Outsourcing maintenance: How it can improve the bottom line

In a global economy, there is no question that companies must continually improve to remain competitive. When a company is in financial danger-and even when it is not-internal analysts look for opportunities to minimize expenditures.

12/01/2000


In a global economy, there is no question that companies must continually improve to remain competitive. When a company is in financial danger-and even when it is not-internal analysts look for opportunities to minimize expenditures. There is one very important question to consider: Are they looking in all the right places?

Maintenance expenses typically represent 5-40% of the total cost to make a product. Hence, the cost of maintenance could be greater than the actual before-tax profit on each sale. Unfortunately, the decision to pull maintenance outside of the organization makes many people uncomfortable. The idea of outside contractors conjures up images of employee lay offs, loss of control, and large initial financial investments.

The point of this article is to outline reasons successful companies outsource, what to look for (and not look for) in a productive outsourcing relationship, advantages and disadvantages of outsourcing, and how to optimally manage maintenance to benefit the bottom line.

Reasons for outsourcing

In a recent poll of Siemens industrial customers in North America, over 60 of the 120 respondents cited "maximize uptime" as the number one driver to outsource maintenance. The underlying message hints that outsourcing produces higher reliability than in-house maintenance programs. Other reasons noted to outsource indicated in the poll included reduce operating costs (26%), cut personnel (10%), work with less capital (8%), and uncover new efficiencies (4%).

A 1998 study by The Outsourcing Institute revealed several additional reasons why companies outsource:

  • Improve company focus

      • Gain access to world-class capabilities, knowledge, and best practices from other organizations

          • Free internal resources for other purposes around the plant

              • Add (human) resources where they previously did not exist

                  • Control maintenance

                      • Share risks

                          • Accelerate reengineering benefits.

                            • The primary reason to maintain equipment is to prevent costly, unplanned shutdowns. So the question remains: "How does a company do that?" The company must evaluate whether or not maintenance is a true core part of its business; in other words, is maintenance a "core competency."

                              Deciding whether to outsource

                              The "business of maintenance" is all-encompassing and must be focused on providing a comprehensive program that includes:

                              • A strategy aligned to its customer's business objectives

                                  • Maintenance policies and plans to meet operational needs

                                      • A suitable organization with a skilled work force to carry out the maintenance strategy

                                          • Performance measurements to ensure compliance to the plan

                                              • An effective continuous improvement program.

                                                • Providing just part of these services does not qualify an organization to regard the "business of maintenance" as its core business.

                                                  Companies have always hired consultants, contractors, and temporary employees to carry out work for peak and specialist services. The concept of outsourcing, on the other hand, represents a long-term, results-orientated relationship with a specialized outside company for whole functions that traditionally were done inside.

                                                  What makes a relationship successful?

                                                  There are several critical success factors involved in every outsourcing relationship.

                                                  The long-term nature of an outsourcing relationship is key. By outsourcing, a company has actually made a conscious strategic decision that a set of activities or a function is not to be developed and maintained as an internal competency. Instead, it leverages the specialized ability of another organization and intends to do so for the foreseeable future.

                                                  Equally important is the fact that outsourcing relationships are results-orientated. Management's role becomes one of focusing on the "what" issues and not the "how" issues. Management relies on suppliers, who now become partners, to bring creative approaches and new technologies.

                                                  A company can benefit from the experience that comes from dealing with not just one company but many, often around the globe, in different industries, where the whole concept of maintenance as a core business transfers to a commitment to developing necessary skills.

                                                  Do not underestimate the importance of finding a business partner whose strategy is in line with the company's objectives. Discuss clear maintenance improvement strategies and a proactive approach to the maintenance process with that partner. Efficient people management, which takes into consideration good material management and open communication, is critical to the relationship.

                                                  Finally, having a properly structured contract, where performance is measured against key indicators that hold the outsourced company accountable for actions (or lack thereof), should be a driving force of the relationship. Instead of agreeing to a set cost, request that fees be paid as a percentage of cost savings. This approach motivates the outsourced company to reach its highest level of performance and maximizes its own return.

                                                  Outsourcing options

                                                  Generally, there are four outsourcing scenarios.

                                                  • The outsourced maintenance provider's management team oversees existing company employees who perform the work.

                                                      • The outsourced maintenance provider hires existing employees, and they become employees of the outsourcing company.

                                                          • A Greenfield plant opens and the outsourcing company is charged with starting fresh and builds up the maintenance staff.

                                                              • A "supplemental services" approach is used where the outsourced provider manages maintenance on a project-by-project basis.

                                                                • Each company has to find the most appropriate terms and conditions for its outsourcing relationship and evaluate critical success factors to determine what it is willing to do.

                                                                  Common myths of outsourcing

                                                                  Some companies are uncomfortable entering an outsourcing relationship. These three myths express some common concerns, along with information that probes deeper into the issues.

                                                                  Myth #1: Workforce resistance. To a large degree, maintenance personnel usually have little or no influence over the decisions that determine whether maintenance is regarded as a core business. These strategic decisions (or nondecisions) dictate where resources such as capital, training, and systems development are allocated and in so doing, identify the core competencies that the company has chosen to develop as its standards.

                                                                  If it is decided that maintenance should be outsourced, it could upset the workplace and send some of the best employees searching for new jobs. To avoid this situation, especially in today's tight job market, it is important to include maintenance personnel in outsourcing decisions.

                                                                  Regardless of the outsourcing scenario, communicate throughout the organization that the change will transform maintenance to its own "core business." Maintenance employees will have more ownership, more credibility, and more commitment. They will have the opportunity to become "maintenance experts," taking pride in their work and winning the respect of their peers.

                                                                  Myth #2: Management loses control. Sometimes, particularly at the upper-management level, company officials fear that "giving away" a slice of the business-even a noncore slice-forfeits control. By letting another company manage and even hire away their employees, management believes it is putting itself in a vulnerable position.

                                                                  Often not considered is that it never had control in the first place. Do the assigned maintenance personnel have the direction and skills to make their operation world-class? When cost pressures require change, does it take the form of reductions and arbitrary cuts to the spares budget, head count, or training? Are current maintenance personnel paid for their performance?

                                                                  The answer to these questions is to structure the contract to ensure that the company realizes greater control. The company actually gains control by utilizing key performance indicators to measure maintenance effectiveness and determining compensation.

                                                                  Myth #3: It's too expensive. There's no question that outsourcing maintenance in a way that reaps the largest long-term financial rewards requires some up-front investment. But studies show that within 2 yr, that investment pays off with savings of 5-20% on overall operational costs.

                                                                  When comparisons are made, people don't consider the complete cost of in-house maintenance, such as administration, safety, HR, supervision, and contract management. The maintenance provider manages all these functions and, in most cases, the work is done within the original maintenance budget.

                                                                  There are several questions to ask in order to determine if the financial investment is worthwhile. Is capital allocated to value-adding maintenance projects with a return greater than or equal to operational projects? Are the necessary support resources provided for developing programs or tools such as the CMMS, planning, and scheduling? Are these resources maintained, even if the cyclical pressures of the industry impose pressures? Is there a performance-based contract?

                                                                  As a last thought about maintenance rewards and accountability, there are usually no rewards for meeting performance expectations in an in-house organization. Consequently there is a reward-overtime-for rework or reactive maintenance. With an outsourced maintenance contract, people share the benefits when performance meets or exceeds the expectations.

                                                                  As industries face stiffer competition, re-evaluating costs, trimming budgets, and reconsidering the definition of necessary expenditures are crucial. For example, utilities in deregulated markets have to find ways to bring down their cost per kWh of electricity. Pulp and paper mills must find ways to price their product low enough to compete with inexpensive imports. In these times, more than ever, concentrating on true core competencies and outsourcing noncore aspects of the business builds leaner, more profitable companies.

                                                                  Bruce Caspersen is Performance Center Manager over maintenance for Siemens Westinghouse Technical Services (SWTS). SWTS is a full-service maintenance organization offering the industry's broadest range of engineering services, from the plant floor to enterprise business applications. Caspersen, who holds an electrical engineering degree from the University of Massachusetts (Amherst), has been with Siemens for 18 yr.

                                                                  For additional information on this subject, call 800-241-4453 or e-mail maintenance@sea.siemens.com.

                                                                  Previously published Management Side of Engineering articles are available on Plant Engineering Online: www.plantengineering.com.





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