May 23, 2002 -- The outsourcing and externalization of functions has significantly gained in popularity across industrial end-user circles 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.
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, attracted by high profit margins and robust growth.
Predominantly supplying electronics, food and beverage, pharmaceuticals 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 per cent.
A new study by Frost & Sullivan, the international marketing consulting company, 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.
Frost & Sullivan stresses 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 require a close relationship with the customer that stretches throughout the duration of the contract.
Utilities, process engineering companies and also equipment manufacturers focus on higher margin areas by gearing their business strategies towards the provision of competitive services, tailored to industrial end-user requirements.
The Water Framework Directive (2000/60/EC), 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, OEMs and engineering groups, and contributing to an increasingly bustling competitive environment. Frost & Sullivan's study identifies a low level of customer awareness of outsourcing benefits, indicating that this is still largely a supplier-controlled domain.
In a bid to woo discerning customers, water and wastewater contractors must adopt a proactive and innovative approach. Those players providing a total solution to secure 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 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."
"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, the engineering companies are seizing a larger share of the overall market than the utility companies."
Mr 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 nascence."
The richest pickings have so far gone to the two dominant players in the overall industry, Ondeo 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 the individual European national markets.
Report Code: B081 Publication Date: May 2002
Background
Frost & Sullivan is an international marketing consulting company that monitors a comprehensive spectrum of high-tech markets for trends, market measurements and strategies. This ongoing research is utilized to complement a series of research publications to support industry participants with customized consulting needs. Interviews and free executive summaries are available to the press.
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