The top 10 concerns when contracting services

Companies are balancing regulatory and shareholder influence, while seeking the agility and speed to compete globally. Scrutiny of capital expense budgets has slowed infrastructure upgrades and allowed older equipment to fall out of warranty. To compensate, companies are placing a higher value on contractual services to offset lost manpower, supplement their technical abilities, and increase profitability.

By Sheila Kennedy, Contributing Editor

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It once was that companies were extremely protective of their strategies and tactics, and shielded their equipment, technologies and practices from view of the outside world. To sustain a competitive advantage, they took pains to protect trade secrets, conceal new designs and emerging products and strategies, and shelter their operational methodologies.

In recent years, industrial dynamics have caused this defensive barrier to break down, provoking organizations to enlist third-party assistance in critical service roles throughout the organization.

Economic, financial and technology pressures have contributed to this trend. The existing workforce is aging, the replacement labor pool is shrinking, and cost reductions have constrained hiring within maintenance and engineering organizations. Companies are balancing regulatory and shareholder influence, while seeking the agility and speed to compete globally. Scrutiny of capital expense budgets has slowed infrastructure upgrades and allowed older equipment to fall out of warranty. To compensate, companies are placing a higher value on contractual services to offset lost manpower, supplement their technical abilities and increase profitability.

Keep your eyes open

Pepsi Bottling Group-Detroit (www.pbg.com) has service agreements with a variety of vendors to conduct tasks such as electrical PMs for high-voltage systems, printer PMs, vibration analysis, part manufacturing and a component exchange program for filler parts. “Using contractors to meet our requirements for a healthy operation where we do not either possess the skill nor have the time to perform specific tasks has resulted in increased uptime and has saved us considerable costs,” says Anthony Yanora, maintenance manager.

Aladdin Temp-Rite (www.aladdintemprite.com), a division of the Ali Group, also favors the strategy. “Service contracting helps us to take better care of our customers, supplementing our internal technical staff,” says Kim Sprout, manager of technical and customer services.

It once was that companies were extremely protective of their strategies and tactics, and shielded their equipment, technologies and practices from view of the outside world.

The counterargument can also be compelling. Only when specialized knowledge or equipment isn’t in-house will Diamond Chain (www.diamondchain.com) farm out a service. “We choose to remain self sufficient for two reasons,” says Larry Edwards, manager of plant services. “First, because most of our assembly equipment and tooling were designed and built inside the plant, making it difficult to have outsiders come in to perform maintenance. Second, as a strategy to engage and retain a skilled workforce.” Diamond Chain does, however, contract outside support for non-core tasks such as janitorial services, elevator inspections, fire extinguisher service and relocating large equipment.

Providers’ perspectives

For vendors, service contracting is a growth opportunity. OEMs have leveraged their expertise to service systems related to their offerings. “Service contracting allows plants to stabilize their own end costs,” says Scott Tackett, manager of centrifugal systems at Cameron Compression Systems (www.c-a-m.com). “We are their insurance policy — if a unit goes down, the burden is on Cameron. It reduces their risk and gives them peace of mind.”

“Some of our installed base has an architecture that is 20-years-old,” says Greg Bodenhamer, general manager, Schneider Electric Solutions and Services (www.schneiderelectric.com). “They need help migrating to reduce their repair costs, improve operational efficiency and achieve world-class expense budget productivity. And, they want to leverage these outcomes at locations around the globe.”

Some OEMs offer services far beyond their own products. “We allow our customers to focus on their core competencies, which in many cases do not include reliability engineering or maintenance management,” says Stephen Rahr, vice president for services processes, ABB (www.abb.com). “Our performance services are scalable to fit the needs of the customer. We can provide short-term contracts to quickly improve the performance of a specific piece of equipment, or long-term outsourcing agreements where benefits are measured in terms of strategic impact and operational improvements made across an entire facility for multiple years.”

There also are service providers originated solely for the purpose of providing comprehensive maintenance and repair services. “There is a tremendous difference between companies that supply an on-site staffing service and a company like ATS that is held totally accountable for machine availability,” says Jeff Owens, president, Advanced Technology Services (ATS, www.advancedtech.com). “By making them responsible, they can improve production significantly — many times up to 30% by implementing a unique style of maintenance and methodologies.”

So while some are yet resisting the temptation, there has been an explosion of growth in service contracting. Once limited to non-threatening and inconsequential roles, service contracts are now encompassing a much greater scope and strategic significance within the heart of the organization, and lengthening to multi-year terms.

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