Garry Law Law Associates Ltd Consulting Engineers

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

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

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

Protecting your future 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

Resist “Dumbing Down” because you are contracting Garry Law Setting Performance Targets

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

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

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

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

End of Term Issue (this is a part of therepair / 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

Contract Forms Garry Law Setting Performance Targets

CAPEX Long term contracts have escalation issues and enhanced risks of regulatory intervention within a longer term. Garry Law Setting Performance Targets

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

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

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

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

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

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

Cascading objectives The objectives are hierachically linked - the KPIs relate to objectives not each other Garry Law Setting Performance Targets

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

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 onadefined 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

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

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

Risks with KPIs Garry Law Setting Performance Targets

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

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

Garry Law Law Associates Ltd Consulting Engineers