201

MAINTENANCE OUTSOURCING
GUIDELINES

Joint Working Group

23/39.14

April 2002
 201

MAINTENANCE OUTSOURCING GUIDELINES

Joint Working Group 23/39.14

Authors: T. Eyles (England-NGC-Convenor TF01), P. Wester (Holland-NUON-Convenor JWG 23/39), J. Corbett

(Ireland-ESBI), E.O. Gonzalez (Spain-REE), F. Hofmann (Germany-ALSTOM Schorch), A. Wilson (USA-DOBLE),
J. Lica (Portugal-REN), P. Renaud (France-RTE-Secretary JWG 23/39)
 MAINTENANCE OUTSOURCING GUIDELINES
JWG 23/39-14

Contents Page

Outsourcing In A New Business Framework 1

PART 1

Development of A Service Option Strategy 3

Reasons For Outsourcing 3
Benchmarking 3
Access To Data 4
Business Models 4
Comparison of Internal & External Service Providers 5
Barriers To Success 6
Barriers To Entry of External Suppliers 6
Human Resource Management 7

PART 2

Decisions Models 9
Competency Mapping 9
Effectiveness Vz Risk Analysis 10
Outsourcing Evaluation Methodology 11
The RCQ Model 12
The Risk Component 12
In-House Costs 13
Outsourced Costs 14
The Quality/Effectiveness Component 15

PART 3

Outsourcing Risk Management 18

Business Risk Control 19
Best Value 19
Selection of Service Providers 20
Management of Service Providers 22

PART 4

Key Performance Indicators for Measuring/Assessing External Service Providers 24

Performance Improvement 26
Relevance 26
Selection of KPIs 26
Obtaining Data 27
Presentation of Data 28
Use of Benchmarking 28
Typical KPIs 29
Asset Performance KPIs 29
Management of Service Providers, Contract Issues 30
Long Term versus Short Term Contracts 31
Risk versus Reward Concepts 32
Contents Page
Possible Contract Types 32
Outsourcing Good Practice 33

Conclusions 34
Bibliography 36

Appendices
1. KPIs for Measuring Transmission Asset Performance 37
2. Electra Article – Maintenance Outsourcing Guidelines 42
3. Cigre 2000 Session Paper –Outsourcing of Maintenance in view of Market 48
Liberalisation
 JWG 23/39-14
Maintenance Outsourcing Guidelines

August 2001

Outsourcing In A New Business Framework

In the session papers1,2 for CIGRE 2000, in Paris, concepts of outsourcing were reviewed, including business models,
assessing the risk through outsourcing exposure and the development of contractor-owner relationships. These
guidelines attempt to review these in a systematic manner. Part 1 discusses the general issues around the development
of a service options strategy. Part 2 focuses on the analysis of outsourcing opportunities, Part 3 considers some more
general aspects of outsourcing e.g. risk management and measurement of contractor performance and Part 4 discusses
Key Performance Indicators for measuring the effectiveness of outsourcing contracts, and managing Service Providers.

An "International Survey of Maintenance Trends and Policies" was published in September 2000. This reported the
results of a questionnaire conducted during 1998 and was coordinated by a joint working group (WG 23/39) of CIGRE
study committees 23 and 39. The analysis reflected the recent, and ongoing, dramatic changes occurring in the
management of the electricity supply industry worldwide. Liberalization, deregulation and, in many cases,
privatization has led to profound changes in the business environment of these industries. One of the aspects
highlighted in the survey was the trend towards outsourcing of many tasks. Aspects of this have been a combined
activity for debate within the working group and two discussion papers were presented at the 2000 Paris session of
CIGRE. These Guidelines have been prepared by the group to highlight some of the issues and give guidance to those
utilities contemplating increasing their outsourcing activity level.

The recent practice has been to give increased focus upon achieving greater efficiency. Business profitability,
availability, reliability, revenue and customer satisfaction were all identified in the survey as key drivers. These must
operate within a framework focused on safety to the public, staff and the environment. Company strategy and stage of
implementation will determine performance within this framework. For many utilities the tradition has been for
internal staff to undertake all operation and maintenance activities - and to achieve this at the same high technical
standard at all points in the transmission system. This situation has changed, and many now report outsourcing of
activities that are judged to be "non-core". This includes tower painting and substation building repairs. Such activities
are traditionally defined as non-core work since they are not of a technical nature and have little, if any, immediate
impact on the operation of a power system. Conversely, technical work, for example, primary plant or protection
maintenance, is considered to be core work since they have direct consequences for asset performance and hence
security of supply. The typical level of outsourcing reported in the survey was that in 1998 utilities were reporting 30-
35% of their operation and maintenance activity was being outsourced. In general this activity related to non-core
activity. The exceptions were in some countries where there was not a strong technical capability and there was greater
reliance upon external technical support for activities usually conceived to be "core". This average shows an increase
from a survey undertaken in 1991, which reported an average of 26% outsourcing. More surprising is that 25% of
respondents outsourced more than 50% of their maintenance, and of these 15% outsourced more than 90%. Asia and
the Middle East had the highest average of 57% and North America the lowest at 5%. While this North American
result has increased substantially since 1998, there remains evidence that many of the large U.S. utilities still have little
exposure to outsourcing.

1
The level of outsourcing applying at present is, therefore, variable and reflects the wide variety of business models and
environments for Utilities around the world. Consequently, it is not possible to provide definite advice on what
services should, or should not, be outsourced. This document attempts to provide a guidance to help Utilities address
the right issues and make sound outsourcing decisions regardless of their particular business environment. The
outsourcing evaluation methodology set down in part 2 of this document should be viewed as a two-stage approach.
The decisions models, explained in sections 2.2 to 2.4, are intended to facilitate a high level identification of potentially
outsourceable services. The “RCQ” model set down in section 2.5 to 2.10 provides a framework against which more
rigorous and quantifiable assessments outsourcing opportunities can be made.

The following flow charts sets out the main issues in relation to successful outsourcing and cross references them to
appropriate sections of this document.

2
PART 1

Development of A Service Options Strategy

1.1 Introduction

This section considers, in general terms, the business drivers causing utilities to adopt outsourcing strategies. This
is followed by a discussion of common business models to support understanding of the outsourcing boundaries
applicable to transmission utilities, and to prompt initial thoughts on where any particular utility should broadly be
placing itself in outsourcing terms.

1.2 Reason For Outsourcing

The extent of outsourcing with which a particular utility feels comfortable will, to a large extent, be dependent on
the business conditions prevailing within its sphere of operation, its strategic objectives and particular business
drivers (e.g., mode of regulation). It is not possible, nor appropriate, for these guidelines to recommend a
particular model as being the best for all. Rather the viewpoint is taken that many utilities are examining the
opportunities and threats for outsourcing core activities, while few have reached a state (or state of mind) for
outsourcing all operation and maintenance activities. This document addresses this middle ground in the main -
although many of the issues also face those operating in the "network owner" mode (see 1.8 for definition).

There are a few simple questions that any utility should ask itself when initially considering outsourcing - to which
a positive response will most likely lead to a decision to proceed:

• Can an activity be delivered more efficiently or effectively through outsourcing?

• Does organizational flexibility suffer due to time wasted on non-core functions?
• Should the utility procure new skills externally to meet new technology challenges in preference to creating
them in-house?
• Has the company tested itself on what to manage, rather than how to manage?

Drivers such as globalization, increased deregulation, growth in services and technology changes have forced
many companies to reconsider how they conduct their business, and the electricity sector is no different.

In general the top reasons generally given by the general business community for outsourcing are:

1) to achieve cost savings

2) to focus on core business
3) to keep a competitive edge
4) to obtain an expertise not currently in-house
5) to improve the quality of service
6) to achieve more revenue
7) to meet changing demands
8) to increase shareholder value
9) to become world-class
10) to gain internal flexibility through changing work practices

1.3 Benchmarking

A key benefit of outsourcing is that it allows the performance of internal service providers to be benchmarked, or
compared, against that of the Contractor. However, it is necessary to be fair in the comparison. The internal and
external service provider must work with the same opportunities to make the comparison reasonable.

The experience specific to the electric utilities to date is that much of this can be achieved through outsourcing
non-core work. Some also claim this also be true for much of core activity also, but contrary evidence also exists,
particularly with regard to cost savings. To be effective, the above very laudable reasons need to be connected to
targets that can be assessed for effectiveness. One attempt to do this has been an international benchmarking
exercise.

3
 At its first level it assesses a company's performance against others, and is one measure that world-class
performance is or is not being achieved. The same benchmark method is also used as a process improvement tool
by comparing one geographic area against another in the same company. One element for assessment is cost, and
various methods have been developed for effective currency conversion between countries. Against this is a
measure of "service" provided by several key maintenance tasks.

International benchmarking is increasingly used by Utilities to assess their performance against “best in class” and
to identify opportunities for efficiency gains or cost reductions.

Benchmarking requires a process for defining service, and this is the key to answering the effectiveness of
outsourcing of core functions. It may be possible to judge the merits of contractor bids for non-core activities - or
even their eventual success - on a purely cost basis. It is extremely unlikely that this is applicable to core work and
key performance indicators must be established.

1.4 Access To Asset Data

Equally important as the need for performance indication is the need for defined traceability. The development of
information strategy and consequent installed systems have an important role. This requires the utility to have
effective means for the contractor to access substation plant and site drawings and documentation, and an efficient
means of documenting work schedules, maintenance documentation, fault and defect reporting, space holdings and
management and, most importantly, access to the tools of condition-based maintenance.

Traditionally, many maintenance activities were controlled by time-based (or sometimes duty-based) triggers. The
trend has been to focus on failure mode, criticality and effects analyses and condition assessment. This has led to
increased effectiveness in the maintenance investment but is more difficult to define as a standard for an
outsourced contract. The success would rely upon the contractor and utility having a common access to condition
assessment data, and very detailed knowledge of company risk exposure. Third party access to the latter is often
not a desirable feature. Yet, management of outsourcing of core business requires such a level of openness, and
acceptance of how the responsibility is to be attributed in the event of circuit outages caused by the contractor not
meeting agreed performance indicators.

1.5 Business Models

When outsourcing of services is being considered, organisations must decide upon the appropriate level for
themselves. The easy decision is likely to be to solely outsource maintenance. From then on decisions on what
can be outsourced and what must not become progressively more difficult. For example, should the engineering
associated with fault management, forensic investigations or maintenance policy and standards etc. be outsourced.

In terms of the extent of outsourcing employed, transmission utilities can be categorised into one of four business
models, namely:

• asset owner
• asset manager
• network manager
• service provider.

The models are differentiated by the extent of in-house service provision. At one extremity, i.e. the asset owner,
virtually all work is contracted out. At the other boundary, namely the service provider, most activities are carried
out in-house.

The particular model adopted by a utility will to a large extent reflect it’s level of maturity in outsourcing terms and
examples of utilities fitting each of the models can be found around the world.

1.6 Asset Owner Model

Under this model most activities are contracted out. The company owns the assets, controls the system and
manages financing. All asset management including technical asset management strategies and maintenance
services are contracted out to third parties. Operating risks are therefore managed through contractual relationships.

4
1.7 Asset Manager Model

In this model the company manages the investment risk and capital spend. Activities such as technical asset
management strategies and work planning and outage planning are retained in-house, with maintenance services
being outsourced. Feedback on asset condition is dependant on contract requirements. The asset manager
continues to carry all risks associated with plant failures since to offset them to suppliers is likely to make
outsourcing non-viable.

1.8 Network Manager Model

The majority of business critical activities are managed in-house. The company thus manages both investment and
operating risks. The balance of services are outsourced only if the key criteria of best value, service level
(including the availability of suitable suppliers) risk and strategic fit can be satisfied. Maximum learning from
front-line experience of the assets is sustained in-house.

1.9 Service Provider Model

Under this model a company manages as much work as it has resources available. The majority of services are
carried out by direct labour. Only minor, low risk non-core activities are outsourced on the basis of cost benefit to
the business. This option enables companies to retain the most complete in-house knowledge of their assets, but at
a price.

Examples of the maintenance tasks associated with each model are shown in Figure 1.

Site Facilities
Management
Site Technical Care
Primary Plant
Protection and Control
Telecom’s
Cables
Overhead Lines Outsourced In-house
Auxiliary Plant
Standby
Cables inspection
Network Management
Safety Management
Grantor Relationships
Contract Management
Service Activities Asset Asset Network Service
Model Owner Manager Manager Provider

Fig. 1: Maintenance Activity fit with Transmission Business Models.

From the above it can be appreciated that the traditional utility was a service provider, and many have moved
towards a network manager model. At present there are relatively few that adopt the asset owner or asset
manager model. What is, however, clear from the experience gained to date is that both of the latter categories
need to maintain a “realization management” function within their companies. Its role at the highest level is to
manage interfaces and limit risk. More will be said about this later.

1.10 Comparison Of Internal and External Service Providers

At the outset of outsourcing considerations it is important to recognise the different business drivers that
influence the manner in which internal and external service providers behave. These behaviors heavily influence
the strategies that have to be adopted by Utilities to overcome barriers to the successful implementation of
outsourcing policies.

Some of the business drivers are listed below. The list should be considered to be neither complete, or static,
since it will be heavily affected by the prevailing commercial environment.

5
 Internal Service Providers
• Driven by security of supply
• Driven by work programs etc
• Driven by long term issues eg reliability
and ability to maintain
• Generally have greater specialised system
knowledge and understanding of the
impact of changes
• Driven by budgets, but have the ability to
influence budgetary provision
• Often strong political influence and high
levels of reporting
• Feel a high level of ownership of the assets
External Service Providers
• Driven by cost and profit considerations
• Driven by programme and cost damages
• Driven by reliability during warranty
periods
• Knowledge is limited to product or service
being provided
• Generally not able to perform better than
contract will allow
• Minimum controls and reporting
• Mixed attitudes towards long term. Often
have little regard for long term operational
or maintenance issues

1.11 Barriers To Success

It follows from the above that difficulties that have to be overcome in moving to an outsourcing strategy are not
insignificant. Utilities will inevitably face a number of hurdles in seeking to implement outsourcing. The major
barriers to success, in order of importance, are:

• internal resistance
• unclear performance/benchmarking metrics for the contract
• loss of control over the process or activity
• lack of prior outsourcing experience
• inadequate planning of the contract
• lack of suitable contractors in the local market
• inadequate documentation of existing maintenance standards, processes and asset records (too much is still in
the heads of your key in-house service providers)

In addition to barriers to overcome there are a number of common mistakes made by businesses in the course of
outsourcing decisions that should be avoided to ensure a successful implementation of the strategy. These
include:

• no link to business strategy and competencies

• lack of clarity and honesty around description of core competence
• strong tendency to start with the name of a service provider and then try to justify the relationship
• no objective selection criteria
• lack of clarity around the type of relationship required
• lack of management experience and vision
• lack of basic management processes, KPIs and organisation structure
• inadequate senior management involvement
• expectations of both parties misaligned
• misunderstanding of all the cost components in the process chain

Other issues that should be considered before embarking on outsourcing are:

• cost of developing adequate documentation of standards and processes e.g. transmittal of drawings
• bringing Asset registers/maintenance management systems up to date
• site access control systems
• access to spares by contractors
• increased risk of sabotage by disgruntled in-house workers

1.12 Barriers to Entry of External Suppliers.

In addition to the above there are a number of entry barriers that suppliers will have to overcome to provide
best value services to transmission utilities. Some barriers are common e.g. where site access is concerned

6
 there are safety management issues. Others may be cumulative e.g. network wide coverage may be required to
establish a critical mass for the market.

Typical barriers to entry are:

• Site access and safety rule authorisation requirements.

• The infrastructure necessary for nation-wide coverage.
• Market size. There may be lack of critical mass for some equipment e.g. power electronics.
• Understanding of network operation and systems issues. Could be critically important in some areas, e.g.
protection testing.
• Breadth of technology employed.
• Supplier skills and knowledge. ( expertise in the maintenance of older technologies may now only reside
within utilities particularly if there is no history of outsourcing)
• Emergency response requirements ( Immediate response 365days/year, 24 hours/day)
• Flexibility requirements (e.g. short term cancellation of work due to system operator Prequirements)
• Establishing contractor competence
• Union attitudes
• Complexity of contracts. (particularly for smaller suppliers)
• High set up costs e.g. infrastructure, spares, insurance etc.
• Purchasing power
• Level of liquidated damages
• Inadequate asset information systems

Some or all of these issues would need to be addressed in most instances to enable external suppliers to enter
the market.

1.13 Human Resource Management

To change from a traditional public service organisation, to one which is results oriented and commercially
driven represents a shift in business model and requires dramatic changes in employee attitudes which are very
difficult to achieve.

The application of private- sector management practices, resulting in new management systems, re-
organisations and new working methods has created work environments 3 within electricity utilities that are
characterised by significant and constant change. It should be recognised that against this background of
turbulence in the work place, outsourcing will inevitably exacerbate the human impacts on staff within those
utilities.

In most utilities the introduction of a commercial culture will be in direct contrast to the focus on technical
issues and security of supply that the majority of employees will have experienced for the largest part of their
careers. Most permanent staff will be uncomfortable with the change to an uncertain working environment
from one that was previously characterised by a high degree of stability. An outsourcing strategy can be
expected to amplify that discomfort since it indicates an approach to human resource management in which
employees are perceived as human resources rather than ‘resourceful humans’ since their competencies are
sought in the market like any other resource.

This unease felt by staff manifests itself in various ways. Typically, employees are dissatisfied with the
culture of their company and confidence in the Board of Directors and Senior Managers is low. Complaints
about the lack of visibility of Directors and ineffective communications during the transition period are
common. There is also a strong tendency for staff to try to resist change i.e. to attempt to remain within their
“comfort zone”.

The adoption of an outsourcing policy inevitably has a major impact on staff because for many it means lost
jobs or at least transfer to a new service provider organisation with inferior terms of employment. It is
therefore likely that any move towards significant outsourcing will have an initial and may be longer term,
adverse impact on the industrial relations climate within a utility.
Individual utilities must therefore decide whether the gain is worth the pain before embarking on an
outsourcing approach.

7
In electricity utilities, direct employees are an expensive resource. As a consequence of the monopoly regimes
of the ex-state industries that initially hired them, they are normally employed on superior terms and
conditions to those prevailing in the wider market. Their contracts of employment are generally not geared
towards flexibility of deployment and consequently it is very difficult to fully utilise them as work fluctuates
over the course of a year. What electricity utilities gain through outsourcing is flexibility in hiring and firing.
Additionally, responsibility for (and the costs of) holidays, sickness, training, severance and personnel
management etc are all transferred to a third party.

In a commercially driven environment those factors combine to make the use of contractors very attractive
from financial and resource management viewpoints in comparison to in-house maintenance staff. It is
therefore likely that despite the potential industrial relations issues, most utilities will wish to move down the
outsourcing route in response to pressures from regulators and shareholders to reduce costs.

A sudden change to an outsourcing approach runs the risk of destabilising a utility’s relations with its staff and
their trade unions. To succeed in the transition, a balanced organisational involvement and employee
commitment is essential. This means that a phased approach, which attempts to minimise the human impacts of
the policy, is one most likely to deliver the required results.

Important questions that need careful consideration in relation to human resources management when
outsourcing include:

• what thoughts go into personnel policy, development of competencies and retention of employee loyalty
• what impact will outsourcing have on the work environment
• how will staff morale effect the operation of the business
• what affect will outsourcing have on work quality and safety

The rationale for outsourcing is that no one company can be effective in solving all tasks. Outsourcing
predominantly provides utilities with greater flexibility. However, the human impacts of the adoption of an
outsourcing policy in electricity utilities are potentially very significant and consequently human resource
strategies in support of outsourcing initiatives need to be carefully developed in advance.

8
PART 2

Evaluation of Service Requirements

2.1 Introduction

This section describes a means of confirming what services should best be outsourced. A competency-mapping
model is discussed which enables utilities to identify which in-house services should be outsourced to fit their
strategic goals. This is supported by a risk vs effectiveness model which can be used to test outsourcing
decisions against risk and in-house capabilities. Finally, a methodology is described (RCQ model) to support
outsourcing decisions in a regulated environment.

2.2. Decision Models

The extent of outsourcing a utility decides to adopt will be governed by its business drivers. Two decision
models have been developed in order to aid outsourcing decisions.

A Competency Mapping model4 (Fig2) enables a clear understanding of the current situation to be developed.
This is supported by a Risk vz Effectiveness model (Fig 3) which provide a relatively quick and simple, if high
level, means of understanding what services should potentially be outsourced. This is approach is backed up by
a rigorous outsourcing evaluation methodology which can be used to provide a systematic evaluation of
outsourcing opportunities, but more of this later.

Fig. 2: Competency Mapping Model

2.3 Competency Mapping

Five distinct competency classes have been identified:

• distinctive

the most important capability of an organization. In the case of an Asset Manager type utility this would be the
ability to manage contracts. For a Network Manager it might be the competency to effectively carry out
switchgear maintenance.

• essential

needed for an organization to operate. In the case of a transmission utility this could be the competency of post
fault restoration of demand. In essence, the skills of operational
switching, maintaining safety from system dangers and emergency repairs
.
• spillover

9
 allow a utility to obtain profits in a related activity through its distinctive competencies. In a transmission
utility which uses helicopters for line patrols this could include hiring out the helicopter for other purposes, for
example transport, hence increasing revenue through external sales.

• protective

close to distinctive competencies but related to activities that cause considerable risks for the success of the
whole organization if they are not managed properly. An example in the case of transmission utilities would be
protection maintenance.

• parasitic

activities that are done in-house that waste organizational resources. Tower painting would be an example.

This chart would help to develop understanding of what activities are important for the utility to manage, but
it’s dynamic nature should be recognized. Changing market environments can cause activities to shift from one
category to another over time. As an example, air blast circuit breaker maintenance may be considered to be a
distinctive competency since appropriate skills may only reside within the utility, whereas in the case of SF6
circuit breakers, skills may be available through manufacturers, enabling circuit breaker maintenance to be
considered even as a parasitic competency.

Decisions on what and how to outsource are supported by this model. Obviously, parasitic competencies must
be outsourced to the best provider available. Essential competencies can be outsourced if an appropriate
relationship can be established to ensure continuos availability of the service and the minimisation of risks.
Finally spillover competencies can be sold externally providing the utility can retain the profits.

2.4 Effectiveness Vs Risk Analysis

Where Fig 2. helps in describing and understanding the roles of different activities within a utility, Fig 3. tries
to capture the efficiency of the in-house activity. The model supports the decision process regarding
outsourcing with the aim of avoiding problems that can cause a difficult outsourcing relationship.

Fig 3. : Effectiveness vz Risk Model

The drivers are:

• risk associated with maintenance activity under review, including the risk of losing know-how.
• Effectiveness of the activity when performed in-house as opposed to an outside contractor.

For each quadrant a logical action follows:

10
 • (A) If the effectiveness of the regarded maintenance competence is high it is logical to keep the activity
in-house, assuming that the utility can maintain effectiveness into the future. Risks can be managed by the
distinctive and tightly controlled.

(B) If the effectiveness is low and risks associated are low the logical action would be to outsource the
activity. Examples could be building maintenance or tower painting.

(C) If in-house effectiveness is high and risks low, the activity would only be outsourced if an external
provider were able to offer improved effectiveness.

(D) The main challenge arises when in-house effectiveness is low and risks high. In this situation the task
of management is to redesign the activity so that either it becomes more effective or the risks become
lower. Outsourcing should only be considered after the activity has been managed out of the risky
quadrant and effectiveness of third party suppliers is higher.

An Outsourcing Evaluation Methodology

2.5 The Regulator’s Perspective

It is necessary to follow up any high level analysis of potential outsourcing with a rigorous assessment of the
situation. The following paragraphs outline a methodology which can be used to provide a systematic
evaluation of outsourcing opportunities against defined criteria. It can be used to support a utility's
outsourcing strategy in a regulated environment, particularly when Regulators require utilities to demonstrate
that they are incurring costs efficiently, i.e. are they procuring services for the least cost?

Utility: Undertake
Are costs Outsourcing
Yes
efficiently Evaluation
Are the suppliers
incurred? capable of producing
a level of service at
Yes least equal to that of in-house
supplier?
Is the market Can the actions provide the
What actions
Yes competitive? No customer with:
are required
No to overcome
Do suppliers exist
these issues?
externally to the utility that
can provide the particular Lower prices Yes No
service?
Barriers to Entry
No Why Not? Better service Yes No

Low Profit Potential

Better legislative
Yes No
compliance

Innovation Yes No

If Yes to any, If No,

Market Review how would would the actions
regulatory still meet regulatory
objectives be met? objectives?
Regulator
Impact Assessment In
If No,
consultation with Utility Yes
do nothing

Figure 4: A Regulator's Perspective

Any methodology for outsourcing evaluation must allow for any Regulator's perspective of the market to be
taken into account. He must be convinced that services are being procured by the utility for the least cost. This
process is represented in Figure 4 above.

It should be recognised that whilst the strategic importance of an activity to a utility (Fig 2- Competence
Mapping) is crucial to it, it is of less interest to a Regulator.

It follows, therefore, that in a Regulated environment, in the first instance any evaluation of whether a
particular activity should be outsourced must be objective, quantifiable and independent of a utility's own

11
 strategic intent. Whether an outsourcing decision is followed through however, will be heavily influenced by
the utility’s regulatory strategy.

2.6 The "RCQ" Model

Recent work has confirmed the view that the three overriding issues of importance to outsourcing decisions
are:

• risk (R)
• cost ( C)
• quality/effectiveness (Q)

These factors have been combined into an "RCQ" model that is activity specific in its application and enables
objective and quantifiable assessments of outsourcing opportunities to be made. The components are
compatible with the overall concept of best value. The model is shown schematically in Figure 5 below:

Outsourcing Opportunity

RISK
Assessment

Risks
COST Safety COST
In House Service Outsource
Business

QUALITY/EFFECTIVENESS
of Current Suppliers

Recommendation
In-House or

Figure 5: Outline "RCQ" Model Structure

The model facilitates a structured and consistent approach to the evaluation of risk, cost and quality to arrive at
a sound and defendable outsourcing decision.

It is apparent that the components overlap, e.g. management of a high risk activity down to a lower level of
risk may incur costs. Risks can always be managed, but at a cost i.e risk translates into cost. Nevertheless, the
components are compatible with the overall concept of best value.

The results of applying the tests should either validate or challenge a utility’s thinking in relation to whether a
service is outsourced or supplied by in-house resources.

2.7 The Risk Component

For the purpose of simplicity, only operational risk is considered in the model.

The model uses activity based risk scoring. Risk is calculated by multiplying the frequency with which an
event occurs over a given time period (F) (obtained from historical records) by a severity weighting factor (W)
based on an assessment of the impact of the events.

The results are summarised in the simple matrix shown below

12
 Risk by Activity Severity of Impact/Hierarchy of Risk Frequency Score
(F) (FxW)
Service Risk SYSTEM
Weight (W) 6 System Shutdown x y
5 Partial Dirty Shutdown x y
4 Partial Shutdown x y
3 Local Shutdown x y
2 Uneconomic Transmission Operations x y
1 Reliability (outage related) x y
Total z

Figure 6: Activity Based Risk Scoring.

Typical results for a transmission utility are summarised below. Whilst transformer faults are relatively rare in
comparison to switchgear faults, they are more likely to result in lost demand over a more widespread area.
Consequently, their impact is higher, and overall risk score higher. Conversely, at the other end of the
spectrum poor vegetation control has less impact (generally) in systems terms.

Risk Level

0.1 Transformers
High

0.06 Switchgear

0.03 Vegetation
Low Control
0.01

Figure 7: Typical Risk Scores: Transformers. Vegetation

Control and Switchgear Maintenance

2.8 The Costs Components

2.8.1 In-House Costs

For rigorous outsourcing evaluation it is important that costs should be compared on a like for like basis,
including overhead allocation. It is vital that all costs associated with in-house provision are captured. In
addition to direct costs e.g. labour costs, the assessments should also include training and development costs,
investment in tools and equipment etc., and all management costs. There could also be a cost associated with
lobbying the Regulator to keep the service in-house. The following figure shows the in-house costs that the
model considers.

13
 IN-HOUSE COSTS

Direct Indirect
Labour & OMGS •Additional Labour & OMGS
enable work to be
Other Internal Transactions Costs of
Regulator
•Personnel
to keep Activity
•Continued In House
•Monitoring
•Risk
•Investment in Tools &
•Additional Management
Costs

Ongoing

OMGS = other materials, goods and services

Figure 8: In-House Cost Components

2.8.2 Outsourced Costs

To enable a comprehensive comparison of costs it is essential that outsource cost components should include
on-going direct and transaction costs as shown in the figure below. Where cash flows are uneven, discounting
should be used.

To complete the picture one off costs e.g market development costs should also be included when appropriate.
A supplier for a certain service may not exist externally and it may be necessary to stimulate the market to
develop capability. There could also be switching costs associated with transferring the activity to an external
supplier e.g technology transfer and redundancy costs, and these must be taken into account.

OUTSOURCE COSTS

Transactions Market Development

Search
(Includes vendor
qualification)

Direct Costs Select Switching Costs

Purchasing Service •Activity Analysis
Negotiate •Process Mapping
•Technology Transfer
Monitor •Training
(Includes contract •Redundancy/TUPE
management, shadow •Learning (NS)
organisation and risk •Additional/Unanticipated
management costs,
invoice administration)

Ongoing Costs One Off

Figure 9: Outsourcing Cost Components

14
2.9 The Quality/ Effectiveness Component

The final component of the model is the assessment of Quality/Effectiveness. The following matrix is used to
compare the effectiveness of the in-house activity with an outsourcing opportunity. The criteria against which
judgements are made can obviously be varied to suit a particular utility’s requirements

Importance of the Follow ing to: ACTIVITY How w ell provider meets requirements
1 2 3 4 5 n/a 1 2 3 4 5 n/a
1. Total Service Delivery
- Flexibility
- Availability
- Reliability
2. Meeting Key Performance Targets
3. Innovation
4. Communication
5. Relationships

Key: Key:
1 = Of no importance at all 1 = Not well at all
2 = Of little importance 2 = Not very well
3 = Of some importance 3 = OK
4 = Quite important 4 = Quite well
5 = Very important 5 = Very well

Figure 10: Quality/Effectiveness Components

(importance vs performance)

The importance of a service component to the utility, e.g. flexibility, is scored on a 5 point scale. This is
compared to how well the current provider (could be in-house) meets those requirements.

ACTIVITY Activity Impor tance & Cu rrent Provision

Vegetation Control 1 2 3 4 5 n/a
1. Total Service Quality
- Flexibility
- Availability
- Reliability
2. Meeting Key Performance Targets
3. Innovation
4. Communication
5. Relationships
Key: Importance of criterion (as assessed by the utility)
How well current provider meets requirements

Figure 11: Quality Effectiveness Assessment Example

Obviously the closer the red and green lines are in alignment, the better the service provider is meeting the
service needs of the utility.

The results can be summarised as shown in figure 12 below.

15
 Optimal 0
Performance Vegetation Control - outsource
-2.5

-10 Vegetation Control - in house

Worst
Performance
-32

Figure 12: Example of Quality/Effectiveness Results Plot

At one extreme, the importance of each criterion would be 5. An achieved score of 1 for each element, i.e. a
shortfall of –4 for each of 8 factors, would give rise to a total of –32. Obviously a score of 0 would be
achieved if all elements aligned.

In this example it is assumed that the plot shown in figure 11 above represents an outsourcing opportunity for
vegetation control beneath overhead lines. The potential supplier loses 1 point for total service quality (i.e. a
score of 3 against a desired of 4), 1 point for KPI’s and ½ point for communication, making a total of –2.5.

For illustration purposes it is assumed that a similar exercise for the in-house provider resulted in a score of –
10.

Figure 12 above summarises the results from this assessment. Risk is low whether outsourced or in-house.
However, the quality/effectiveness of the external service provider is judged to be better than existing in-house
provision and in-house costs are significantly higher, the obvious decision is therefore to outsource the
activity.

Outsourcing Opportunity

RISK
3.6x10-2 (Low)

COST COST
IN-HOUSE Outsource
Total Total
£12,072,000 £11,131,000
QUALITY/EFFECTIVENESS
in-house -10
outsource - 2.5
Recommendation
OUTSOURCE

Figure 13: Vegetation Control Summary

16
Use of the model requires access to good quality cost and other data. In many utilities with a history of in-
house service provision it is likely that although data sources will exist, access to good quality data may be
difficult due to the way in which it has been captured and collated in the past . To use the model effectively it
is crucial to understand the basis of the data and in particular the underlying level of activity on which any
particular cost information is based.

17
PART 3

Outsourcing Risk Management

3.1 Introduction

This section focuses on some of the more important general issues surrounding outsourcing, particularly risk
management.

3.2 Risk Management

The issue of risk is a constant theme throughout this brochure so far. Without doubt management of risk is a
major concern for transmission utilities and is worthy of further discussion. Whilst the "RCQ" model focuses
on operational risks there are other equally significant categories of risk associated with outsourcing which
should be regularly reviewed to ensure that they are understood and managed.

The risks include:-

Contractor Performance Issues

• unsatisfactory quality of work and management systems leading to plant failure and possibly wide system
disruption or injury to employees or members of the public.
• inadequate staff training and loss of technological skill base
• conflict of work priorities with other customers
• inadequate work volume to retain work force
• business failure or pull-out by contractor and hence loss of resource especially if in-house resources have
been run down or eliminated

These are normal business risks that can generally be overcome provided the market is sufficiently mature to
allow choice of suppliers. Appropriate forms of contract will also mitigate against such risks.

Loss of Control by the Utility Issues

• Inadequate management resources retained by the utility.

• inadequate technical resources retained by the utility.
• the contractor dominates the utility.
• the contractor may commit the utility to unforeseen liabilities and obligations.
• loss of knowledge of it’s assets to the point where the utility can not make sensible decisions regarding
their health or capability.
• inadequate consideration of safety or environmental issues leading to breaches of statutory duty.
• the level of availability of skilled resources, especially if the utility does not have it’s own field resources
or is changing supplier.
• loss of reputation/public image. Despite the legal allocation of responsibilities between a utility and it’s
contractor, it is the utility which will suffer the consequences of any failure/incident in terms of public
perceptions of mismanagement, reliability or share price etc.

Loss of control risks can be offset by ensuring that the Asset Manager retains sufficient expertise and
resources to adequately manage suppliers (realisation capability).

Before effective outsourcing decisions can be made it is important for a utility to identify the level of risk
with which it is comfortable and the particular risks that it will have to manage.
To a large extent these will be governed by the commercial, legal and political environment in which the utility
is operating. Some of the defensive measures that will need to be taken against such risks will incur extra costs
and these should be included in a re-evaluation of the RCQ model.

The allocation of risks themselves is also a key issue. It should be recognised that it is generally not possible
to contract away all risk and that it is usually more practical to accept more, rather than less, risk.

18
 To transfer risk to an External Service Provider, careful scoping of the work and adjustment of the Utility’s
practices is required. It is necessary to ensure that the Contractor understands that he owns the risk. Failure to
do this properly may mean that the Utility still owns the risk despite its intentions.

At some stage in the risk evaluation process it becomes necessary for the utility to strike a balance between
risk levels and cost to the extent that it feels comfortable with the degree of risk and the needs of it’s various
stakeholders , be they electricity consumers, regulators, shareholders, or members of the public are satisfied.

3.3 Business Risk Control

Management of business risk to an acceptable level is an essential part of any successful operation, but too
many controls stifle efficient operation and too few can leave the business exposed.

The use of external service providers does enable risk to be shared. However, it is unreasonable to expect a
Contractor to carry large risk on behalf of the Utility if the work to be undertaken is low cost with low
margins. Contractors need to pay their insurance premiums.

As mentioned previously, risk can be managed by using a realization management function. For a company
that adopts an asset manager model, the function would include a small group of highly skilled engineers. The
utility needs to maintain a minimum position of being capable of making the decision on what work requires to
be carried out. This can be achieved with the assistance of the contractor or from independent consultants The
role of the realisation function would be:

• to oversee contracting activity - preparing contracts, assessing bids, assessing performance, premature and
timely contract conclusions
• if the competitive market is limited in the skills required, make sure there is a contractual arrangement to
take over the contractors resources should they have a business failure or do not wish to continue to
provide the service
• to provide the first level response to a system event. This allows management of unplanned activity.
Their role would be to take operational control, arrange necessary switching, protection settings post-fault,
and receive the work area pending the granting of a remedial contract to remove the system
• to ensure that a spares policy is effective
• ensure that the Asset Information is retained within your business and that you do not lose control of it or
permit it to degrade
• (most likely) to control protection settings.
• to ensure adequate documentation flows exist between the contractor and the utility. This may involve
ensuring that contractor's adequately brief subcontractors.
• to ensure that all work is undertaken with due regard to safety of all contractors, utility staff, the general
public, and the environment.
• the key to effective work control is through information systems and this group will be responsible for all
aspects.

The style of contract chosen by the Asset Manager to outsource by and large reflects his maturity in
outsourcing terms. However, it does have a major impact on the level of resources that are required to manage
the contract and the Asset Manager must ensure that he has sufficient in-house expertise to enable effective
management of his contracts. It is vital that a Utility does not allow the level of risk to be increased through
use of external service providers unless it is planned to be that way.

The best defence appears to be rigorous and continuous measuring of the contract against the utilities
objectives. Is it getting what it wants?.

3.4 Best Value

By definition core activities of transmission utilities involve work on or about complex, high value assets
which generally have long lives. Consequently, when considering outsourcing of such services, narrow focus
on the cost of a service to be purchased, i.e. the lowest price, is unlikely to give rise to the best overall
procurement solution. A better result would be achieved by consideration of “best value”.

19
 In concept “best value” is about obtaining services not just in a cost effective way, as can be demonstrated by
competitive tendering, but through evaluation of the whole context in which a service is provided.

Where a market exists the cost argument is easy to demonstrate, but there are few easy answers regarding the
value of a particular service. To determine best value it is necessary to consider the quality, performance,
potential for innovation and improvement of a service and the volume of a contract before arriving at a
conclusion regarding it’s worth to a company. Additionally, ongoing consultation with the service provider
regarding compliance with performance targets etc. is an important component of a “best value” contract.

The following simplistic case illustrates how consideration of best value rather than lowest price might alter an
outsourcing decision: -

Supplier A undertakes to maintain some power electronics equipment to a standard and policy determined by
the Asset Manager, for a fixed term , for a price of X Euros.
Supplier B undertakes to maintain the same equipment, to the same standard, for the same period, but also has
the capability within his organisation to develop, in partnership with the utility, some in-service diagnostic
testing which will reduce the overall level of intrusive maintenance required. His price is Y Euros, which is
greater than X, but the offers benefits, including increased availability and reliability, through innovation. In
“best value” terms supplier B could be preferred to Supplier A, although in a strict competitive tendering
environment Supplier A would have been chosen.

Where “core” services are involved, then some form of “profit sharing” would seem to be the only driver that
aligns the asset owner and service providers interest. Otherwise the tendency to over service (or under service
if price is fixed) will predominate.

Selection of Service Providers.

3.5 Contractor Selection

This section gives general advice on the selection of Service Providers.

Maintenance contracts for transmission assets tend to be long tenure, typically greater than five years. It is
therefore important that the contracting organisation is carefully selected. An important consideration in terms
of contractor selection is alignment of the utility’s and contractor’s business objectives. Of equal weight is the
fit of the contractor with the current, or desired, culture of the utility.
In other words the contractor should enhance the utility’s business.

3.5.1 Gateway Questions

In partnering style contracts, because arrangements are long term, selecting the right supplier to work with is
critical and a rigorous and formal approach to selection can avoid risk of failure down stream.

The first stage of this process is to determine the business drivers behind the outsourcing project and then rank
them in order of relative importance.

The next stage is to determine the views of potential suppliers on the utility to help determine how well the
parties could work together.

1. Determine business drivers

2. Relative importance and weighting of business drivers determined.
3. Survey of suppliers’ views of the utility.

This will enable selection criteria to be developed made up of “gateway” questions, business and softer issues.

The Gateway questions are high level questions covering the financial health of the contractor and Health and
Safety standards for example. These questions allow high level screening of potential suppliers. Unsatisfactory
responses to Gateway questions disqualifies potential suppliers from further consideration.

20
Business selection criteria could be:

• Cost
• Quality
• Time
• Value
• Risk management
• Technical skills and experience

Evaluation of the softer issues is by definition more subjective and difficult to measure and analyse in a
consistent fashion. Typical questions in this area are:

1. What is the suppliers attitude to becoming involved in supply chain improvements

2. What is his attitude to the Environment and how does he handle such issues.
3. What is their attitude to collecting and recording asset and condition data accurately and reliably?
4. What are their systems to interpret such data?
5. What are their self auditing or quality processes?

Softer selection criteria revolve around the areas of:

• Human resources
• Supply chain management
• Environmental policy
• Organisational structure
• Health and safety.

In the area of Human Resources sensible areas to probe would be:

• Employment policies
How are employees treated? What are their Terms and Conditions?

• Desired Culture
What is the desired culture? How is it going to be managed?
• Culture development
• Team building and team development
What processes will the supplier use?
What is their culture to data recording?
• Skill sets and staff selection
How will they ensure that they have the right people in the team?

Similarly, in the area of Environmental Policy areas of concern would be:

• Environmental Policy
Does the supplier have one? Is it better or worse than the Utility’s?
• Environmental Management
What is their approach to environmental management?
• Recycling and Waste Management
Are proper systems and/or licenses in place?
• Environmental Constraints
How are environmental risks foreseen and managed?

A critical area to test is Organisational Structure:

• Business processes
Does the business operate efficiently e.g. timeliness of invoices?
• Integrated Team Structure
Look at the proposed structures to deliver the outsourced programme. Can it be integrated into the
Utility’s preferred ways of working? Are they clear and defined?

21
 • Team Member Responsibilities
Are they clear and defined?
• Communication
How will the supplier work in terms of communication within his team and with the Utility?

Critical testing of all potential suppliers in this way should result in a supplier of “best fit” with the Utility.
However, once the supplier is appointed, given the long term nature of a partnering relationship ongoing
review is essential. Typical areas to assess would be:

• Regular Progress meetings

What is the suppliers view on how well the Utility is performing?
• Solution development
• Working relationships
Do the parties understand each other? How will the relationship work?
• Office and site visits
Check what the supplier is saying is true with regard to how people are working etc.
• What are their self auditing processes like? (This will reduce the cost of contract supervision)

3.6 Management of Service Providers: Organisational Issues

3.6.1 The relationship between a Contractor and a Utility can be highly affected by the organisation put in place, by
the joint organisations, to delivery the contract.

A number of organisational models are possible, two options are discussed below:

Figure: 14 Linear Control Of Service Provider Figure: 15 Triangular Control of

Service Providers

3.6.2 Linear Control

Under this model, groups within a Utility’s organisation are potentially distanced and the asset manager could
be separated from direct control of his assets. This can have benefits, but also presents problems if the
Contractor withdraws at short notice.

This model can only be safe for a Utility if the Contractor does not have an intermediate level of control in the
Utility’s organisation, but is rather the last link in an hierarchy. This has implications for the type of work for
which the Contractor is used e.g. a support role to the Asset Manager or carrying out physical work on assets
would be acceptable.

3.6.3 Triangular Control

This model permits the Asset Manager to avoid some of the pitfalls of vertical integration. It allows for the
asset Manager to use external Contractors to duplicate some levels in his existing hierarchy but with reduced
risks as contact and control is maintained across service providers. This model also allows for use of multiple

22
 internal and external service providers and the operation of all groups in the model is visible to the Asset
Manager.

3.6.4 Integration

The discussion of these simple models can be taken further by considering the extent of integration of a
Contractor within a Utility’s organisation. Two possible options are either keeping the Contractor on the
periphery (and isolated) or highly integrated with the management and daily activities of the Utility.

The Contractor will seek a level of integration into a Utility’s organisation according to the scope of work of
his contract and the environment erected by the Utility. The achieved level will be dependant on how much
the Utility and Contractor are prepared to let others understand each others internal operations.

The level of integration may be one sided by choice. It may be formally controlled through a QA programme
or informally by selecting the right people with the right personality and skills to manage the project. The
degree of integration can significantly effect how well the Contracts’ objectives are met. Some possible effects
of different level of integration are list below:

3.6.5 Peripheral

Benefits Risks
• Better security of intellectual property • Less understanding of each organisation’s
for each party operations
• Maximise transfer of risk to Contractor • Hides some poor work practices
• Forces better scoping of work by
Utility
• Less disruption to Utility organisation
if contract terminated

3.6.6 Highly Integrated

Benefits Risks
• Better sharing of information • Loss of security
• Risks shared more evenly • Disruption to Utility’s organisation if
• Poor work practices more visible contract terminated

23
PART 4

Management of Service Providers: Role of Key Performance Indicators

4.1 Introduction

This section concentrates on the development of Key Performance Indicators for measuring and assessing
external service providers. It moves on to discuss relationships with external service providers and contractual
issues.

4.2 Key Performance Indicators (KPI) For Measuring/Assessing External Service Providers

In simple terms these measures are an indication of the match between a Contractors’ performance and the
Utility’s scope of work. The closer the match, the more likely the Utility will be satisfied with it’s
Contractor’s performance. KIPs therefore have value in aiding contractor selection and improving the
performance of service providers.

Identification, segmentation and evaluation of service spectrum

1

Determine areas to be outsourced

Identification of savings potential generated through outsourcing

2
Detailed description of service units
Optimal execution of outsourcing process
Select the external service
provider
Interface management with service provider
3a
Contr of
ction
3b
ol Consistent evaluation of service provider for performance
servic of external Redu al costs management
e prov n
ider inter
Systematic reduction of internal costs in parallel with
transfer of activities to the service provider

Figure 16: Successful Outsourcing Requires A Three-Phase Approach. Done Well!

In traditional contract relationships, KPIs are not particularly relevant because the contractor is obliged to
deliver the performance criteria set out in the contract.

Some new style partnering arrangements rely on the management of the “relationship” to deliver a successful
end product. In these cases satisfactory performance is generally rewarded by some sort of performance bonus
or “gainshare” and opportunities for long term business. A disadvantage of this approach is the lack of
objectivity in the measures of performance. There is also the risk that because the performance of the external
service provider seems satisfactory the perception arises that there is no need to improve the way things are
done.

At the other extreme KPIs are used as a “stick” to beat external service providers without analysing the
underlying reasons for poor performance and developing a change management programme.

Properly constructed and applied KPIs can used to:

• improve the management of services by permitting a high level overview

• enable a process for continual improvement
• allow external comparisons
• promote competition between suppliers.

The measures will only be sensible if they are representative of the scope of work.

An Asset Manager is likely to require all work done for the lowest costs, at the highest quality and in the

24
shortest time. This is not a sensible expectation so it is important for the Utility, as the Asset Manager, to
balance the three key basic measures of cost, quality and time

The following figure outlines a framework for developing KPIs. It is worth saying at this stage that a utility
will need to tailor KPIs to it’s particular situation and business objectives. It is not possible to provide a “one-
fit” solution, although this section attempts to provide readers with some basic guidance to help in this process.

Regulatory Purpose Other Utility

Environment KPI’s

Any Type of
Existing Key Considerations For KPI’s
KPI
KPI

Number of KPI’s

Selection of KPI’s

Test Against Criteria

Fig 17 Development of KPIs

In developing KPIs it is vital to understand the utility’s business objectives. The regulatory environment will
have an impact as will the need to efficiently capture data for producing the KPIs.

Other questions to consider are:

• What KPIs do similar utilities use. Can they be copied?

• What is the purpose of the KPIs
• Are any KPIs currently used within the utility which could be adopted?
• What type of KPI is needed?

This process will inevitably give rise to a large number of potential indicators. There will be a need to select
the smallest number possible for routine use. However, it is vital that the chosen KPIs are realistic and
achievable

KPIs take much time and effort to establish. To make successful use of them requires an understanding of the
framework in which they will be used including the means by which they can address poor performance and
their role in continuous improvement. Once the KPIs have been selected the final stage is to test them against
those business criteria to ensure that they provide the necessary overview in an appropriate fashion.

This following paragraphs provide advice on how to:

• choose relevant KPIs

• ensure accuracy of data behind KPIs
• present the data in a meaningful and helpful context

25
 • use benchmarking to establish trends and an improvement programme.

4.3 Choosing Relevant KPIs

Performance Improvement

Improving performance should be the underlying objective of KPIs therefore before deciding which KPIs to
use the utility needs to establish a foundation to work from. This involves the setting of standards for the
delivery of a service. These will be a combination of pre-defined targets e.g. outage duration’s, and the
standards (set by the utility) by which those targets are to be achieved.

Once that base is established performance can be measured and benchmarked, improvements implemented and
standards reassessed, enabling continual improvement. This process will be aided if benchmarking is carried
out by independent consultants to ensure impartiality.

Yes
External
facilitation -
coach or mentor?

Whole
Performance No situation
Indicators Satisfactory? Causal
Analysis
No blame

Encourage
feedback

Corrective action
improved process etc

Figure 18: Managing Poor Performance

4.4 Relevance

Ensuring relevance of KPIs is a key requirement in terms of their successful use.

Too many will cause the process to fall into disrepute, too few will not provide the appropriate overview of an
external service provider’s performance. KPIs should be used to unlock the vital success criteria.

Time should be taken to select the smallest practical number of KPIs and to subject them to continual review
and feedback to ensure their continuing relevance. A key test is “is the KPI being used?”

The chosen KPIs need to fit into the overall business frameworks of the utility and the external service
provider. If, for example, there is a conflict of business objectives between the two in terms of profitability,
then the KPIs will be interpreted in different ways by both organisations.
Time should be taken to ensure “fit” of KPIs with all involved parties.

4.5 Management Action

If no management action results from a KPI, then either management effectiveness or the KPI itself should be
questioned. The KPI should be capable of causal analysis, monitoring trends and improvement and
benchmarking against industry standards.

4.6 Selection of KPIs

The selection of KPIs should begin, as previously stated from fundamental business standards then applied as
appropriate to the particular service to be delivered. For example at the business level the standard might be
system availability which at the service level might be translated into maximum outage duration.

26
 The KPIs could incorporate:

• Financial aspects such as productivity or expenditure against target.

• Physical measures of outputs against targets e.g. number of faults repaired.
• People management issues such as training
• Health, safety and environmental measures
• Levels of service and third party issues e.g. number of damage claims

To assist the process of using KPIs in a meaningful way, hard KPIs should complement softer KPIs such as
“partnering health checks” which can be measured through questionnaires etc. These will ensure that not only
is everyone bought into any improvement strategies but there is confidence that the improvements will be
delivered together. Subjective KPIs work if the “sample” is large enough and there is goodwill between the
parties. Their importance lies in the fact that they enable behaviour as well as process to be measured.

When compiling a suite of KPIs effort should be extended towards ensuring that a number of leading (as
opposed to lagging) indicators are included. This is to ensure that some proactive, rather than purely reactive,
action is possible.

These considerations are summarised in the figure below.

Leading
Leading
&& Consistent
Consistent
Lagging
Lagging

ACTION

Process
Process
&&
Behaviour
Behaviour

Fig 19 Key Considerations

How To Ensure Accuracy Of Data Behind KPIs

4.7 Obtaining Data

Capture of data is expensive and time consuming. The data required to produce KPIs should therefore be
carefully targeted. Some key considerations are:

• how will the data be collected?

• who will collect it?
• does the information already exist in an appropriate format?
• what will it cost, including time?
• if the data doesn’t exist, do we really need it?
• the volume and quality of data
• consistency of data/results across suppliers
• is there a need to jointly develop the data with the supplier?
• are we comfortable with the data?
• what is the cost of collecting the asset and condition data?

27
 For any effectively managed service contract raw data should be available on a regular basis for such items as
utility labour costs, contractor labour costs, latest forecast total costs, absenteeism and training etc. Certain
KPI data will be deemed to be of such importance that dedicated staff will be required to collect it to pre-
defined quality standards, e.g. health and safety data . In other cases data will be provided by the external
service provider, but ideally this should be independently verified and analysed. Caution is required to avoid
the “data monster” i.e. the time and effort required to capture and analyse certain data may not be justified by
the benefits received from the end KPI

4.8 How To Measure

A well presented KPI will often be taken on trust, but if sourced from inaccurate or misleading data, can do
more harm than good. In the context of partnering or alliancing, where considerable savings on duplication of
resources can be made, some of these savings can be used to provide robust performance data. If for example
“man to man” supervision is removed, then methods of monitoring the quality and efficiency of the process
should be developed

Disciplined methods of storing data will ensure that it is readily and easily analysed for presentation. Finally,
the overall process of KPI data collection should be independently reviewed to give confidence to all parties.

4.9 When To Measure

This is a decision which must be applied to the particular measure involved. Where action is required
immediately, e.g. lost time accidents, weekly data is probably most appropriate. Other measures may only be
relevant if sufficient time intervals are allowed e.g. service level indicators. In other cases it may be
appropriate to vary measurement intervals depending on the stage a process has reached.

4.10 Presentation Of Data

KPIs must be accessible and available for them to be relevant. Don’t be shy to publish results for fear of
offending.
There must be transparency and understanding of the methodology used. People need to understand how KPIs
are arrived at. This is true for suppliers as well as the utilities since the former need to understand that any KPI
truly reflects their performance. League tables can be a powerful incentive for performance improvement
since nobody likes to be bottom.

The KPI process is as important as the KPIs themselves and without transparency and discussion continuous
improvement will not be realised.

Having ensured availability of the data it is necessary to put the results to work for example by ensuring that
KPIs are a standing agenda item on regular contract meetings between the utility and the external service
provider.

In parallel with each KPI an action or improvement plan should be put in place.

4.11 Use Of Benchmarking

Despite the risks of not comparing “apples with apples” careful use of benchmarking can inject real innovation
into service delivery.

Full use should be made of available internal benchmarking data which, due to the regulated nature of many
utilities, is often comprehensive. Other data will be available via professional bodies, Cigre and partner
organisations. The benchmarks can be used to monitor the service provider’s performance against other
suppliers, previous performance and industry norms etc. Looking outside of the team via the use of
benchmarks is likely to engender innovation and competitive edge.

KPIs can be a vital tool for ensuring the successful adoption of an outsourcing programme provided that they
are relevant, accurate and meaningfully presented.

28
 They can only be effective however, if used to make improvements through causal analysis.

4.12 Typical KPIs

Some typical KPIs, that could usefully complement a suite for measuring and monitoring an external service
provider, are:

Financial and Time Indicators

• Outturn v Target Costs (Outturn cost as % of target cost )

• Predictability of Costs ( Outturn cost as % of budget)
• Achieving Outage Dates ( % Outages completed within planned window)
• Achieving Spend Profile

Statutory and Customer Indicators

• Accident Frequency Rate (Weighted AFR-all/reportable/notifiable)

• Regulatory Failures ( Number of failures/incidents)

Quality Indicators

• Client satisfaction (Score from feedback questionnaire)

• Innovation ( Score based on number and value of
innovations)
• Fault Response ( score based on time to rectify defects)

• Contractor Error (Number of outages due to “finger faults”)

Of the above examples it is the area of quality which is most difficult to resolve satisfactorily and which
probably justifies a higher proportion of time being spent on it to ensure that KPIs are meaningful.

4.13 Asset Performance KPI’s

In addition to monitoring the performance of its contractors, a utility will want to gauge the impact of an
outsourcing programme on system performance and particularly to gauge whether any change in its approach
to maintenance leads to a degradation of system performance.

In general, a transmission utility must ensure a flexible, continuous and adequate quality supply of electricity
with minimum restrictions. This implies “contracted” availability of both equipment and facilities.

In the Electricity Supply Industry, service continuity, as determined by the number and length of outages, has
been traditionally identified with service quality.

Nowadays, the notions of voltage and frequency range as well as wave quality are incorporated in the electric
power supply quality as complementary to continuity.

It is unrealistic, to expect that in an electricity supply system, where each component i.e. generation,
transmission, operation and distribution, includes a huge number of elements, all items of equipment will be
available for operation at any one time. Fortuitous failures are experienced by systems and service quality
components are differently affected by these failures.

The quality of transmission service can be measured and controlled through the use of Key Performance
Indicators (KPIs) that are centered around both the performance of individual items of plant and that of the
overall transmission system.

It is necessary to establish specific types of Indicators for measurement of the quality of maintenance.

29
 Examples of the types of KPI that are of value in measuring a transmission utility's performance are:

Electrical service quality indicator:

• Availability Indicators.
• Service Reliability Indicators.

General statistic:

• Performance Reliability Indicators.

Economical indicator:

• Maintenance Costs Indicators.

Quality management indicator:

• Transmission System Availability Indicators.

The above examples are defined in Appendix 1

4.14 Management of Service Providers: Contract Issues.

4.14.1 Pros and cons of competitively let versus partnering style contracts.

Collaborative style contracts are often referred to as “partnering “ contracts. Partnering contracts can be
defined as high performing, genuinely mutual relationships, producing significant added benefits to both
parties.

The term partnering describes the quality and not the legal form of the relationship, since a range of
contractual arrangements can be used.

Transmission utilities that have outsourced services are moving to longer-term arrangements and building
appropriate business relationships. This is because the nature and consequences of the work requires a high
level of mutual trust and confidence. The utility will get the best out of a contractor if innovation and value
adding activities are encouraged and appropriately rewarded.

Very close collaboration is necessary if a relationship is to generate the scale of benefits needed to justify a
decision to outsource. This requires a foundation of long term or even life time contracts.

Partnering relationships are highly demanding of time, management attention, know-how, and resources,
particularly financial and technical. Consequently, it is unlikely that companies will be able to build more than
one such relationship at a time in similar areas of activity. It is therefore extremely important that companies
are selective in the try to build.

Traditional outsourcing contracts are competitively let, short term, priced based, discrete transactions Such a
model does not sit well with the requirements for long term and close relationships with suppliers as the
following analysis demonstrates:

30
 Adversarial Collaborative
Behaviour individual gain seeking mutual respect
transitory committed
defensive open and sharing
aggressive trusting
Attitudes retain expertise focus on group gains
centralised authority people involvement
power over and active devolved authority
buyer knows best power covert, inactive mutual
homogeneous suppliers differentiating suppliers
passively responsive proactive innovation
problem driven preventative driven
Measures uni-directional e.g. delivery mutli-dimensional
measures
uni-dimensional relationship positioning
inspection outcomes limited measure process
infrequent feedback extensive evaluation and
feedback
success individually biased success shared self regulation
Processes buyer specifications shared design
hands off open information exchange hands
few boundary spanning roles on, close
static systems many boundary spanning
contracts
learning organisation
team based
supplier investment in people and
processes
Time limited life extended, guaranteed life
frequent resourcing single sourcing
low switching costs high switching costs
discrete transactions infrequent resourcing
less information transfer transaction history-context

In the light of the above it is evident that whilst adversarial relationships might deliver the lowest price for a
service, they may not necessarily deliver best value nor indeed the lowest overall cost when transactional and
other possible add-on costs are taken into account.

It is concluded that a collaborative, i.e. partnering, approach to outsourcing of services offers the best option
for transmission utilities.

However, in order to comply with EU Directive 90/531/EEC, utilities must advertise any intention to award an
outsourcing contract in the OJEC and comply with the provisions of the Directive. This can create difficulty in
relation to long term partnering style arrangements since a utility may not wish to enter into a competitive
tendering situation but rather award a contract to its existing supplier because of the strategic value of the
relationship.

4.15 Pros And Cons Of Long Term Relationships Versus Short Term Contracts.

The tenure of maintenance contracts in the context of transmission assets tends to be longer term, typically five
years or greater. The reasons for this include:

• the contracts usually cover a number of assets and equipment in an asset class. It can therefore be
expected for a contractor to take some time to become fully acquainted those assets. (Unless the resources
that have historically carried out the maintenance are employed by the Contractor).

31
 • if the utility requires “added value” from the maintenance contractor, for example assisting with failure
mode analysis to develop maintenance strategy , the contractor needs to understand and gain experience of
the asset over a period of time.
• to gain trust and confidence between the parties there needs to be adequate time allowed for sound and
enduring business relationships to be built.

The contractor should be around long enough to “reap what is sown”, that is depending on the style of the
contract and the latitude given, the contractor may short-change the utility on the level of service which may
not materialise as problems for a number of years.

Finally, the Contractor should be given adequate time to evolve in the required direction (as must the Asset
Manager!)

4.16 Risk Versus Reward Concepts.

Because transmission assets have a high level of inherent reliability, maintenance contracts should have a
reasonable tenure so that the contractor can be rewarded or penalised on the longer term performance of the
asset. There are many styles of contracts that can be applied. However, the final choice should be made with
due consideration to the desired relationship with the contractor and the way in which the utility wishes to
incentivise the contractor

In general the more risk a service provider is required to carry, the more he can expect to be rewarded:

• if he is expected to fund implementation of new systems in order to make the service contract cost
effective, then he will expect significant rewards and long term contracts.

• if he is expected to provide fixed price services he will generally price volume and process change into the
pricing agreement
• unique services, for example those having a high degree of complexity, suit risk and reward contracts.

The nature of partnering contracts is that both parties have to understand the others risks and difficulties and
hence regular liaison on critical issues is most important.

4.17 Possible Contract Types

The following are typical, fee structures of contracts that are used for maintenance contracts:

Fixed Price. If the scope of work is well defined competitive tenders can be sought. This style can be used in
the context of a retainer.

Cost Reimbursable. All direct costs and overheads are reimbursed at cost with profit declared rather than
built into the schedule of rates. This removes the incentive for the contractor to do more work than is necessary
whilst providing a fair and predictable return. Some or all of the profit can be put at risk and used to
incentivise the contractor to perform against KPIs set by the utility.

Schedule of Rates. Typically all overheads, including profit, are included in the rates. This provides an
incentive for the contractor to do as much work as possible. Such contracts therefore require more utility
resources to manage than other types because of the scope for abuse. This style can be used when the scope of
work is not well defined.

Fixed Management Fee/Direct Costs. All overheads and profit are agreed within the fixed management fee.
Direct costs for the “doing” labour have no overhead or profit component. There is no incentive for the
contractor to do more hours than the indicative scope. This style of contract can be used when the scope of
work is not well defined.

32
 Other Possible Outsourcing Approaches. It should be recognised that service providers are not limited to
third party businesses. Utility managers should consider all of the outsourcing options outlined below to
determine the best fit for their organisation.

4.17.1 Joint Venture Model

A joint venture between two companies is set up to transfer assets, staff and capital into a separate service
company. This approach has a number of attractive and negative features:

Positive Features Negative Features

high level of control over contract and service difficult to establish (parties have mixed
delivery retained. objectives|)

joint venture can generate third party business difficult to agree ongoing objectives and terms

contract and pricing arrangements are unsuccessful due to:

transparent - inadequate service level agreements
- inflexible contractual terms and conditions
- lack of appropriate exit clauses

4.17.2 In-House Service Company Model

Under this model the utility sets up an in-house ring-fenced service company which provides services to its
parent. Once again there are pros and cons associated with this model.

Positive Features Negative Features

introduces commercial culture no injection of expertise or management
relatively easy and non-disruptive change required to achieve “best practice” may
implementation be too much.
in-house company can generate third party Asset owner is “taken for granted”.
business Insufficient drivers to change processes and
in-house company could be floated over lower costs.
Culture stays the same

4.17.3 External Service Provider Model.

The factors which favour and count against establishing an outsourcing arrangement with an external service
provider are:

Positive Features Negative Features

utility receives “best practice” services
contracts are often lowest cost service
orientation of supplier
capital investment can be spread over long
contracts
could be held to ransom by an external contract
typically no exit planning
contracts are costly and time consuming to
establish and monitor
greater information documentation required
intellectual property is captured by outsiders
asset owner does not have full control of
resources

4.18 Outsourcing Good Practice

Some good practice points in relation to establishing sound outsourcing contracts are:

• clearly stated objectives

• good understanding of both parties objectives
• both parties stand to gain

33
 • contracts should clearly state the required service and costs levels, how they are to be measured and the
penalties that would apply.
• spend time and effort on getting the right structure for the outsourcing contract
• significant leverage over service providers can be obtained when they are encouraged to compete against
each other on a regular basis.
• use of more than one service provider may be advantageous in areas of rapid change. (e.g. Information
Technology).
• build benchmarking milestones into long contracts to check performance standards
• partners should be open with one another
• breaks and exit routes should be planned
• make sure that asset information is adequate and up to date first
• make sure that standards and process documentation and drawing systems are adequate and up to date
first.

4.19 Outage Planning/ Flexibility of Response.

The dynamic nature of transmission systems requires flexibility in outage planning. Although typically 70% of
work scheduled at the year ahead takes place during the planned outage window, a significant amount of work
has to be moved, accelerated or cancelled.

In liberalised markets an increasing important factor in outage planning is emergency return to service times
required by customers as a consequence of the targets for system availability and reliability set on them by
Regulating Authorities.

Traditionally the costs associated with these changes have been absorbed internally by utilities. Outsourcing of
outage related work will have associated flexibility costs and management of them will increase the
complexity of the outage planning process and may lead to higher contract management costs.

5. Conclusions

The use of external service providers by Utilities is an established feature of life in Asia and Australasia and a
growing trend in Europe. However, maintenance outsourcing is not a simple task, particularly in core areas,
although in most instances it could be successful provided goals are not unrealistic, are obstacles minimised
and suitable management controls established.

The main steps in the outsourcing life cycle have been covered in this brochure. In summary the main steps of
the life cycle are:

• development of a service options strategy

• scoping and definition of the services required
• selection of service providers
• negotiation and resolution of contracts
• transition
• communication and staff management
• performance monitoring and control
• post contract review
• contract renewal/extension

The liberalisation of the electricity industry around the world has caused many utilities to change from
traditional public service organisation to ones that are results oriented and commercially driven. The
application of private-sector management practices with new management systems and working methods and
re-organisations has created work environments that are characterised by significant and constant change.
Against this background of turbulence in the work place, outsourcing will inevitably exacerbate the human
impacts on staff. Human resource management issues therefore possibly present the greatest challenges facing
managers in moving to an outsourcing regime.

34
In most utilities the introduction of a commercial culture will be in direct contrast to the focus on technical
issues and security of supply that the majority of employees will have experienced for the largest part of their
careers. Most permanent staff will be uncomfortable with the change to an uncertain working environment
from one that was previously characterised by a high degree of stability. An outsourcing strategy can be
expected to amplify that discomfort since it indicates an approach to human resource management in which
employees are perceived as resources that can be sought in the market like any other resource.

In any service options strategy careful consideration of the human issues is critical to success in breaking
down barriers to entry of external suppliers.

Competency mapping models provide a relatively simple means of forming a high level view of what services
are important for a utility to manage and those which are potential candidates for outsourcing. However, it is
necessary to follow up any high level analysis with a rigorous assessment. The RCQ model allows systematic
evaluations of outsourcing opportunities against defined criteria. It can be used to support a utility’s service
options strategy in a regulated environment, particularly when regulators require utilities to demonstrate that
they are procuring services for the least cost.

Whilst the RCQ model focuses on operational risk, there are other equally significant categories of risk
associated with outsourcing that should be regularly reviewed to ensure that they are understood and managed.
In the main these are normal business risks that centre on loss of direct control of service provision and
contract performance. They can generally be overcome provided the services market is sufficiently mature to
allow choice of suppliers. In instances where this is not the case special consideration needs to be given to
managing risk in monopoly/duopoly supplier situations.

Maintenance contracts for transmission utilities tend to be longer term. The reasons for this include:

• It can be expected that a contractor will take some time to become fully acquainted with a wide range of
assets.
• If the utility requires “added value” from the maintenance contractor, for example assisting with failure
mode analysis to develop maintenance strategy, the contractor needs to understand and gain experience of
the asset.
• The contractor should be around long enough to “reap what is sown”

It is important therefore that the contracting organisation is carefully selected. Important considerations are the
alignment of the utility and contractor's business objectives and the fit of the contractor with the current, or
desired, culture of the utility. A rigorous and formal approach to selection is the most realistic way of avoiding
the risk of failure of the relationship downstream. This assessment should include consideration of both hard
issues (e.g. cost, quality, value and technical skills) and softer ones e.g. employment policies.

The relationship between a contractor and a utility will be highly affected by the organisation put in place to
deliver a contract. There is a wide range of possible models, but perhaps the most important consideration in
this context is the extent of integration of the contractor with the utility. The achieved level will be dependent
on how much the utility and contractor are prepared to let others understand their internal operations. The
degree of integration will significantly affect how well a contract’s objectives are satisfied.

The introduction of external service providers adds a complexity beyond managing physical assets, since
Contractors have also to be managed. The nature of the relationship between utility and contractor has a
significant impact on the level of effort necessary to achieve this.
Transmission utilities that have outsourced maintenance services are moving towards longer-term
arrangements and building appropriate business relationships. This is because the nature and consequences of
the work requires a high level of mutual trust and confidence to generate the scale of benefits needed to justify
outsourcing decisions. A partnering approach to outsourcing is considered to be the best option for
transmission utilities.

Key Performance Indicators (KPIs) have a key role to play in managing contractors in such relationships with
utilities. Some partnering arrangements rely on the management of the “relationship” to deliver a successful
outcome however; a disadvantage of this approach is the lack of objectivity in the measures of performance.
In a partnering environment, the use of properly constructed KPIs is recommended since they:
• Improve the management of services by permitting a high level overview.

35
• Enable a process for continual improvement.
• Allow external comparisons.
• Promote competition between suppliers.

KPIs take much time and effort to establish. Their successful implementation requires an understanding of the
framework in which they will be used, including the means by which they will address poor performance.
Hard KPIs should complement softer ones such as “ partnering health checks”. The importance of the latter
lies in the fact that they enable behavior (as well as process) to be measured. Whenever possible, a number of
leading, as opposed to lagging, indicators should be included to ensure that some proactive rather than purely
reactive action is possible.

A properly constructed and implemented suite of KPIs is essential to the sound management of outsourcing
contracts.

By understanding the above issues and applying appropriate controls there is a strong possibility that
opportunities to leverage efficiency and performance gains through maintenance outsourcing will be
successfully achieved.

Bibliography

1 Outsourcing of maintenance in view of market liberalisation. Cigre 2000, Session Paper, Group 23, Eyles,
Wester, Brennan & Wilson
2 A review of methods for the management of Outage Management Risks. Cigre 2000 Session Paper,
Group 23, Damstra, Bayliss, Hoekstra, Aupied, Greeneklee, Tremblay, Simoens & Allison
3 A “hands on” or “hands off “ approach in electricity distribution; outsourcing of business processes in a
HRM perspective. Unpublished paper P Lohmann
4 Mastering Global Business. 1997 Gordon, Vollman & Heikkaila
5 Macbeth & Ferguson

36
 APPENDIX 1

KPI’s FOR MEASURING TRANSMISSION ASSET PERFORMANCE

1. Definition Of Different Types Of Indicators

1.1 Availability Index (AI) is defined as:

The surveyed time span when a given family of elements (lines circuits, substations equipment, protections,
telecommunications control or service) have been available for service.

AI (%) = 100 - UI (%)

The Availability Index (AI) is the complement to the Unavailability Index (UI) and is computed through the
following formula

AI(%) = 100 −
∑ t ⋅100
NT
The summation encloses all the considered elements.

Where:

t: total time (in hours) that each family of elements in the system has been unavailable during the
considered time span.
T: length of the considered time span in hours (usually, one year)
N: number of lines circuits or substations equipment, or protections, or control systems, or
telecommunications systems installed in the grid, throughout the considered time span.

The Availability Index (AI) can be broken down, in principle, in three different indexes, based on the reasons
for unavailability and its possible causes:

Due to scheduled maintenance

Due to fortuitous causes (final tripping or failure)
Due to other scheduled causes (construction of new facilities or any other conditions external to the grid)

Then we can consider:

t = tm + tf + to

Where:

tm: unavailability time caused by maintenance.

tf: unavailability time due to fortuitous causes.
to: unavailability time due to other causes.

Next we define the availability indexes o establish traceability of the indicators and their evolution in time.
(According to the “International Survey of Maintenance Trends and Policies” only a few utilities have these
indicators sufficiently developed.)

These indicators can be defined for the following families of elements of which consists the Transmission
Grid: (1) circuits, (2) bays with breakers, (3) power transformers, (4) power reactors, (5) protection system.
Their corresponding availability indexes could be the following:

37
 (1) AI(%) = 100 −
∑ t 100
NcT

Where:

Nc: total number of circuits of transmission grid

(2), (3), (4) AI(%) = 100 −

∑ t 100
NxT
Where:

Nb (2) : total number of breakers installed in transmission grid

Nt (3) : total number of power transformers installed in transmission grid
Nr (4) : total number of power reactors installed in transmission grid

(5) AI(%) = 100 −

∑E as
100
365N E e

Where:

E as : days of abnormal state of protection systems

E e : average of devise per equivalent protection systems
( Ee 10)
N: number of equivalent protection systems.

1.2 Reliability Index (RI)

The reliability of a family of elements can be stated as follows:

Service reliability (continuity)

Operation reliability (compliance)

The Service Reliability (continuity) is defined as the likelihood (or ability) of an element (or device) to
perform properly its expected service function, on a time basis, while operating in the environment for which
it was designed.

The Service Reliability Index (SRI) will be computed for circuits, power transformers and reactors through
the following formula:

n
N·T − ∑ ( t mi + t fi + t oi)
SRI(%) = i =1
n
⋅ 100
N·T − ∑ ( t mi + t oi)
i =1

Where:

txi: The time span each circuit, power transformer and reactors fitted in the transmission grid, remains
unavailable, based on the type of scheduled unavailability due to maintenance work (x = m), fortuitous
(x = f), and other scheduled (x = o) causes.
T: Total of the considered time span

38
N: Total number of considered elements of the transmission grid.

The Operation Reliability (compliance) is defined as the likelihood (or ability) of an element (or device) to
perform properly its function, when it is required, in the environment for which it was designed.

The Operation Reliability Index (ORI) has to be computed for circuit breakers and protection system.

E.g.: For circuit breakers:

ORI(%) = 100 −
∑N f
⋅ 100
∑N m

The summation encloses all the elements considered.

Where:

Nf :Number of major failures (which imply removal from service, for repair) referred to the performance of
similar type equipment.
Nm: Total number of operations (opening or closing) of circuit breakers considered, and circuit breaker
operations required for voltage control in the grid, and operations required by maintenance work
outages.

E.g.: For protection systems, it is computed through the following formula:

ORI(%) =
∑N c
100
∑N t

The summation encloses all the considered elements.

Where:

N c: Total number of correct operations performed by the protection systems during the considered time
span.
Nt: Total number of operations performed by the protection systems during the considered time span.

Also failure rates can be computed for the following elements: (1) circuits, (2) bays with breakers, (3) power
transformers, (4) power reactors, (5) measure transformers.

(1) Failure rate per 100 km of circuit with unavailability:

FR(%) =
∑N f
100
L
Where:

Nf : circuit elements failure number which caused unavailability

L: circuit length in km.

(2), (3), (4), (5) Failure rate of different families of elements installed in the transmission grid:

FR(%) =
∑N f
100
N
The summation encloses all the elements considered.

39
 Where:

Nf : failure numbers of considered families of elements

N: total number of considered families of elements

1.3 Availability Index Of The Transmission System

This index (AITS) is determined as the complement to 100 of the Unavailability Index of the Transmission
System (UITS).

The Unavailability Index of the System shows the unavailability of all the considered elements in the system
(power transformers, elements for control of HV and MV active and reactive power, and line circuits of the
transmission grid), which are weighted up according to their rated power.

This Index is computed through the following formula:

∑ t ·PNi i
UITS(%) = i =1
n
⋅ 100
∑ T ·PN
i =1
i i

The summation encloses all the elements included in the System, taking into account all possible
unavailability causes of the elements analysed.

Where:

ti: Time the “i” element remains unavailable

T: Total of the considered time span
PNi: Rated power of the “i” element
n: Total number of circuits, transformers and elements of active and reactive power control in the
transmission grid which are taken into account.

1.4 Maintenance Costs Indexes

The Costs Indexes (CI) can be determined based on the resources assigned directly to scheduled maintenance
work, repair of failures, renovation and improvement, materials and labour costs, and outsourced services.

The resources assigned to maintenance or Costs Index (CI) will be computed as follows:

IC =
∑R d

N
Where:

IC: Cost Index of direct resources shown in Work Orders, per each Km of circuit, bays with a circuit
breaker and protection, control and telecommunication services.
Rd: Resources assigned directly for maintenance work in lines, substations (enclosed protection and control
system) and telecommunications services.
N: Total length in kilometers of circuits, in case of lines, or number or bays with circuit breakers, in case
of substations (including total number of protection and control systems), or number of
telecommunications services.

The costs indexes can be broken down based on the types of activities performed.

1.5 Service Quality Effects

In some rules the level of the service quality has direct economical consequences

40
Compliance of the Availability Index (AI) by the transmission utilities can be rewarded with an incentive, but
non-compliance of the quality indexes may lead to penalties being levied.

The penalization or incentive results from the calculation that contains a component which includes as
reference value the objective value and the real value of the quality level of the service. If the real value
improves the objective value there is an incentive and vice versa.

41
 APPENDIX 2
Electra Article
Maintenance Outsourcing Guidelines

1. Introduction
Cigre published an International Survey of Maintenance Trends and Policies in September 2000. This reported the
results of a questionnaire conducted during 1997 and was co-ordinated by a joint working group of Cigre Study
Committees 23 and 39. The analysis reflected the ongoing dramatic changes occurring in the structure of the
electricity supply industry around the World.

One consequence of those changes, highlighted by the survey, is the trend towards increased outsourcing of
services in response to intense pressure for efficiency improvements.
The typical level of operational and maintenance outsourcing reported in the survey was 30-35%. This is a
significant increase from the results of a survey undertaken in 1991 when an average of 26% outsourcing was
reported. In the 1997 survey, perhaps surprisingly, more than 25% of respondents outsourced more than 50% of
their maintenance.

The level of outsourcing applying at present is varied, reflecting the wide range of business models for utilities
around the world. Whilst it is evident that there is scope for many utilities to increase the level of maintenance
outsourcing, it is not possible to state what is, or is not, the optimum degree. This is because the individual political
and business circumstances of utilities vary so considerably.

Against this background, Cigre Joint Working Group 23/39 has been developing a methodology to help utilities
evaluate opportunities and determine their particular, optimal levels of outsourcing.
Cigre will publish the methodology next year under the title “Maintenance Outsourcing Guidelines”. The
document is intended to assist utilities to develop, or refine, their outsourcing strategies and reach sound
outsourcing decisions relevant to their individual circumstances. This article gives a flavour of the content of those
Cigre Guidelines.

2. The Evaluation Process

Success in outsourcing requires the rigorous evaluation of service requirements.
The extent of outsourcing with which a particular utility feels comfortable will, to a large extent, be dependent on
the business conditions prevailing within its sphere of operations, its strategic objectives and particular business
drivers (e.g. mode of regulation).

There are a few simple questions that a utility should ask itself when initially considering a service options strategy
to which a “Yes” answer should probably lead to a decision to proceed:
• Can an activity be delivered more efficiently or effectively through outsourcing?
• Does organisational flexibility suffer due to time wasted on non-core functions?
• Should the utility procure new skills externally to meet new technology challenges in preference to creating them
in-house?
• Has the company tested itself on what to manage rather than how to manage?

Drivers such as globalisation, increased deregulation, growth in services and technology changes will all have an
impact on how a particular utility wishes to conduct its business and hence the service options strategy it wishes to
follow.

3. Scoping and Definition of Services Required

Decision models provide an easy means of obtaining a high level view of which services should potentially be
outsourced and which should be retained in-house. This high level approach is followed up by a more rigorous
assessment (RCQ analysis) of the outsourcing opportunities which can be used to provide a systematic
evaluation, but more of this later.

3.1. Decision Models

A Competency Mapping model (Fig2) enables a clear understanding of the current situation to be developed.
This is supported by a Risk vz Effectiveness model (Fig 3) which provide a relatively quick and simple means
of understanding what services should potentially be outsourced.

3.2 Competency Mapping

Five distinct competency classes have been identified:

• distinctive

42
 the most important capability of an organization. In the case of an Asset Manager type utility this would be the
ability to manage contracts.
• essential
needed for an organization to operate. In the case of a transmission utility this could be the competency of post
fault restoration of demand. In essence, the skills of operational switching, maintaining safety from system
dangers and emergency repairs.
• spillover
allow a utility to obtain profits in a related activity through its distinctive competencies. In a transmission utility
which uses helicopters for line patrols this could include hiring out the helicopter for transport for example,
hence increasing revenue through external sales.
• Protective
close to distinctive competencies but related to activities that cause considerable risks for the success of the
whole organization if they are not managed properly. An example in the case of transmission utilities would be
protection maintenance.
• parasitic
activities that are done in-house that waste organizational resources. Tower painting would be an example.

Fig. 2: Competency Mapping Model

This chart can be used to develop understanding of what activities are important for the utility to manage.
Parasitic competencies should be outsourced to the best provider available. Essential competencies can be
outsourced if relationships can be established to ensure continuous availability of the service and the
minimisation of risks. Finally spillover competencies can be sold externally providing the utility can retain the
profits.

3.3 Effectiveness vs Risk Analysis

Where Fig 2. helps in describing and understanding the roles of different activities within a utility, Fig 3. tries to
capture the efficiency of the in-house activity. The model supports the decision process.

For each quadrant a logical action follows:

(A) If the effectiveness of the regarded maintenance is high it is logical to keep the activity in-house, assuming
that the utility can maintain effectiveness into the future. Risks can be managed by the distinctive and tightly
controlled.
(B) If the effectiveness is low and risks associated are low the logical action would be to outsource the activity.
Examples could be building maintenance or tower painting.
(C) If in-house effectiveness is high and risks low, the activity would only be outsourced if an external provider
were able to offer improved effectiveness.
(D) The main challenge arises when in-house effectiveness is low and risks are high. In this situation the task of
management is to redesign the activity so that either it becomes more effective or the risks become lower.
Outsourcing should only be considered after the activity has been managed out of the risky quadrant and
effectiveness of third party suppliers is higher.

43
 Figure 3 Effectiveness vs Risk Model

3.4 RCQ Model

It is necessary to follow up the high level analysis of potential outsourcing opportunities with a more rigorous
assessment. Recent work has confirmed that the three overriding issues of importance to outsourcing decisions
are Risk ( R ), Cost ( C ) and Quality/Effectiveness ( Q ).
These factors can be combined into a “RCQ” model that is activity specific in its application and enables
objective and quantifiable assessments of outsourcing opportunities to be made.

3.4.1 Risk
For the purpose of simplicity only operational risk is considered in the model. The model uses activity based risk
scoring. Risk is calculated by multiplying the frequency with which an event occurs over a given time period
(obtained from historical records) by a severity weighting factor based on an assessment of the impact of the
events.

3.4.2 In-house Costs

For rigorous outsourcing evaluation it is important that costs should be compared on a like for like basis,
including overhead allocation. It is vital that all costs associated with in-house provision are captured. In addition
to direct costs e.g. labour costs, the assessments should also include training and development, tools and
equipment and all management costs.

3.4.3 Outsourced Costs

It is essential that outsource cost components should include both on going direct and transaction costs. To
complete the picture, one-off costs, e.g. market development costs, or switching costs associated with
transferring the activity to an external supplier must also be taken into account when appropriate

Outsourcing Opportunity

RISK
Assessment

Risks
COST Safety COST
In House Service Outsource
Business

QUALITY/EFFECTIVENESS
of Current Suppliers

Recommendation
In-House or

Figure 4: Outline RCQ Model Structure

3.4.4 Quality/ Effectiveness

The final component of the model is the assessment of quality and effectiveness. A matrix is used to compare the
effectiveness on in-house provision with an outsourcing opportunity. The importance of a service component,

44
 e.g. flexibility, to a utility are plotted on a scale and compared to how well the in-house provider meets those
requirements. The closer the plots align, the better the service provider is meeting the service needs of the utility.

4. Outsourcing Risk Management

Without doubt management of risk is a major concern for transmission utilities. Whilst the “RCQ” model is
focussed on operational risk there are other equally significant categories of risk associated with outsourcing
which should be regularly reviewed to ensure that they are fully understood and managed. The risks include:
• Inadequate training and loss of technological skills base
• Business failure or pull out by contractor
• The level and availability of skilled resources, especially if the utility does not have its own
field resources
• Domination of the utility by the contractor

Whilst the above risks are significant they are normal business risks that can be overcome provided that the
market is sufficiently mature to allow choice of suppliers. Appropriate forms of contract and ensuring that an
asset manager retains sufficient expertise and resources to adequately manage suppliers can also offset such
risks. This latter capability is defined in the Cigre Guidelines as a realisation capability.

The use of external service providers does enable risk to be shared. However, it is unreasonable to expect a
contractor to carry large risks on behalf of a utility if the work to be undertaken is low cost and low margin. The
allocation of risk is a key issue and it should be recognised that it is generally more practical to accept greater
rather than less risk.

5. Selection of Service Providers

Maintenance contracts for transmission assets tend to be long tenure, it is therefore important that contractors are
carefully selected. Important considerations are the alignment of the utility’s and contractor’s business
objectives, and the fit of the contractor with the current, or desired culture of the utility. Whenever possible the
contractor should enhance the utility’s business.

A rigorous and formal approach to selection is necessary to avoid risk of failure downstream. This requires that a
set of selection criteria be developed and thoroughly applied to all supplier candidates. The Cigre Guidelines
describe a process based on the ranking of the business drivers behind the outsourcing initiative and an
assessment of the potential utility/supplier relationships. The proposed selection criteria also make use of
“gateway” questions. These are high level questions covering, for example, the financial health and health and
safety standards of the contractor. These enable high level screening of potential suppliers.

Management of Service Providers

Two, of a wide range of possible options for control of Service Providers are discussed below:

Figure: 5 Linear Control Figure: 6 Triangular Control

6.1 Linear Control

Under this model, groups within a Utility’s organisation are potentially distanced and the asset manager could be
separated from direct control of his assets. This can have benefits, but also presents problems if the Contractor
withdraws at short notice.

This model can only be safe for a Utility if the Contractor does not have an intermediate level of control in the
Utility’s organisation. This has implications for the type of work for which the Contractor is used e.g. a support
role to an Asset Manager or carrying out physical work on assets would be acceptable.

45
6.2 Triangular Control
This model permits an Asset Manager to avoid some of the pitfalls of vertical integration. It allows for an Asset
Manager to use external Contractors to duplicate some levels in his existing hierarchy but with reduced risks as
contact and control is maintained across service providers. This model also allows for use of multiple internal
and external service providers and the operation of all groups in the model is visible to the Asset Manager.

6.3 Integration
These models can be taken further by considering the extent of integration of a Contractor within a Utility’s
organisation. Two possible options are either keeping the Contractor on the periphery (and isolated) or highly
integrated with the management and daily activities of the Utility.

The Contractor will seek a level of integration into a Utility’s organisation according to the scope of work of his
contract and the environment erected by the Utility. The achieved level will depend on how much the Utility
and Contractor are prepared to let each understand the other’s internal operations. The degree of integration can
significantly effect how well the Contracts’ objectives are met.

The role of Key Performance Indicators (KPIs)

With traditional contracts, KPIs are not relevant because the contractor is obliged to deliver the performance
criteria set out in the contract. New style partnering arrangements however, rely on the management of the
“relationship” to deliver a successful end product. In these cases satisfactory performance is generally rewarded
by some sort of performance bonus and opportunities for long term business. A disadvantage of this approach is
the lack of objectivity in the measures of performance. However, properly constructed and applied KPIs can
used to:
• improve the management of services by permitting a high level overview
• enable a process for continual improvement
• allow external comparisons
• promote competition between suppliers.

To make successful use of them requires an understanding of the means by which they can address poor
performance and their role in continuous improvement.

6.5 Performance Improvement

Yes
External
facilitation -
coach or mentor?

Whole
Performance No situation
Indicators Satisfactory? Causal
Analysis
No blame

Encourage
Corrective action
feedback
improved process etc

Figure 7: Managing Poor Performance

6.6 Management Action

If no management action results from a KPI, then either management effectiveness or the KPI itself should be
questioned. The KPI should be capable of causal analysis, monitoring trends and improvement and benchmarking
against industry standards.

6.7 Setting KPIs

The selection of KPIs should begin from fundamental business standards then applied as appropriate to the
particular service to be delivered. For example at the business level the standard might be system availability
which at the service level might be translated into maximum outage duration.

The KPIs could incorporate:

• Financial aspects such as productivity or expenditure against target.
• Physical measures of outputs against targets e.g. number of faults repaired.
• People management issues such as training
• Health, safety and environmental measures
46
 Hard KPIs should complement softer ones such as “partnering health checks” which can be measured through
questionnaires etc. Subjective KPIs work if the “sample” is large enough and there is goodwill between the
parties. Their importance lies in the fact that they enable behaviour as well as process to be measured.

7.0 The Role of Contracts

7.1 Collaborative Style Contracts
Electricity utilities that have outsourced services are moving towards collaborative style contracts. This is because
the nature and consequences of the work requires a high level of mutual trust and confidence. The utility will get
the best out of a contractor if innovation and value adding activities are encouraged and appropriately rewarded.

Collaborative style or partnering contracts can be defined as high performing, genuinely mutual relationships,
producing significant added benefits to both parties. Very close collaboration is necessary if a relationship is to
generate the scale of benefits needed to justify a decision to outsource. This requires a foundation of long term or
even life time contracts.

H.V. maintenance contracts benefit from longer tenure because:

• the contracts usually cover a number of assets and equipment in an asset class. It can therefore
take a contractor to take some time to become fully acquainted those assets.
• if the utility requires “added value” from the maintenance contractor, for example assisting
with failure mode analysis, the contractor needs to understand and gain experience of the asset over a period of
time.
• trust and confidence between the parties takes some time to build.

Traditional outsourcing contracts are competitively let, short term, priced based, discrete transactions. Such a
model does not sit well with the requirements for long term and close relationships with suppliers.

7.2.1 Risk Versus Reward Concepts.

Maintenance contracts also need a reasonable tenure so that the contractor can be rewarded, or penalised, on the
longer-term performance of the asset. There are many styles of contracts that can be applied. However, the final
choice should be made with due consideration to the desired relationship with the contractor and the way in which
the utility wishes to incentivise him.

In general the more risk a service provider is required to carry, the more he can expect to be rewarded. For
example:
• If he is expected to fund implementation of new systems in order to make the service contract cost effective,
then he will expect significant rewards and long term contracts.
• if he is expected to provide fixed price services he will generally price volume and process change into the
pricing agreement
• unique services, for example those having a high degree of complexity, suit risk and reward contracts
•
8 Conclusions
The introduction of external service providers adds a complexity beyond managing physical assets, since the
Contractor has also to be managed. The basic issues to be well grasped are:
• The reasons for outsourcing (are they truly understood)
• Performance Measurement (KPIs)
• The level of integration of Contractor (s)
• The form of contract.
Space limitations prevent full discussion of these issues in this article. Readers are therefore recommended to
purchase the Maintenance Outsourcing Guidelines Brochure when it is published by Cigre early next year. It is
only by understanding outsourcing issues and applying appropriate controls that opportunities to leverage
efficiency and performance gains through outsourcing can be successfully exploited.

47
Cigre 2000 Session Papers. Group 23
Paris, August 2000
OUTSOURCING OF MAINTENANCE IN VIEW OF MARKET LIBERALISATION
TERRY EYLES*
National Grid Company Plc
Great Britain
PHILIP WESTER
NUON Infracore
Netherlands
GAVIN BRENNAN
ElectraNet S.A.
Australia
ALAN WILSON
Doble Engineering Company
USA
On behalf of Study Committees 23 and 39
1 Abstract
This paper has been prepared by the JWG23/39-14 to
structure discussions concerning outsourcing by
describing a framework to enable consistent decisions in
this area.
Outsourcing of maintenance services such as the painting
of transmission towers or substation building repairs has
been common practice in most power utilities for many
years.
Liberalisation of electricity markets has radically altered
the business environment of power utilities, introducing
significant pressures to perform more efficiently and
reduce costs. As a consequence many companies are now
also considering outsourcing of more traditional in-house
services, including primary plant maintenance, as a means
of increasing shareholder value.
Four transmission business models are discussed, which
are defined by the extent of outsourcing employed. The
models provide a means of mapping a company’s
strategic aims to enable a broad understanding of it’s most
important capabilities, or distinctive competencies, to be
achieved and hence the areas of outsourcing likely to be
appropriate for that particular company’s business
environment.
A significant outsourcing issue is the level of risk with
which a company feels comfortable. The paper therefore
describes two decision models that can be used to refine
the general appreciation given by the Transmission
business models and build more robust decisions. The
first, the Competency Model, enables current activities to
APPENDIX 3
be classified to enable a clear understanding of the role of
particular activities within an organisation and hence what
and how to outsource. The second, the Effectiveness and
Risk Model tries to capture the efficiency of in-house
service provision with the aim of avoiding problems that
can cause difficulties in outsourcing relationships.
Finally, possible methods of outsourcing are touched
upon to give brief examples of some of the issues that
need to be considered.
2 Introduction
Decisions regarding outsourcing can often be highly
subjective. As a minimum they should include
consideration of what have been traditionally defined as
core and non-core activities. However, this simplistic
approach could lead to bad decisions and damage to
organisational goals.
Outsourcing of maintenance services is more readily
achieved for distribution networks than transmission
networks, because the implications of plant failure are
much less serious. Generally, distribution networks are
passive and radial in nature, consequently any fault
incidents or plant failures have a localised and minor
impact. Transmission networks in contrast, are active and
heavily interconnected, and under certain system
conditions, a single event can result in a total system
shutdown with severe financial and civil emergency
implications. When account is also taken of the
significantly greater capital costs of transmission
equipment, it is evident that the management of risks for
transmission companies is a strategically important issue.
48
This paper therefore concentrates on outsourcing from the
transmission perspective.
3 Implications of Outsourcing
Whilst outsourcing can increase risk it also potentially
provides significant business advantage through:-
• Reducing cost of labour
• Improved methods
• Value added services
• Greater focus on core skills
• Long term asset support
It should be recognised at this stage that there are certain
activities that cannot be divested under any circumstances.
These include responsibilities under Health and Safety
legislation, conformance to Regulatory and National Code
requirements and Public Acceptance.
4 Transmission Business Models
Transmission utilities can be considered to fit one of four
conceptual business models. The models, which are
defined by the degree of outsourcing employed, are
described in turn below.
Under this model asset management policy is determined
and implemented internally, i.e. the company manages the
investment risk (Capital Spend), with third parties
undertaking the maintenance activity, diagnostics,
inspection and testing etc. Limited knowledge of asset
health and condition is developed or retained internally
and feedback on asset condition becomes dependent on
contracted relationships.
4.4 Asset Owner
Under this scenario the company owns the assets, controls
the system and manages financing. All asset management
and maintenance is contracted out. An area of exposure
pertaining to this model is that only very limited internal
learning of asset health and capability is possible due to
the scarcity of technical experts within the organisation.
The asset owner needs to maintain a minimum position of
being sufficiently informed to operate assets effectively.
This could be achieved with the help of independent
consultants, and will be dependent on contractual
relationships.
5 Mapping of Strategic Issues

Figure I – Transmission Business Models To develop a broad understanding of the areas of

Housekeeping outsourcing most appropriate for a particular company it
Services
Non-core is useful to map its strategic issues, against the four
Maintenance transmission business models.
Peak-lopping
Maintenance
Diagnostic Testing
Fault Response
This approach enables a broad understanding of the most
Condition Inspection important capabilities, or distinctive competencies, of a
Asset Status Outsourced In-house
Maintenance Strategy particular organisation to be developed.
Maintenance Policy Figure II – Mapping of Strategic Objectives for
Project Management
Maintenance Planning Maintenance Service Provision
Resource Scheduling Strategic Objectives Asset Asset Network Service
System Planning Owner Manager Manager Provider
Contract Management Meet Regulatory Needs ✔ ✔ ✔ ✔
Learning and understanding derived
Design Standards
from hands on experience of the ✔ ✔
System Control assets.
Service Activities Asset Owner Asset Network Service The ability to real time manage
Model Manager Manager Provider assets and expertise to manage ✔ ✔
networks.
4.1 Service Provider Retaining the capability to carry out
forensic investigations into fault and
found on inspection defects to ✔ ✔
identify type faults etc and avoid
Under this model a company manages as much work as it repetitive incidents.

has resources available. The majority of services are Retain the capability to respond to
emergency situations such as faults, ✔ ✔
carried out by direct labour. Only minor, low risk, non- incidents affecting public safety,
Civil Emergency and Black Start.

core activities are outsourced on the basis of cost benefit Meet statutory obligations and
discharge liabilities under Health ✔ ✔
to the business. and Safety.
The ability to set appropriate
maintenance policies and quality ✔ ✔ ✔
standards.
4.2 Network Manager Influence supplier behaviour to
obtain best value. ✔
Be an effective contract manager
obtaining delivery to quality, time ✓ ✔ ✔
In this case the majority of business critical activities are and price.
Sustain a baseline resource to be
managed in-house. The company manages the investment able to provide best value ✔ ✔
maintenance services to the licensed
risk and Capital Spend and operating risk and Operating business.
Retention of skills in support of new
Spend, with the balance of services being outsourced business and acquisitions. ✔

subject to cost benefit, the availability of appropriate Dependency on Contractors for

strategic services. ✔ ✔
service levels and strategic fit. Capability to provide lowest price
for services provision. ✔ ✔
Capability to manage exposure to ✔ ✔
overall risk.
Capability to deliver best value. ✓ ✓ ✔

In the above example a Company has identified that the

4.3 Asset Manager most appropriate for its particular set of strategic

49
objectives would be the Network Manager model.
However, it should be recognised that another outcome
could be expected e.g. Asset Owner, if the Company was
willing to manage risk through contractual relationships
with third party suppliers. Once an appropriate model is
identified it can be applied at the Services level to enable
more refined outsourcing decisions by helping
maintenance activities to be further categorised using the
competency classifications discussed below.
Figure III – Maintenance Activity Fit With Transmission
Business Models
The most important capability of an organisation.
In the field of maintenance this could be the
competence to effectively set a maintenance
policy.
Essential competencies
Needed for an organisation to operate. In the
case of a transmission utility this could be the
competency of post fault restoration of demand.
In essence, the skills of operational switching,
maintaining safety from system dangers and
emergency repairs.

Routine Checks • Spillover competencies

Predictive Maintenance Allow a company to obtain profits in a related
Preventive Maintenance
Emergency Response activity through its distinctive competencies. In
Outsourced In-house a transmission utility which uses helicopters for
Maintenance Policies
Maintenance Planning line patrols this could include the hiring out of
Resource Scheduling
Safety Management
those helicopters for other purposes eg transport,
Spares Support hence increasing revenue through external sales.
Grantor Relationships
Contract Management

Service Asset Owner Asset

Manager
Network
Manager
Service
Provider
• Protective competencies
Activities Close to the distinctive competencies but related
to activities that cause considerable risks for the
Model
success of the whole organisation if they are not
managed properly. An example in the case of
6 Decision Models utilities would be protection maintenance.
The extent of outsourcing a Utility decides to adopt will
• Parasetic competencies
be governed by the level of exposure it considers
Activities that are done in-house that waste
appropriate for its’ business environment. In order to
organisational resources. Tower painting is an
make the right decisions against the background, two
example.
decision models have been developed. (Lit 1) Model A,
(Figure IV) enables a clear understanding of the current
Model A helps develop understanding of what
situation to be developed. Model B, (Figure V) helps
activities differentiate the company, but it should be
decisions on what and when to outsource.
looked upon as dynamic. Changing market
environments can cause activities to shift from one
6.1 Model A; Competence Classification
category to another over time. As an example, air
Model A is based on a classification of activities which
blast circuit breaker maintenance may be considered
aid understanding of their role in a business. The five
to be a distinctive competency since appropriate skills
classifications are:-
may only reside within the Utility whereas in the case
of SF6 circuit breakers, skills may be available
Essential
Competencies
Spillover
Competencies
through manufacturers, enabling maintenance to be
considered even as a parasetic competency.
Pressures to minimise maintenance costs may force
Distinctive
changes of opinion in this area.
Competencies

Decisions on what and how to outsource are

supported by this model. Obviously parasetic
competencies must be outsourced to the best provider
Parasetic Protective
Competencies Competencies available. Essential competencies can be outsourced
if an appropriate relationship can be created to ensure
MODEL A
continuous availability of the service and the
minimisation of risks. Finally, spillover
competencies can be outsourced providing the utility
Figure 4: Competency Model
is going to keep the profits that could be made.

• Distinctive competencies
6.2 Model B: Effectiveness and Risk Model

50

Where Model A helps in describing and understanding the
effects of different activities in differentiating a company
from its competitors, Model B tries to capture the
efficiency of the in-house activity. The model supports
the decision process regarding outsourcing with the aim
of avoiding problems that can cause a difficult
outsourcing relationship.
The matrix-drivers are the:
• Risks associated with the maintenance activity,
including risks of losing know-how.
• Effectiveness of the maintenance activity when
performed in-house compared to an outside provider.
HIGH
PROTECTIVE
(D) (A)
PARASETIC DISTINCTIVE
ESSENTIAL
RISK
(B) (C)
LOW SPILLOVER
LOW EFFECTIVENESS HIGH
Model B
Figure V – Effectiveness and Risk Model
For each quadrant a logical action follows:-
(A) If the effectiveness of the regarded maintenance
competence is high it is logical to keep the
activity in-house, assuming that the company can
maintain effectiveness into the future. Risks can
be managed by the distinctive competency. In
high risk areas in-house provision enables an
operation to be better controlled.
(B) If the effectiveness is low and risks associated
are low the logical action should be to outsource
the activity. Examples could be tower painting
or building maintenance.
(C) If effectiveness is high and risks low, the activity
would only be outsourced if the effectiveness as
delivered by an external organisation is higher.
(D) The main challenge arises when the effectiveness
is low and risks high. In this situation the task of
management is to redesign the activity so that
either it becomes more effective or the risks
become lower. In the case of an HV
maintenance activity identified as having low
effectiveness, say through benchmarking,
effectiveness could be raised by the design of
consistent maintenance practices and risks
lowered through the application of rigid quality
control.
Outsourcing should only be considered after the activity
has been managed out of the risky quadrant, and the
effectiveness, as delivered by third parties, is higher.
7 Best Value
A key consideration in any analysis of outsourcing
options is best value, which is about obtaining services,
not just in a cost effective way, as could be demonstrated
by competitive tendering, but through seeking additional
advantage in terms of quality, performance and ongoing
service improvement.
7.1 Adversarial Vz Collaborative Supplier
Relationships
Traditional outsourcing contracts are competitively let,
short-term, price based, discrete transactions. The
analysis in Figure VI demonstrates that such adversarial
contract arrangements are not suitable for managing the
very significant risks associated with outsourcing
protective or distinctive competencies. Also, whilst
adversarial relationships might deliver the lowest price for
a service, they may not deliver best value nor indeed the
lowest overall costs, when transactional and other
possible costs are accounted for. Very close collaboration
is necessary if the relationships are to generate the scale
of benefits needed to justify a decision to outsource. This
requires a foundation of long term contracts. A
collaborative approach to outsourcing of essential or
protective competencies is the only realistic option for
transmission utilities.
7.2 Collaborative Relationships
A collaborative relationship or partnership can be defined
as a high performing, genuinely mutual relationship,
producing significant added benefit to both parties.
Partnerships can include customer supplier relationships;
joint ventures with equity share and the establishment of a
separate legal entity; extensive strategic alliances as well
as mergers and acquisitions. The term partnership,
therefore describes the quality and not the form of the
relationship. They are highly demanding, involving
considerable investments in time, management attention,
know-how and resources, particularly financial and
technical. It is therefore important that companies are
selective in the relationships they try to build.
51
 In this model the company sets up an in-house ring-fenced
Interestingly, in the transmission utility field, the lack of service company. Once again there are pros and cons
suitable acquisition candidates in many instances leads associated with this model:
organisations towards alliances.
Figure VI – Adversarial Vz Collaborative Relationships Positive Features Negative Features
(Lit. 2) Introduction of commercial Lack of injection of new
culture expertise and management
Adversarial Collaborative Introduction is relatively easy Change required to achieve ‘best
Behaviour Individual gain seeking Mutual respect and non-disruptive practice’ may be too much.
Transitory Committed In-house service company can
Defensive Open-Sharing generate third part business
Aggressive Trusting
Focus on group gains In-house service company could,
Attitudes Retain expertise People involvement in time, be floated.
Centralised authority Devolved authority
Power over and active Power covert, inactive mutual
Buyer knows best Differentiating suppliers
8.2 External Service Provider Model
Homogeneous suppliers Proactive innovation
Passively responsive Preventative driven The factors which favor and count against establishing an
Problem driven
Measures Uni-directional eg vendor Multi-dimensional total acquisition outsourcing arrangement with an external service provider
rating cost are:
Uni-dimensional Relationship positioning
Inspection outcomes limited Measure processes Positive Features Negative Features
Infrequent feedback Self regulation Company receives best Could be held to ransom
Success individually biased Extensive, frequent evaluation and
feedback practice service provision by an inflexible contract
Success shared through network Contracts are often lower Typically no exit planning
Processes Buyer specifications Shared design
Hands off Open information exchange
cost
Few boundary spanning Hands on-close Service orientation Contracts time and cost
roles Many boundary spanning contacts evident from provider consuming to establish
Static Systems Learning organisation
Team Based Capital investment can be
Supplier investment people and spread over long contracts
processes
Time Limited life Extended guaranteed life
Frequent resourcing Single sourcing 9 Risk-Reward Concepts
Low switching costs High switching costs
Discrete transactions Infrequent resourcing
Transaction history-context The more risk a service provider is expected to accept, the
more he can be expected to be rewarded:
8 Possible Outsourcing Approaches
9.1 If the service provider is expected to fund
Possible approaches to outsourcing are:- implementation of new systems in order to make the
service contract cost effective then he expects
8.1 Joint venture model significant rewards and long-term contracts.

A joint venture between two companies to transfer assets, 9.2 If he is expected to provide fixed price services, then
staff and capital to set up a separate service company has he will generally price volume and process change
a number of attractive and negative features: into the pricing agreement.
Positive Features Negative Features
High level of control over Difficult to establish Commodity services are generally competitive and have
contract and service (mixed objectives) simply service based pricing.
provision retained
Joint venture can generate Difficult to agree ongoing Unique services (eg high degree of complexity) have “risk
third party business objectives and terms and reward contracts”.
Contract and pricing Unsuccessful due to:
arrangements are - Inadequate service As a general rule, most risks can be minimised by
transparent level agreements. providing all maintenance services internally. However,
- Inflexible contractual this benefit will be offset by the fact that some internal
Can strengthen terms and conditions. costs will be higher than market rates particularly for low
commercial culture - Lack of appropriate skill level activities or more generally, due to the absence
exit clauses. of commercial drivers, even for higher skill level staff. A
utility will need to determine an approach to risk

8.2 In-house service company model

transferred, the required contract flexibility and the
importance of service to the corporate objectives.

52

10 Other Outsourcing issues
10.1 Health and Safety
Most utilities will have to satisfy Health and Safety
Legislation with regard to maintenance activities.
Whether maintenance is provided in-house or outsourced,
liability generally remains with the utility. The
requirement for control over contractors is therefore likely
to be as onerous as for its own staff, although this could
be mitigated to a greater or lesser extent by ISO Certified
Contractors.
10.2 Outage Planning
The dynamic nature of transmission systems requires
flexibility in outage planning, since a significant amount
of work has to be moved, accelerated or cancelled. In
liberalised markets another important factor is emergency
return to service times required by customers,
necessitating work to be accelerated or abandoned at short
notice, as a consequence of targets set by the Regulating
Authority. Traditionally the associated costs have been
absorbed internally. Outsourcing of maintenance work
will have associated flexibility costs and management of
them will increase the complexity of the outage planning
process.
10.3Downsizing Costs
A decision to outsource services may lead to a
requirement to reduce headcount. The transactional costs
associated with this will depend on the Statutory
requirements, employment contracts and Industrial
Relations climate etc. within a particular Country.
However, they could be considerable and could
significantly increase the total costs associated with the
outsourcing exercise to the extent that it becomes
unattractive commercially.
10.4Barriers to Entry
There are a number of entry barriers that suppliers have to
overcome to provide services to transmission utilities.
Some barriers are common e.g. where site access is
concerned there are Safety Rules and authorisation issues.
Others may be cumulative e.g. network wide coverage
may be required to establish a critical mass for the market.
Other typical barriers to entry are:-
Understanding of operation of the transmission
network.
Breadth of technology employed by the Utility.
Supplier skills and knowledge (expertise with older
technology now resides with utilities).
Emergency response capability (24 hrs/day, 365
days/year).
Flexibility requirements.
Complexity of contracts.
Potential high set up costs.
Procurement Rules (ie Euro Journal)
Purchasing Power
In the particular case of partnerships key barriers are the
number of potential partners and the skills/resources and
time required to establish them. However, the Joint
Venture or In-house Service Company models offer the
possibility of circumventing these problems.
10,5Emergency Response
In instances where the Utility is a “supplier of last resort”
careful consideration has to be given to how emergency
situations, especially black start, would be managed if
maintenance services are supplied by Contractors. For a
utility to retain the skills and knowledge necessary to
provide a back-stop response it is essential that they are
regularly practiced through routine maintenance tasks.
This implies the retention of a minimum staffing level.
11 Conclusion
Liberalisation of electricity markets has introduced
significant pressure on Utilities to reduce costs and many
are now considering outsourcing of traditional in-house
services, including primary plant maintenance. The
extent to which outsourcing is employed by a particular
company will be dependant on the acceptable level of
risk, which is in turn governed by its business
environment.
Companies should look upon outsourcing decisions as
complex business initiatives that cannot be lightly
assessed.
It is important that outsourcing decisions are considered
against a framework which enables a consistent and
focussed approach. The four conceptual Transmission
Business Models, combined with the competency models
provides such a framework.
High level analysis of the nature of contractual
relationships indicates that a collaborative approach to
outsourcing, provides the best risk management solution
for Transmission Utilities.
It is concluded that the approach outlined in this paper
provides a useful outline methodology by which utilities
could develop their outsourcing strategies.
References
Lit. 1: Gordon C. Vollman T. Heikkaila J. Mastering
Global Business
Lit. 2 Macbeth and Ferguson
53
Le CIGRÉ a apporté le plus grand soin à la réalisation de cette brochure thématique numérique afin de vous
fournir une information complète et fiable.

Cependant, le CIGRÉ ne pourra en aucun cas être tenu responsable des préjudices ou dommages de quelque
nature que ce soit pouvant résulter d’une mauvaise utilisation des informations contenues dans cette brochure.

Publié par le CIGRÉ

21, rue d’Artois
FR-75 008 PARIS
Tél. : +33 1 53 89 12 90
Fax : +33 1 53 89 12 99

Copyright © 2002

Tous droits de diffusion, de traduction et de reproduction réservés pour tous pays.

Toute reproduction, même partielle, par quelque procédé que ce soit, est interdite sans autorisation préalable.
Cette interdiction ne peut s’appliquer à l’utilisateur personne physique ayant acheté ce document pour
l’impression dudit document à des fins strictement personnelles.
Pour toute utilisation collective, prière de nous contacter à sales-meetings@cigre.org

The greatest care has been taken by CIGRE to produce this digital technical brochure so as to provide you with
full and reliable information.

However, CIGRE could in any case be held responsible for any damage resulting from any misuse of the
information contained therein.

Published by CIGRE
21, rue d’Artois
FR-75 008 PARIS
Tel : +33 1 53 89 12 90
Fax : +33 1 53 89 12 99

Copyright © 2002

All rights of circulation, translation and reproduction reserved for all countries.

No part of this publication may be produced or transmitted, in any form or by any means, without prior
permission of the publisher. This measure will not apply in the case of printing off of this document by any
individual having purchased it for personal purposes.
For any collective use, please contact us at sales-meetings@cigre.org