Outsourcing is a key lever for managing the downturn and uncertainty we’re facing now. In this blog series, we are discussing how organisations can remain competitive through strategic use and better management of contractors in the medium-term even while running immediate cost reduction programmes.

We explored long-term strategic contracting decisions and medium-term tactical ones in the earlier blogs. In this blog, we explore the third component – Establishment: the setup to get each project off on the right foot.

Establishment

Our objective is to minimise waste and maximise performance. To do that, we need to:

1. Minimise planning waste 

Contractors will naturally look for profitable opportunities in our planning gaps. It’s up to us to make sure we get what we want and get it efficiently. To procure efficiently our scope needs to be clear. Whether it's tomorrow’s work or the next six months, if our scope is unclear it’s easy to pay for work we didn’t need or want. The clearer we are on scope, the more likely we are to get exactly what we want.

But sometimes we just can’t tell exactly what is required. For example, one of our clients suffered a significant face collapse at an open cut mine. They could readily estimate the volume of material that needed to be removed, but they couldn’t tell how difficult it would be to do. So, they worked with their contractors to...

2. Agree the best payment mechanism for the work to be done 

Normally for a simple repetitive task like moving material, we would prefer a unit rate but with the uncertainty arising from the face collapse, time and materials were the fairer mechanisms for both our client and the contractor. The contractor would have had to build a risk premium into a unit rate; under time and materials our client had to manage performance closely, but the arrangement was both cheaper and more flexible.

Fundamentally, the choice of payment mechanism comes down to risk (who bears it and how much it costs), clarity (on both scope and measurability) and flexibility (which directly affects risk and clarity). Less clarity means we need more flexibility and are creating higher risk – and will want time and materials. High clarity suggests unit rates or lump sum.

We can develop tailored shortcut tools for choices like this (e.g. a decision tree can factor in local limits, approval processes, etc) but it’s always important to start from the commercial logic. And in the right circumstances, we might consider a hybrid (e.g. if we need guaranteed emergency response, a Retainer plus Unit Rate model can be attractive).

3. Minimise systematic waste

It's easy to waste time and money on non-productive or overpriced work.

Burning time often happens in many small increments. Does it take 15 seconds or 15 minutes to get through the gate in the morning? Does every morning standup really need to go for 15 minutes? Does every contractor need to be at every minute of the standup? Do we request paperwork we don’t use?

While there’s no silver bullet for addressing time wastage, we can save time by analysing time-consuming processes step-by-step and then redesigning them, from scratch if necessary.

Paying too much for an hour of contractor time has three causes:

• The job is completed on overtime rates
   While some overtime is normal; we should avoid planning for overtime. Maybe we can have more contractors in regular time, or the work can be completed on the next shift.
• The contractor is overqualified for the job
• Someone underqualified does the job

We can eliminate the first two causes by being clear on the skills needed when we specify a task – and being very clear that unnecessary skills are on the contractor’s dime, not ours.

One of our clients noticed a contractor supplying overqualified people (and charging full rate) and also supplying underqualified people (and charging as if they were fully qualified). The contractor claimed a tight labour market was forcing them to staff flexibly. Interestingly, some of these people were scheduled regularly for “wrong” tasks, and even for overtime.

Our client’s contract managers started managing contractor performance more actively. A quick policy change, and a quiet word, and the contractor suddenly found it much easier to navigate local labour market issues. We also identified some simple system opportunities to catch this issue earlier next time – and our client invested in closing them (e.g. using the access tracking system for checking each contractor’s staffing qualification).

4. Clear short interval KPIs

We already defined clear performance measures in the Strategy phase. In this Establishment phase, we need to determine the daily/weekly targets for those measures. Conceptually this is easy but in practice, this is where our contractors have to sign up to meaningful targets (“how much, by when”). Targets that are useful for maximising contractor performance need to be measurable in short intervals, ideally daily. A contractor who won’t commit to meaningful short term targets means not to achieve any long-term target. We won’t succeed, and we can’t proceed, without commitment.

In the next blog, we’ll explore Execution, and some controls and processes we can use to help us manage performance successfully and hit our targets.

Click through to read other blogs in this series:

Part I - Strategy

Part II - Tactics

Part III - Establishment