8 min· water· building
Water's digital divide
Digital solutions could unlock real efficiency, productivity and safety gains for water utilities. Adoption remains low. Some of the reasons why — and what solution providers in the US could do about it.
First published in Amane Currents, Growth — Spring 2023, where I was a Principal.
Why do some companies experience 'hockey stick' growth while others fall flat? At its simplest, the answer typically distils to how well the company is addressing an unmet need, and how many — and how much — customers are willing to pay to fill that need.
There are, however, many factors that influence these drivers. Here I want to explore the current trajectory of digital technology providers targeting water utilities, and specifically, why so many of them are struggling to grow quickly.
First, a few of the 'needs' that companies address in this sector — for there's no shortage of them. Chronic water challenges, and the consequences unfolding due to rising global temperatures, mean utility leaders have to do more with less on every front. Digital solutions let utilities collect and make sense of the data they need to respond. They create a pathway to greater efficiency, cost savings and productivity, and they support utilities in meeting the expectations of customers who are now accustomed to fast, personalised, on-demand online services.
Next, the potential customer base. There's a strong market opportunity here too. The digital utility solutions market was worth roughly $6 billion in the US alone in 2022, and many utilities — particularly at the smaller end — are only just beginning their digital journey. Greenfield, for technology providers.
But while the pandemic raised the urgency around adopting digital technologies, water utilities globally remain a digital laggard compared to industries such as power, agriculture and mining. And despite the need, and the growing interest among their targets, many solution providers are struggling to convert that interest into paying customers.
Several hurdles get in the way.
Fixing the engine while flying the plane
The first is whether the solution aligns with utility leaders' top organisational priorities.
Water utilities are responsible for the world's most precious resource, and their leaders are juggling significant challenges — from managing aging infrastructure to keeping pace with stringent regulations. Much of their focus goes on the day-to-day work of keeping the water flowing. Digital transformation tends to rank lower on that list, particularly for smaller Tier 3 and Tier 4 utilities.
What utility leaders themselves say is critical, from the AWWA's survey of 3,021 respondents:
| Challenge | Rated critical |
|---|---|
| Renewal and replacement of aging infrastructure | ~65% |
| Financing for capital improvements | ~57% |
| Long-term water supply availability | ~52% |
| Public understanding of the value of water systems and services | ~38% |
| Aging workforce and anticipated retirements | ~38% |
| Watershed and source water protection | ~37% |
| Emergency preparedness | ~35% |
| Public understanding of the value of water resources | ~32% |
| Groundwater management and overuse | ~30% |
| Compliance with current regulations | ~29% |
| Cost recovery | ~29% |
| Compliance with future regulations | ~28% |
| Drought or periodic water shortages | ~27% |
| Water conservation and efficiency | ~26% |
| Cybersecurity issues | ~25% |
| Talent attraction and retention | ~25% |
| Improving customer, constituent and community relationships | ~21% |
| Data management | ~20% |
| Asset management | ~19% |
| Water loss control | ~18% |
Source: AWWA 2021 "State of the Water Industry" Report, N = 3,021.
Note where data management and asset management sit.
Water utilities are also historically quite reactive, and may lack a well-defined process for proactively implementing changes — even changes that would lead to improvements. The same AWWA survey showed that once a need for an infrastructure improvement had been identified, 60% of water utility leaders would only take the next step when they suspected something was about to break or fail.
If your solution is not directly solving a critical pain point that is front-of-mind for utility leaders, providers should expect — and plan for — longer sales cycles.
Mini fiefdoms limit collaboration
Many water utilities still work in silos, which adds complexity and can further stymie procurement. Outdated, disparate data and siloed people, budgets and decision-making processes limit collaboration, and prevent many utilities from making and implementing strategic, data-based decisions.
Most utilities are still working with outdated SCADA and CMMS asset management systems that offer little-to-no integration with newer tools. Since most digital solutions need data to work, selling one tool means talking to multiple stakeholders across several departments. Concerns over integration, the potential for obsolescence, and the problem of assessing which of the 1,400+ digital tools out there today is the right choice — all of it keeps leaders from signing on the dotted line.
Overcoming workforce challenges
As baby boomers edge closer to retirement, many industries are grappling with the impact on their workforce. Water utilities may have fewer workers to replace an ageing one, and operational expertise can be lost with them.
Leaders often expect to lean on digital solutions to close that gap — to let newer staff function at a similar level with less operational experience. But when the experienced decision-makers evaluating those tools are not themselves accustomed to using digital tools, there is a disconnect in how tech providers communicate their value proposition and establish a clear business case.
Changing tack
These are just a few of the challenges that can grind a sales cycle to a halt, which in turn delivers a blow to a technology provider's unit economics. Lengthy sales cycles drain resources, and over time customer acquisition costs become much too high relative to customer lifetime value. Slowly but surely, the digital divide widens.
The reality is that there are already hundreds of digital solution providers building genuinely good products with the potential to make a real impact on water utility operations, customer experience and bottom line. The challenge is getting the right product, to the right customer segment, at the right price point — essentially, nailing the go-to-market strategy.
And this is where the shape of the market matters. The US water utility market is large and fragmented, with approximately 50,000 water utilities:
| Tier | Population served per utility | Utilities | Population served |
|---|---|---|---|
| Tier 1 | >250k | 138 | 99m (32%) |
| Tier 2 | 50–250k | 855 | 84m (27%) |
| Tier 3 | 3.3–50k | 8,227 | 101m (32%) |
| Tier 4 | <3.3k | 43,500+ | 24m (8%) |
Source: Amane Analysis; Bluefield 2020 report, "Water Industry 4.0: U.S. & Canada Digital Water Market Forecast, 2019–2030".
Around 2% of utilities would be considered Tier 1 or Tier 2, but roughly 40% of the population is served by the 40,000+ Tier 3 and Tier 4 utilities. Strategic priorities, leadership bandwidth and attitudes towards digital vary greatly across these tiers. Tier 1 and Tier 2 utilities have generally adopted more digital solutions, given their size and access to funds; Tier 3 and Tier 4 are typically at the very beginning of their technology transformation.
What we found from our conversations with technology companies, though, is that many lack a clear picture of their ideal customer.
Many are designing products, services and features to appeal to Tier 1 and Tier 2 utilities — the coveted 'whale' customers that large, established tech players are also chasing with comprehensive smart water platforms at enterprise price points. New entrants find it difficult to gain a foothold in that crowded and sophisticated market, and harder still to maintain a high margin.
On the other hand, there is abundant white space serving Tier 3 and Tier 4 utilities — albeit with a simpler and more cost-effective product. We've yet to see many companies hit this market effectively, but it could offer providers the potential to scale faster: more agile, streamlined 'as a service' pricing and products, or channel partnerships that open access to a far greater number of small utilities.
The North America digital utility market is forecast to grow from around $5.5B in 2019 to $11.0B in 2030 — a 6.5% CAGR overall, but with the smaller tiers growing fastest, at 7.1% and 8.4–8.8% for the segments serving them.
The onus isn't only on providers
Water utility leaders cannot afford to ignore the value that digital solutions can provide. Rising to the challenges ahead demands agile, data-informed decision-making. Digital is no longer a nice-to-have, and leaders have to be proactive in exploring and considering the solutions that are right for them.
Greater cooperation among utilities — sharing the results of pilot programmes, or agreeing parameters by which results can be validated and acted on more quickly — would go a long way, not only in accelerating digital adoption but in improving efficiency and driving cost savings across the board.
The original spreads, as published in Amane Currents:
