Combined with the trend of divesting non-core functions, cost efficiencies are encouraging the industrial sector to outsource on-site utility management. Such outsourcing agreements are being increasingly associated with risk management benefits.
"Critical factors for attracting industrial customers to externalize their on-site utilities are operating cost savings, accelerated re-engineering benefits, long-term stability from integrated services, proactive support in managing exposure to legislation and full or partial risk transfer," notes Saana Karki, Industry Analyst at Frost & Sullivan.
For instance, due to their high investment assets, shifting or sharing of risks through long-term contracts with complete on-site service providers is a particularly attractive proposition for the power utilities sector. To optimize on this situation, suppliers will need to lessen the customer's operating risk even as he establishes his credentials in effectively managing the same.
"The two main barriers to entry to the European industrial outsourcing markets are technological and financial -- the ability to manage assets and tailored solutions and the ability to manage the financial commitments in long-term operating contracts," warns Karki.
To this end, suppliers active in prominent utility sectors (water and wastewater; waste management; energy management and IT and telecoms) will need to develop certain key capabilities. Significant among these will be proven technical expertise, financial stability as well as an ability to forge strategic partnerships.
The outsourcing of on-site utility services is currently in the developmental stage. Estimated at more than $8 billion in 2002, the market for outsourcing of industrial utility services (comprising water, waste, energy and IT/telecoms) is poised to double in value by 2009. Recording robust two-digit annual growth rates, it is forecast to reach $20 billion by the end of the decade.
The energy services market is likely to persist as the largest utility sector in terms of revenue generation. It is expected to be followed by the water and wastewater sector, which will experience healthy double-digit annual growth. The smallest and least developed waste management and the larger, most mature telecoms outsourcing sector are both forecast to expand, albeit at a relatively more sedate rate.
The industrial utility outsourcing services market comprises both vertical sector specialists as well as multi-utility service providers. At present, the ability to capitalize on cross-sector opportunities is limited to only a few leading suppliers who alone possess the resources to implement multi-site, multi-client and multi-service agreements.
"In many instances, customers still continue to favour expertise over one-stop services," Karki said. "Service and industry-specific requirements are therefore likely to sustain the ongoing competitiveness of specialized service providers along side the leading multi-utilities."
The competitive landscape in all four utility sectors is defined by intensifying competition and high consolidation at the top levels, accompanied by high fragmentation at the low end. At the top end, a small clutch of multinational companies dominates. In contrast, the lower end of the competitive spectrum is highly fissured and comprises several local players specializing in one utility sector.
Veolia and Suez (along with their subsidiaries) are the undisputed leaders of the European on-site utility services markets. These companies occupy the top two positions in the water, waste and energy markets. A completely different set of large companies is active in the IT/telecoms sector.
"Regional barriers -- differences in regulation and market concentration -- have made it difficult for many suppliers to successfully achieve international expansion in these markets, while sustaining opportunities for local specialists," adds Ms. Karki.
The U.K. and France are pioneers in the market for outsourcing of industrial utility services within Europe. With its considerable size, the less developed German market offers exciting growth potential.
Positive signs are emerging from regional energy markets. Demand from Scandinavian utilities running large local heating networks has underlined the relatively faster growth of energy management outsourcing in comparison to other utility outsourcing services in the region. In Germany, energy management outsourcing has received impetus from the boom in local industrial parks.
Industries with complex and wide-ranging needs have constantly pushed for innovation in outsourcing solutions. Coveted contracts from Novartis, Shell, GlaxoSmithKline, Renault, Saab, Ford, BASF and BP testify to the importance of leading end-user sectors such as chemicals, petrochemicals, pharmaceuticals and automotives in all four utility markets. Sectors with high growth potential are likely to be pulp and paper, food and beverage, engineering and electronics.
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