CONTRACTOR MANAGEMENT BEST PRACTICES: USING DATA FOR IMPROVED DECISION MAKING D.Yemenu, K.McCartin ISN Software Australia Pty Ltd. PO Box 1215 Australia Square, NSW 1215 ISNAustralia@isn.com Abstract Global industry trends indicate increased outsourcing of non-core business activities (i.e. construction, maintenance, engineering, etc.) to third party contractors. Data from several industries show that contractors face 1.5 to 3 times higher incident rates than employees of the outsourcing company. Contractor Management Best Practices: Using Data for Improved Decision Making discusses leading edge approaches for managing contractor risk, currently implemented by organisations in the oil and gas, pharmaceutical, mining and manufacturing industries. Utilising real world experience over the past ten years and a database of over 32,000 contracting companies and over 200 owner/operator companies, the paper outlines insightful best practices and trends associated with contractor health and safety management practices. Applying statistical analysis methods, including correlation analysis and linear regression models to analyse an extensive data from contractors, actionable leading indicators and trends can be obtained to help identify specific factors that tend to drive contractor safety performance. Such data centric information helps to make objective decisions when it comes to hiring and managing contractors. The paper also examines contractor management best practices and decision making tools that are based on a comprehensive health and safety management system approach to contractor risk management. The following key areas will also be discussed in the paper: 1. The four key elements of an effective contractor management system 2. Gathering, reviewing and verifying contractor information as part of the due-diligence process 3. Analysing leading and lagging performance indicators 4. Driving safety through feedback, benchmarking, and continual improvement. Introduction Outsourcing is defined as a process by which a corporation takes a process or entire business unit and hires a third party to perform the work. Outsourcing of work should be done after careful consideration of the costs, risks and benefits, as well as the impact to quality of work for the corporation, customers, and associated stakeholders.
The benefits to outsourcing can be measured in both qualitative and quantitative terms. Outsourcing business functions or entire departments frees up overhead costs, capital costs, and human costs which can be reallocated or help an over-extended budget. Contracting work can free up employees to focus on their core areas of competency. Chart 1 Outsourcing and Contractor Hours Increasing Data from the International Association of Oil and Gas Producers shows that the number of contractor hours per every company hours has increased nearly every year since 1988. It is also a well known observation that contractor companies working in industries exposed to high hazard activities experience a greater rate of recordable injuries and experience higher fatal accident rates than employees of the owner/operator company itself. Costs, like the benefits, are both qualitative and quantitative. Money must be spent up front to identify the business functions that can be outsourced, locate and manage appropriate service providers, and transition the business functions. Qualitatively, outsourcing can result in the loss of direct control if onsite supervision is not performed, and potentially increases associated risk exposure. With the continued outsourcing of activities, companies often struggle to standardise their contractor management processes. Requirements and regulations from regulatory bodies and other governing bodies are constantly changing. Companies need to have full visibility into how hired contractors have performed in the past and are performing at present. This is a challenging undertaking if not managed effectively. Industry Observations and Challenges When an owner/operator chooses to contract out a particular service activity, there are multiple internal stakeholders involved in the process. The operations or process group hiring the contractor want the project or process completed on-time and under-budget, and must identify
companies to help meet these goals. Risk management must ensure that insurance documentation and due diligence processes are in order to limit liability on the hiring company and ensure adequate risk mitigation vehicles are in place. The group charged with overseeing health, safety, and environmental compliance must also seek to minimise or eliminate regulatory noncompliance and business interruptions in the form of incidents, injuries, environmental spills or releases. The procurement team has a vested interest in all of the associated departments, and is often charged with overseeing the contractor procurement process. Hiring corporations may identify a contactor manager or company liaison to work directly with the contractor once on site. However before the contractor company is selected, each stakeholder works to ensure their specific needs are met before awarding work to one company. The needs of these stakeholders do not end with pre-qualification and selection of the contractor. They must be continually managed throughout the business relationship. Associated with these stakeholder needs are the administrative processes that must be created to manage them. Without a coordinated system, multiple, department based paper document processes create duplicative and inconsistent administrative work for both the contractor and the hiring corporation. Further complicating the contractor outsourcing process is the lack of standardisation across companies, regions, and industries. Rarely do hiring corporations share prequalification metrics and processes with others for fear of releasing a competitive advantage. Finally, achieving continual improvement and managing contractors beyond a level of minimal compliance is a task that demands strategic vision. Owner/operators outsourcing work on a large scale typically set expectations for their organisation to exceed minimum regulatory guidelines. These expectations for excellence must be communicated to contractor companies in an evenhanded, yet simple and transparent manner. The OHSAS 18001 standard also mentions contractor safety, requiring the corporation to ensure that the organisation s safety and health requirements are applied to contractors and even states that this component is implicit in OHSAS. Contractor Management Key Elements In order to effectively meet the demands of increased contractor utilisation, multiple stakeholders, and comply with applicable standards, management systems principles should be applied. The Plan, Do, Check, Act process behind a management system approach provides an overarching framework which helps drive continual feedback and improvement process for managing contractors. Four key elements play a pivotal role in establishing and sustaining an effective contractor management system. Figure 1 below provides a visual representation of these four key contractor management elements that world class owner/operators imbed in their contractor management processes. Figure 1 Contractor Management System Elements
Establishing an effective communication strategy is a crucial step in the contractor management process. Clear metrics for contractor performance must be set that meet the needs of all internal key stakeholders of the hiring organisation. More important than the actual metrics, however, is communication of these expectations and metrics. These expectations typically include communication of the owner/operator s corporate values, prequalification guidelines, evaluation thresholds, scoring and rating, as well as feedback on performance. Methods to communicate these elements must reflect the owner/operator s industry and contractor base. Written communication, email and email groups, online bulletin boards, telephone contact, web-based tools, and face to face meetings are all options to communicate with contractors. The tool to select depends primarily on the size and type of the contractors managed and the purpose for the communication; yet in most cases a combined approach should be taken. Prequalification and selection is typically an early step process in the contractor life-cycle management process. This step hinges on collecting key performance measurement information. A comprehensive approach to data collection includes collecting self-reported information from the contractor companies, and verifying that the information is accurate and applicable to the scope of work at hand. Upon collecting data from the contracting companies, selection must be made according to the set criteria; bringing fairness and objectivity to the process. Contractor management must not be thought of as a onetime prequalification and selection process alone, and should incorporate both conformance and continual performance monitoring steps. Continually collecting and evaluating relevant contractor safety performance is imperative. The major key performance indicators (KPIs) used by owner/operators to continually evaluate the performance of contractors include health and safety KPIs (TRIR/TRF and DART) as well as workers compensation indicators (Workers Compensation Rate). These items are typically based on past events, and for this reason are known as lagging indicators. In general, owner/operators should assess a variety of performance measures versus relying on just one or two lagging indicators to make contractor procurement decisions.
Central to contractor management is the measurement and evaluation of leading indicators to safety and business continuity excellence. One potential resource which can be used as a framework for data collection and assessment is the OHSAS 18001 management system standard. This framework provides a comprehensive approach to assess how a contractor plans, executes and monitors key activities surrounding their work activities from a health and safety standpoint. Contractors should also be able to provide evidence that they have a solid planning component to their own internal HSE system. This may be evidenced through a well written and communicated health, safety and environmental program and policy, well documented recordkeeping and training records and the like. Data collected on contractor performance should be reviewed and verified when possible. The motto Trust but Verify is key, as conformance and regulatory compliance should not be simply assumed. Chart 2 below looks at 2009 OSHA forms from 12,419 contractors in the petrochemical, manufacturing, and biopharmaceutical industries. These documents were reviewed and compared to information provided by the same contractors via a pre-qualification questionnaire. Results show over 22% of the contractors show some form of discrepancy in the form of completeness or inconsistency of information between the questionnaire and the verified information on the OSHA documents. Chart 2 Contractor OSHA Log Review Results Continual Improvement Using management systems and applying lagging and leading indicators should be coupled again with communication back to the contracting companies. The concept what get s measured get s done is crucial in this context. By communicating goals and metrics for qualification and asking for continual updates, contractor companies are better informed on their performance and what they need to further improve upon to meet or exceed their owner/operators expectations. Providing a simple yet effective feedback is often a challenge for owner/operators, among a myriad of KPIs and performance measures being collected and tracked. The concept of a simple scorecard along with clear and specific deficiencies goes a long way to enhancing feedback to contractors.
Another method to identify opportunities is to utilise statistical analysis models. A linear regression model is a mathematical model between a large number of X s and a single Y variable. This method can be used to identify both actions and observations about contractors with are most closely associated with their Total Recordable Incident Rate (TRIR). A logistic regression model is a mathematical model which seeks to predict the likelihood of an event or incident. For instance, data collected on contractor processes and safety performances can be used to analyse the likelihood of the contractor experiencing a recordable injury. In one case study, data from 1,486 contractor companies working in the United States for a large petrochemical refining corporation were analysed. Data on contractor safety plans, policies, written programs, evidence of training, insurance compliance, and incident and injury records were collected over a period stretching from August 2007 to December 2009. An analysis of this data was performed with three main objectives: use statistical methods to objectively identify variables that correlate most closely to the TRIR, identify time based trends in incident frequency, and highlight items associated with increased/decreased incident rates. Some of the statistical methods used include data trending annually and quarterly, comparing this company s contractors to industry averages, and linear and logistic regression models. The first component of this analysis was to trend contractor incident rate over time, as it compared to the contractors ability to meet the Owner s scorecard requirements. TRIR was calculated for these contractors using an exposure hour weighted average, which consists of summing the incidents incurred by all contractors and hours worked by all contractors in their respective year, and inserting that data into the TRIR formula (TRIR = ((Number of Recordable Incidents) x 200,000)/(Number of exposure hours). Chart 3 below gives graphical representation of this analysis, showing those contractors meeting the Refining owner requirements had a 3- year TRIR average 78% lower than those not meeting the hiring Refining Owner requirements.
Chart 3 Refining Owner Contractor TRIR To gain additional insight on health and safety performance drivers, results from linear and logistic regression models can be examined along with experiential and anecdotal evidence of factors affecting contractor safety performance. While it is not best to rely solely on one analysis for making decisions, these statistical models allow a company to further understand and analyse their contractor management system. Ultimately, proper data collection on contractors performing or applying to perform work for an owner/operator allows trending, tracking, and the potential to introduce additional mathematical and statistical analyses to the owner/operators continual improvement process. An additional case study conducted used TRIR data collected on 13,615 contractors. These contractors work across various industries, and are of a full spectrum of company size, from one employee up to companies larger than ten thousand employees. The NAICS code was collected for all of these contractor companies, and 5 frequently reported NAICS codes were determined. The 2008 TRIR for each of these groups was calculated using the OSHA formula, and the hours weighted mean. 2008 industry benchmark data was used because the latest data available from the Bureau of Labor Statistics (BLS) is from 2008 during the completion of this paper. The mean TRIR of these actively managed contractors was then compared against BLS data by NAICS code and charted. This data, found in Chart 5, shows that across the 5 most common NAICS codes, actively managed contractors using the principles described in this paper, have a lower incident rate than their industry peers.
Chart 4 Actively Managed Contractors and BLS Industry Average TRIR Conclusions Effectively managing third party contractors could be a challenging undertaking if not effectively and systematically managed. With the ever increasing trend to outsource work, managing risk and mitigating the exposure due to third party involvement is a top concern for many involved in hiring and managing contractors. This paper (and presentation to be provided) discusses best practices in contractor management, particularly from a health and safety standpoint, obtained through years of real world experience and examination of extensive contractor s health and safety data. Owner/operators can utilise the four key elements of an effective contractor management process outlined earlier (Communication, Pre-qualification and Selection, Conformance and Performance Monitoring, and Continual Improvement) to benchmark and identify possible areas of improvement in their contractor management processes.
References American National Standards Institute, American Society of Safety Engineers, ANSI/ASSE A10.33 Safety and Health Requirements for Multi-Employer Projects Anteby M. and Khurana, R. A New Vision. Harvard Business School Baker Library Historical Collections. Retrieved July 2010 at <https://library.hbs.edu/hc/hawthorne/rl-guides.html#gac> Bureau of Labor Statistics, How To Compute a Firm s Incidence Rate for Safety Management. Retrieved July, 2010 from < http://www.bls.gov/iif/osheval.htm> International Association of Oil and Gas Producers, OGP Report 439 Safety Performance Indicators 2009 Data, Retrieved July 9, 2010 from <http://www.ogp.org.uk/pubs/439.pdf> Occupational Safety and Health Administration, US Department of Labor. 29CFR1910.119 Process Safety Management of Highly Hazardous Chemicals. Retrieved July 2010 from <http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=standards&p_id=97 60> OHSAS Project Group, Occupational health and safety management systems Guidelines for the implementation of OHSAS 18001 OHSAS 18002:2000 OHSAS Project Group, Occupational health and safety management systems Requirements OHSAS 18001:2007 Richard Gillespie, Manufacturing Knowledge: A History of the Hawthorne Experiments. Cambridge: Cambridge University Press, 1991, and Jeffrey A. Sonnenfeld, "Shedding Light on the Hawthorne Studies," Journal of Occupational Behavior, Vol. 6, 1985 For more information or questions, please contact ISN at the following address: ISN Software Australia Pty Ltd. Attn: Rory Callaghan PO Box H178 Australia Square, NSW 1215 Office: +61 (0)2 8296 0885 Mobile: +61 (0)417 776 925 Email: rcallaghan@isn.com 2010 ISN Software Corporation
ISNetworld Speaker Bio - Rory Callaghan Rory Callaghan leads ISN s operations in the Australian/AsiaPac market. With emphasis on the energy (oil, gas and mining) sectors, the team is dedicated to the development and account management of both companies and vendors who utilise ISNetworld s services. Rory has presented to several associations throughout the United States and Australia. Before relocating to Australia, he expanded ISNetworld into new markets within North America. Prior to joining ISN, he was a principal owner for a contract staffing company. Rory holds a marketing degree from Southern Methodist University in Dallas, TX.