Aryana Group - IPAMC - 2006

Maintenance
Outsourcing
Ben Stevens
ben@ omdec.com
www.omdec.com

www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 1
 Agenda
• Why Outsource?
• The Steps in Outsourcing
• What to Outsource
• The Deal
• Performance management
• Service Levels
• Pricing

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 2
 What is Outsourcing?
• Definition
– Paying another company to do part of your
own company’s normal work

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 3
Why?

Why Outsource?
• Improve Business Performance
• Costs of Services
• Quality of Services
• Manage resource demand peaks
• Take advantage of external specialist skills and
experience
• Management Focus

• Image
• Head count
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 4
Why?

Why Outsource? Business Performance

• Cost of Services - External Service Provider

• Their business, their revenue source, their profitability.

– Impact of service competitors
» Need to be efficient to compete.
• Focus on profitability of service delivery
• Broader service industry perspective.
– Awareness of Other Practices
» Other customer organizations.
» Other service providers.
• Allocation of overheads among multiple clients

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 5
Why?

Why Outsource? Business Performance

• Cost of Services - External Service Provider

• Specialized equipment and training.

» Vibration analysis, thermography, laser alignment, etc.
• Share costs of special equipment to reduce
underutilization of assets and resources.
• Focus on improving effectiveness of Maintenance Tactics
– RCM - Reliability Centred Maintenance
– Investigate critical / repeat failures
• Training of workforce, supervisors, managers.
• Work Management - Planning and Scheduling

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 6
Why?

Why Outsource? Business Performance

• Quality of Services - External Provider

– Will focus on quality,
… within requirements of contract.
– Working to KPI’s – therefore objective and
measurable quality performance is required.
– More formal WR-WO process = better planning
– Able to see methods in other companies and
therefore improve quality
– Less of “it’s the way we always do it”
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 7
Why?

Why Outsource? Business Performance

• Manage resource demand peaks
• Special seasonal or periodic increases in service
demand
• Shutdowns, run changes
• Requirement for specialist resources
• Special skills such as blast furnace relining, oil analysis
• Management focus
• Allows management to concentrate on their core
business
• Image
• Head count
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 8
Why?

Why Outsource? – Why Not?

• Loss of control
• Poor Service / Business Disruption
– Reduced quality
– Poor company attitude / orientation
– Poor response times
• Uncontrolled or Increased Costs
• Lack of Flexibility
– Difficult to change vendors - perpetual contract
– Workload for purchasing
– Time-consuming to supervise the contract
• Unexpected Costs at End or After Contract
– Condition of assets at contract end – Costs to rehabilitate
• Unavailable outsourcers

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 9
Why?

Live Example - 1
The contract for mechanical maintenance
services was signed about 20 years ago, but is
regularly reviewed.
The Client’s Comments
– Transfer people management issues to service
provider.
– Cost is less than doing it “in-house”
– Flexibility in adjusting the size of the workforce
– Management can better focus on other critical
issues
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 10
Why?

Live Example - 2
• Service provider supplies a web based CMMS
service hosted on third party servers; Clients
access the application using an internet browser

Service Provider: Customers look for:

– expertise, excellent support and low cost.
– company that is familiar with their particular industry.
– security of data and stability and reliability of the service
– quick and accurate response times + flexibility
– loss of control – especially knowledge and data
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 11
 Workshop
5 strongest reasons to outsource for your organization

5 strongest reasons to NOT outsource for your organization

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 12
 The Steps in Outsourcing
1: Analyse 4: Plan
3: Select
Needs and 2: Define Transition
Outsourcing
Service “The Deal” And
Company
availability Implement

5: Performance
Monitoring
Feedback
and contract
optimisation

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 13
1: Analyse
Needs and
Service
availability
Overview of Outsourcing Process
• Outsourcing is not automatically right for
everyone, all of the time.
• About 50% conclude that outsourcing is not
appropriate for their organization.
– the process must have exits at certain points.
• Time-consuming
• Early planning will have the greatest impact
on success
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 14
1: Analyse
Needs and
Service

What to Outsource?
availability

• Common Outsourced Services

– Electrical, instrumentation, and mechanical
maintenance and construction services.
– Specialized maintenance and construction services.
– Project work
• Engineering and project management
– Information Technology
• General services
• Specific ASP (Application Service Provider)
applications.
– EAMS / CMMS systems

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 15
1: Analyse
Needs and
Service
availability
What to Outsource?
• Generic activities are:
– Common to multiple organizations.
– Typically routine activities.
– Can be technically complex.
– Can generally be delivered at a lower cost base
through use of scale, skill and technology by
specialists

• Unique activities:
– Only we know how to do
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 16
1: Analyse
Needs and
Service
availability
What to Outsource? Other Requirements
• To be successfully delivered by a third party
organization, the activity must be:
– Capable of being well defined and “separated”
from the organization.
– Measurable, and manageable at “arm’s length”
• Can write an effective contract.
– Readily provided by established suppliers in a
competitive market place for outsourcing.
– Not a competitive advantage,
… and not required to be in house for risk
management.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 17
1: Analyse
Needs and
Service
availability
What to Outsource? Other Factors
• Potential Issues / Risks
– Organizational
– Union Relations
– Legal / Regulatory
– Risk Management
– Public Policy / Public Relations Perspective

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 18
1: Analyse
Needs and
Service
availability
Activity Matrix - who does what?
Plan work Execute Close Work Materials
orders Work Orders Orders

Planners Plan new Review WO’s before Forecast

WO’s; Review closing for materials use
and improve completeness from planned
repeat WO’s; WO’s
Schedule work Expand
Electrical Identify Complete WO’s Enter Work and Pick and collect
needed work for all electrical Materials data materials; return
Maintenance work for Line 1 used and unused
and Line 2 to Stores
Mechanical Identify Complete WO’s Enter Work and Pick and collect
needed work for all mech- Materials data materials; return
Maintenance anical work for used and unused
Lines 1 and 2 to Stores
Instrumentation Identify
Expand
needed work
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 19
1: Analyse
Needs and
Service

Electrical Maintenance Activities

availability

Function Who Unique or Hours per Cost – labour +

does it? Generic? month Materials
Swap boards as Elect 2 Generic Line 1 – 17 Line 1 – y,000 Rs
per work order Line 2 – 48 Line 2 – x,000 Rs

Diagnose faults Elect 1 Unique Line 1 – 45 Line 1 – y,000 Rs

Line 2 – 23 Line 2 – x,000 Rs

Remedy Faults Elect 1 Unique Line 1 – Line 1 – y,000 Rs

230 Line 2 – x,000 Rs
Line 2 –
115
Install new circuits Elect 1 & Generic (after
2 plan
completed)
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 20
1: Analyse
Needs and
Service
availability
This should be your starting point
– CMMS work order data by type of work done
Electrical Labou Materials Contract Tool Total $ Comments
Activity Type r$ $ $ s$
Line 1
- Swap 15,250 12,440 Nil 300 27,990
Boards 3,240 4,500 nil nil 7,740
- Diagnose 5,200 4,500 nil Nil 9,700
- Remedy 3,500 2,550 45,000 Nil 51,050
- Other 27,190 23,990 45,000 300 96,480
Total
Line 2

Line 3

Total
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 21
1: Analyse
Needs and
Service

Defining Activities
availability

• Identify any new activities

• Identify those activities that are no longer required.
• Documentation required for physical assets.
– Drawings, records, maintenance history, utility consumption,
etc.
• Existing Third party contracts:
– Assign where possible.
– Identify costs of assignment - e.g. software licenses
• Projects:
– Capital and refurb projects - Include in scope?
– Scoping, pricing and service level issues are different for
projects versus O&M.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 22
1: Analyse
Needs and
Service
availability
Determining Scope
• Scope of work to be outsourced:
– Are the activities generic (or unique)?
– Are these activities competitively available in the market place?
– Are the activities measurable?
• Can develop service level measures for the activities?
– Are they manageable at arms length?
• Can write a contract for these services?
– Can they be fully defined and decoupled?
• Taken out of the organization?
– Is this activity required for risk management,
… or is it a competitive advantage?
• Anything that does not meet these criteria should
be retained in house.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 23
 2: Define
“The Deal”

Constructing a Baseline
– Develop a five year business plan for self-
provision.
• Included expected any improvements (technology,
staffing, processes etc.)
• Reconcile with budgets (activity based costing) to
identify all costs.
– Collect all relevant metrics and identify cost
drivers.
• Number of work orders, number of staff, number of
invoices to be processed, number of square feet,
operating hours, production output, etc.

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 24
 2: Define
“The Deal”
Initial Vendor Requests
For Proposal
• Identify activity groups to be considered for
outsourcing
– Functions, frequency, location, lead times
• Clearly allocate responsibilities:
– Outsourced;
– Retained;
– Shared - Need to clearly delineate responsibilities.
• Identify dependencies in activities:
– Affects accountability.
– Affects how we construct service levels.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 25
 2: Define
“The Deal”

Initial Vendor proposals

• Compare the self-provision scenario against
vendor submissions in order to determine if
outsourcing is a viable option.
• Forms the basis of the scope description in
the future outsourcing contract.
• Narrow the field for negotiating by selecting
the two with the best experience

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 26
 2: Define
“The Deal”

Service Contract Components

• Develop a “win-win relationship” between customer
and service provider.

• All service contracts need three fundamental

components:
– Scope
– Service Levels
– Price

• All inter-linked
– Change in one, will cause a change in the others.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 27
 2: Define
“The Deal”

Service Contract - Service Levels

• Focus on the business factors.
– Understand the critical operational issues.
– Define the maintenance issues that support these critical
operational issues.
– Ensure there is full scope coverage.
• Service level – “equal or better service”
– Must be fully described as part of the self-provision
scenario.
• Performance orientation.
– Focus on the “what”, not the “how”.
– Encourage scope for vendor to improve to his and your
benefit
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 28
 2: Define
“The Deal”

Service Contract - Service Levels

• Service levels are the most difficult area of
outsourcing contract development.
– The concept of measuring quality is new to many
in industry.
– Many maintenance contracts use time and
materials (because it is easier!) What is incentive
to improve service cost or quality?
– If T&M is used, the price is the prime motivator

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 29
 2: Define
“The Deal”

Why Service Levels?

• To measure quality and performance
• To specify minimum service levels
• To encourage and reward higher quality and
performance
• To provide the basis for a dispute resolution
mechanism.

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 30
 2: Define
“The Deal”
Components of Service Level
Agreements
• What services are being measured. (KPI’s)
• What targets must be achieved.
• Who measures these services.
• How these services are measured.
• How often these services are measured.
• What is the severity of impact to client, if
service levels are not met.
• And therefore what is the penalty
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 31
 2: Define
“The Deal”
Examples
• Examples: 4 hour response time for 98% of service
requests;
• Mean Time Between Failure of 5,000 hours on
critical equipment;
• MTTR not to exceed 4 hours on critical equipment
etc.
– How many KPI’s? How do KPI’s integrate?
– Must be based on history and be achievable
– Must be within the service provider’s control
– Link to continuous improvement?
– Link to price / service points in the market place.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 32
 What should you outsource?
Services you should consider Suggested Service Levels
outsourcing
1

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 33
 3: Select
Outsourcing
Company

Which vendor to select?

• 5 Criteria:
– Experience
– Experience
– Experience
– Resources to do the job
– Price

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 34
 Selecting the Right Vendor
Minimum Price/Quality Budget
Quality 5 Function Cap
Price
2
Too high cost
Too high cost 3N Quality OK
Too low quality eg
ot
ia
Within Budget te Within Budget
Too low quality 4 Quality OK
Target Zone
1

Quality = (Experience
Vendor 1 + Resources)
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 35
 Negotiating Options
D. Eliminate Tasks A. Lower price

Price 5
2 B. Increase Budget
5a
3
2a
4a
4 E. Add more experience

1 C. Bring Tasks in-house

Quality = (Experience + Tasks)

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 36
 Negotiating - Conclusions
Price
5 Discard 1
2
3 Discard 2a
4 Evaluate 3, 4a, 5a
1 Price
Select 5a?
Quality
5a
3
2a
4a

Quality = (Experience +Tasks)

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 37
 4: Plan
Transition
And
Implement
Introducing the new contract
• Set up reporting process
• Familiarize with work place, stores, safety
• Transferring employees
• Training
• Testing work request – work order process
• Detailed planning of handover
• Agree on inspection procedure

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 38
 4: Plan
Transition
And

Contract Management
Implement

• Grace Period:
– Normal to establish a short “grace period” at the
start of a contract.
• To address potential difficulties of implementing service
levels, and problems with availability of information.
• During the grace period, service levels are measured but
no remedies are applied.
• This allows the vendor to develop a measurement and
reporting routine.
• Base-line measure is established at the end of the grace
period.
– Need to balance with the imperative of continued
production
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 39
5: Performance
Management

Contract Management
• Monitor and Report:
– Reporting is a primary contract management tool.
– Obligation to monitor and report on service levels
must lie with the service provider.
– Customer rights
• Change priorities with due notice
• Plan and schedule extra work (for extra pay)
• Request additional detail
• Right to audit work, equipment condition and charges

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 40
5: Performance
Management

Contract Management
• Contract Change Mechanism:
– Contract must make provisions to change:
• Target service levels
• Schedules
• Task content and frequency
• Inspection frequency

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 41
5: Performance
Management

Contract Management

• Dispute resolution
– Keep it simple, keep it out of the courts
– Dispute resolution mechanism should focus on
remedies for not achieving Service levels
– Can involve third-party arbitration.
– Increases need to quantifiable measures and
objective non-ambiguous terms and conditions, to
reduce interpretation issues.

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 42
5: Performance
Management

Contract Management
• Severity of Consequence:
– Understand consequences to the organization of the
service provider not meeting service levels.
– Generally use three levels / tiers of severity:
• Catastrophic
• Severe - causes business disruption
• Annoyance - linked to the business mission and
consequences.
– Financial remedies specified in the contract must be
tied to the severity of the consequence.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 43
5: Performance
Management

Contract Management
• Enforcement:
– Service Levels must have an enforcement mechanism,
in the event that service levels are not met.
– This should be a combination of management cure,
followed by financial remedies.
• Escalation:
– Looking to identify and prevent an ongoing trend in
poor service.
– When a service level breach occurs, the service
provider should present a plan to eliminate problem.
– This must be followed by an escalating financial
remedy, for successive incidents of poor service.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 44
5: Performance
Management

Contract Management
Penalties versus Incentives:
– Balance between penalizing for sub-standard
performance and making it not worthwhile the
vendor continuing
– Leave service provider with desire to continue and
improve service levels.
– Off-set penalties with credits for above standard
performance
– Make sure bonuses are available for high
performance
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 45
5: Performance
Management
Contract Management - Termination
Customer’s right to terminate:
• For catastrophic service level breaches
• where it is clear that the vendor is unable to cure the
problem.
– Vendor’s right to terminate
• for late payment
• changing the rules
• inadequate notice for work
– Customer must have Plan B
– Vendor must provide transition assistance at termination
– The termination clause should reflect balance and
fairness with obligations and responsibilities
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 46
5: Performance
Management

Service Levels – Examples

• Disruption to Operations
– Able to operate when required / scheduled = Availability.
– Emergency response time.
• Operational Measures
– Non-emergency response time.
– Incidents / complaints
– Continuous improvement e.g. percent reduction in costs,
downtime, response time, etc.
• Serviceability / Utility
– Usability for intended purpose.
• Asset Condition / Degradation
– Relative to “normal wear and tear”.

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 47
5: Performance
Management

Service Levels – Examples (2)

• Reporting
– Timeliness, completeness, accuracy.
• Financial Measurements / Accounting
– Labour costs, materials costs
– Timeliness, completeness, accuracy.
• Compliance
– Compliance to all relevant regulatory requirements.
– Compliance to organizational standard requirements
(e.g. HSE Health – Safety - Environment).

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 48
5: Performance
Management

Service Levels – Specific Examples

• General Maintenance Services
– Electrical, Instrumentation, Mechanical
• OEE (Overall Equipment Effectiveness) of Critical
Equipment
– Availability, Production Rate, Quality Rate
» Reliability (MTBF), Maintainability (MTTR)
• PM Schedule Compliance
• Maintenance Backlog by Trade
– Time of Work Order Cycle
• Quality of Equipment Information
– Details of work done (labour, materials) and findings
• HSE (Health, Safety Environmental) Measures
– Incidents
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 49
5: Performance
Management

Service Levels – Specific Examples (2)

• Specific Maintenance Services
– Predictive Maintenance Services
• Vibration analysis, oil analysis, thermography, etc.
– Missed failure detection
– Downtime attributed to missed failure detection
– HSE Measures
– Specialized Services
• Crane maintenance, overhead doors, HVAC, etc.
– Audit compliance to regulatory requirements
– HSE Measures

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 50
5: Performance
Management

Service Levels – Specific Examples (3)

• Engineering, Project Management,

Construction Services
– Project Performance / Compliance Measures
• Schedule, Budget
• Measures of Deliverables (Post Project)
– Performance of Deliverables Relative to Project Definition
» OEE, ROI Targets (e.g. Reduced Production Costs)
– Rework Required
– HSE Measures

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 51
5: Performance
Management

Service Levels – Specific Examples (4)

• Information Technology
– General IT Service
• Response Time for Issue Resolution
• System Availability
• Subjective Measures
– ASP (Application Service Provider)
• System Responsiveness / Speed
– Via Internet
• System Availability
• First Time Capability on Problem Resolution
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 52
 Some
Assumptions

Outsourcing Requirements
• Access to information (through CMMS?)
• Accuracy and speed of reporting
• Speed of decision-making
• Quality of planning cycle
• Equipment condition measurement
• Materials planning and delivery cycle
• Acceptance by current staff (maintenance
and operations)
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 53
Pricing

Pricing Options
• Cost-plus contract
• Management fee contract
• Unit price contract:
• Fixed price for term contract:
• Fixed price for term contract with
performance incentive
BUT
• Zero margin = marginal performance
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 54
Pricing

Pricing Options- Cost-plus contract:

- Time and materials, plus a mark-up.
– Highest risk to customer.
– Very reliant on intense management / oversight by
customer and intensive auditing in
implementation.
– Often done where information is lacking or lead
time is short.

– Effort avoided prior to contract, is much less than

effort required to manage situation well after
contract. Avoid where possible!
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 55
Pricing

Pricing Options - Management fee

contract:

– Service provider paid a management fee.

– Sub-Contract costs are outside the provider's
scope - i.e. flow-through to customer.
– May be a cap on the flow-through costs.
– Maybe combined with an offer to split savings on
O&M budget.
– Most risk stays with client
– Service providers may be selected on the basis of
their management fee – not their competence
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 56
Pricing

Pricing Options - Unit price contract

– Contract price based on a “work-unit” associated

with service.
– Linked to consumption or usage.
– Can be price within a certain volume “band”.
• Example - $ per unit between x and y volume.
– Provides scalability, capacity management and
flexibility.
– Customer typically has to guarantee minimum
volumes.
– Vendor competes on unit price.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 57
Pricing

Pricing Options
- Fixed price for term contract

– Sub-Contract costs are in the service provider's

scope of work.
– Pricing risk and cost management risk is mainly
transferred to service provider.
– Service providers selected on the basis of fixed price
for term plus perception of quality.
– Any savings made on cost of services through the
term stays with vendor.
– Requires extensive detail to be provided in the
Request for Proposal document.
– Difficult to implement in situations where information
is lacking.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 58
Pricing

Pricing Options - Fixed price

for term contract with incentives
– Similar to previous except that savings
achieved are shared between the vendor
and the customer
– Is most likely to be the “win-win” that we
are looking for
– Need to makes sure that quality is a key
component – no incentive for cutting
corners.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 59
Pricing

Pricing - Other Considerations

• Flow-through costs:
– Work to obtain some incentive to provider to
obtain “preferred customer” pricing for costs.
• Clearly define what is in the price and what is
not:
– There may be additional out of scope services
(priced in the contract) which can be brought into
scope.
– May have a mix of fixed fee and unit cost pricing.
• Whose materials are they? Who buys, what
price? www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 60
Pricing

Pricing - Other Considerations

• Avoid front-end loading of payments to the vendor:
– Payments should not get ahead of service provision.
– Avoid giving the vendor the ability to pull profits out of a
contract early.
– Creates an unstable situation in the long run i.e.
abandonment or sale of the contract when there is no profits
potential.

• Allow for the reducing price of technology and skills.

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 61
 Other
Contract Options

Capital versus Operating Requirements

– Where does maintenance end and capital

replacement begin?
– Are capital projects in scope?
– If not, how do you handle capital spending?
– What are service level implications of not making
capital expenditures?

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 62
 Other
Contract Options

Contract Term:
– Outsourcing contracts typically are long term (five
to ten years).
– Service providers require time to recoup
investments made in process improvements and
technology.
– BUT longer terms mean the contract must be
flexible.
– Change management, benchmarking to market
and continuous improvement clauses are
important.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 63
 Other
Contract Options

Contract Risk Transfer

– Risks that can be transferred to the vendor:
• Achievement of projected savings
• Labour issues, technology implementation, process re-engineering.
• Equipment / facility performance.
• Interest rate and financing risks.
• Environmental management, etc.
– Risks not for transfer
• Operations and maintenance strategy
• Job priorities
• Cost and budget management
• Production management
• Capital Spending
• KPI setting
– You pay for the risk - vendors will adjust pricing for
their risks.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 64
 Other
Contract Options

Asset Condition
– Asset degradation risk.
– Is the service provider expected to manage the
condition of the assets so that they are returned
“in same condition, except for normal wear and
tear”?:
– Do not want the service provider to find savings by
omitting preventive maintenance.
– Especially critical in fixed fee contracts
– Important where service providers have incentives
to find savings.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 65
 Other
Contract Options
Building a “Win-Win”
– Both parties must have more to gain by fulfilling the contract,
than by pulling apart.
– Select the correct scope going in to the contract.
– The service provider’s primary motivation is price and
margin.
– The customer’s is cost and reliability
– Continuous improvement incentives should ensure that
the vendor delivers in those areas that are improtant to
the customer.
– Contracts must allow for changes in scope and service
levels, and therefore price.
– Dispute resolution must be clear - an escalating
process, followed by arbitration.
– Termination must be fair www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 66
 Pricing
• Which pricing approach makes most
sense for you.

• Why?

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 67
 Thank you for your attention
• Any questions….

• >>> email me ---- ben@ omdec.com

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Ben Stevens, OMDEC – “Maintenance Outsourcing” 68