Garry Law Setting Performance Targets1 Setting Performance Standards for your Maintenance Contract Maintenance Management Conference, Auckland 2003 Garry

Garry Law Setting Performance Targets 1

Setting Performance Standards for your Maintenance Contract

Maintenance Management Conference, Auckland 2003

Garry LawLaw Associates Ltd Consulting Engineers

PO Box 87311 Meadowbank Auckland – 09 520 2152 - 021 665764


Road Map

Ensuring maintenance is contributing to the overall productivity

How to set KPIs

Risk management around performance measuring

Performance measurement when the contractor is doing some of the asset management


A good operator will have these integrated.

If one is going to contract out maintenance how will one retain integration?


Protecting your futureContract Forms -

Extremes IP on Asset Strategies

Franchise whole operation Captured by the Contractor

etc

etc

Body Hire for maintenance Retained by the Principal

Body Hire may seem to most easily allow an integrated view, but where is the efficiency driver? The optimum is likely to be somewhere between the extremes.


Resist “Dumbing Down” because you are contracting

Ease of measuring contractor’s contribution

Contract Form

Reliability centred Hard

Innovative, risky, longer to establish,

longer to run

Condition responsive

Time programmed

Breakdown reactive

Easy Traditional - pay for work – low risk


Risks

Overall Business Risks – can attempt to allocate to Principal or Contractor on the basis of who can manage them best – but there will be a class where both parties need to be involved to get the best outcome.

Contracting Risks – can be allocated


Three Particular Risk Issues with Maintenance Contracts

Interaction with operations

Repair / Replace decisions

End of Term


Interaction with Operations

A maintenance-only contractor may have no incentive to ensure operations are sustained.

A highly prescriptive regime of access for specified maintenance at very constrained sequenced times may not allow opportunities for innovation in maintenence


Repair / Replace decisions Involve a long term view Involve considering the CAPEX cost

Can have either:– Principal decides– Contractor involved but Principal decides– Decide jointly– Principal involved but Contractor decides– Contractor decides

With increasing contractor involvement must go greater responsibility on the Contractor for the cost of CAPEX and longer contractual terms so Contractor investment is justified.


End of Term Issue (this is a part of the repair / replace issue)

With contracts that commit the contractor to replacement expenditure, the time horizon the contractor will be working in will get shorter as the contract progresses. There will be less incentive to replace as the benefit will be captured by the Principal.

Rely on contractor’s desire to retain reputation and be in running for next term?

Have a Principal- only option to extend the term? (But may not want to for other reasons)


Contract Forms Issues: Repair /

replaceEnd of term Operations

interaction

Alliance Contracts (cost reimbursement + gain share on negotiated cost target)

Construction form Needs simple end of term target. Not applicable in maintenance

Target Cost Contract (fixed management cost with gain share on sub-contracted work)

Construction form - Needs simple end of term target and substantial sub-contracting Not applicable in maintenance

Management Fee, Maintenance only (fixed plus variable reimbursement plus margin at-risk on performance)

√ √ x

Facilities Management, Principal funds CAPEX

x √ √

Franchise, Principal funds CAPEX x √ √

Facilities Management, Contractor funds CAPEX

√ x √

Franchise, Contractor funds CAPEX √ x √


Who Plans?

Contractor Joint Principal

Who

Funds?

Contractor √ (but long term

contract)

x x

Principal x √ √

CAPEX

Long term contracts have escalation issues and enhanced risks of regulatory intervention within a longer term.


Solution?

Principal funding of CAPEX Contractor involvement in asset

planning Joint teams on optimising asset

strategies (? with gainsharing) Include operations where possible


Performance Incentive

Reward is: Fixed fee for management / overheads Fixed fee for specified scope and / or Variable fee (time and materials) for

unpredictable items At risk element variable on performance


Why Use KPIs?

The objective in maintenance management is not just cost management

Want reliability On one-off work paid on time and

materials want productivity Multiple objectives are the norm Factor the at-risk reward by KPI

measurmements linked to performance on the multiple objectives


KPIs linked to Payment The at-risk element may be a fixed sum or

a percentage of the base payment – If the Principal sets this too large the Contractor will

manage risk by bidding up the base payment The actual payment is the at risk element

factored by an overall performance measure The overall performance measure is made

up of a “basket” of perfomances on KPIs


Using KPIs to get to an overall performance score

Can use as “all – or – nothing” - appropriate for measures where failure has an external risk – environmental prosecution or such. Must be achievable. Don’t use on matters which may be cause for contract termination.

Can be progressive. Full allowance for reaching target – nothing for being at lower limit – pro rata between. – The lower limit will not be KPI score zero. You need to judge

what over-zero score is the lowest you can tolerate as a lower limit.

– If you set targets which are “stretch targets” that the Contractor cannot expect to meet, expect the at risk element to be bid up.

With progressive scoring you may allow overpayment for performance in excess of the target – but don’t do unless it has value to you.


Setting KPIs Need to start with your organisation’s objectives

(Key results areas) How many of them involve the contract? You will have some organisational KPIs. Some

will measure broad things including maintenance. If the contractor can’t control most of what influences them they can’t be used.

To get organisational objectives into a useful form, cascade the objective to the relevant level and set a KPI on that.


Cascading objectivesLevel Objective KPI

Corporate Increase EVA > +1% for year 04/05

Manufacturing Increase asset utilisation and free assets for sale

Output / asset value employed + 5% by Dec 04

Plant xyz Free old widget line for sale

Sold byJan 05

Maintenance Contract

Increase plant availability

New widget line availability > 95%

The objectives are hierachically linked - the KPIs relate to objectives not each other


Good KPI Characteristics Measured for a long time Have external benchmarks to set good

performance Contractor has primary influence over

achievement Close to real time (Contractor can act to correct) Contractor can measure (but with auditability) Balanced set across the scope of the contract Not too many!


Sorts of KPIs “Milepost” Achieve something by a date.e.g. Populate the Computerised Maintenance Management

System by July 30th 2004

“Measure” Meet a target on a defined measurement.

e.g. Measure: Rework rate on class 3 tasks Target: < 5%

A maintenance contract will most likely have both.


Defining KPIs

Time window looked at What counts Who measures When reported Exceptions management

A methodology datasheet per KPI is good practice


Opportunities with Targets

Set them once measurement has run for a bit (on some - not too many)

Step them up – if way below a benchmark standard, get there progressively rather than pretend you will do it overnight.

Ratchet them – a new performance record becomes the new target (don’t do if there is much variation beyond the control of the Contractor i.e. Demming’s common causes dominate )


Risks with KPIsRisk Mitigation Strategies

Disputes on KPI calculation - Use methodology datasheets- Contractor self-production

External measure discontinued Minimise use of external measures

Measure unavailable at start-up Allow 100 score for start up period

Measure unavailability at payment Incentive: Score zero for Contractor generated, 100 for Principal generated, no back calculation.

Contractor mis-calculation Audit trail – keeping of records – and post term

Disputes over applicability – unforeseen circumstances

Have disputes procedure apply, with staged escalation if unresolved

Declining relevance of KPIs over time

Have a periodic review – substitution by agreement.

Declining relevance of targets over time

Ratchet, re-evaluation against external bench marks with substitution by agreement.

Tenderers skeptical on achievability Have history available

Performance history treated as commercially sensitive

Contract must make clear will be available to tenderers in renewal


When the contractor is doing asset management

Switch to more output oriented measures– Input oriented (e.g. percent of class 1 faults

responded to within specified time)– Output oriented (e.g. % of time widget

assembly line available) Gainshare on mutualy agreed asset strategy

changes.


END

The background picture is Mt Agri in Turkey.(aka Mt Ararat)

Documents

Garry Law Setting Performance Targets1 Setting Performance Standards for your Maintenance Contract Maintenance Management Conference, Auckland 2003 Garry