Back to Services

Four Key Approaches for Contractor Management

Each cost element can typically be tackled by considering four levers, each of which uses a different methodology. These levers are:

1. Non-Essential Usage (Discretionary): readily identifiable unnecessary usage can typically be impacted through rapid behavioural change using PIP's SPIN Methodology
2. Essential Usage: detailed root cause analysis is required before effectively reducing usage
3. Price & Terms: Strategic sourcing or the renegotiation of price and terms
4. Wiring for Contractor Management: implementing systems, processes, and skills needed to hard wire' both the existing improvement ideas and to drive ongoing cost reduction

Methodologies - 4 main levers for each spend type.

1. Non-Essential Usage of Contractors (Discretionary Usage)

These are levers where the change required is relatively straightforward analytically and these levers can be impacted largely by getting people to behave (and manage) differently. We call these non-essential or discretionary' because few hardware changes are required and major capital does not have to be spent – we just need the behaviours of employees, contractors, supervisors and managers to change.

We apply PIP's SPIN methodology to drive rapid changes in behaviour on discretionary cost elements, starting at the layer in the organisation where the need to create behavioural change is the greatest. The results charts below give a sense of the speed at which our SPIN methodology delivers results.

2. Eliminate Root Cause of Contractor Usage

In parallel with the discretionary spend, PIP tackles the next layer of usage where more fundamental solutions are required to further reduce usage. Root cause analysis and problem solving are applied to understand essential usage and generally use a rigorous sequence. The Value Driver Tree is used together with Root Cause Analysis and Idea Generation Sessions to prioritise ideas that will reduce costs by eliminating the need for the expenditure. These ideas are given specificity to ensure rapid implementation without adding extra risks. The implementation and results are tracked in Idea Owner Reviews.

An example of applying this approach is shown here from a PIP client in the steel industry.

• Our client had a high cost to the business of their 3.5 day furnace maintenance program. The shutdown cost was over $300K per day in lost production, in addition to the contractor labour and equipment costs incurred over this period of time. An analysis of the process and how it could be shortened led to the implementation of four basic steps which reduced the downtime considerably.

1. A team worked together with the vendor to develop a specially designed custom built scaffolding that is used repeatedly during equipment shutdowns to reduce downtime.
2. Air conditioning was used to save time on waiting for furnace cooling
3. A waste chute was installed on the scaffold
4. The manning roster was optimised to reduce the time of the turnaround.

Scaffolding budgets for equipment maintenance

• By looking at the Total Cost of Ownership to the business of scaffolding, the tendering of a basic $2 million service contract generated $10 million in EBIT improvement. Total cost of the specialty equipment was less than $200,000.
  
  In this instance, essentially paying a higher hourly rate for an innovative scaffolding supplier decreased labour hours and increased equipment uptime.

3. Price & Terms (or Strategic Sourcing).

As a general rule, PIP tends to apply the price lever after the two usage levers above have been tackled, because usage work can fundamentally change the understanding of what really needs to be purchased.

PIP delivers 10-15% reduction in price even with our big global clients with strong strategic sourcing groups. This work is covered more extensively in the section on procurement in the "Our Services" section of the website. These results are achieved by:

• Placing our top strategists with extensive operating experience on the sites
• Locking sourcing and operations together to achieve a combined solution
• Understanding the full economics of the business
• Using strategic experience to shift the negotiating power balance even in situations when negotiating with what appear to be monopolists

Please contact us for a copy of our article on strategic sourcing which outlines our approach and case examples.

4. Wiring for Contractor Management

Wiring is required to sustain effective contractor management over the long term. Wiring can be at the business-wide level or at the level of locking in individual ideas. Wiring at an individual idea level means putting accountabilities, processes, systems, incentives or training in place to ensure the idea's improved results are embedded in the organization on a self-sustaining basis.

At the business-wide level it may include simple things like putting contract owners through our course on how to manage suppliers. It may be modifying contractor authorisation forms to require users to justify:

• Why they need a contractor
• Why they can't do the work internally
• How many hours are required
• The use of the chosen supplier (by showing that procurement policy has been followed - preferred supplier or 3 quotes)
• The root cause need for the contractor if it is a repeat spend

Once done, it becomes easier to maintain the new behaviours and systems than to return to the old ways of working or work around it. There are many wiring changes possible, covered in our articles on cost wiring and contractor management - please contact us if of interest.

This Cranage and Rigging case study illustrates a combination of these features.

Cranage and rigging spend with a contractor was reduced by 40% from a $0.8M annual spend.

This was achieved by pulling multiple levers. Firstly the need for each spend was critiqued and discretionary spend was eliminated via authorisation forms and budget accountabilities. From there planning and scheduling were improved to have more tool time' and better resource utilisation over any planned period. Planning meetings and targets were also implemented at the supervisor level, while prices were also renegotiated based on the improved planning system that better utilised the supplier's equipment and manpower. Results can be seen in the graph below which tracks weekly progress.

Cranage and rigging costs reduced by 40%

While it's always a good time to be driving a focus on contractor costs, drops in prices make this an urgent focus for many of our clients. We hope the examples described provide insight into of the types of savings that can be achieved in your organization.

Contractor Spend Down 30%

Contractor Spend Down 25%

Click here to view a site-wide case study.

Back to top