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| Service Delivery Optimisation: Outsource versus Inhouse |
The Situation
A large electricity transmission business faced increasing pressure and complexity on its network after a period of under investment.
The business had evolved from a labour heavy government department in the 1980s through a series of organisational changes including separation out of various maintenance arms followed by arms length and then fully commercial contracting as these arms were sold or merged with private sector organisations, and new contracting providers entered the market.
An “alliance” approach had been partially implemented but circumstances had evolved more recently so the client currently used a large number of contractors divided by asset type and geography. In many cases formal terms had expired or contractual arrangements no longer formally agreed. Corporate activity in contractor organisations meant in some areas commitment to the client had reduced and the future supplier landscape was uncertain.
Other concerns included:
- ability to preserve and exploit expertise in best practice for the maintenance, refurbishment and repair of a very diverse and often very old range of substation, transmission, scada, communications and protection equipment. Staff and contractors with the relevant experience often gained it in the 70s and 80s and were nearing retirement. Key equipment had often long since ceased to be supported by manufacturers
- the need to build electricity industry capacity to address planned multi-billion dollar ramp up in capital works
- the need to co-ordinate complex outage planning and capital works with ongoing maintenance in an increasingly constrained network
- ensuring high quality work with regard to reliability and safety in a network where more and more elements were becoming critical and redundancy was reducing
- striking the right balance between client and contractor sense of asset ownership, responsibility and control – contractors often had greater control and operational ownership of key assets than the client
- regulatory and commercial imperatives meant ensuring and demonstrating value from maintenance spend was crucial, but tradeoffs between short term cost and sustainable value, reliability and safety were essential.
The nature of relationships within the client and industry at large meant conducting any review or change needed to be handled with integrity, consistency, judgement, diplomacy and credibility.
PIP and client achieved:
- Realignment and reduction in contractor “patches” and asset classes producing a fairer allocation of work to competing contractors, balancing capacity provision with price discipline.
- Reduction in the number of contractors, enabling the higher frequency and intensity of interfacing between client and contractors, and improving the sustainable economics of contractors.
- Fewer, simpler KPIs.
- Revised contractor incentives with supporting management arrangements, including a changed approach to encouraging innovation and the adoption of best practice.
- Reviews established to promote and enable more effective client management on both the formal and day to day relationships with contractors from tool box to board room.
- A new approach to capacity management in the industry.
- A fresh footing for collaborative relationships with key service providers.
- A foundation from which to make desired changes in internal systems, structure and behaviour.
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What we did:
- Interviewed client management individually and through workshops to identify and reach agreement on what the real underlying concerns or opportunities were. This lead to challenging and then establishing the real case for change and the appropriate tradeoffs in outcome that would have to be made.
- Identified a number of comparison organisations locally and internationally ranging from those with a highly out sourced/ virtual organisations to those where all work was conducted in house. PIP conducted interviews at CEO or GM level and generated key insights as to reasons, merits and more importantly the determinants of success in each approach.
- Completed interviews ranging from board room to tool box level with current or past contractors to identify how effective arrangements were in practice, and to understand the drivers of alignment between performance and requirements.
- Located and interviewed long standing industry experts with “elder statesman” knowledge who had seen the evolution of arrangements in the industry and were able to provide the insight from decades of personal experience.
- Reviewed current and previous contractual terms, and contract management systems and practice, and available data around cost and performance management.
- Identified a hidden difference in profitability between different asset classes that made some contracts profitable while others were unsustainable.
- Enabled the client to understand their requirements in terms of asset complexity, level of technical specialisation, asset criticality, geographic concentration, need for proactive management, and ability to provide alignment through incentives.
- Developed a client approach to achieving the best trade offs through use of contractual terms, contractor number and competition, tender and works management processes, contractor span of work, and extent of client participation down the value chain.
- Drove a new understanding within the client that there was much more to success than merely the traditional “make versus buy” considerations, supported by useful frameworks.
- Made specific actionable recommendations to best address the concerns and capture the opportunities identified.
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