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

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Presentation on theme: "Garry Law Setting Performance Targets1 Setting Performance Standards for your Maintenance Contract Maintenance Management Conference, Auckland 2003 Garry."— Presentation transcript:

1 Garry Law Setting Performance Targets1 Setting Performance Standards for your Maintenance Contract Maintenance Management Conference, Auckland 2003 Garry Law Law Associates Ltd Consulting Engineers PO Box 87311 Meadowbank Auckland – 09 520 2152 - 021 665764

2 Garry Law Setting Performance Targets2 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

3 Garry Law Setting Performance Targets3 A good operator will have these integrated. If one is going to contract out maintenance how will one retain integration?

4 Garry Law Setting Performance Targets4 Protecting your future Contract Forms - Extremes IP on Asset Strategies Franchise whole operationCaptured by the Contractor etc Body Hire for maintenanceRetained 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.

5 Garry Law Setting Performance Targets5 Resist Dumbing Down because you are contracting Ease of measuring contractors 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

6 Garry Law Setting Performance Targets6 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

7 Garry Law Setting Performance Targets7 Three Particular Risk Issues with Maintenance Contracts Interaction with operations Repair / Replace decisions End of Term

8 Garry Law Setting Performance Targets8 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

9 Garry Law Setting Performance Targets9 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.

10 Garry Law Setting Performance Targets10 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 contractors 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)

11 Garry Law Setting Performance Targets11 Contract Forms Issues: Repair / replace End of termOperations 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 CAPEXx Facilities Management, Contractor funds CAPEX x Franchise, Contractor funds CAPEXx

12 Garry Law Setting Performance Targets12 Who Plans? ContractorJointPrincipal Who Funds? Contractor (but long term contract) xx Principalx CAPEX Long term contracts have escalation issues and enhanced risks of regulatory intervention within a longer term.

13 Garry Law Setting Performance Targets13 Solution? Principal funding of CAPEX Contractor involvement in asset planning Joint teams on optimising asset strategies (? with gainsharing) Include operations where possible

14 Garry Law Setting Performance Targets14 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

15 Garry Law Setting Performance Targets15 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

16 Garry Law Setting Performance Targets16 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

17 Garry Law Setting Performance Targets17 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. Dont 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 dont do unless it has value to you.

18 Garry Law Setting Performance Targets18 Setting KPIs Need to start with your organisations 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 cant control most of what influences them they cant be used. To get organisational objectives into a useful form, cascade the objective to the relevant level and set a KPI on that.

19 Garry Law Setting Performance Targets19 Cascading objectives LevelObjectiveKPI CorporateIncrease EVA> +1% for year 04/05 ManufacturingIncrease asset utilisation and free assets for sale Output / asset value employed + 5% by Dec 04 Plant xyzFree 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

20 Garry Law Setting Performance Targets20 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!

21 Garry Law Setting Performance Targets21 Sorts of KPIs Milepost Achieve something by a date. e.g. Populate the Computerised Maintenance Management System by July 30 th 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.

22 Garry Law Setting Performance Targets22 Defining KPIs Time window looked at What counts Who measures When reported Exceptions management A methodology datasheet per KPI is good practice

23 Garry Law Setting Performance Targets23 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 (dont do if there is much variation beyond the control of the Contractor i.e. Demmings common causes dominate )

24 Garry Law Setting Performance Targets24 Risks with KPIs RiskMitigation Strategies Disputes on KPI calculation- Use methodology datasheets - Contractor self-production External measure discontinuedMinimise use of external measures Measure unavailable at start-upAllow 100 score for start up period Measure unavailability at paymentIncentive: Score zero for Contractor generated, 100 for Principal generated, no back calculation. Contractor mis-calculationAudit 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 achievabilityHave history available Performance history treated as commercially sensitive Contract must make clear will be available to tenderers in renewal

25 Garry Law Setting Performance Targets25 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.

26 Garry Law Setting Performance Targets26 END The background picture is Mt Agri in Turkey. (aka Mt Ararat)

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