1. Implementing O&M Best Practices:
1.3 Reduce O&M costs
While operational efficiency is currently a watchword in most infrastructure sectors, it received far less attention in the past. In the public sector particularly, management rules and culture offered few incentives for cost optimization because of the often-used “cost-plus” approach to allocating funds. The issue is still particularly acute in developing countries, where the priority is on building new assets rather than on operating existing assets efficiently. Africa’s maritime ports, for example, operate at a productivity that is only 30% of the international norm.88
Pressure is growing to reduce costs, however. Public budgets are constrained, and customers increasingly demand lower prices. Operators had better respond to the challenge. Three broad strategies are recommended: making processes more efficient by implementing lean and automated processes; reducing unit costs by optimizing procurement costs and outsourcing; and optimizing overheads by rightsizing management and support functions.
Implement lean and automated processes
This strategy consists of two main strands: adjusting processes in line with lean principles, and leveraging automation.
Redesign and optimize processes according to lean principles.
The starting point for process optimization is a full and thorough review of business processes. Such an analysis needs to take a holistic approach rather than focusing on narrow functions, and comprehensively investigate all critical processes throughout the value chain. Transparency needs to be created on all the activities and costs of current processes. For example, the maintenance processes should be traced along the full chain of events – from the initial identifying and reporting of the failure, through failure registration and works planning, to works implementation, billing, monitoring and evaluation. Guided by process-mapping, analysts can identify opportunities for reducing O&M costs. Costs are often unnecessarily high, owing to typical sources of “waste” such as unnecessary and non-value-added activities, lack of standardization, insufficient coordination, low workforce effectiveness and lack of workload planning. Given these sources of costs, efforts to reduce them include:
- Reduce unnecessary activities
- Check and if possible extend the maintenance cycles for time-based maintenance of non-critical equipment. Currently, the intervals are often based on conservative risk and warranty practices, whereas they should be based on a factual review of the actual vulnerability and criticality of specific components.
- Direct the bulk of spending and maintenance effort at those pieces of equipment that are most likely to fail and whose failures would have the most damaging impact.
- Implement condition-based maintenance to avoid needless replacements and thereby save on costs.
- Consider start-from-home initiatives rather than summoning depot-based maintenance teams, to reduce travel in company cars and trucks.
- Standardize O&M processes
- Develop standard operating procedures, including the “who, what, where, when, why and how”. For example, London Underground developed a generic concept describing the likely O&M of stations, depots, railways and passenger services up to 2020, in order to reduce the variety of operating standards and equipment used in future upgrades and to achieve high reliability at minimum cost.89 Remain alert to changing system requirements, however, and remain flexible enough to forgo some standardization.
- Improve work scheduling and coordination
- Strengthen field force effectiveness by refining coordination between supervisors and the field force, as well as contractors. Yorkshire Water (UK) integrated and digitized all previously paper-based data into a single, real-time information system to sharpen its work scheduling, enable dynamic task allocation and allow access for both the internal field force and external service partners. Better routeing and information on repair jobs led to a 50% reduction in unnecessary field jobs, and customer performance improved.90
- Enhance workforce effectiveness
- Optimize team size, being guided by internal or external benchmarking.
- Consider centralizing teams and adopting flexible team set-ups.
- Consider staff specialization. At the Barranquilla water supplier in Colombia, for example, specialized teams were established to deal with different tasks – customer-complaint handling, maintenance work and inspection. In conjunction with other initiatives, this specialization has reduced the time taken to repair pipe leaks by 50%.91
- Optimize staff allocation and shift work. By reorganizing its shifts, Singapore’s public transport operator SMRT improved driver productivity by 10%.92
- Plan well ahead to streamline processes
- Integrate maintenance planning with operations planning to enable anti-cyclical scheduling of maintenance tasks during times of low system load.
- Plan holistically to reduce workload variability and to average out workloads over the course of the year.
- Plan individual work processes in a detailed way to avoid, for instance, insufficient stocks of inventory and hence delays and additional logistics costs.
With its strong maintenance planning philosophy, the ACP, for example, is able to pre-order or pre-build components and equipment, and thereby avoid waiting times during the actual maintenance works. Using Gantt charts, it plans maintenance activities down to the minute. Thanks to such detailed planning, it optimizes the sequence of maintenance steps, and has succeeded in reducing major gate outages from an average 14 days in the past to just 4.5 days now. It has also successfully shifted to an all-in-one-go model of maintenance work, rather than multiple sequential work packages, to avoid repeating some of the fixed costs (e.g. sending out staff, building scaffolding).
In some cases, however, economies of scale can be achieved by bundling similar maintenance tasks from various sites, rather than by conducting all-in-one-go maintenance at a single site. For example, the MTA New York City Transit found that its one-station-at-a-time rehabilitation approach was proving too costly and time-consuming, so it shifted to a component-based programme. This involved assessing certain items of equipment and structures across all stations, such as platform edgings or escalators, and then carrying out repairs where indicated. In this way, resources were concentrated on the most needed upgrades.93
Leverage automation technologies.
Process optimization often requires difficult trade-offs between quality and costs. The need for these traditional trade-offs can be increasingly reduced or even dispersed by automation.
Opportunities for automation abound – from driverless underground trains in metros and unmanned stacking cranes in ports, to the inspection of assets using wireless sensors and to automated repair scheduling (see Figure 17 and Box 4 for examples). Skanska’s use of Building Information Modelling provides a good example of automation leading to improved value. Instead of traditional survey methods, Skanska used laser scanning to store design and construction information from structures and road surfaces, and to optimize and plan maintenance and rehabilitation works – providing a return on investment of 10 to 1 relative to the old methods.
Automation is not limited to single operation processes, but is now being applied to whole systems. Control and monitoring take place in integrated and sometimes remote operations centres, which provide real-time, end-to-end visibility on all of a system’s processes, and enhance efficiency without compromising quality or safety. The high-tech Rio Operations Center in Brazil is a case in point; opened in 2010, it integrates the data and monitoring functions of 30 agencies and utilities under one roof.94
Box 4: GE’s Centralized Asset Management Operating Model for Healthcare Facilities95
While health systems nowadays are challenged to reduce costs to match financial realities, the opportunity to reduce the cost burden associated with managing assets remains relatively neglected. About 95% of a hospital’s clinical asset base consists of ventilators, infusion pumps, telemetry units and other mobile workhorse devices. The amount of such equipment per hospital bed has jumped 62% over the past 15 years, but average utilization is only about 42%; a modern hospital’s asset inventory is now both pricier than ever and often underutilized.
GE’s Centralized Asset Management Operating Model for healthcare facilities can help reduce those costs. The model optimizes the asset workflows at each hospital through better tracking and monitoring of the mobile assets at all hospitals within a healthcare system. In addition to facility-level optimization, the model can enable healthcare systems to leverage their operations’ scale on the system-level by centralizing and coordinating distribution of the devices for three or more hospitals within a 50-mile (80-km) radius. In this comprehensive approach, all processes associated with clinical asset management (procurement, utilization, infection control and equipment maintenance) are controlled and supported centrally. A central distribution unit maintains appropriate stocks at each facility, moving the devices as needed from one hospital to another to meet fluctuating demand.
By adopting the model, healthcare systems can reduce the costs associated with asset management by 15-25%, and can save on future capital spending.
Optimize procurement costs and outsourcing
Optimize procurement costs.
Despite high spending, the purchasing practices of infrastructure operators are often underdeveloped. Many procurement departments tend to concentrate on the initial purchase rather than on whole life-cycle cost, and regularly base their purchase decision on single product attributes, such as brand, performance, durability or after-sales service. A wiser policy is to apply a total-cost-of-ownership analysis, incorporating a whole life-cycle review of any high-value system, equipment and component being purchased.
Figure 18: Checklist of Procurement Opportunities
1. Not a comprehensive list of all available actions.
A comprehensive procurement strategy needs to apply the various commercial procurement levers such as supplier management, bundling and best-cost country sourcing. In addition, however, it should seek to enhance procurement processes and apply technical procurement levers such as standardization and make-or-buy where possible. The checklist in Figure 18 provides an overview of the various procurement levers, and the case study on the As-Samra wastewater treatment plant (Box 5) illustrates an example of select technical procurement levers.
Box 5: Case Study – The As-Samra Wastewater Treatment Plant
The cost of electricity has almost doubled in Jordan over the past five years, and further increases have already been scheduled. The As-Samra Wastewater Treatment Plant, with its sponsors Suez Environnement and Consolidated Contractors Company, has adopted several measures to reduce its energy bill. Because few commercial levers are available to pull when purchasing commodities such as energy, the company has taken advantage of the wide range of existing technical levers, notably:
- Reducing electricity consumption. The company has implemented an energy management system as per ISO 50001 to evaluate and control its energy consumption. The project involves reviewing the efficiency of each energy source, defining KPIs and targets, and taking appropriate, subsequent action. An example is the air blowers used for aeration, which consume the most electricity in the plant. One aeration tank is currently undergoing modification to enable each zone to control its air injection independently, leading to potential electricity savings of 2-3%.
- Maximizing electricity production. The company also produces electricity through its hydro turbines and biogas generators. It has implemented several measures to maximize the availability of its biogas generators at over 95%. These include: planning preventive overhauls, reducing the maintenance cycle and negotiating a supplier service agreement with incentives to reduce downtime.
Consider outsourcing of activities.
Increasingly, infrastructure operators need to “do more with less”. Outsourcing can help, with its high potential for reducing costs. Without outsourcing, operators would have to acquire advanced technology and other expensive resources themselves, invest in the necessary process know-how and take on specialist employees. Outsourcing can spare the operators those costs, while maintaining or even improving their service levels.
The two main applications for outsourcing are:
- Maintenance works. While construction and design works in most countries have already been mostly outsourced over the past decades, maintenance is still largely performed in-house. Yet in the UK, for instance, the public sector has been contracting out for many years a great deal of routine maintenance and reactive work for urban and local roads.
- IT services and call centres. While many agencies still rely on legacy IT systems, technological progress often allows for more efficient solutions.
Some precautions are necessary, as outsourcing is not always beneficial:
- Run a whole life-cycle analysis and establish the strategic relevance of each activity that is a candidate for outsourcing. Each make-or-buy decision should balance the operator’s own know-how, cost and scale against those of third-party providers.
- Use performance-based contracts. Such contracts have worked successfully in many countries (e.g. Brazil and Argentina) in the roads sector, as they incentivize the private-sector partner to operate efficiently over an extended contract period of 5-7 years with clear outcome-based performance metrics. Typically, they achieve savings of 10 40%, while also improving road quality and safety.96
- Decide carefully on the contracted outsourcing period. It should be long enough for the contractor to justify investment in advanced equipment, research and development, training and new systems, but short enough to benefit from a competitive market and to get the best price through regular re-tendering.
- Select the right package size or take a portfolio approach, where multiple small projects are packaged and managed by a single contractor. Such a method will realize synergies and enable economies of scale, reduce transaction costs, diversify financial risks for the private contractor, integrate the management of all the projects and provide comparable standards. A good example is the trend towards regional contracts for O&M outsourcing. In Alberta, Canada for instance, outsourcing contracts has led to 25% savings in road maintenance.97
- Assess and amend the procurement processes and foreign direct investment framework to assure that both domestic and foreign outsourcing providers will be able to participate in the bids. This will maximize competitiveness and get the best deal for the government based on world-class skills and knowledge.
- Build a strong relationship with the provider organization. While contracts are obviously important, they often are not sufficient, as outsourced services may entail hard-to-measure outcomes and unpredictable needs and costs, and hence, a reliance on the provider’s cooperative attitude.98
- Retain an appropriate level of control. A fair degree of direct operational control may be necessary when many contractors are involved and in need of coordination.
- Keep some of the outsourced activity in-house, to preserve an “echo” or benchmark of the service.
- Secure organizational know-how. Even when outsourcing is used abundantly, the agency will still need staff with engineering and commercial skills, to manage risks and to challenge the contractors’ performance.
- Assess the alternatives to outsourcing. For example, in Denmark, a fairly common approach to maintenance is through partnering. In Italy, Autostrade per l’Italia, in repaving its highway network with porous asphalt, opted to assign the project to its subsidiary construction company. This approach provided the flexibility and incentives of external contracting, but also reaped the benefits of scale across the network. The two associated organizations supported each other in optimizing the asphalt recipe and the works processes, and succeeded in reducing the price of the innovative asphalt by 30% to the same level as regular asphalt.
Rightsize management and support functions
In addition to improving operational processes and costs, infrastructure operators also need to make structural improvements to overheads. Many organizations have grown organically over time, changing their regional footprint and functional requirements but retaining legacy structures that are now ill-suited to current demands. In this regard, the operator needs to conduct a regular strategic review of its organization, and in particular its management and support functions such as finance, human resources and technology/IT. (See chapter 2.3 for more comprehensive governance reforms to be initiated by policy-makers.)
Transform into a lean organization.
Many infrastructure operators apparently regard themselves as “oversized”, and perceive their support functions as being of low quality. The following remedies are indicated:
- Redesign the organization. A high-performance organization requires the right structure, clearly defined individual roles and accountabilities, as well as collaboration guidelines and joint budgets to align incentives and coordinate and facilitate information exchange across departments.
- Undertake delayering. Delayering will optimize the number of direct reports (span of control). By making the organization leaner, operators can avoid micromanagement and excessive bureaucracy, cut duplication and reduce the distance between top management and the customer.
- Investigate and perhaps adopt shared services. Such one-stop service centres can centralize, standardize and automate support functions, and reduce their costs by up to 40%.99
Any of these initiatives will only be successful if accompanied by a rigorous, organization-wide change management effort, supported by strong commitment and strategic direction from key executives.
Embed a cooperative and high-performance culture.
Given a lack of spontaneous cooperation among employees, O&M decisions in many infrastructure organizations are taken in silos. But to optimize total costs of ownership, it is essential to have joint decisions and active communication involving the engineering, construction, purchasing, maintenance and operations functions. To realize such a cooperative culture requires adaptation not just of the organizational design, but also of the organizational context. Fostering teamwork and cooperation involves the following essentials: shared values and vision, an open and performance-oriented culture, proper career paths, long-term incentives, strong leadership capabilities, and high-quality IT systems and tools. Two examples illustrate this:
- The Tennessee Valley Authority in the US introduced a Balanced Scorecard with clear financial, customer, process and learning targets, and cascaded and communicated this to all employees, with bonuses and non-monetary rewards linked to the targets. The initiative resulted in office-space savings worth US$ 20 million, and a US$ 6 million reduction in system losses.100
- The ACP transformed from a “process control” culture to one of entrepreneurial decision-making, by abolishing the “instructions for everything” and installing a continuous improvement process, where staff can propose ideas through the intranet. The new culture inspired a team of about 70 professionals to set up a “maintenance circle” and get together even after work hours to discuss issues and best practices.
Balance centralization and decentralization within the organization.
This balance is of particular importance to network infrastructure such as roads and railways, as well as to water and electricity distribution and transmission networks with an extensive regional structure. While the role of the centre can vary, successful infrastructure operations typically balance local asset management responsibility with central knowledge sharing and scale efficiency gains. Infrastructure assets are real assets, which require distributed visual inspection and asset management interventions by teams with local responsibility for O&M. However, to enable economies of scale, some degree of coordination, monitoring and exchange of know-how should be provided by central units or regional operations centres.