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Partnering with your service providers can be a win-win arrangement that yields performance and profit

By Jim Humphries, P.E.

Plant Services magazine

Manufacturers shouldn’t be satisfied with simple time-and-materials or lump-sum contracts for services. These are win-lose approaches that drive both parties to mutually exclusive business objectives. Too frequently, the relationship delivers less-than-required value that provides no competitive advantage for the owner.

On the other hand, partnering and performance contracting for plant services offers a win-win approach that rewards contractors on the basis of the value they furnish. Performance contracting can:

• Leverage the service provider’s full capability.
• Link compensation to plant performance.
• Establish an atmosphere of cooperation and accountability.
• Ensure complementary business objectives.

Cost and performance
A recent study of Fortune 500 and International Fortune 1000 companies determined the three distinguishing characteristics of the best plants (Figure 1):

• Systematic failure elimination.
• Profit-centered maintenance.
• Strategic performance contracting.

Systematic failure elimination focuses on eliminating mistakes and unintended outcomes, such as breakdowns, safety incidents, work delays and the like. Profit-centered maintenance integrates the plant organization’s culture, processes and attitude to drive the business decision-making process.

Strategic performance contracting is an approach to partnering with service providers that bases much of the service providers' compensation on the business results achieved jointly with the owner. As illustrated in Figure 1, many plants use performance contracting to reduce cost and increase overall equipment effectiveness. When combined with systematic failure elimination and profit-centered maintenance, plant performance invariably increases while cost decreases.

Three good traits

Figure 1. The best plants (upper left) use some combination of systematic failure elimination, performance-based contracting and profit-centered maintenance.


What to outsource
Effective partnering starts with decisions about what to outsource. The sidebar, "Outsourcing/insourcing decision logic," outlines the six-step decition-making logic for arriving at that assessment.

Outsourcing/insourcing decision logic 1. Generate list of activities or functions to consider. 2. Assess risks of outsourcing and self-performing. 3. Assess value of self-performing versus outsourcing. 4. Rate ease of transitioning. 5. Compute advantage index for each candidate. 6. Sort and select candidate by advantage index.

The first step is to decide which outsourcing options make sense. Particularly pertinent to partnering contracts are combinations of related activities that might prove more valuable than outsourcing individual activities.

The second step is assessing the relative risks of outsourcing, self-performing and partnering. Evaluate whether outsourcing or self-performing an activity will compromise a strategic competitive advantage, your reputation, or your ability to deliver the quality and quantity promised to your customers. Questions you should ask about each option during the risk assessment include:

• Will you need to disclose intellectual property or proprietary knowledge critical to your ability to compete?
• Can the service provider cause an environmental or safety incident for which you retain accountability or that will risk your company’s reputation?
• Can you control service delivery effectively to avoid major throughput or quality disruption?
• Will outsourcing cause work force or bargaining unit conflicts or work stoppages?

If the answers reveal an unacceptable risk, discontinue consideration of the option. If the risks are acceptable, rate them. A high rating indicates that self-performing the activity has no risks, whereas outsourcing it has severe risks that must be offset with significant value to be justified. A low rating indicates that there are few risks from outsourcing the activity, and self-performing is undesirable. A mid-range rating indicates that the risks of self-performing the activity are comparable to outsourcing it.

The third step is to assess the value of self-performing versus outsourcing along two dimensions: focus and cost (Figure 2). If outsourcing enhances your ability to compete, the activity plots on the left of the figure. In contrast, if self-performing the activity enhances your control of critical variables, the activity plots on the right.

To evaluate the cost dimension, ask whether self-performing provides you with a cost advantage. If the annual activity cost is a major portion of your budget and self-performing is a big advantage, the value of self-performing is positive and plots at the top of Figure 2. Conversely, if self-performing is known to be a cost disadvantage or if your competitors gain a cost advantage by outsourcing the activity, the cost of self-performing is a negative and plots in the lower half.

Figure 2 combines the cost and focus dimensions into a single value assessment. For example, an activity that provides a moderate level of focus at a slightly negative cost has a value near zero. Therefore it shouldn’t be considered by itself for a performance-based partnering scope. In contrast, activities that plot in the lower left are great candidates for partnering.