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1 www.ipamc.org Ben Stevens, OMDEC – “Maintenance Outsourcing” Maintenance Outsourcing Ben Stevens ben@ omdec.com www.omdec.com Aryana Group - IPAMC - 2006

Maintenance Outsourcing

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Page 1: Maintenance Outsourcing

1www.ipamc.org

Ben Stevens, OMDEC – “Maintenance Outsourcing”

Maintenance Outsourcing

Ben Stevensben@ omdec.comwww.omdec.com

Aryana Group - IPAMC - 2006

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

Agenda• Why Outsource?• The Steps in Outsourcing • What to Outsource• The Deal• Performance management• Service Levels• Pricing

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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”

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

Why?

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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

Why?

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• 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

Why?

Why Outsource? Business Performance

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• 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”

Why?

Why Outsource? Business Performance

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• 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

Why?

Why Outsource? Business Performance

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

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

Why?

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Live Example - 1

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

The contract for mechanical maintenance services was signed about 20 years ago, but is regularly reviewed.

Why?

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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

Why?

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5 strongest reasons to NOT outsource for your organization

5 strongest reasons to outsource for your organizationWorkshop

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

The Steps in Outsourcing1: AnalyseNeeds and

Service availability

2: Define “The Deal”

3: Select OutsourcingCompany

4: Plan Transition

And Implement

5: PerformanceMonitoringand contractoptimisation

Feedback

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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

1: AnalyseNeeds and

Service availability

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What to Outsource?• 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

1: AnalyseNeeds and

Service availability

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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

1: AnalyseNeeds and

Service availability

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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.

1: AnalyseNeeds and

Service availability

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What to Outsource? Other Factors

• Potential Issues / Risks– Organizational– Union Relations– Legal / Regulatory– Risk Management– Public Policy / Public Relations Perspective

1: AnalyseNeeds and

Service availability

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Activity Matrix - who does what?

Enter Work and Materials data

Enter Work and Materials data

Review WO’s before closing for completeness

Close Work Orders

Identify needed work

Instrumentation

Pick and collect materials; return used and unused to Stores

Complete WO’sfor all mech-anical work for Lines 1 and 2

Identify needed work

Mechanical Maintenance

Pick and collect materials; return used and unused to Stores

Complete WO’sfor all electrical work for Line 1 and Line 2

Identify needed work

Electrical Maintenance

Forecast materials use from planned WO’s

Plan new WO’s; Review and improve repeat WO’s;Schedule work

Planners

MaterialsExecute Work Orders

Plan work orders

Expand

Expand

1: AnalyseNeeds and

Service availability

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Electrical Maintenance Activities

Line 1 –230Line 2 –115

Line 1 – 45Line 2 – 23

Line 1 – 17Line 2 – 48

Hours per month

Generic (after plan completed)

Elect 1 & 2

Install new circuits

Line 1 – y,000 RsLine 2 – x,000 Rs

UniqueElect 1Remedy Faults

Line 1 – y,000 RsLine 2 – x,000 Rs

UniqueElect 1Diagnose faults

Line 1 – y,000 RsLine 2 – x,000 Rs

GenericElect 2Swap boards as per work order

Cost – labour + Materials

Unique or Generic?

Who does it?

Function

1: AnalyseNeeds and

Service availability

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This should be your starting point– CMMS work order data by type of work done

Total

Line 3

Line 2

27,9907,7409,700

51,05096,480

300nilNilNil

300

Nilnilnil

45,00045,000

12,4404,5004,5002,550

23,990

15,2503,2405,2003,500

27,190

Line 1- Swap Boards- Diagnose- Remedy- OtherTotal

CommentsTotal $Tools $

Contract $

Materials $

Labour $

Electrical Activity Type

1: AnalyseNeeds and

Service availability

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Defining Activities• 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.

1: AnalyseNeeds and

Service availability

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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.

1: AnalyseNeeds and

Service availability

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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.

2: Define “The Deal”

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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.

2: Define “The Deal”

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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

2: Define “The Deal”

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Service Contract Components• Develop a “win-win relationship” between customer

and service provider.

• All service contracts need three fundamentalcomponents:– Scope– Service Levels– Price

• All inter-linked– Change in one, will cause a change in the others.

2: Define “The Deal”

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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

2: Define “The Deal”

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

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

2: Define “The Deal”

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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.

2: Define “The Deal”

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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

2: Define “The Deal”

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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.

2: Define “The Deal”

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

What should you outsource?Suggested Service LevelsServices you should consider

outsourcing

5

4

3

2

1

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

Which vendor to select?• 5 Criteria:

– Experience– Experience– Experience– Resources to do the job– Price

3: Select OutsourcingCompany

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Selecting the Right Vendor

Price

Quality = (Experience + Resources)

Budget Cap

Minimum Quality

1

4

3

25

1Vendor

Too high costToo low quality

Within BudgetToo low quality

Within BudgetQuality OKTarget Zone

Too high costQuality OK

Price/QualityFunction

Negotiate

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Negotiating Options

Price

Quality = (Experience + Tasks)

1

4

3

25

5a

A. Lower price

B. Increase Budget

C. Bring Tasks in-house

2a

D. Eliminate Tasks

4aE. Add more experience

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Negotiating - Conclusions

Price

Quality = (Experience +Tasks)

1

4a

5a32a

Price

Quality

14

32 5 Discard 1

Discard 2aEvaluate 3, 4a, 5aSelect 5a?

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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

4: Plan Transition

And Implement

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

Contract Management• 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

4: Plan Transition

And Implement

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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

5: PerformanceManagement

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Contract Management

• Contract Change Mechanism:– Contract must make provisions to change:

• Target service levels • Schedules• Task content and frequency• Inspection frequency

5: PerformanceManagement

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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.

5: PerformanceManagement

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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.

5: PerformanceManagement

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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.

5: PerformanceManagement

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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

5: PerformanceManagement

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Contract Management - TerminationCustomer’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

5: PerformanceManagement

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

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”.

5: PerformanceManagement

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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).

5: PerformanceManagement

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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

5: PerformanceManagement

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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

5: PerformanceManagement

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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

5: PerformanceManagement

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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

5: PerformanceManagement

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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)

SomeAssumptions

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Pricing Options• Cost-plus contract• Management fee contract• Unit price contract:• Fixed price for term contract:• Fixed price for term contract with

performance incentiveBUT

• Zero margin = marginal performance

Pricing

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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!

Pricing

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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

Pricing

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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.

Pricing

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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.

Pricing

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

– 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.

Pricing

Pricing Options - Fixed price for term contract with incentives

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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?

Pricing

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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.

Pricing

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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?

OtherContract Options

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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.

OtherContract Options

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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.

OtherContract Options

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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.

OtherContract Options

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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

OtherContract Options

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

Pricing• Which pricing approach makes most

sense for you.

• Why?

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Ben Stevens, OMDEC – “Maintenance Outsourcing”

Thank you for your attention• Any questions….

• >>> email me ---- ben@ omdec.com