Coherent Contracting in the Context of Asset Management

Researchers:

Andreas Hartmann

Geert Dewulf

Project Duration:

January 2011 – December 2012

Project Partner:

Delft University (The Netherlands)

Project Description:

In the management of infrastructure networks ‘asset management’ increasingly is being recognized and adopted as an important and salient practice. Asset management can be defined as ‘the systematic and coordinated activities and practices through which an organisation optimally manages its physical assets, and their associated performance, risk and expenditures over their lifecycle for the purpose of achieving its organiisational stratguics plan’ (British Standard Institution, 2004). Despite the clarity this definition suggests, in the day to day practices of infrastructure management in various sectors and countries asset management, as far as present, may take various forms and is interpretated in various ways.

In Anglo-Saxon countries asset management in the last decades has developed into a more or less clearly defined model that has been implemented in practice. Methods of asset management have been standardized and formalized in certified procedures. In this model, efficiency and outsourcing are important distinctive features. Developments in European network industries are less unambiguous. E.g. in The Netherlands asset management approaches in different network sectors are in a different stages of development, some organizations and sectors (e.g. energy) being more ahead then others (roads, rail). Moreover, consensus regarding the meaning, instruments and practices of asset management has not evolved yet. Some consider asset management to be the same as Anglo-Saxon outsourcing practices. Asset management may also be aimed at professionalising maintenance and repair e.g. by introducing new information systems, a risk based approach, or a life-cycle perspective, resulting in more economic allocation of resources. Yet, asset managament may also be seen as a way to link maintenance more closely to the strategic policies and investment decisions of the asset owner regarding the management of the infrastructure network as a whole. As a result, sectors seems to pass through their own development paths, which restricts opportunities to learn from experiences elsewhere.

Another important development in maintaining infrastructure networks is the increased use of different kinds of contractin. Contracting is an important part of an asset management strategy. Contracting encompasses outsourcing and procurement. Outsourcing is aimed at identifying and evaluating service delivery options (in-house, ownership, leasing, ect.) and selecting the best mechanism, in line with ideas on what are considered to be core and non-core tasks and taking the supplier structure into account. Outsourcing is followed by procurement: selecting the optimal contract form, work packaging, deciding upon duration and tendering practice.

Just like with asset management approaches, a great variety of outsourcing practices exists. On the one hand we depict models in which the asset owner keeps control over the whole process and outsources only less important parts, but on the other hand in some cases complete integral systems are outsourced. Transactions can be coordinated by short term and long term contracts. Sometimes maintenance is part of an integrated contract including design and construction of new infrastructures, using DCM contracts (like the tunnels of the HSL-railway in the Netherlands) or forms of public private partnership, so called DBFM-projects (e.g. the A59 road project). In the market, asset providers present themselves, willing to take over the care and risks of maintaining assets, or to fulfill the role of a long term strategic partner. As a result, practices of innovative tendering and contracting, the use of functional requirements and performance contracts, selection based on quality in stead of price only (on lowest bid), and new ways of bundling projects are introduced in infrastructure maintenance. A diverging set of objectives underlie these new ways of outsourcing and contracting, e.g. increased efficiency (value for money), reducing management efforts by steering on performance, offering room for innovation, et cetera.

These two developments, the arise of asset management approaches and new practices of contracting, may be closely interlinked. Contracting may be well-integrated in a consciously designed asset management strategy.
In practice however, these developments are not necessarily mutually reinforcing. On the contrary, asset management objectives and outsourcing practices incorporate certain almost inherent characteristics that can be conflictious. Combining both may give rise to a number of tensions or dilemmas. We discuss three important tensions to illustrate this point.

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A first tension may exist between strategic decisions regarding the management of the infrastructure network and contracting practices. Service level agreements (SLA’s) with external stakeholders and strategic goals of the asset owner, are translated in Key Performance Indicators (KPIs), that are leading for asset management strategies at the tactical management level of the network system. At this level KPIs have to be translated in (functional) requirements of the (performance) contracts, that are guiding operational maintenance activities and eventually network performance. In the practice of tendering, drafting and managing contracts it may be difficult to do justice to all the objectives, that are wanted at the higher level. E.g. contracting out may be very suitable to realize efficiency, but may be less suitable to contribute to the life cycle approach asset managers are trying to realize, or service oriented values (like availability) articulated at the top level of the organization.

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Second, asset management may be aimed at realizing a coherent integrated management of the portfolio of assets. This may be hindered by practices of using seperate contracts, which are fine tuned to the conditions of specific assets. This for instance may occur in the field of road infrastructure using long term contracts like DBFM for the construction of new roads, while asset management is aimed at integral management of the maintenance of the network.

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Third, the choice to use long term contracts or to engage in long term partnerships may reduce the flexibility required from the perspective of effective asset management, or the dynamics that stem from developments at the strategic level of the organisation or its larger environment (introduction of new technologies, institutional changes, policies and regulation, market developments, claims from stakeholders) (Transfield et al, 2004).

These tensions stem from a lack of coherence between choices and practices at the various levels of managing an infrastructural network system:

1.

the strategic level at which goals and values of the organization (asset owner) are set and the asset management strategy is decided upon

2.

the tactical level of programming activities and allocating budgets

3.

the operational level of contracting: outsourcing, procurement and execution of activities.

This may result in a suboptimal performance at all three levels: values of the top level not taken care off, attempts at realizing the asset management strategy being hindered, and the potentials of outsourcing and procurement not being realized.

Given the lack of clarity and consensus on asset management and outsourcing strategies and practices, one might conclude that conditions to deal with these tensions in a conscious, systematic way are unfavourable. This lack of a generally accepted frame of reference also reduces possibilities for learning, since it is it hard to determine what the strategic, technical and institutional constraints (so called economic order) are to use solutions that prove to be effective in one sector in another setting.

Therefore this study seeks to develop a framework to support strategic decision making on outsourcing and contracting, aimed at anticpating and mitigating tensions with asset management strategies and organizational goals of public owners of public infrastructure networks. This framework should help to enhancing the realization of the expected advantages of these governance forms without eliminating flexibility and the integrality of the infrastructure network, thus alligning contracting practices with asset management strategies and organizational goals, in light of technological and institutional innovations that public infrastructure networks in the coming decennia will incorporate. This requires innovative answers both at the level of outsourcing practices and at the level of asset management skills, methods and strategies. Therefore this research is focussed at the identification and in depth analysis of innovative practices of combining outsourcing with asset management strategies, in order to understand the conditions and behaviours that create or contribute to the above mentioned tensions. Aim is to exploire and understand the strategic choices that underlie succesfull alignment attempts and to formulate best practices, that can be generalized to other, comparable settings.

In addition this study strives for clarity regarding the concept of asset management and contracting by making an inventory of theories and practices, clarifying their distincitive characteristics and their underlying motives and determinants (asset characterics/technologies, institutional path dependencies), thus enhancing the conditions for earning across organizations and sectors. The study will compare innovative practices of combining outsourcing and asset manament in four public infrastructure network sectors: water (waterways, dikes, dams and locks), roads, rail and electricity.

The research question: What innovative combinations of contracting and asset management strategies are available to owners of public infrastructure networks, that can cope with both the technological and institutional innovations the infrastructure network may face during the coming decennia, and the tensions that exist between contracting out practices and asset management ambitions and expectations.