August 2002
Volume 44 Number 8
 

World Spotlight: Europe by Water -- Intricate Knowledge of End-User Needs is Prerequisite for Growth in Industrial Outsourcing of Water Services
by Kristina Menzefricke   Pages: 

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The outsourcing and externalization of functions have significantly gained in popularity across industrial end-user circles in Europe in recent years, as companies remove non-core and low value-add activities from their fabric.

Water supply, process water and wastewater treatment have recently joined the list of services that customers in industrial markets consider appropriate to outsource, and the shift towards externalization of non-core business is already paying dividends.

An attractive market
The new and buoyant market for industrial outsourcing of water services, racking up sales worth $590 million in 2001, is attracting an emerging crop of companies, buoyed by high profit margins and robust growth.

Predominantly supplying electronics, food and beverage, and pharmaceutical companies as well as electric utilities, the value of outsourcing contracts in the European industrial water sector is poised to reach $1.5 billion in 2008. This represents a compound annual growth rate (CAGR) of 14.1 percent.

A new study ranks cost savings as the primary objective in outsourcing, permitting an organization to redirect its resources from non-core activities into greater value-adding activities.

Alongside efficiency improvements and enhanced services, outsourcing allows companies to maximize the utilization of internal resources, focus management time on activities fundamental to the business and improve financial ratios in core areas. Also, companies gain regulatory compliance and attain quality and quantity guarantees.

Do your homework
It should be stressed that suppliers must attain a solid understanding of the industrial end-user sectors' complexities and requirements to effectively exploit the vast potential the outsourcing in industrial water industry displays. Furthermore, outsourcing contracts requires a close relationship with the customer that stretches throughout the duration of the contract.

Utilities, process engineering companies and equipment manufacturers focus on higher margin areas by gearing their business strategies toward the provision of competitive services, tailored to industrial end-user requirements.

The Water Framework Directive on Integrated River Basin Management for Europe (2000/60/EC) -- see http://europa.eu.int/comm/environment/water/water-framework/index_en. html -- and other associated significant pieces of European water legislation are set to overhaul the management of the water environment in Europe. Mounting pressure to ensure compliance with legislation will help outsourcing activity shift up a gear.

The market is awash with new entrants and a broad scope of market participants including utilities, original equipment manufacturers (OEMs) and engineering groups. These contribute to an increasingly bustling competitive environment. According to the study, a low level of customer awareness of outsourcing benefits exists, indicating this is still largely a supplier-controlled domain.

Total solution approach
In a bid to woo discerning customers, water and wastewater contractors must adopt a proactive and innovative approach. Those players providing a total solution -- securing the continuous supply of water to a pre-defined quality and the discharge of the wastewater to the legal specification -- will be catapulted into prominence.

Due to the heavily regulated nature of the water supply sector of the market, end-users largely consume the water supplied by incumbent water companies.

John Raspin, research manager at global marketing consultant Frost & Sullivan, explains: "This scenario limits the successful penetration of the water supply market to companies that can offer on-site supply solutions, such as bore-holes (or wells)."

Although our research highlights a general trend toward liberalization in the utilities market, the process will be slow. At present, the outsourcing market offers more possibilities for companies active in the process water and/or wastewater treatment sectors rather than focusing on the outsourcing of water supply. Consequently, engineering companies are seizing a larger share of the overall market than the utility companies."

Raspin notes that outsourcing of water and wastewater treatment is currently at different stages of development. "Contracting for ultrapure water is widespread, while wastewater outsourcing is a more recently emerging method. Meanwhile, the integrated management of water from intake through manufacturing to discharge is still in its nascency."

The richest pickings have so far gone to the two dominant players in the overall industry, Ondeo (a division of Suez) and Vivendi Water. These two French industry giants have spread their tentacles across the two major segments of the industrial water market as key players in utilities and process engineering, either through direct regional presence or through subsidiaries in individual European national markets.

Conclusion
Only 10 percent of the world's freshwater is used for human consumption, while 20 percent is used for industrial purposes. More often than not, in lesser developed countries and developing countries, the wastewater from these applications isn't treated, resulting in ground and surface water pollution that may have a significant impact on human health and the environment. In U.S., European and industrial markets, this has led to more stringent regulation -- the cost of which has prompted greater outsourcing of treatment services. That market trend is likely to continue, creating greater opportunities for those who've developed an expertise in serving these end-users effectively.

About the author
Kristina Menzefricke is communications specialist with San Jose, Calif.-based Frost & Sullivan in its United Kingdom affiliate office. Frost & Sullivan released a report on water services outsourcing in Europe in May. Menzefricke can be reached at +44 20 7343-8376, +44 20 7343 8380 (fax), email: Kristina.Menzefricke@frost.com or website: http://frost.com

EXTRA -- Water & Wastewater in Europe

Two other studies released earlier this year by Frost & Sullivan report on municipal customer dissatisfaction with water and wastewater treatment equipment suppliers and the boost regulatory pressure is giving the market. "Deficient services, uncompetitive pricing and lengthy lead times are cited as the most alarming failings of current" outsourcing services suppliers, according to survey results in the first study. While interest in outsourcing continues to rise, customers require better assurance of long-term cost benefits and in a supplier's expertise and service capabilities before approving operations and maintenance contracts.

Such issues are all the more important because of upcoming new rules under the EU's Urban Wastewater Treatment Directive (UWWTD) -- see http://europa.eu.int/comm/environment/water/water-urbanwaste/index_en.html -- and its 2005 deadline for achieving compliance, the second study reports. It pegs European revenues for municipal water and wastewater treatment equipment at $1.96 billion in 2001 and projects growth to be $2.42 billion by 2008. Wastewater will account for 68.5 percent of total sales at that point, with secondary treatment equipment to be required for every community between 2,000 and 15,000 in population by December 2005 under the UWWTD. Currently, the United Kingdom is the largest national market, with a 26.7 percent share. Plus, membrane equipment represents the dominant product segment with 32.3 percent of sales. Among about 700 competitors in the European market, the three top companies are Vivendi Water, Ondeo-Degremónt and Stereau, all of France, which account for 22.6 percent of sales.

A third study assessed the European food industry's appetite for water and wastewater treatment equipment, projecting growth from $334 million in 2001 to $400 million in 2005 in the market segment, which accounts for 9 percent of the total. Average investment per plant remained about $30,000 with current annual investment for maintenance and replacement of existing installations between a few thousand and almost a half a million dollars per customer. Customer loyalty averages 3.62 on a 5-point scale. Culligan, which draws strength from its regional focus, had the highest customer satisfaction ranking at 4.67, with other top performers -- Pall, Kruger, Nijhuis and Alfa Laval -- competing successfully in local or niche technology markets. Purac, Degremónt and OTV showed potential for quality performance on a more diversified scale.

For a complete look at water-related regulatory issues in the European Union, see http://europa.eu.int/comm/environment/water/index.html