Meeting of the minds
Contractors in the process industry have long been much more than just subcontractors who carry out standard tasks. They assume a central role in production and maintenance, which makes it all the more important to select and manage suitable network partners. Otherwise purchasers stand to lose valuable know-how and money.
by David Selbach
The question of whether it is better to opt for “buy” instead of “make” is as old as industrial mass production. Even Henry Ford realized that it would ruin his company were he to handle every product and every step along the value chain, choosing instead to rely on external service providers and suppliers. Following in Ford’s footsteps, many industrial firms are focusing on their core businesses while keeping their service providers at arm’s length, in the hope that it will help them to enforce favorable terms.
Temporary labor models, project and framework agreements, plant provider models and strategic partnerships were designed in order to cut fixed costs and allow a more flexible response to fluctuations in utilization. The outcome is that the contracting business is booming and continues to evolve. Today’s modern industrial service companies are more than executive bodies; they are taking on ever larger shares of value creation and, as a result, present themselves as self-confident service providers. The rub lies in the fact that many plant operators still rely on the old arm’s length model, even though it suits providers such as cleaners, scaffolders or bus companies better.
Wheat from the chaff
Third-party firms also take on core functions in production, though. If there is no central steering function in management to oversee all contractors, tenders and contracts, there is a risk that the plant operator will gradually lose its ability to evaluate.
Avoiding this first requires compiling all available facts and figures about third-party firms that have con-tracts. Which activities are outsourced? How are in-house and external personnel involved? How high are the costs? Day In The Life Of (DILO) studies are one proven means of understanding the division of labor between in-house and external personnel, as well as which processes and consultations actually take place. Observers shadow key people such as supervisors, workshop managers or service provider employees over a complete shift cycle. Their insights straight from the shop floor help reveal the causes of waiting times or duplicate work, for example.
Incentives for effieciency
Contracts and compensation models also need careful checking. For example, contracts with a standard service catalog used to be typical in maintenance, and were repeatedly modified over the years with no questions asked. Other contractors were compensated based on work completed even though no one was checking to see whether they were worth the money. In short, companies have to be clear on which core competencies should remain inhouse and which should be handed over to service providers. This is the only viable basis for sustainable service level agreements.
Where cooperation with a contractor makes economic and strategic sense, it is helpful to have contracts that offer a higher incentive for efficiency – for example, using fixed all-in prices for a service area or service-based compensation models. At the heart of sustainable contractor management are the plant operator’s so-called third-party coordinators. They keep an eye on calls for tender, contracts and ongoing reporting, which allows them to manage the providers in question. Of course, to do this the position of third-party coordinators has to be permanent and take into account absences and fluctuations so as to retain the acquired know-how. Numerous corporations have formed overarching competency centers that set out standards and provide support in emergencies.
These companies have significantly improved the mix of in-house and external service provision and boosted efficiency by up to 30 percent. A third-party coordinator is responsible for the vital task of managing communication between in-house and external personnel. Wherever possible, contracts should mandate service-based compensation models or appropriate fixed prices. A KPI system gives both client and contractor a solid basis for comparing work completed and costs, which is what makes long-term strategic partnerships possible. In this way, the morass of service providers being kept at arm’s length can be turned into companies with whom a clearly defined and controlled business relationship can be enjoyed: a mutually beneficial partnership of equals.