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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
Garry Law Setting Performance Targets 2
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
Garry Law Setting Performance Targets 3
A good operator will have these integrated.
If one is going to contract out maintenance how will one retain integration?
Garry Law Setting Performance Targets 4
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.
Garry Law Setting Performance Targets 5
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
Garry Law Setting Performance Targets 6
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
Garry Law Setting Performance Targets 7
Three Particular Risk Issues with Maintenance Contracts
Interaction with operations
Repair / Replace decisions
End of Term
Garry Law Setting Performance Targets 8
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
Garry Law Setting Performance Targets 9
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.
Garry Law Setting Performance Targets 10
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)
Garry Law Setting Performance Targets 11
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 √
Garry Law Setting Performance Targets 12
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.
Garry Law Setting Performance Targets 13
Solution?
Principal funding of CAPEX Contractor involvement in asset
planning Joint teams on optimising asset
strategies (? with gainsharing) Include operations where possible
Garry Law Setting Performance Targets 14
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
Garry Law Setting Performance Targets 15
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
Garry Law Setting Performance Targets 16
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
Garry Law Setting Performance Targets 17
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.
Garry Law Setting Performance Targets 18
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.
Garry Law Setting Performance Targets 19
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
Garry Law Setting Performance Targets 20
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!
Garry Law Setting Performance Targets 21
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.
Garry Law Setting Performance Targets 22
Defining KPIs
Time window looked at What counts Who measures When reported Exceptions management
A methodology datasheet per KPI is good practice
Garry Law Setting Performance Targets 23
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 )
Garry Law Setting Performance Targets 24
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
Garry Law Setting Performance Targets 25
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.
Garry Law Setting Performance Targets 26
END
The background picture is Mt Agri in Turkey.(aka Mt Ararat)