Is "Water-as-a-Service" a Strategy?
Increasingly corporations and investors have been drawn to the concept of “WaaS" - water as a service. As capital budgets are frequently constrained, offering a service around water delivery, treatment, or analytics, and billed as an operating cost, has become an attractive means of selling a water solution while creating long-term stickiness with customers.
“With a growing offering of technologies around sensing, software & analytics, the WaaS model has rapidly expanded across municipal, industrial, and commercial sectors.”
AquaVenture Holdings coined the phrase for investors with its Quench and Seven Seas platforms as it described two distinct business models, but with one similar objective, charging for the delivery of water. Having announced the sale of its business for an impressive 15.8x EBITDA, AquaVenture represented a shift from selling equipment to selling a service that alleviated the burden of a capital spend.
Evoqua has also tapped into this concept on two fronts with its acquisition of ProAct, and secondly, by building its Water One offering. Rolled out nationally about a year and ahlfago, Water One offers remote monitoring, real-time data analytics, with customer support and service. The company’s three-year goal is to digitally enable $90-$100 million of sales.
Nalco (Ecolab) was one of the early pioneers in providing water-as-a-service, with its 3D-Trasar, focused on providing water analytics on cooling water towers. As a means of providing information on water quality, Nalco could help customers optimize dosing of its chemicals with a monthly/yearly service contract for use of the 3D-Trasar. Selling equipment was secondary to the strategy of selling chemicals and developing stickiness with customers making it difficult for competitors to replace Nalco. The company now has over 25,000 systems in use.
With a growing offering of technologies around sensing, software & analytics, the WaaS model has rapidly expanded across municipal, industrial, and commercial sectors. Traditional instrument and equipment providers realized there is a great untapped opportunity to address significant water challenges while reducing one of the biggest hurdles—high upfront costs of adoption. Companies such as Hach have also leveraged technology (e.g. Claros) to create a much richer experience that also results in greater customer retention and higher margins.
Innovyze’s recent acquisition of upstart Emagin underscores the growing importance of analytics in this model. Xylem has also made a big bet on technology and is seeing the benefits of its technology service offerings. While the goal for the seller of service is a long-term recurring revenue stream, it is important not to lose sight of the value to the customer, understand what those pain-points are (e.g. plant efficiency, asset management, budget/resources, etc.).
Though WaaS can be capital intensive, even smaller companies can deploy this model through financial partnerships.For instance, Cambrian Innovation, a distributed wastewater treatment company has partnered with Spring Lane Capital to finance its innovative Water Energy Purchase Agreement (WEPA) model where it provides treatment systems to beverage producers and sells back recovered clean water and power over a fixed period up to 20 years. With an initial $18 million tranche, it intends to shift the bulk of its business to this model since it is preferred by its customers who want to focus on beverage production not wastewater treatment.
Ultimately, Water-as-a-Service is not a fad (perhaps a catch-phrase); rather it is a means of solving customers’ problems—and technology will be a key enabler.