Maintenance contract saves metals company a bundle

Nov. 1, 2003
Competitive pressures are not just a North American phenomenon. Take Outokumpu Harjavalta Metals Ltd. and its copper works in Harjavalta, Finland. As at other companies around the world, executives at Outokumpa Harjavalta have stepped back and taken a long view of their business, what they are good at and what areas are in need of better expertise.

“We decided to change our strategy to secure our business due to the serious problems with the availability of nickel at the end of the 1990s,” says Pentti Ahola, director of Outokumpu Harjavalta Metals Oy. “We incorporated the nickel business into a separate corporation. Since our strategy had changed, we also decided to outsource all supporting tasks, from security to maintenance.” He and Pekka Tuokkola, now vice president of operations at the Harjavalta works, were the drivers in designing a new business model for the mill.

Choosing wisely

One critical task was finding a strong and specialized partner for the entire maintenance operation of the works. This selection was crucial because maintenance is fundamental to efficient operation of the plant. The wrong choice could cost a lot of money.

Tuokkola notes that they carefully investigated potential new partners. “We visited different companies that had already outsourced their maintenance operations. We asked about their process of selection, criteria and experience so far. After that, we selected a few candidates for our contract. All candidates made a couple of presentations for our personnel describing their capabilities and their strategies for accomplishing the job. We had an evaluation committee, which performed more detailed research on the candidates, their performance and practices.”

As the committee pondered its decision, it considered many factors. It investigated references provided by the contenders, the results of projects previously undertaken, and each company’s image in the industry. Financial backing was a critical element, as was the company’s capacity to handle big projects. Finally, the committee considered each company’s plan for transition and continued operation of the maintenance function.

ABB Ltd., a Zurich, Switzerland, automation products and services company, was selected for the job. ABB has been an aggressive buyer of automation and power product suppliers over the past 15 years. The company has recognized the need to be a services provider, according to Group Senior Vice President Gregg Williams. “We have seen double digit growth each year over the past three years,” he states. “There is a real market need as customers scale back investments and number of employees. They need to extend the life of their equipment while improving the performance of their automation infrastructure.”

Maintenance and service solutions mean far more than just fixing something when it’s broken. Engineers and technicians work to help companies optimize performance of their current installations. Williams says that services will add about $100 million to ABB revenues this year.

Williams states, “Customers don’t want traditional ‘time and material’ contracts (open-ended contracts where providers invoice for the amount of time it takes to fix the problem and for the cost of materials involved). They wish to establish long-term relationships with suppliers they trust.”

Tuokkola concurs. “We do not call our contract an outsourcing contract. We term it a networking contract, which is based on trust.”

The contract between Outokumpu Harjavalta Metals Oy and ABB is based on a bonus, or sanction agreement, which defines specific profit goals. The partners receive bonuses or sanctions according to the cost savings achieved. If the ABB profit surpasses the goal, the company returns the surplus to Outokumpu.

Open books

Trust is a very good thing, but how does Outokumpu know what ABB’s profits are on this job? Says Tuokkola, “We have deep involvement with our ABB people in daily operations, and vice versa. Both parties have the same targets. The bonus/sanction system in the contract has been very successful so far. Because this is a performance-based contract, we need to share information. We have an ‘open books’ philosophy. If needed, the books can be opened for investigation and confirmation of results.”

One of the problems of performance contracts lies in defining all of the criteria of success. Industry is littered with failed contracts because the responsibilities and success factors were not correctly defined at the beginning. Tuokkola notes that this issue was considered thoroughly. “The criteria for success included ABB’s capability to achieve continuous improvements and cost efficiency, develop ideas for development, improve quality and manage our on-time availability.”

Perhaps the most difficult challenge to overcome was the transition of responsibility from Outokumpu to ABB. The former terminated all of its maintenance personnel, save one who was charged with overseeing the contract, while the latter had to hire personnel and have them and operating procedures in place at the exact moment of transfer.

New boss, new values

Tuokkola says the transition went smoothly. “ABB had a clear training program and a plan for how to deploy new personnel who were mainly ex-Outokumpu maintenance staff. ABB primarily brought in managers from the outside and kept many current staff-level personnel. The training included introduction to new values, the new customer-focused way of thinking and deeper knowledge of service functions.”

The ABB Full Service contract with Outokumpu covers all maintenance activities in the factory, including the areas of concentrate handling, drying, copper and nickel concentrate smelting and molten material handling units.

“ABB’s take-over of the maintenance function was well-designed and exemplary,” adds Ahola. “They immediately trained the maintenance personnel in their new employer’s values and service standards. Tasks and responsibilities were efficiently re-assigned, which shows in the results. Last year was our best ever, both operationally and in terms of production. Our partner, ABB, had a good year as well, so the win-win principal of our contract was fulfilled.”

The numbers confirm the success. Outsourcing supporting services enabled Outokumpu Harjavalta Metals to more than halve its employee head count, from 1,000 to about 450. ABB currently maintains a staff of around 200 at the Harjavalta location.

Utilization of the nickel smelting capacity has increased by 6 percent during the last four years. The operational level of the copper smelting units is also going up.

Maintenance costs have dropped significantly. The first year resulted in savings of 3 percent, and cost savings last year were 10 percent compared to the time before outsourcing to ABB. There was also a dramatic 50 percent decrease in the number of work hours lost due to accidents.

If Outokumpu managers are happy with the arrangement, what is ABB’s outlook? Was this really a win-win situation?

“When we came to Harjavalta, we found the factory in very good working condition,” says ABB Area Director Hannu Lahtinen. “In addition, Outokumpu provided us with a great deal of information, which really helped us during the transition period of taking over the maintenance.

“We have not only been able to target and channel our resources better than before, but we have also succeeded in integrating technical and financial issues. We paid a lot of attention to subcontracting in order to avoid unnecessary purchases,” adds Lahtinen.

Brad Kramer, ABB senior vice president of asset management service, says, “We studied the successes IBM has had with developing its service model. This becomes even more relevant when you see companies beginning to merge their information technology and controls departments. We emphasize a collaborative approach to the business. The customer has expertise in their processes, while we have expertise in the control and automation systems. We try to work together to get the best performance possible for the customer. This puts the risks of manufacturing in the places where they are best mitigated.”

Technology, plus business

Not all of the discussions center on technology. While technology and how it is used is still the foundation of manufacturing, business problems must also be considered. Says Kramer, “We are working with customers to get them to think at a higher level. Not only technology, but also training and people performance issues must be considered. Operator competence is a key factor of success. We will help perform assessments and employ gap analysis to help improve that, as well.”