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Should we outsource

Outsourcing is a form of alternative service delivery where one company hires another to perform some of its functions. It’s fairly common in some fields, such as accounting, manufacturing, human resources, procurement and IT, but not as common when it comes to maintenance and asset management. It has it’s advantages and risks and must be approached carefully.

In July / Aug 2014, we authored an article on outsourcing in PEM magazine (now MRO Magazine). Although outsourcing isn’t yet as popular in North America, as elsewhere, it is increasingly being seen as an option. Here are a number of considerations to make when considering outsourcing or contracting of services.

There are a lot of unknowns, and therefore fears, around outsourcing. Some are well founded. Contracting work out, often results in lower quality work from a company that has no stake in your success. Indeed, they may even benefit as you experience difficulties. For instance, the business volume for a local machine shop actually increases if you experience more failures. They have no real incentive to offer suggestions that might reduce the instances of those failures. Quality of the service you receive is therefore a major concern. Yet contracting and outsourcing are not the same thing at all, even though contracted services may be referred to as having been “outsourced”.

An contracted service provider may not be as oriented towards provision of quality services as your own staff. Response and resolution time for problems may be compromised. If something occurs that is in the contractual gray area it may take a long time to resolve and it creates an opportunity for increasing scope of work. Once the work has begun, costs may not be as well controlled. In some markets, or with some highly specialized services, you may become dependent on one supplier. Over time, the assets entrusted to the contractor’s care may degrade because of short-term profitability drivers on their part, or short term contract horizons imposed by you, the buyer.

Contracting tends to have a fixed work scope, often defined quite prescriptively, and with little wiggle room. They tend to be shorter term contracts, say 1 year vs. 5. Many service contracts specify pricing by service, by volume of work or by hours expended in delivering the services. Rates are fixed and there’s no incentive, except the fear of losing the contract, to help the buyer of services, achieve better business results.

Outsourcing is quite different. If done properly, it creates a partnering relationship between you (the user of services) and the service provider. Scope is usually defined more in terms of results and outcomes than defined and limited services. There is often some sort of incentive mechanism to reward high performance and / or to share in the benefits of improved performance that benefits the customer. Much like a bonus scheme for your senior management, there are rewards for improving the business, not just for maintaining the status quo.

In both arrangements, there are benefits to be gained if the risks can be managed. In contracting, risks are managed by tightly controlling scope. In an outsource arrangement they are managed by specifying desired outcomes. Both can bring expertise in a field where your own staff is lacking. Because they specialize they may also have access to more current technology, systems and processes. Their services may be more easily scaled to match changing market demands on your business, both up and down, which is not so easy to do with your own cadre of full-time employees. Scaling your workforce to the available work is very tough to do with employment arrangements, and particularly so when skills such as those needed in maintenance, are in high demand but short supply. They may also be less expensive, helping to de-capitalize your balance sheet, while enabling you to focus on strategic issues as you leave the day-to-day operations to others. This is much more easily done if you outsource to a trusted “partner” who you don’t need to watch so closely because what benefits you, also benefits them.

Consider that outsourcing as a form of delegation, albeit on a corporate scale. Successful entrepreneurs learn to delegate activities that are not unique to the business, are not of strategic value and could easily be done by others. For example, there is nothing unique in any business about accounting, so it can, and often is, outsourced. Similarly, larger organizations with unique abilities – things they do well that have driven their business success – can do that same.

Maintenance is a largely a generic activity. No matter what physical assets you have and in what industry, they are usually constructed of the same sort of parts and systems. They are all civil, mechanical or electrical in nature. They use chemical, thermodynamic, atomic and other properties to perform a variety of functions. Subjected to the same stresses and environments they all break down and fail in similar manners. A bearing for instance, doesn’t behave differently in an airplane or a refinery pump or a car just because it is in a different piece of equipment. Repair work is also much the same but from industry to industry the bureaucracy associated with it may change. For example, aircraft, nuclear and pharmaceutical maintenance are subject to very stringent controls and documentation/record keeping, but the hardware being worked on and the tasks being performed are no different than elsewhere. Aircraft maintenance is critical to safe flight operations, yet it is often outsourced successfully. What’s unique is often the specific product or services being produced (e.g.: air transportation), but for the assets themselves, those only really impact what fails, how often and in what ways. In RCM we refer to this as the operating context and indeed it is different in more cases. That context can have a big impact on failures, but much less on the repairs.

If your maintenance work deals with matters that are common across your industry, your competitive market, your particular sector, etc., then there is a good chance that outsourcing can work well. If your maintenance work is truly unique or deals with proprietary processes, then outsourcing is probably not a good idea. For example, maintaining a specific proprietary process that is critical to your brand success (e.g.: production of a specific drug that only you provide), then outsourcing might be risky. But even activities that demand highly skilled capabilities on critical or complex systems are not necessarily unique. Aircraft maintenance is a good example. Thorough analysis of your maintenance regime within its business context can reveal whether outsourcing is even worth considering.

The risks can all be dealt with in the contract structuring through performance measures, various remedies for poor performance and rewards for good. Where dickering over whether or not work is in scope occurs you’ll almost always find an overly prescriptive scope of work where an attempt was made to control every detail. That happens when you are contracting and shouldn’t happen if you have structured your outsourcing contract well.

In outsourcing agreements, you want to build in flexibility and mechanisms to handle unforeseen circumstances based on a broad general set of criteria that you would use yourself if you were directly managing the activity. Usually those are based on outcomes, not activities. That is perhaps the biggest difference between contracting and outsourcing – the focus on results as opposed to activities.

There is a whole methodology that spans the spectrum of scope definition, service-level determination and pricing that can be used in assessment and preparing for use of services contracts. It is far more complex than merely contracting a small job. Most procurement (purchasing) groups have developed to focus on costs and services with a preference to over specify work activities. They often lack the expertise to deal with a large-scale outsourcing initiatives. Attempting to over-specify and be prescriptive doesn’t work in an outsourcing arrangement. That can lead to trouble in what might be thought of as an outsourcing arrangement that is really just a big contracting arrangement. Expectations may be set based on outcomes, but actions driven by overly prescriptive attention to activities.

Outsourcing maintenance is not yet very common and it may never be, but it is a viable option that, in many cases, is probably not being considered as seriously as it deserves.

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