This case study looks at how Anglian Water's @one Alliance aligned their commercial arrangements throughout an alliance team to give the partners a sustainable profit and deliver over and above an agreed business plan.
In delivering an alliance, it is important that the commercial arrangements back up the principles of the alliance and don’t undermine them. With alignment between the commercials, as well as the intent, the two reinforce each other. This case study shows how developing the commercial model over time, gave Anglian Water’s @one Alliance an aligned commercial arrangement and led to stronger long term performance. The commercial arrangements developed into a shared reward pool, encouraging ‘best for task’ personnel assignment, regardless of employing organisation.
This case study is one of a number of real life demonstrations of the Alliancing Code of Practice.
What we did
Anglian Water’s @one Alliance was set up in 2005. Its function was to deliver a large part of the AMP4 regulatory investment programme, roughly £800m before savings, over the five year period. The programme spanned water and water recycling assets, above and below ground. The average project size was around £1m, which meant that in total there were in the order of 600 projects. The large number of projects makes the programming aspects a big challenge and forces a need for low overheads and simple governance.
The initial commercial set up created two pools of profits or loss. An overall programme pool and a series of sub programme pools more closely related to work types. The contributions from each project were decided, based on outturn cost, compared with an agreed target cost related to the business plan, which Anglian Water had agreed with OfWat. One of the core principles was a need for a back to back arrangement with the Business Plan. The level of target cost was set such that if it was met, then Anglian Water would make its savings targets but that the partners would need outperformance to create more profit. The fee was payable on turnover and the shares of the profit pool were also related to turnover.
This initial set up had a few drawbacks in the form of the behaviour it encouraged. Firstly, with fee and share being related to turnover, perverse incentives were created to chase turnover. This led in some instances to increased costs for no added value. Secondly, with the sub programme allocations being focussed on a few of the partners lucky enough to receive the “easier” programmes, the rewards were not shared evenly and were not earned on merit. Finally the incentive for Anglian Water to drive outperformance was not as strong as it needed to be, as its needs were met at the target level.
The board of the Alliance, consisting of representation from each partner, recognised this problem. They unanimously decided that the behaviours created were a risk to the future sustainability of the arrangement and future customer benefits and their profits. The changes made to the agreements firstly removed the exclusivity of gain from the sub programme pool, thereby removing the ‘luck of the draw’ element. Secondly the rewards share was moderated down to a fixed figure, agreed between the members of the board. This entailed very difficult discussions and a great degree of trust and honesty between the companies. Without their leadership and commitment, the alliance could have failed at this point.
As the Alliance entered the next AMP period, the model was evolved to reduce the fee and remove the turnover chasing incentive. Anglian Water put some “skin in the game” by reducing their take of the gain pool, so that outperformance became necessary for all parties to achieve their targets. Finally as the Alliance has evolved even further with a new round of contracts being let and a new mix of partners making up the organisation, the fee has been removed entirely. Not only is profit now dependent upon outperformance but outperformance is essential to recover costs for every organisation.
Benefits and outcomes
In AMP4, the first of the Alliance’s investment periods, the total gain was not great. Efficiency targets were hit for Anglian Water and partners’ returns were covered by fee payments. The overall pool remained in negative territory for a considerable time.
As the changes in commercial model came into effect, the pool began to turn around with a small positive value at the end of the AMP. In AMP5, with more of the changes in full effect, the programme pool grew to a positive balance, which not only gave the partners a sustainable profit but also enabled Anglian Water to make reinvestment decisions to deliver over and above the agreed business plan and meet more of their customers’ requirements.
What is the Alliancing Code of Practice?
The Alliancing Code of Practice outlines the information needed at different stages within an alliance. It provides accessible and valuable support to those embarking on an alliance journey and those already developing an alliance. It draws on experience from many organisations; clients, delivery teams, consultants and academics to highlight:
- which aspects of alliance set up are most important,
- when they are most applicable,
- the building blocks that need to be in place to ensure the effective development of alliances.