially if it contributes to the long-term environmental improvement of an area. That concept goes to the heart of ESG.”
The business case for ESG benefits is often hindered by the difficulty in quantifying some ESG data. As a result, “You have to keep encouraging people to think about the other considerations outside of cost. It is important that our colleagues think differently, and this will be essential to get to net zero and meet the targets that the business has set itself.”
Over the last two years, Johns and Clark have effectively embedded the procurement team within the finance function, so that it now informs Yorkshire Water’s strategic business planning. “That has been a fundamental mindset shift. It is important for the procurement function to really understand the pressures and challenges that the operational team faces for it to optimise both the commercial and operational outcomes,” Johns explains.
Clark, as Head of Commercial Services, reports directly to Johns, “The combined Yorkshire Water and Efficio team leads Procurement and liaises with all the leadership teams across the business. It is crucial that they are really visible among the key internal clients.”
Pressure to evidence ESG factors
While it is increasingly commonplace for suppliers to be required to provide information regarding their ESG credentials, smaller companies are somewhat behind in being able to offer this information.
“We primarily contract tier two companies linked to the framework models we have adopted for this current regulatory period, and in doing that we have removed the corporate badging that comes with transacting with a ‘tier one’, as many of our current supply chain partners are on a journey to improve their ESG reporting,” Johns says.
“The tier two community is still probably a couple of years off being able to fully report the likes of say carbon and ED&I information and fit with what Yorkshire Water is aiming for. That community will mature to embrace and match corporate and society's expectations.”
However, referring back to the six capitals approach, Johns adds, “You have to be mindful when driving hard on price. It costs money for the supply chain to change the way that they work currently, and these costs really add up, diminishing their margin or increasing the cost for the client. So, it is a fine line from a commercial perspective.”