Building Contractor Management Excellence

Building Contractor Management Excellence

For several years, companies have been under relentless pressure to control costs. That is especially true of industrial and assetintensive companies, and in response, many have reduced the size of their operational workforce. That in turn has led them to turn to contractors to handle more of the work associated with maintenance, small projects and outage support. Today, companies in industries ranging from oil and gas to mining, chemicals and utilities are relying more than ever on outside providers to upgrade and maintain their critical production facilities and assets. This approach helps bring down internal fixed labor costs but it can lead to other problems. Too often, companies have downsized internal resources to the point where they do not have the people and skills needed to effectively manage the growing contractor workforce a workforce that is playing a larger role in keeping operations up and running. Looking ahead, the management of contractors is not getting any easier. Employees with experience managing projects and contractors are retiring. At the same time, maintenance and small project work is growing in terms of budget, with 40 percent to 60 percent of non-fuel-related budgets now being devoted to such activities. And in several industries, growth initiatives mean that skilled employees and contractors are more likely to be diverted to support capital projects, further reducing the pool of skilled resources available to support existing operations. Companies are not blind to these issues. To address them, they have been pursuing a number of asset-management approaches, such as reliability-centered maintenance, predictive maintenance and operational excellence. These initiatives have helped companies better understand their assets and opportunities. But they often fall short in a world where contractors play a growing role and owners management systems are limited in managing contractor capabilities. Instead, companies need to take a more rigorous approach that focuses specifically on building in-house contractor management capabilities. To guide those efforts, they can adopt a comprehensive framework that encompasses the end-to-end contractor management process. Relatively few assetintensive companies have adopted this type of approach. But in Accenture s experience, those that have done so have seen savings of 10 percent or more in total cost of contracted services, as well as improvements in productivity, throughput and Health, Safety, Security and Environmental (HSSE) compliance. In short, a better approach to contractor management is helping companies to succeed in the face of changes in the workforce, and build the high performance needed to win in the long run.

Contractor management today Essentially, contractor management is focused on making sure that the assets in a company s facilities operate at the lowest possible cost by contracting out non-core activities, or activities that are complex and better managed by external suppliers with the required capacity or skills. That concept is simple enough, but turning it into reality can be a challenge. Too often, contracting decisions are made quickly in an ad hoc manner, driven by the need to meet a short-term requirement. In addition, various parts of the contract management process are likely to be owned by different internal groups, such as maintenance, construction, accounts payables, and supply chain. As a result, the contracting process can take too long, and contracts are often unnecessarily complex while failing to adequately cover the work in question. The result is inefficiency, confusion and, ultimately, reduced productivity and increased costs for the contracted service due to misaligned strategies. Each company s situation is different, but Accenture s experience in asset-intensive industries has shown that there are several common signs of an ineffective approach to contractor management. For example: Companies often classify and assign work based on past practices the way we ve always done it rather than on a standardized identification of services and supplier competencies. Services are often classified at too high a level to make detailed analyses of spending feasible, so important patterns of job types, overruns and productivity are not measured or evaluated. The technology used to support the selection, management and evaluation of contractor services is not integrated across functions and business units, resulting in silos of information that make it difficult to develop a coherent, broad contracting strategy. It is not unusual to find that supplier qualification, selection and development is based on historical relationships and limited to qualitative/quantitative measures The approach to defining the scope of work varies significantly for even common and similar jobs. And work descriptions often have too many gaps and fail to adequately describe the intended work and expected outcome. Plans for how suppliers will execute work often are not detailed or complete enough to maximize wrench time and productive work. Processes to support the commercial transactions related to contractors span across operations and shared services, leading to inefficiencies and substantial resources spent on exception processing The closing out of projects tends to focus on finishing a punch list, rather than following through with an evaluation of the project and the continuous improvement of the contracting process.

The contractor management framework To address such problems, companies need to build a more robust in-house contactor management capability. To do so, they can draw on a comprehensive multifaceted framework that includes strategic activities, planning activities and execution activities (see Figure 1). Figure 1. Contract management framework Strategy Decision to contract out Scope of work development Contractor qualification Sourcing and contracting Contractors Planning Pre-job planning and scheduling Work preparation Job kick-off Scope modification decision and approval Source: Accenture analysis, 2014. Execution Relationship and performance management Executional work management Inspections Contract administration and payment Communications and enabling activities These three key areas are discussed below. Strategy: The starting point An effective approach to contractor management needs to start with a carefully thought-out strategy a step that often gets short shrift at companies today. Strategy work should start early on, when projects are initially being considered and defined. This early start allows time for laying a solid foundation for contracting and avoiding rushed, short-term decision making. Once the decision is made to contract work out, companies use a systematic method to qualifying contractors. Indeed, this is an area that typically holds significant opportunity for improvement, because companies today often take a superficial approach in doing so. Contractors should be assessed against a range of criteria, such as past performance, financial status, certifications and HSSE compliance. This deeper qualification is more important than ever because of the diverse range of suppliers in use today, and the substantial economic and talent challenges that construction and craft companies have faced in the last few years. A clear understanding of costs is naturally a critical part of contractor management. Today, it is not uncommon to see cost evaluations based on a limited knowledge of future needs and a comparison of standard contractor rates. However, with the growing importance of contracting, a more thorough understanding of costs is needed. This more detailed understanding should be developed through the involvement of all stakeholders who are part of contract management process, and these stakeholders should collaborate to take a broader look at the effects of price, usage and process-related costs (see Figure 2). Having a complete view of costs allows the company to better understand what contracted services will cost, and the potential benefit of using a contractor. It also provides a deeper understanding of cost drivers, and opens the door to finding areas where efficiency and productivity can be increased, and where risk can be shared more effectively. Once an outside provider is selected, the company should work closely with that contractor to shape the schedule, scope,

Figure 2. Example of contractor cost factors Price How can we exert pressure to improve the final transaction price? Negotiated price Volume leverage Payment terms Competitive bidding/ negotiations Pricing method Geographic scope Contract term Contracted discounts Number of qualified suppliers Negotiated price components Bid/T&M/unit Risk/reward sharing Contractor service breadth Building projects/contracts Levelizing workload Work/unit definitions Understanding internal requirements Contractor services Usage How effectively do we manage the use of this service? Availability of workforce Planning/ engineering Forecasting capability Frequency/effectiveness of communications Long-term forecasts Distribution of work Internal compliance controls Maintenance Invoice controls Contract usage Inspections Source: Accenture analysis, 2014. Process How can we remove wasted time from the admin and business processes? Administrative costs Contractor performance management Budgeting Permit procurement Invoicing Bid process and contract development Project management Contractor relationship management methods and sequence of activities. This early engagement gives the company and the project manager an opportunity to align all parties around a set of common goals. It also lets the company and the contractor develop a mutual understanding of the market factors such as the availability of skilled workers and equipment driving the project s cost and schedule. And it lets all parties have input into the development of the contract and key performance metrics, and the identification of enabling capabilities that will be needed, including technologies for work planning, requisitioning, service validation and so forth. Finally, contract management strategy should look beyond specific projects to improving the overall contracting process. One way of doing so is to maintain a company library of commonly procured services and contracts in the company s ERP system. For example, this library can capture information about a specific work activity/job, type of skilled laborer (e.g., welder, foreman, pipefitter, millwright), and a specific contractor skill level needed in various activities. This information helps avoid the need to reinvent the wheel as new contracts come up: The company can simply draw on the library s standard methods for measuring and describing services for use across work orders, contracts, purchase orders, service entry sheets and invoices. This standardization also makes it easier to use contract management technology solutions to improve work planning, requisitioning, buying, receipt of services verification, invoicing, analytics, cost evaluation and performance measurement across contractors. On another front, contract management should also include a focus on supplier development on nurturing industries, skills, competencies and the future workforce in locations where the company operates. This development can do more than help meet local content goals. By increasing the quality and number of qualified suppliers, companies have an opportunity to drive down contracting costs while improving compliance and quality. Supplier development can involve a variety of activities, such as community outreach and craft-training programs; segmenting projects to allow suppliers to focus on developing specific competences; and becoming involved with local community, university and government training and certification programs.

Planning: Prepare now or pay later Planning is fundamental to confirming that contractors work efficiently and productively. However, companies often run into difficulties when developing plans. They may lack visibility across the entire portfolio of maintenance work or projects, which makes it difficult to plan holistically. Or they may struggle to define complex or unique projects. There are a variety of issues that companies run into, and such planning challenges often lead to suboptimal performance, additional work, higher costs and increased contractor disputes and claims. To help avoid such issues, companies can create work packages that provide a complete contracting plan that focuses on manageable, measurable portions of work. A complete work package might spell out factors such as the people and skills required, any preliminary engineering work and permits needed, the sequencing of work and scheduling of planned outages; worksite logistics; steps that will be taken to support job site safety; and the processes that will be used to measure performance. This approach clarifies what the contractor needs to do to prepare, and helps confirm that the required people, technology, tools and materials will be available when needed. The goal, ultimately, is to increase productive wrench time and reduce the costs associated with waiting for people or materials and hunting for the right items. Planning should also spell out the steps that will be taken to hand off and launch the effort: Experience has shown that these transitions can be a source of delay and confusion. Planning should also establish how the company and the contractor will deal with any changes in work scope that might be needed, and how they will respond to unplanned outages and emergencies. Execution: Getting it done Proper strategy and planning for the use of external contractors is critical, and so too is the ability to follow through to manage and execute the work. To a large extent, this ability means drawing on the right processes, technologies and methods to keep track of work flow and quality. This means, for example, confirming that invoicing and payables are accurate; monitoring claims and changes to work scope; and tracking work orders, purchase orders and the closing out of contracts. In the execution phase, the measurement of performance is key. Productivity should be monitored and enabled in a variety of ways. These can include the use of earned value and S-curve methodologies; site walkthroughs and inspections to validate work completions; and performance-based measurement that compares planned to-be costs and actual costs, tracks delays, and identifies gaps in productive work. Finally, this process and performance data should be used to drive continuous improvement efforts that focus on increased productivity, better asset utilization and reduced costs in the work being handled by the contractor. At the same time, feedback from the execution phase can be used to improve the contract management process itself. Managing for business results An effective approach to contract management will encompass a morerobust approach to strategy, planning and execution, giving companies a dynamic process that begins well before procurement and extends all the way through to contract execution, performance monitoring and continuous improvement. Accenture has applied this type of approach within a number of asset-intensive companies and delivered significant results. For example: An electric generation utility implemented a contract management process in its coal plants that allowed it to decrease costs by 10 percent. A major oil production company implemented a process-driven contract management process and reduced its claims costs by more than 25 percent. A major oil production company had its contractors implement a process-driven contract management process to reduce its contractors safety- and health-related claims with a goal of zero incidents. A primary steel manufacturing site implemented a contractor management approach involving procurement and operations personnel to drive down contractor spend by 10 percent through reduction of overtime, delays and optimized rate agreements. A Gulf of Mexico oil refinery reduced routine maintenance and operating expenditures by 5 percent through focused contractor reduction and productivity improvement efforts. A mid-sized refinery identified over $12 million in contractor spend reduction opportunities, realizable within 12 months of implementation. Today, asset-intensive companies face new challenges as they manage contractors. But by building a stronger in-house contract management capability, they can take full advantage of the external contractor workforce to keep facilities up and running, improve health and safety compliance, and win in the ongoing struggle to control costs and build high performance.

About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 281,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com. Authors Fred Vitale is part of Accenture s Sourcing and Procurement practice and Global Capital Project Services practice and has more than 33 years of experience in the development and management of capital projects and has worked in over 25 countries. Fred is also responsible for the development and management of Accenture s project sourcing offering that has been used to apply strategic procurement principles globally. In addition, he is a member of Accenture s North American Sourcing and Procurement Leadership Team. Based in Washington, DC, Fred can be reached at fred.m.vitale@accenture.com. Greg Anderson is part of Accenture s Resources Operations practice and has more than 20 years of experience helping companies improve their operations and supply chain capabilities. Greg has completed numerous client operations improvement and procurement engagements within the chemicals, metals, mining and forest products industries, many including industrial contractor services sourcing and optimization He is based in Chicago, and can be contacted at gregory.l.anderson@ accenture.com. Alex Brown is a Senior Principal in Accenture s Operations practice focusing on supply chain, including contractor management. He has teamed with clients in the utilities and energy industries, and specializes in implementing transformation efforts. With more than 15 years of consulting experience, he has led numerous large and complex initiatives to help clients improve all aspects of their supply chain performance. He is based in Salt Lake City, Utah, and can be contacted at alexander. brown@accenture.com. Karin Stevens is part of Accenture s Sourcing and Procurement practice working on improving clients supply chain/ operations function through systems implementation and improvements, process and organization redesign, governance/ metrics, capability development and strategic sourcing. With more than 14 years of consulting experience, Karin s engagements have covered all phases of the project, from diagnostic through implementation. She is based in Chicago, and can be contacted at karin.e.stevens@accenture.com. Greg Setser is part of Accenture s Sourcing and Procurement practice and has more than 10 years of experience focusing on source-topay process transformation and technologies. Greg has completed numerous engagements in helping companies within the chemicals, energy, mining and utilities industries transform their source-to-pay capabilities, standard services library structure, and sourcing and procurement analytics for contractor services and other categories. He is based in Dallas, and can be contacted at gregory.m.setser@ accenture.com. Copyright 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 02-7942/MOD-147