Inside, outside

Contracting strategies for a new economy.

By Bob Sperber, editor at large

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Once there was a plant, heavy with United Steelworkers (USW) members. Business slipped, and the company started down the path of restructuring. Guess what happened?

Collective bargaining negotiations broke down. Union members said there was no way the plant could be run without them. “We maintained that it could be, although we'd rather it be with them,” says a manager with the contract firm that took over all maintenance operations. “Despite our repeated efforts, the unions decided they would not talk to us.”

Union: busted. More than 100 new employees were hired and today, according to the contractor, “Maintenance metrics have never been better and production has never been higher.”

Stories like this have been the extreme exception to the rule, say contractors, but fears of such horror stories are rising and haven’t been this prevalent since (you may repeat this aloud) the Great Depression.

What to farm out

 Figure 1. In 2006, plant managers said building automation showed the largest promise for potential outsourcing (Source: ARC).
Figure 1. In 2006, plant managers said building automation showed the largest promise for potential outsourcing (Source: ARC).

Outsourcing takes many forms, from the automation OEM managing all of a company’s instruments and controls to specialized crafts contracted by the maintenance manager to the full-service firm taking over all services, people and systems, and reporting to the plant manager. What ties them together into a single category is “the existence of a contract, as opposed to calling an outside firm to come in and do some work on a per-job basis,” says Houghton Leroy, senior analyst with ARC Group (www.arcweb.com).

According to ARC’s research, plants typically devote 11% to 25% of their annual maintenance budget to contractors, a percentage Leroy expects to continue and perhaps increase as the economy worsens. The proportion that do full-department outsourcing is much smaller — single digits, he and others acknowledge — but he and outsourcing proponents indicate the practice will grow.

 Figure 2. A new study by ARC (www.arcweb.com) shows cost reduction as fourth on the list of why companies contract for services.
Figure 2. A new study by ARC (www.arcweb.com) shows cost reduction as fourth on the list of why companies contract for services. 

ARC’s surveys indicate that the number of plants that already outsource services or are “very likely” to do so has more than doubled in recent years and now stands at 30% of manufacturing respondents. Building automation leads the list of outsourced activities in ARC’s research; at least 20% of manufacturers outsource in areas including production equipment, as well as electrical and wiring (Figure 1).

In ARC’s 2008 survey, 116 maintenance respondents in manufacturing industries indicated that “gaining access to specific skills” and “focusing employees on core needs” were the top two drivers (Figure 2).

Plant Services’ own survey of maintenance management professionals near the end of 2008 found that, in general, in-house expertise is preferred for critical or “state-of-the-art production equipment,” and is deemed more cost-effective for “mundane” tasks such as filter and coolant changes or hanging signs. But the consensus isn’t clear, as evidenced by the maintenance manager who said simple mechanical jobs and filter changes are the first items to outsource. Others are moving simple maintenance tasks over to the production department.

Of course, it’s common for expensive specialized or infrequent tasks to be contracted out, such as vibration and lubrication oil analysis and, as one manager says, electrical and welding work because that way, “We don’t have to issue hot work permits or provide appropriate PPE for arc flash hazards.”

Such specialized needs are often filled by OEMS like Schneider Electric’s Square D Services (www.squared.com), which

 Figure 3. Access to specialists’ skills and equipment leads the list of reasons why companies contract for services.
Figure 3. Access to specialists’ skills and equipment leads the list of reasons why companies contract for services. 

manages customers’ electrical switchgear and related distribution assets (Figure 3). The company’s “sweet spot” is with customers “with more in-house expertise, who are at the forefront of doing maintenance,” says Hal Theobald, Square D product marketing manager. His reasoning is, “They’re going to be more likely to outsource because they still believe in doing maintenance right,” even as the economy forces staff reductions.

Benefits: The big picture

“Companies are being forced to reexamine how they’re doing things to gain more efficiency from their manufacturing assets,” says Jeff Owens, president, Advanced Technology Services (ATS, www.advancedtech.com), whose revenues have increased 20% to 25% annually during the past few years. ATS offers services ranging from filling a specific short-term need to taking over the full department, including asset management and information systems.

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