[00:00:00] Speaker A: Foreign.
[00:00:06] Speaker B: This is the Future of Water where we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. Today we're going to talk with Bluefield's Eric Bindler about the digital water space and the impacts of cloud computing on the water market. There's a lot to tie to that, including the impacts of cybersecurity hacks per the Colonial pipeline that's currently shut down. So what does all of that mean?
Before we do that, let's talk a little bit of news. But I want to ask you two things. One, please rate this podcast on Apple Podcasts, but also wherever on whichever platform you're listening to the Future of Water, please subscribe. Whether it be Apple, whether it be Stitcher, whether it be Spotify, whether it be Google, just subscribe. Because that's also an indicator for us. It helps us know not only one how we're doing, but also is anybody out there?
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Secondly, you should sign up for Bluefields weekly email newsletter, Waterline. We send it out every week. In fact, as I'm recording this, I just saw one pop up on my screen. It's a weekly newsletter giving you news items of the week. What's happening gives you some data. I think this week we talk a little bit about forecasts and what is the outlook for capital expenditures in the U.S. we just revised our outlook for the third time in a year because of this crazy Covid environment. So to receive these, all you got to do is go to bluefieldresearch.com and you'll get all of these headlines, data snapshots, analyst perspectives and so on.
Now with the news, as I do, three things, California Water Service Group has just announced the formation of a Texas subsidiary, Texas Water Service.
The San Jose based Cal Water is an investor in utility. It acquired the majority of BVRT utility holding company.
Why do we care? Well, they have been expanding their footprint a little bit. So Cal Water, which I think 90% of its customer connections are in California, but now it's expanded into Hawaii, it's expanded into the state of Washington, it's got a position in New Mexico. Now it looks like Texas is next on the list.
So it's a small deal. We're only talking four systems, about 2,500 connections. But I know that our analyst Marielle Marchand has just put out a research note on how that could grow. I think the expectations are that organic growth alone from these systems could grow multitudes higher than what it already is. Part of that is because Texas is a high growth state, not only just in population growth, but also just think of all of those companies, people like Elon Musk and Tesla plus Palantir. And I think there are other companies. Did I see the HP even there? A lot of companies are setting up shop in the Austin San Antonio corridor. So lots of opportunities for growth there. So be on the lookout. What's happening in Texas, Private water investments. Because there are other companies. It's not just Cal Water. Reach out to us and we'll tell you more about it.
Number two, Quebec based H2O Innovation has announced an expansion into Latin America and also it mentioned increased efforts for water reuse in North America.
So H2O, it's built out a strong position in the US for its O and M services or contract operations, particularly in Texas, as I just talked about. So they're seeing opportunity there. They've been acquiring some service operators in Texas and other markets. But the move into Latin America and reuse is also in line with its recently announced acquisition of Genesis Membrane. I think that happened last year. So it acquired Genesis. It's also added offices in Santiago, Chile. Chile has been undergoing a drought, but also the mining and industrial sector demand for water supplies is pretty significant. So that company publicly traded is growing and something that Bluefield is looking at closely and really interested in. The other interesting part when you look at their financials is their stake in the maple syrup business. Who doesn't like maple syrup?
Thirdly, lastly, the world is a crazy place relative to Elon Musk's Mars community. I think he's hoping to build, I suppose. But more importantly, we at Bluefield believe in transparency. For this reason we continue to monitor the critical and dynamic inputs in influencing capital investments and expenditures across the municipal water space. And obviously because of COVID quarantines, changing municipal revenues, uncertain unemployment numbers, super strong housing starts, and now we're talking, well, we're talking stimulus, but also federal emergency funding. Our team continues to adjust the inputs in their forecast model and sort of try to read the tea leaves about what all this might mean.
This is the third time. We have just released our new CAPEX numbers for the third time in a year. We've done this because of all of the change in uncertainty and volatility, but also partly because of client requests. Economic skepticism. How can the economy be so strong while part of the economy and workforce is struggling so much? And also just new data. So what's interesting about this latest outlook is that stronger market fundamentals have actually pushed our market outlook upward. The current perspective anticipates the capex declines for municipal water utilities will only be about 13.8% from 2020 to 2024. You're like, oh, man, that sounds terrible. Well, you should have seen it last September in our forecast when everybody was practically crying. It looks so bad. We didn't think we were going to get out of this, but now everybody's vaccinated, housing starts are still strong, and hopefully we're about to get out with a good rebound. So if you have any questions about our forecast methodology, how we've done it, and how we're helping companies develop their strategic plans, there's no time like the present. You can always reach out to us. You can always go to bluefieldresearch.com There's a contact form. Ask a question, or just email waterexpertsewfieldresearch.com as well. So that's three for the day. And as I mentioned, register for the Waterline newsletter. I think you'll find it interesting. And now let's get to our discussion with the one and only Eric Bindler, who's going to tell us a little bit about digital.
All right, so I'm joined today by Eric Bindler, research director, Bluefield. Eric, how's it going?
[00:07:26] Speaker A: Not too bad. Filled up my tank last night, so I'm going to weather the storm, I think. How about you?
[00:07:31] Speaker B: I've not filled up the tank. We've talked a little bit about it, that I hardly drive, but the thought of losing my parking space to fill up my car with gas is not my ideal. So I'm willing to take the risk rather than searching for another parking space for 45 minutes in downtown Boston. But those are the breaks when you're not willing to pay $400 a month for a parking space. But hey, so look, Eric, the reason we sort of decided to talk today is because you've done some research on the cloud, broadly speaking. So a key factor, I think, driving growth in the digital water market is more mainstream adoption of cloud computing. And along with that, business model models things like software as a service. So we hear a lot about this over and over in the news and all different industries.
So before we dig into details and what the cloud and software as a service means for the water sector specifically, can you give us a quick explanation about what these terms mean, just as a. As a primer?
[00:08:48] Speaker A: Yeah, absolutely. Good question. I mean, I think so these two concepts, cloud computing and then software as a service, they're definitely related, but they're not exactly the same thing. So it is important to kind of draw that line between them. So we can start with cloud. Cloud essentially represents an evolution from the kind of traditional on premise software model, which is basically where an organization like let's say a water utility would host all of their software kind of internally, like on their own servers, on their own data centers. It's a pretty capital intensive model. The organization has to buy all of that IT infrastructure, they have to maintain it just like any other kind of capital asset. Meanwhile, with cloud, with the cloud computing model, essentially that organization, that utility, all of their data, their software applications would instead be hosted remotely, like in a data center that's owned and maintained by a cloud service provider like Amazon Web Services or Microsoft Azure.
So that's kind of the cloud piece of it, Right. And then that technology can also kind of enable this new type of business model, which is called Software as a service or SaaS. So in that traditional on premise model, an organization usually buy software licenses, they pay a pretty high, pretty significant upfront price to purchase perpetual licenses for a piece of software, and then they just pay kind of a smaller annual fee every year for support, for maintenance, for that kind of thing. That's kind of the traditional model.
Whereas with SaaS, you're essentially subscribing to a software product rather than buying these licenses outright. And so it's more of a monthly or a yearly access fee that you're paying. And so that the on premise, that kind of traditional model with on premise software, with perpetual licensing, again, it's really capital intensive. Right. And it's also labor intensive because you need people that can maintain the IT infrastructure. Whereas with cloud, with software as a service, it's a little bit capital light, it's more typically funded out of operating budgets. And a lot of the burden of actually performing upgrades and maintaining all of the infrastructure shifts more to your vendors rather than to your customer, your utility in this case. And so it's a really big difference there between where those budgets are coming from, where those costs are being paid out of, and then also just kind of who's responsible for what in terms of making sure that that software and that IT infrastructure is doing what it's supposed to be doing.
[00:11:03] Speaker B: Yeah, I mean, I think that makes perfect sense. And I think we're obviously seeing this in our everyday lives just from the perspective of Bluefield. We have an online data platform, Bluefield's Data Navigator. Right. We're basically all of our data, we use that platform, but it's all in the cloud. Right. We're tying into Amazon Web Services and servers there rather than having that. I mean that was actually a big deal for us. We're small business and this is kind of what we're getting at is all of that is stored in the cloud. We don't have server rooms in our offices. Also, it's easier because we have people scattered in France and Spain and all over the US as well as in Boston. It allows faster, easier connectivity to the data itself. This is really interesting to see this happening now. It seems to be coming to a head.
We talk water, that's what we do. So you've got these solutions and business models, like you said, the subscription piece that's sort of tied into this on the back end of the cloud. And then there's also the need for asset management and data management within the utility landscape. And we're talking in the U.S. 50 or so thousand water systems or utilities. You get another 15 to 20,000 wastewater systems. So you've got a wide range of utility profiles. And it seems like traditionally the focus has been, and it's not just digital, but just across the board has been for the big fish. The vendors go whale hunting and they try to land an ladWP or a DC water and you know, that's great, but it's really competitive. But I think ultimately it seems like the need, back to my bluefield data platform analogy is it's the smaller players that actually have an equal or even bigger need relative to their size. So what's so great about cloud computing for these types of companies?
[00:13:22] Speaker A: Yeah, absolutely. I mean, I think if we look at the landscape as a whole, this shift towards cloud computing, towards software as a service, it is really has been really beneficial for water utilities, which generally are not historically the most tech savvy organizations in the world. Right. And so most water wastewater utilities, kind of, to your point, they don't necessarily have a lot of extra room in their CAPEX budgets to afford these expensive software license purchases. And they certainly don't have the technical resources, IT or server infrastructure. But also it's the staff, the kind of technical know how to be IT organizations that can maintain this really complex IT infrastructure internally.
And that's kind of the case for most utilities around the world. But it's especially the case for smaller utilities. To your point, and you made the point about the US and kind of how fragmented the US market is, that's actually more common than not. If you look at major global water sectors, certainly there's major exceptions. If you think about the uk, IT'S highly consolidated. It's very large private utility organizations serving the bulk of the UK population. But I looked at a handful of other markets around the world for this research. And if you look at the US and Canada, if you look at Scandinavia, if you look at Germany or Brazil, as much as 85%, 90, even 95% of the utilities that serve those markets serve fewer than 50,000 people. Small to medium sized organizations that account for again, the vast majority of utilities in these countries. And so from the perspective of the vendor landscape, the software companies, the technology companies that are serving the water industry globally, these kind of new, they're not that new, but Newer Cloud and SaaS based solutions, they really open the door to that lower end of the market, right? They're kind of the long tail of this very fragmented global utility market. They make small utilities kind of actionable or addressable for the first time in a really meaningful way. And to your point, I mean, these are organizations that have greater need, right? They've got tighter budgets, they've got tighter staff. And so they're digital solutions that can really help them manage their assets more efficiently, help them manage their networks more efficiently, help them provide the services that they're mandated to provide more cheaply, more efficiently, and just kind of do business better. But they're not able to afford a million dollar software license and all the IT infrastructure that goes along with that. So this SaaS model as cloud based computing really does open up the door to those types of small organizations having access to these technologies kind of for the first time.
[00:15:50] Speaker B: Yeah. And I guess people can be overwhelmed or I guess scared when they hear, oh, cloud computing or SaaS. And at the end of the day, it's really just a tool, right? I mean, to what one is already doing. So I mean, your point about highly fragmented markets, 50,000 customers and above being, we'll call those the big systems, Right. And just for perspective, in the U.S. i know our team is looking at hundreds and hundreds of capital improvement plans for Systems that are 50,000 customers and above. When you start getting it around the 50,000 range, it's kind of amazing how thin the capital improvement plans, if they even are available, how thin they look. And I think part of that is do they have the tools for the budgeting and sort of bringing it all together? I mean, obviously they have budgets and they've gone through that, but at the same time, it's not necessarily publicly available. And part of that may in fact just be a basic lack of a solution or technology to bring it together and present it. But I think secondly, that it's not going beyond what you're already doing and it helps tie everything together and understand what's happening in the network. And I think for that reason the competitive landscape is obviously changing. I think you've got a bunch of small startups that are entering the space like never before and this opens the door to them. But also you've got the big players, the big technology vendors that are active in the space. So when it comes to the technology landscape, I think we're going to see more and more activity. So how do we measure this?
[00:17:38] Speaker A: Yeah, I mean, there's a couple of different ways to look at it, I think, you know, kind of to the point that you just made. In the same way that cloud computing opens doors to smaller utilities, it also kind of opens doors to smaller vendors, right? To smaller technology providers, to startups, because they also don't have as much of a responsibility of a burden to make these upfront investments in, you know, in IT infrastructure if they can just host their solutions, host their customers data in the cloud. Right. So we've seen this kind of explosion of digital water startups that have been founded over the past couple years. We have a running database of digital water solutions providers and about almost 40% of all of the vendors that we've identified around the world were founded in the past decade. And some of these companies are at least 100 years old. Some of the old metering companies, for example, are from the 1800s. So when you think about that timescale and the fact that about 40% of the company's total were founded in the past decade, it's pretty significant. So that's the smaller side of the scale, the smaller startups, and I think that's one way of measuring it is just looking at the companies that are coming out with these types of solutions. But then obviously you can look at the larger players, the incumbent players, those firms that date back to the 1800s that have been in the market evolving over time and they're getting in on this action as well. And M and A is a really significant tool for that. So for my research in this area, I went back and looked through Bluefield's M and A database, just took a look at all of the, the major kind of software related digital water deals that we've tracked over the past couple of years and in particular for the past like three to four years, just about all of the major software related acquisitions that I've seen in water and related sectors have had some Sort of a significant cloud or SaaS component. Either the company that was being acquired already had a strong SaaS solution or the vendor kind of acquired them with the explicit goal in mind of building them out as a potential cloud based offering or a SaaS offering. And you see that in the press releases, for example, you see that in discussions with the companies or with the players involved in those acquisitions. So if you look at Schneider Electric acquiring Aviva for nearly $4 billion, Koch Industries acquired Infor for $13 billion. And then most recently, the deal that everybody's talking about these days is Autodesk acquiring Innovise for a billion dollars, which values that company at what we think is about 10 to 15 times annual revenues. Pretty big valuation for this water software. Pure Play. Just at the same time, like a day before, I think Innovise announced this major SaaS platform that they were launching for the water industry. So I think the timing there was especially kind of poignant that they again are kind of moving into the cloud software space. They're moving into the SaaS space at the same time that they're being acquired at a 10-15x valuation.
And then the last piece that we can look at is the engagement of the cloud services providers themselves. Right. You know, obviously for all of these vendors to be hosting solutions in the cloud and hosting data in the cloud, somebody's got to be managing that back end and providing those services. And so it's, it's been interesting to look at, you know, the major players, which would basically be Amazon Web Services or aws, it would be Microsoft Azure, you know, kind of in a distant third would be Google Cloud. Just looking at what they're doing in the water industry and how they're kind of positioning in the water industry. And so AWS, I think is really interesting. They launched a kind of a dedicated water unit last year, which I think is pretty indicative of just the size of the opportunity that they see in providing these backend cloud services to water utilities, but also to water technology providers. Right. They're partnered with Innovise, they're partnering with Xylem or Mueller. We haven't seen as much of a kind of strategic commitment to water from Microsoft Azure, from Google Cloud. But they do work with a lot of water companies, right? They are definitely there, they're definitely involved. And so I wouldn't be surprised if we see more of a kind of strategic focus, more of an explicit strategic focus from those companies in the future as well, especially Microsoft. Microsoft has made a really big deal about their own Kind of internal water footprint lately from kind of a corporate sustainability perspective. They're talking about water use of data centers. So I wouldn't be surprised to see them kind of target the water industry as more of a business opportunity, a little bit more explicitly moving forward.
[00:21:45] Speaker B: Yeah, I mean, without a doubt water is popular. It falls into the sustainability or ESG space that companies, the corporates are definitely concerned about, investors are interested in. So if there's an opportunity for growth, there's no doubt that these big tech players and others are going to go for it. Right? I mean, they're looking for opportunities as well. I think the other thing I just want to add is just looking at some of the research that you had put out and this just a broad brush approach and that is just the share of subscription revenues for some of these companies like Autodesk and Aviva you mentioned. You know, when they're looking Aviva, I think you had this is across all sectors. But their subscription growth is a compound annual growth rate of like 109%. Autodesk is 85 and above, but also Trimble is 17% and so on. So there's definitely growth in the subscription business. But we see that. I mean that's not a surprise when we think about, I've done this before where I just lay out, hey, what are all the big trends that are happening in the world? And obviously climate is one. But it's also like, what's the Amazon effect? Purchasing habits? Are people buying food differently? Are they shopping more online than at Brick and Mortar? The role of energy transition, electric vehicles, all these sort of wide sweeping trends. And then start thinking about, hey, how is that impacting the water sector as a whole? Right. And so one case, subscription services, right? I mean we're, there's all this collateral impacts of I've been sitting around, I watch more Netflix in the past year than I have in all the years prior combined that we've had Netflix in our house. So what does that mean? Well, there's more data usage, there's more water needed for cooling of the data centers and there are all these impacts. But my point of it was really getting at Netflix is like subscription services are not new. Right. I mean, and that's just everything we do, it feels like is a subscription. Hey, Bluefield Research is a subscription. There is a, you know, there's no secret there. So you can always. We don't just do consulting. We also have an annual insight service that you can sign up for. There's my plug for the day. So I think that's all really interesting. So changing gears a little bit is, you know, now all of this data is in the cloud and it's like, oh my God, it's out there, it's on the loose, anybody can get at it. Given what's happening.
When we started this, we're making wisecracks about the availability for gasoline for our cars. You know, the Colonial pipeline has been shut down in the eastern US because of a cybersecurity hack. So cybersecurity is in the news now with everybody or all the water utilities data up in the cloud.
Doesn't the risk go up there? That must be a concern, right?
[00:24:47] Speaker A: Yeah, yeah, absolutely. It's a great question and I mean, I think a really timely question. Certainly, you know, cybersecurity has been a really hot topic of conversation in the digital water space so far this year. I mean, I think really more so than I've, I've seen it in the past. And we've tracked a bunch of major hacks over the past couple of years, whether it be Atlanta or Baltimore. But I think the Oldsmar incident in particular back in February really kind of shook the industry just because it was targeting the treatment infrastructure more so than, you know, a ransomware attack on the billing infrastructure. And I think we're hearing a lot of chatter from, even from the Biden administration. And I'm seeing a lot of state level policies being floated for protecting water and critical infrastructure from cyber attacks. So it's really the hot topic of the day, I would say. And I think also we've seen a lot more, we did some research on this earlier this year in the aftermath of the old MAR incident. And there's some decent data out there on just hacks or cyber attacks in the utility or the infrastructure sector more broadly. And there has been a massive spike in attacks since the onset of, of COVID Just because everybody's working from home, everybody's more remote, it's harder to kind of secure an organization's data and their employees kind of floating all over the world in many cases. Right. Just like with us. So how does this all tie into to the cloud?
[00:26:04] Speaker B: Right.
[00:26:04] Speaker A: With regard to kind of cloud technology, I've seen some industry research that's been done that suggests that cybersecurity concerns really are the single biggest barrier that utilities have or the single biggest kind of inhibitor for moving to the cloud. Right. I think there's this kind of fear about losing control over your critical systems, losing control over your data if they're hosted remotely, rather than sitting there securely in your own server room or your own data center. Right. And so it's this kind of psychological to a certain extent, but if you really think about it, right, cloud providers like AWS or Microsoft Azure, they've got far more financial resources, far more technical resources, far more staff to deal with cybersecurity, to kind of manage that threat. They're much more prepared for cyber attacks, they're much more sophisticated in that sense than your kind of average run of the mill water utility. Right. If we think back to Oldsmar, a big part of what happened there was that the utility was running outdated software, they hadn't updated their operating system and they were sharing passwords across staff members. Right. Like that's not the kind of thing that happens at AWS or at Microsoft Azure. You know, it's not to say that they're invincible, but at the end of the day, I think they are a much more secure environment for utility data, for utility systems and applications than a local municipal government server room or public works department server room. Right. And so, you know, I think, I think part of it is just kind of a matter of some education that still needs to happen in the industry about really what this technology is and how it works and what those kind of cybersecurity benefits are of having trained professionals actually managing and monitoring where that data is kind of hosted to protect from those cyber threats.
[00:27:46] Speaker B: Yeah, I think that's interesting point. I mean, do you put your money, your paycheck in your mattress because you feel safer? Do you put it in the bank? Right. And people seem to be comfortable with that. I think the other point is these large enterprise software companies in particular, I mean, they're working with the financial sector. The financial sector is way out there on the curve as far as adoption because obviously there's a lot to lose, right? So it's not as if they're not well prepared. The utility sector, particularly the water utility sector, is definitely way down on that curve and maybe that's accelerating, relatively speaking, towards more advanced digital solutions. And part of that is the cloud. So that's going to happen. It just may take time. There's also the cultural impact. Utilities are pretty conservative and rightfully so. I think the other thing, thinking back to the colonial pipeline and the gas and tying it to that, I mean, you've said this before, cybersecurity hacks have evolved a little bit, right? They've gone from, hey, let's go in and grab customer data and maybe we can find their credit card numbers and kind of cherry pick opportunities as a hacker there. And then we've seen the ransomware where cities like Baltimore are being shut down because a hacker has gone in and said, or even hospital groups, pay us $80,000 by Friday in Bitcoin or you're not going to be able to get back in business. And that's happened now. Like you said, the old Zmart hack was someone getting to the asset, the operating asset itself. I mean, that's what's happened with the Colonial pipeline as well. I mean it's basically just been shut down. And that is when it gets a little scary.
The solution is not going after the Russians and trying to hack all their systems. We still have a problem here. Right. So it all needs to be addressed and unfortunately it's going to cost money. Right? You know, so do you either pay now for, you know, a stitch in time saves nine. Right. You pay now to save a lot of hassle down the road or are we going to wait it out? I'm a little nervous about that. So. But yeah, I think this is really interesting. Like you said, there's like a lot of small startups in the space, you know, bringing cloud solutions. It's better for them. It's a much more dynamic environment for startups to get into the water sector but also penetrate small utilities that have traditionally been overlooked by the larger vendors and still are to some extent because they're just not big enough. Right. I mean it's interesting to see firms like Inframark. Right. That's a good contract operations firm that was just acquired by newmountain. I know that they operate in that small to mid tier group of utilities. I know they're stronger in Texas but in other select markets. But this is a space in which they can play. They don't have to go head to head with other providers and they can bring in cloud solutions and other, you know, as a third party, you know, operator.
So this is great. I think it's really interesting and I know you did put out something, some research on this and. But before I let you go, the other thing that has come up in recent weeks and is tied to digital as well is the engineering firms moving more into digital or it seems there's more activity with Tetra Tech and stantec. They've just launched new digital platforms. I know that we've talked about this. We put out a report, I think. Was it fall? I can't. Time has gotten away from me. But it was a while ago, let me put it that way. We put out last year 2020, we put out a report on the engineering firms and digital.
Does this validate what we've seen or what we're saying? What does all of this mean with Tetra Tech and stantec?
[00:31:58] Speaker A: Yeah, yeah, no, absolutely. I mean it's a fascinating topic, right? Because engineering consultancies, in many ways they're kind of the gatekeepers of the digital water sector, especially in the U.S. i think the U.S. dynamic is a little different than other parts of the world, but, but utilities, they rely pretty heavily on their engineering firm partners for guidance, right. In terms of just planning out their digital transformation roadmaps, selecting their technologies and vendors and then even in many cases handling the actual kind of systems design, systems engineering systems integration. So it's really a logical next step that these engineering companies would want to start actually providing their own software to, rather than just kind of working with third party software vendors actually providing some of their own proprietary software tools to try to capture an even greater share of that digital water pie. But I mean, the challenge is the software business is a totally different animal than the engineering services business. That the business model is different, the kind of product development and investment requirements are different, the staffing needs and capabilities are different. So a big question for us when we've looked at this is just how some of the major engineering firms kind of in the water industry are, how they're handling that development of a digital business, how they're structuring it, how they're managing it to try to navigate these issues. As you said, we put out this report on this landscape last year. I think it was, I want to say it was like June or July, so summer, fall. It's been amazing to see how quickly that landscape has continued to evolve even over the past couple months since that report came out. Because I think what's happening is we're seeing these big engineering firms, they're all watching what the other ones are doing and they're all trying to define their own digital identities as distinct from one another. And I think really the Stantec IO press release in particular was really, really interesting to me because of how explicitly they're trying to distinguish themselves from some of the other players.
Arcadis Gen, I would say, and GHD Digital, they were both pretty early in this process. They were both last year or beginning of last year, they launched these really, they carved out these standalone digital software and services units. Like they've got their own software sales engineering team, they've got their own KPIs, they're really kind of developed as these separate business units within the larger whole. Whereas stantec, in this press release, they're almost taking pains to say that that's not what they're doing. They're not launching a separate branded business, they're embedding it within their existing business lines and they're really trying to kind of draw that line between what they're doing and what some of their competitors have already done. And, and I think that's super interesting like that, you know, to this point, I don't know that there's a right answer. Right. I don't think anybody's really figured out which way to go or which way is going to necessarily be the better approach. And so it's going to be really interesting to see how these units all kind of do and how they evolve over the next couple of years. And so we are going to be diving into this a little bit. We're going to put out another research note looking at Tetra Tech and stantech. I also actually just this morning saw that Arcadis Gen wants a new kind of like a, like an app store for analytics that'll be hosting third party software applications and stuff like that. So pushing even further into that like software product space and software platform space. So there's a lot going on in here, a lot to unpack and definitely something that we're going to be continuing to look at and to analyze moving forward.
[00:35:09] Speaker B: I'm certain that you're tired of updating and changing your value chain exhibits and quadrants of, you know, where does everybody stand? It gets a little.
It's a good thing, let me put it that way. I'm going to be optimistic. I think the other thing is how much of this, maybe it's completely unrelated, but I feel like speaking of Stantec, that used to own Innovise, right. I think, you know, a number of players, we've had conversations over the years where companies, investors come to us to better understand how did Entervise do it? Right. They were part of an engineering services firm, they were part of MWH and they were acquired by Stantec and then Stantec sold them to EQT and now Autodesk has acquired Innovise. So Innovise is. But they've been around a long time, it's not new. And I know part of their growth and their success, if you will, was or is because of a will of personalities. Right. I know they had strong leadership and they had higher margins than the rest of the business at mwa. And therefore leadership of Entervise is able to Kind of keep the business and their product, their strategy at arm's length from the rest of the engineering business. And I think to your point, they are two different business model approaches, you know, billable hours versus services and such. So do you think that has anything to do with it or is that just a guiding data point that these firms are using?
[00:36:45] Speaker A: Yeah, it's a good question. I mean I do think that the kind of Innovise model was one of the early ones and there were a few others. I mean actually if you kind of go back and look at a lot of other software firms, there are a number of digital water players that kind of have some origins in engineering firms like even Opti. Right. Opti is another really interesting company. It was kind of born out of an engineering firm and then spun out as a separate company and has kind of, you know, gone on to develop its identity in that sense as well. It's really a difference in philosophy. I mean, I think there are like the Arcadis gens and the GHD Digitals of the world. I mean they are to some extent taking that type of a model where you're really drawing a pretty clear line in the sand between your engineering services and your software and you're, you're hiring people that are selling software as a product and you're investing in supporting and developing those, those software products.
And then there's the more of the kind of services philosophy where it's like you've got, you know, you're a consulting firm, your job is not to sell standardized products, it's to provide custom services that meet the specific requirements of your customer. Right. And if you have a stable of digital tools of your own that help meet those challenges kind of tools in the toolbox, then you bring those to bear as appropriate. But you're not necessarily selling them as standalone products. And I think that's kind of the major difference in mindset that I'm seeing between some of these engineering firms is those that are really going more the route of software kind of productization and selling software products and that business model versus the like again the Stantec IO they've developed all of these different tools that they, that maybe, maybe it was born out of a specific consulting engagement or something like that. But they've got these different software tools that they've developed in house that they will offer to you as part of a broader time and materials based contract potentially. But they're not going to necessarily sell you this ongoing license where you're bought into this software in perpetuity in the way that a software business would typically approach that type of sale. So it's really a very different mindset. And again, I don't know that anybody. There's not really a right answer yet. I think it's kind of all still shaking out and, and you're seeing these firms kind of eyeing each other and what they're doing and trying to kind of position strategically and experiment honestly with what is going to work the best and what's going to drive adoption. I mean, I think there's kind of merit to both approaches. And so it's just going to be interesting to see kind of who comes out on top, if anybody really does or if both, you know, both sets of players are just going to keep slogging on and kind of contributing to the growth of digital overall. And both, there's probably enough Runway out there in the digital market as a whole for all of these firms to do pretty well.
It's just a matter of the types of solutions that they're bringing to the table and then we'll see where it goes from there.
[00:39:43] Speaker B: Yeah, I think it's interesting. I mean, you raised this point. The US market is a little bit different than the rest of the world. Every market's got its own unique characteristics, whether it be the uk, you know, and it's full, you know, it's amp cycle and private, you know, private utilities versus Australia versus the US versus Brazil.
But in this context with Stantec and Tetra Tech, is there a possibility? I mean, strategically speaking, are the engineering firms, and you pointed them out as being gatekeepers. Right. To the utility. They're key source of insights and guidance for water utilities. Right.
So is there a competitive concern on their end? I mean, we started talking about the cloud and is that the democratization of digital solutions across the broader water segment. And if that is the case, are the engineering firms concerned that they're going to get outflanked by some of these big tech companies? Right. So they're having to kind of, hey, we need to figure this out before someone else does. You know, someone doesn't end around on us and get straight to our relationship we've built up over decades.
[00:41:05] Speaker A: Yeah, yeah, yeah. I mean, there's definitely kind of disruption happening. Right. And I think from the perspective of the engineering firms, a big part of it is just particularly software that kind of replicates or even automates some of the processes or the services that an engineering firm would typically provide. So, like design, automation or, you know, all of these, like, kind of asset Investment planning optimization tools that whereas the traditional kind of engineering model is you hire an engineering firm to come in and design your capital improvement plan that's kind of this like static five year plan and then you work through that and then you bring them back again in another five years to do it again. There's software solutions out there now that are, you know, you kind of have really like a living, breathing capital improvement plan that changes as you know you're, as you get new work order data, maybe, maybe there was a main break and that shifts the balance towards okay, maybe we should prioritize that first or taking all of that data that you're already gathering your operational data, your asset performance data and kind of feeding that into again, yeah, more of a living, breathing capital improvement plan. So you don't need to hire these services firm to come in and design these big five year programs every five years. Right. So they're seeing the pressure I think from their core business being potentially disrupted by software providers, by digital providers. And so yeah, they are kind of trying to see what else they can do in that space, trying to move beyond those core services and see where else they can fit into the digital chain and I think the digital value chain. And I think because they do have that strong gatekeeper role, they're in a really good position to influence the decisions that utilities are making. So part of it is, I think, evolving from a services perspective. Part of it is evolving beyond that core engineering service to being kind of almost more of a technology consultant. Right. And a lot of the engineering firms that I looked at have these kind of more tech consultant, management consultant wings as well, or divisions as well that are going to utilities to say, okay, like this is, you know, this is what you have now. These are all of the systems that you have in all of these different departments.
You know, this is where you want to be. These are your goals, these are your KPIs, these are your service objectives. So what do you need to invest in along the way to become kind of a digital utility? And hey, if it's part of the process, you use some of our software that we've developed in house rather than buying something from, you know, from Innovise or from, you know, from Fracta, then all the better. Right? And that's kind of, I think the position that a lot of them are taking, especially the ones that are a little bit more, more service oriented versus you know, the arcadis gen approach. I mean essentially this, this new platform that they launched this morning. I think it's Basically it's kind of an app store for like artificial intelligence and machine learning. Right. It's like, hey, you're a utility. You, you need some cheap analytics. You want to augment your own decision making capability with some advanced analytics, but you don't have that capacity in house and you don't want to necessarily go pay for something like Fracta or Vota. You can go and just go into the Arcadis gen app store and get a low cost application and run your analytics and use those insights to inform your decision making process. So it's totally different mindset, but as I said, there's scope for both of them and it's going to be interesting to see what types of water utilities gravitate to one or the other. Again, I think it does come down to the larger versus smaller utilities. If you're making this stuff, especially if you're making kind of advanced analytics and optimization technology cheaper and more geared towards smaller utilities. Again, using cloud technology, using SaaS as a business model, you're going to be continuing to push further down to some of the utilities that maybe these engineering firms haven't typically worked with. Right. I mean, even we talked about earlier on that the vendors are typically targeting the big fish. They're going whale hunting. I mean, in a lot of cases, if you're talking about the big national or international engineering firms, they're not necessarily working with a bunch of small suburban communities either. So it does open the door to them as well, I think, to get a little bit further down into that lower end of the market.
[00:45:11] Speaker B: No, that's interesting. And just for the record, so everybody knows a whale is not a fish. Yes, we are aware of that, but I started it.
[00:45:21] Speaker A: I blame you for that analogy though.
[00:45:24] Speaker B: Exactly. Well, anybody who knows me well enough, I throw out analogies and colloquialisms. I think it's just part of my southern roots that I throw these things out there and people look at me like, have a hole in my head, particularly English as a second language speaker. So look at me like, what are you talking about? All right. Well, in any case, Eric, I could keep asking questions, but I'm going to. Yeah, we've got a bit of a hard stop, so I want to put a bow on this. And thank you for stepping up. This is super helpful. I know you have a lot more insights and definitely we look forward to reading more about Tetra Tech and stantech because when that happens, we've been seeing this for a while and I know we've got a number of clients who are interested in this. So if any anybody out there has any questions about it, Eric is your guy. So, Eric, thanks again and we'll talk soon.
[00:46:23] Speaker A: Yeah, thanks a lot, Rhys. Talk to you soon.
[00:46:25] Speaker B: All right, see ya.
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