B3-106 OUTSOURCING OF MAINTENANCE A REVIEW OF WORLD EXPERIENCE. On behalf of SC B3, JWG B3/C2-14

Transcription

1 21, rue d'artois, F Paris B3-106 Session 2004 CIGRÉ OUTSOURCING OF MAINTENANCE A REVIEW OF WORLD EXPERIENCE On behalf of SC B3, JWG B3/C2-14 Authors: Alan Wilson (US), Klaus Doernemann (GE), Eugenio Olid G. (ES), Jorge Lica (PT), Philippe Renaud (FR), Iain Kinnis (UK), Joe Corbett (IE) 1 Introduction The post Keynsian liberalization of global markets in the 1980s and 90s led not only to the greater privatization of whole electric power companies, it led to re-focusing, or at least identification what was the core business for a utility. At one level this produced the separation of generation and transmission into independent companies. This was to allow the customers for transmission to drive efficiency and cost reduction from open access to multiple generator companies through an independent grid system. At another level efficiencies have been sought by exposing internal processes to pressures from a competitive market. This has altered, or at least started to alter, the nature of a utility from being a service provider into a network manager or an asset manager or asset owner. Such a company would then concentrate on seeking to maximize its financial return on the value invested in grid assets. In process terms this has led to varying amounts of outsourcing of those activities each company decides to be non-core business. It is still far from clear how extensive the whole process, and particularly outsourcing, has become. To determine some measure a questionnaire was created in Spring 2002 and circulated within CIGRE study committees B3 and C2. The questionnaire sought to determine what type of maintenance tasks were being outsourced, how extensive was outsourcing, how competitive was the market, and how successful the process has been over past years. 2 Maintenance Strategies In 1997 a joint working group of CIGRE Study Committees 23 and 39 conducted a questionnaire to survey maintenance trends and policies. The results were published in September 2000 [1]. The analysis reflected the ongoing dramatic changes occurring in the structure of the electricity supply industry around the World. One key development identified has been the change in focus less on technology and more on economics and the environment for their maintenance decisions. Sustained business profitability combined with availability and reliability, revenue and customer satisfaction are now the key issues. Within this context, annual operation and maintenance budgets have a universally high proportion of total operating costs, and often represent 2% of the replacement asset value. The factors identified in the survey that affect the budget provisions are, in order of priority: performance, available budget, regulatory influence, increasing demand, and de-manning. Within most budgets, some three-quarters is the labor charge. Consequently, the greatest opportunity to reduce costs is either to do less maintenance or to outsource activities to a lower cost organization. Typically, the level of outsourcing throughout the world reported in the survey was then to be between 30 and 35% of the total O&M expense. The exception being North and South America, where the survey reported outsourcing to be only 5%. 1

2 A subsequent CIGRE brochure examined outsourcing within the context of business models [2]. Four main models were identified. At one extreme is the service provider - the traditional utility that does all activities with minimal outsourcing. At the next stage is the network manager who will attempt to outsource housekeeping services and non-technical maintenance. The asset manager will outsource these and add to the list maintenance activity, diagnostic testing, fault response, condition inspection, and asset status assessment. The fourth category is the asset owner will further include maintenance strategy, policy and planning, project management, and resource scheduling. This would leave the utility with only system planning and control, together with a contract management for all other functions. It is the general view, expressed in these CIGRE reports that outsourcing can reduce costs but creates risk. Companies will select the extent of outsourcing on the basis of their assessment of the acceptable, or manageable, level of risk. The brochure described one method of managing the risk to be by altering the supplier relationship, changing into a collaborative alliance in place of the more normal, adversarial contract type. The traditional kind of activities being outsourced is the lower skilled non-technical site care areas such as tree pruning, tower painting, grass cutting, etc. To an extent these may be considered a commodity and ideally suited to outsourcing. But there is also a major change towards outsourcing more specialist activities. Utilities are increasingly focusing their activities on core business, and that will mean that for some small and mid-size utilities they will no longer be able to justify their maintaining a complete technical infrastructure. Some of this will be outsourced to niche companies, and it may be seen as a growth area for such companies. Equally, suppliers of apparatus will be moving into this area providing total power system solutions, taking the responsibility for construction and operation of the substation installation. The aim of the 2002 survey was to examine the extent of change since 1997, the relative proportion of work in the higher skilled areas now being outsourced, and to review the perceived effectiveness in outsourcing. 3 Questionnaire for 2002 Specific sectors included: Extent of outsourcing as a percentage of the operation and maintenance budget. What activities were being outsourced, expressed in terms of their complexity. Experience outsourcing these activities Contract length, the opportunity to use multiple providers and derive cost -competitive tenders, contract termination. The use of incentives to improve efficiency, together with the means to quantify performance. The recipients group were selected from CIGRE as well as from other organizations like IEEE. Besides utilities large industries were covered. 3.1 Extent of outsourcing With regard to the extent of outsourcing related to the Operations and Maintenance budget the answers are shown in table 1. table 1: percentage O&M budget for outsourcing Outsource percentage O&M budget The US/Canada respondents included two industrials, one with <10% and the other 25-50% outsourcing. All other 26 respondents were utilities. Respondent numbers by location Tot US/ Latin Eur Far al Can Ameri ope East ca <10% % % % 1 1 >75% Austra lia/ NZ 2

3 <10% category This group s outsourcing activities were mainly in the area of non- technical site care. This included vegetation control and tower painting, activities outsourced by almost all: other activities for half the group included civil works and security. For two thirds of the group the outsourcing experience with these areas extended between 10 and 30 years. Another common area was specialist testing- oils and helicopter surveys. Rarely, some included recent experience outsourcing life assessment (3), design and install (3), emergency response, repairs and fault investigation. A steel company was the one that outsourced all these aspects. Generally all were able to access multiple suppliers for competitive tendering, and gave contracts that were either by project or for annual renewal or re-tender % category In addition to outsourcing non-technical site care topics for many years, this group included recent experience in other areas. This included construction project and installation (all), emergency response (3), together with oil tests, helicopter surveys, noise and Infra Red surveys, and spare parts. Two European companies claimed years experience with some of these topics as well as with the non-technical site care. There was not always more than one supplier. Where this was the case, contracts were longer than 1 year and there were incentive plans to encourage cost or performance improvement % category The work areas were very similar to the previous category. Those in this group mainly had only one supplier, and all monitored the contracts with payments linked to performance, with contract lengths up to 5 years, even for non-technical site care. One of the group included a wide range of maintenance activity outsourced- breaker/ltc overhauls, corrective maintenance, emergency response and repairs % category The one company in this group outsourced all activities except asset management and network operation- ie non-technical and technical site care, construction, initial works, testing and condition assessment, maintenance, spares and emergency response, but excluding holding of complete spare units. Their experience of outsourcing was for 4 years and they always had multiple tenders. They monitored performance with fault and incident trends. >75% category Three companies claimed 10, 15 and 30 years experience of outsourcing the category of work listed above. One company had multiple suppliers and did not use an incentive based payment, instead had the incentive of an extension to the contract. For 15 years this company had used a 3-year contract with a 3year extension. They were about to increase the duration to a 5+5 year contract. The other two had mixtures of single and multiple service providers, a mixture of 1,3 and 5- year contracts, all with incentive payments. 3.1 Performance in Outsourcing The respondents had been asked a series of questions, based on a statement for agreement or not. This review shows that in general the respondents were positive for the future of outsourcing. There were some exceptions. Two of those with extensive experience, one in the >75 and one in the 25-50% categories, consistently voted against the majority, and showed a negative view of their outsourcing experience. Answers were initially analyzed on the basis of percentage of maintenance budget. Generally there was no statistical difference in response over the range and the table is the composite. The 3

4 exceptions were with statements D, E and F where the responses from the <10% group was evenly divided. Their proportion of the total is included in parentheses. As a background the responses shown can be amplified as follows- table 2: performance in outsourcing Statement Yes No A) The number of service 17 7 providers can grow to create a sustained competitive environment B) It is too difficult to create and grow outsourcing service providers if the utility seeks to retain a near monopoly in skilled resources C) The contractor can retain the 20 5 knowledge and grow a skilled workforce for the next generation D) Service providers can achieve a better level of performance than inhouse staff 17 (6) 9 (6) E) Contractor performance improves in a measurable way over time F) The cost of service provision decreases with outsourcing G) Performance can be adequately measured, using Key performance indicators for example 18 (6) Statement A- the number of service providers/contracting 6 (5) 16 9 (7) (5) 20 5 companies can grow to create a sustained competitive market. In general respondents thought that deregulating the market would create more service suppliers. Some noted caution; for example, the evidence from New Zealand, where outsourcing is extensive, is that because an increasing number of network companies now outsource their maintenance and project works there is an increasing number of capable maintenance contractors to choose from. This, however, may only be short-term phenomena as network companies spin off their maintenance and project work to external contractors and these external contractors, over time, rationalize and consolidate. Further many of these suppliers are sufficiently large to have access to international expertise. Statement B- that it is too difficult to create and grow outsourced service providers in a work area where all skills and resource reside in utilities. In general in most countries the availability of external painters, security companies and forestry experts will be greater outside the utility. Consequently, this topic relates to outsourcing of the technical activities. The greatest concern is where the technology is dated and even the original equipment manufacturer no longer can support the technology. This applies with some protection systems and circuit breaker designs. Problems can occur even where the technology is current. If there has been a national generator or transmission company that has previously undertaken all of one category of work, this will have not have created an environment where independent companies will start up, and the manufacturers also will have very limited post manufacture exposure. No external commercial company will invest in employing skilled staff without there being evidence of the utility/client providing a level playing field for seeking competitive tenders or otherwise fairly allocating work. This latter aspect is a key role for the developing outsourcing environments. Some have had to employ strategies to encourage the development of externally based skills. A key element of the strategy could be to restructure internally to separate out the utilities internal skill resource, and then privatize it. Statement C- outsourcing companies can retain knowledge and grow a skilled workforce for the next generation. A concern is that an outsourcing company may exist initially with the correct level of knowledge- where it has been resourced using stall transferred from the utility- but being driven to reducing costs, does not invest in training the next generation of engineers. The response shown in the above table is very positive that this will not occur. For technical activities some companies use long contracts, or rolling one-year contracts, to ensure this occurs. Increasingly, however, the establishment of longer-term contracts for example 10y (i.e. 5y+5y) is seen as the critical element in ensuring this outcome. Other key steps which may be taken by a utility include engagement with industry training forums and providers, to ensure that appropriate standards are set, that training 4

5 providers are available to meet training needs, and that there are appropriate incentives and structures for on-going recruitment and training of young people entering the industry. A range of measures will be needed to ensure sustainability over the longer term. 3.3 Contractual Issues The respondents were asked a series of questions relating to the contract. How do you measure performance? This was intended to determine the extent qualitative or quantitive measures were being used. Several responded that they used their experience in a qualitative way, perhaps using inspectors. Only four replied that they used trends in fault or incident statistics of which one considered the evolution of a robust and broadly based KPI regime to be essential. What incentives are provided in the contracting arrangements to ensure continuing improvement. Several reported they used no incentives. Most used incentives or penalties. One incentive used by several was the use of longer term contracts, or contracts that were for a rolling one year period, or promise of a more extensive successor contract. Three reported the use of bonus payments. One reported benchmarking between similar work done for them by several contractors as a basis for identifying performance standards. Several used penalties. One used a warranty period. One had a threat of short- term contract termination. One reported that they anticipated at the next tender round (Contract negotiation) that KPI s would highlight an expectation that contractors in a longterm relationship would delivery significant continuing improvements initiatives. Given the long lead time to build new capability, at least some of the KPI s would be input related rather than output focused, to provide some confidence of long term sustainability. What level of risk is maintained by the utility. The utilities themselves operate in a deregulated environment, exposed to significant cost penalties in some contracts if they fail to meet their supply targets to their connected clients. This failure could be related to poor performance from the contractor. The question related to the extent any of this risk was transferred to the contractor. This is clearly a more likely situation for technical work where the supplier would more likely to be too small to meet this risk. It is likely that most utilities and the respondent have a policy. Most of those respondents that replied to this question indicated that they retained all risk, and this is likely to be the general case. Only two indicated that they looked to the supplier to have insurance and take the risk. One utility using long-term collaborative relationships with their contractors considered there are frequently serious downsides in attempting to transfer very large risks from the utility to the outsourced service provider. At present their maximum liability of the contractors are capped at a relatively low level. This risk sharing approach is consistent with the long-term relationship that is sought between the Principal and the out-sourced Service Provider. Is an alliance with a single provider better than multiple providers? If multiple providers are used are they split on function or geographic area? The outsourcing brochure developed the concept of a collaborative rather than the historical adversarial relationship/ contract [2]. This question attempted to address the extent contracts were price driven. Some national legislation requires contracts to be awarded to the lowest bidder. In other cases the size of territory, and how sparse the networks were, determines the opportunities for multiple providers to be available. Several respondents indicated territorial size as being the key factor. Where multiple providers did exist many used the lowest cost contractor. One respondent disagreed that an alliance was more expensive. Another indicated an alliance style of contract and relationship provides a reduced contract management. Others indicated the opportunities for improvement of quality, retention of knowledge etc. However, one operating in a strategic alliance 5

6 with their "sole" service provider found there to be very little incentive for continuous improvement, labor rates had escalated and productivity decreased. One reported that they settled on establishing longer-term 10y (i.e. 5y + 5y) alliance type contracts with four major companies for all maintenance work. Employing multiple providers (i.e. four companies) ensures that a competitive environment is maintained not withstanding the move to longer-term contracts. Using multiple providers gives flexibility to the asset owner to reallocate work to another client knowledgeable company when the performance of any of the four contractors declines below acceptable levels, thus minimising the risk to the utility of contractor failure/poor performance. Within this strategy they had adopted a policy of not awarding more than 50% of its Lines or Sub- Station maintenance work to any one of the four contractors. Within this they haves split their Line Maintenance work into 9 geographical areas and its Sub-Station maintenance work into 13 geographical areas. These 22 areas (contracts) have been awarded to the four maintenance contractors initially on the basis of competitive tenders. The rationale for splitting the contracts by both geographical and function between the four contractors is as follows: allocating all maintenance work into 22 geographical packages means that on average a work package represents only about 5% of the total maintenance work. Thus, if a contractor fails to perform in one area then only about 5% of the system is affected. Thus, the risk to the utility of a contractor s nonperformance is reduced. It has been determined that the degree of commonality of skill sets between Lines and Sub Stations workers is fairly low and, thus, combining Line and Sub-Station Maintenance does not provide any major benefit to the contractors in terms of economies of scale and hence offers no major benefit to the utility. What strategies are employed by utility asset management teams to transfer core skills to contractors and retain sufficient core skills themselves to manage contracts? The aim here was to see how utilities manage skill transfer. They could use in-house resources to train contractors; the contractors could then offer these services and maintain/grow proficiency. The risk is that the contractors do not remain available to do this work, and the pre-existing skills in the utility have been lost over time. At least one expected the service provider to have the skill before engagement if they wished to compete for the business. Several recognized the issue and had funded productivity improvements within the service provider s organizations, by contracting for multi-year programs to support older technologies. Others had paid for the developments in new cost saving technologies, such as the development of hand held devices to improve data collection and efficiencies, for example. Clearly this is a commitment by the utility and more suited to an alliance rather than contracts changing annually on the basis on lowest cost considerations. One believed that the contracts and the size of the provider should be sufficiently large to ensure adequate funding is available from the contracted work for the contractor to train and develop key staff. Another reported a small team within their company to retain the skills. How is the transition between successive contractors managed? What strategies are in place to ensure service performance of an outgoing contractor? Several thought an appropriately worded contract in the first place, together with more rigorous inspections could ensure there was no fall in standards. A few used the implication of awarding further contracts. A small-scale service provider losing a contract would have a significant effect on that company. The need is for suppliers to be large enough and with a sufficient number of different contracts and customers. This is not the case everywhere. For the respondent with multiple contracts shared between four suppliers successive tender rounds, being the company has seen the market share of the maintenance work awarded to each of the four contractors vary as a result of the tender process. A contractor who experiences a decline in market share, arising from the tender round, is unlikely to allow his disappointment to reflect in his service levels as it could result in further loss of both maintenance and project business in other functional and geographic areas. 6

7 Are the providers other network owners or specialist providers, public or private? Most respondents replied that they had access to a good range of private and public providers, specialists in the work area. At least two reported their sole use of a company within the same holding company (this included one of those reporting >75% outsourcing.) 4. Conclusions and further outlook This survey does not indicate any great increase in outsourcing levels since the 1997 survey. The proportion of the O&M budget spent by utilities in North America continues to remain lower than elsewhere and restricted in the main to non-technical site work. All the responding companies outsourced this category of activity and had done so for many years. The survey does show, however, that more companies have begun to outsource technical work. Of the companies that took part in the survey the experience in New Zealand appears to be the most extensive, and they have well-developed processes. Whilst many companies use lowest cost suppliers, several are using longer-term alliance or partnering relationship contracts, particularly where there is only one service provider. Generally the experience of outsourcing is positive, with companies reporting an adequate number of service providers. There were two notable exceptions, where experienced companies voted negatively on most aspects. Whilst many of the companies do have many years of outsourcing experience, several practical issues remain. One is the development of strategies to assign and manage risk. Another remaining issue is the identification of effective tools to measure performance, which in turn would lead to more effective management. The JWG B3/C2-14 is now in the preparing stage of an ultimate outsourcing report, finishing the work as published in [2] and later surveys like described in this paper. The final brochure will cover a practical guide for the outsourcing of utility services and contain: A review of world experience Pre-contract activities Contract structures Management of performance and continual improvement The guide/brochure is planned to be published in References [1] CIGRE JWG 23/39 brochure N 152 "International Survey of Maintenance Policies and Trends ", published February 2000 [2] CIGRE JWG 23/39 brochure N 201 Maintenance Outsourcing Guidelines, published in