Trends in outsourcing (Part II)

Within maintenance and asset management outsourcing is here to stay, not only that but it is likely to become more widespread as companies look to flex their options to get greater and greater value out of asset management. Yet there are still a lot of horror stories from companies who have already been burned in outsourcing arrangements.

Why do companies outsource? The benefits of outsourcing of parts of the asset management function are varied and depend greatly on each company and their position at any point in time. However, they generally include:

• Reduction in the administrative workload of hiring, managing, and sustaining a skilled workforce. This also applies to the technicalities and "dead" capital that can be saved by not spending money on the holding and management of spare parts.

• Ease of access to industry expertise and a skill base beyond what the client company could sustain

• A degree of divestment of risk from the asset owners to the asset managers. In particular this can be the case where inventory management, whole of life asset management and long term replacement decisions need to be made.
  " A direct economic benefit to the company's bottom line. As well as the other benefits mentioned above, contractors are expected to provide a service that is more productive than the in-house service they are replacing.

So, if there are so many obvious and large scale benefits available, why is it that asset owner / asset manager relationships often turn sour? First, let's have a look at the different types of outsourced arrangements that can exist. These are as wide and varied as the types of industry where they can apply.

• Specialist services - Often applies to contract for the provision of a specific service such as vibration monitoring, tribology services, condition monitoring in general, pump maintenance, or at the higher end this could also mean turnaround management and execution.

• Service contracts - These are let on a group of assets or sometimes a geographical region, or a specific function within the company. Examples here could include the outsourcing of pump station maintenance within the water industry, the outsourcing of the maintenance and repair of elevators in a hotel chain, or the management of a fleet of vehicles on behalf of the asset owner.

• Whole-of-Life - These contracts are generally aimed at services provided by equipment vendors. Fleet equipment providers are a good example of this where a fleet of equipment are provided along with the maintenance and repair services. As these assets are generally short life assets, less than 10 years say, they often do encompass the whole of the assets life from provision to disposal.

• Long-term asset management - These contracts dominate the outsourced maintenance sector and often range from 15 to 15 year terms. In these instances there are a range of complex issues to deal with including the replacement schedule based on performance, the condition of assets on hand back, and the transfer of asset knowledge during and after the hand back date. All of these issues do exist to a lesser extent in other contract types, but within long term contracts they define the sector.

One of the reasons that I have encountered for why asset management contracts fail to deliver value is because often they are administered rather than managed. This is a dramatic difference and either turns the discipline of asset management into a legal minefield filled with claim and counter claim, or ends up with drifting performance and ballooning contract costs.

Over twenty-something countries and many industry sectors I have now had the great fortune of seeing many different contract types, arrangements, and reasons for outsourcing. Without a doubt there are pockets of excellence out there, what is needed is a better appreciation between industries and countries regarding what works and what doesn't work.

Regardless of the size, duration, or type of contract in place, success appears to rest on a range of similar principals throughout the globe.

1. A management process that is conducive to high performance and collaboration, not acrimonious debate and grudging compliance.
   
2. A free, open and simple exchange of data and knowledge. The amount of problems caused by systems not communicating to each other, a lack of definition over who owns the data and a tendency to shrink from knowledge sharing is a major cause of distrust and poor management. If you are not able to see the performance in empirical data, then decisions are taken based on personality, opinion and influence.
   
3. Agreed and unambiguous performance measures, produced in an agreed fashion, reviewed regularly, and acted upon in partnership. It is one thing to say an asset will be returned with 10 years remaining life; it is another thing altogether to prove that it is or is not. An agreed performance regime is the spine of any successful contractual relationship.
   
4. A seamless working environment at the shop floor level. If envy and resentment are allowed to flourish they will affect the overall performance of the working teams. This, of course, also impacts on the flow of information, the working relationship between two often vital parts of the workforce and can become an instigation issue for worker unrest and poor motivation.
   
5. Active engagement by the client, or asset owner, in determining the correct activities and means of executing these. Recent changes in the law of many western countries have re-emphasised the need for asset owners to be accountable for the performance of their physical assets, regardless of any contractual arrangements that are in place. This point is representative of a new stream of management that is creeping into contractual management in the maintenance sector.
   
6. The flexibility to be able to change the contractual arrangements in a way that is fair to both sides. This is one of the major sticking points, however if it is not dealt with the cost is borne by the physical asset base. Contractors are wary of changes to the contract because they believe, often justifiably, that it means they will be worse off. However, it has been my experience that it is often the need to pay out for loss of income due to a contractual change that restricts asset management advancing in some corporations. Both sides need to benefit, and both sides need to be prepared to reach compromises if changes to better the asset management practices are to be made.
   

Depending on the type of contract in place, and the time that it has been applied for, some or all of the principles above may be able to be applied. They are obviously very broad areas and are not easily explained in one short posting.

However, there is one initiative that can be put into place regardless of the maturity and type of contractual arrangement, that of an efficient and effective performance measurement program. Even if there are no financial incentive or penalty under the current arrangements, the establishment of an effective and easy to produce contractual scorecard will enable a dramatic improvement in asset performance to take place.

In the next trends in Outsourcing instalment we will review a contract scorecard along with case studies of how measurement programs have assisted companies to better manage their equipment reliability contracts.