Water Rights and Wrongs in Outsourcing
William A. Tanenbaum, Chair, Technology, Intellectual Property & Outsourcing Group
Kaye Scholer LLP
Water is the new scarce resource. Business planners are focusing on Global Drying as well as Global Warming, and are measuring Water Footprints as well as Carbon Footprints. This article addresses (1) the business risks introduced by water scarcity and decreasing water quality in manufacturing and other outsourcing and supply chain management; (2) how water problems create energy problems, because the water management technology used to cure water problems requires tremendous amounts of energy to operate; (3) how water problems create energy problems; and (4) how outsourcing is both a cause and potential solution to water problems.
What Are the Business Risks?
The fundamental business risks introduced by water problems are as follows:
(1) Water Scarcity. Does the company – and its supply chain – have sufficient water to conduct operations? Water scarcity can result from two causes: reduced availability from natural sources (such as water tables or snowpack run-off) or reduced allocations because of increased competition. Competition is further discussed below.
(2) Water Quality. Even if water is available, is its quality sufficient for its intended business uses? Impurities, pollutants or unfavorable chemical composition can interfere with business operations.
(3) Competition. In today’s world, there is competition for water among industry, agriculture and households. Competition applies both to quantity and quality of water. Competition exists in areas where natural water supplies are diminishing and is exacerbated in offshore outsourcing countries where rising affluence levels increase demand.
(4) Regulatory Compliance. Regulatory requirements can apply to both intake and discharge. A company that uses or discharges water that does not meet regulatory standards can lose the water it needs.
(5) Supply Chain Risks. A supplier’s water problem becomes the customer’s problem. Water problems can become the weak link in a company’s supply chain.
(6) Geo-social Risks. Factories cannot be moved. Thus, water presents a special risk unlike other forms of sourcing and outsourcing where supply sources can be moved or switched to other suppliers or other countries.
How Do the Business Risks Converge?
The business risks outlined above are interrelated. For example, water scarcity and competition are converging problems. In many parts of the world, including the United States, water tables are being depleted by use faster than they are being replenished by nature. In other areas, increased demand means that the available water must be divided among more users, thus decreasing its availability to existing users. In other areas, both problems exist. When competition increases, at a minimum the cost of water will increase, and it is possible companies will not be able to buy their way out of the problem because the available water must be reallocated to other users.
How Can the Business Risks Be Addressed?
When water availability is reduced because of natural scarcity, lower quality or competition for available supply, a company can address its water business risks by adopting water management and water treatment technologies. At its simplest form, water management is a form of conservation based on improving the water distribution infrastructure, to reduce waste and optimize the delivery of water to when and where it is needed. Smart grid technology will be repurposed and adopted for use in water infrastructures. Thus, information technology will be used to control water risks.
Addressing water quality requires water treatment technology. This allows a company to treat and recycle available water without increasing its supply of water. For example, a company can use the water it obtains from natural sources or public authorities in the first phase of its industrial process, treat it to remove the pollutants introduced in this phase, recycle it in treated form for the second phase of its process, and continue treating and recycling the water through other phases. This is commercially feasible where the early phases require clean water and the later phases can use relatively dirty water.
Why Is the Water Problem an Energy Problem Too?
Water treatment technology is energy intensive. Thus, while one part of the executive team may be working very hard to reduce energy consumption and greenhouse gas emissions, another part of the executive team may be forced to adopt water treatment technology to treat and recycle scarce water. Thus, solving the water problem can increase energy use and costs. Best practices, or next practices, will combine energy water audits with water audits and develop integrated energy and water efficiency practices. From an overall corporate sustainability perspective, a company cannot adopt water treatment technology without considering energy efficiency. While outsourcing and supply chains can give rise to water problems, outsourcing can be a solution to these problems, as well. The companies that provide water management and water treatment technologies and services will be outsource providers that allow companies to address their water problems.