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Why is the District Cooling industry holding back…

from outsourcing operation and maintenance functions?

| | Feb 15, 2017 | 12:39 pm
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Dan Mizesko

Outsourcing is one of the global megatrends and has been identified by industry leaders as enabling businesses to optimise their resources in an uncertain economic landscape. However, it still has not been embraced by the District Cooling industry. This, in my view, is resulting in missed opportunities for the District Cooling utilities in the GCC region, when it comes to saving energy, improving reliability, lowering operation and maintenance costs and adding profits to their bottom line, which in turn, would allow them to pass on some of the savings to their customers.

The outsourcing of central chilled water plant operation and maintenance (O&M) functions is one of the trends showing rapid growth in the United States and worldwide. The trend has experienced the most notable expansion, where reliable and cost-effective delivery of chilled water services, plant production efficiency and market competitiveness are essential.

The outsourcing of O&M services to a specialist chiller energy solutions company has numerous benefits. Allow me to enumerate them here…

• Contracting with an outside service organisation offers the benefit of professional resources that routinely respond to challenges across many different industries.

• Outsourcing brings expertise not available in-house. A chiller specialist service company will have industry- and factory-trained service engineers, who have the experience to service, maintain, troubleshoot, repair and retrofit all makes, models and sizes of chillers.

• Chiller specialist service providers can set and monitor performance goals. They can factor in specific KPIs relating to the reliability of chilled water delivery, performance in terms of kW per tonne and the cost of producing a tonne-hour of cooling.

• O&M providers, typically, will furnish capital for improvements to the plants, if the O&M agreement is inclusive of energy guarantees.

In a global liquidity crunch, as the world is still faced with today, plant owners can create extra cash flow by outsourcing to the O&M specialist contractor

• They would also cover any and all equipment damage due to operations or service errors. This is not the case with in-house staff. Let’s explore a possible scenario, where the in-house operators start a chiller with valves closed with no water flow. (This was, in fact, an actual situation that emerged while working with a District Cooling company in the GCC region.) The operator’s SCADA/BMS system would indicate flow even in the absence of flow, owing to the unfortunate possibility of the flow switch being broken and to signalled flow. The chiller is started and the evaporator tubes are consequently damaged, as a result of which there is intrusion of water in the chiller. Typically, the repair work would exceed AED 300,000. What recourse would the District Cooling company have, apart from terminating the employees responsible! None whatsoever. So it would be staring at a huge loss. Why put oneself in such a situation, then?

• Typically, managers or owners of District Cooling companies rely on the competency of their in-house engineering personnel for the in-depth operation of mechanical systems. They cannot look over the shoulder of their engineering staff and know if the preventive maintenance is being performed properly. Through outsourcing to a specialist chiller energy solutions company, the supervision is done by highly trained and experienced personnel. Typically, supervisors are those that have moved up through the ranks of the company and know the job inside and out. These supervisors will review the operation of the plant on a regular basis in order to assess the performance of their people. Since chillers and chilled water plants are a specialist chiller energy solutions company’s core business, and the reputation of the company is based on the O&M of the plants, it would make every effort to ensure the plant is operating at its peak and that the plant owner and managers are completely satisfied. Specifically, this means that the mechanical systems get extra attention and are kept in peak operating condition, clean and painted. The O&M company would look for all possible ways to improve the plant operation and optimisation with new technologies and cost-saving measures.

• If there is failure or breakdown with the chillers, towers, piping network or other major components of the plant that the onsite staff cannot repair in a timely manner, the outsourced O&M company has other resources, including supervisors and management, to resolve the issues immediately. The owner or managers of the plant do not solely have to rely on the in-house staff or on calling an outside contractor on an emergency basis.

O&M that is able to increase the availability of chillers, pumps and towers will contribute 10-20% to the bottom line

• The current job market is extremely tight. Good engineers, mechanics and technicians are very hard, if not impossible, to find. Insurance rates, as well as employee benefits, are increasing. The outsourced specialist is set up to deal with all aspects of personnel issues on a daily basis. The Human Resource department is set up to search for the best for less in order to keep the customer’s cost low. Owing to the ability to train and promote staff, the specialist O&M Company is able to better recruit young talent desirous of building a career. Another significant advantage to the owner is the ability to pick and choose the employees at the sites. Dealing with many different personalities is a major challenge these days. With in-house staff, you have very little flexibility to separate people if the personalities do not work well. With outsourcing, if the contractor’s personnel do not work well with other on-site workers or management, the contractor can transfer people on his payroll, as and when necessary. There is an overall substantial savings in management time and cost for the plant owner, because an outsourcing approach obviates the need for dealing with payroll, accommodation, transportation (such as service trucks, cars, bus) healthcare, uniforms, visas, end-of-service benefits (gratuity), holiday and end-of-service air fare, demographic mix of the workforce (a Labor department requirement), hand tools and other costly equipment purchases and other issues associated with in-house operation and maintenance staff. Besides, the owner can eliminate administrative costs associated with HR and PRO, plus the cost for accounting time to enter payroll and other functions.

• In today’s litigious society, the risks of employment are great, and being able to pass the risk of employment-related liability on to a contractor is of some material benefit to owners. Typically, the O&M contractor would take the responsibility for hiring, firing, motivating, supervising, training and disciplining the site staff and shield the plant owner from any risks associated from these activities.

• With outsourced services, the plant owner and managers have a guaranteed budgeted cost; guaranteed performance, which can be incorporated into the service agreement), and high-quality guaranteed expertise that’s difficult to find and retain.

• Last but not least, outsourcing also improves the owner’s cash flow position. In a global liquidity crunch, as the world is still faced with today, plant owners can create extra cash flow by outsourcing to the O&M specialist contractor. Rather than having to pay in-house personnel monthly and pay their mobilisation costs up-front, plant owners can pay their bills after 30, 60 or even 90 days, however the agreement may be structured, thereby creating months of extra cash flow not only on labour but also on all materials.

Key considerations for outsourcing
The decision to outsource is a very significant one and deserves a lot of thought. The most important consideration when outsourcing the maintenance activities is to focus on change and improvement. It is amazing to me how the management team even at those plants with a bad track record at equipment maintenance decides to outsource maintenance but often wants it done the same way it has been carried out all these years. How is it possible to improve the reliability and efficiency of the equipment if maintenance does not change? A key characteristic of an outsource maintenance provider is the ability to play the role of “Change Agent”. A common mistake that is made when considering whether to outsource maintenance or keep it in-house is focusing solely on the ability to reduce the cost of maintenance. There is no question that reducing costs is a key element in any outsourcing decision. Reducing the cost of O&M contributes to improving the bottom line of a plant. However, effective O&M contributes in a big way to reducing the overall cost to produce and generate chilled water. O&M that is able to increase the availability of chillers, pumps, towers and ancillary plant equipment as well as reduce power and water costs will contribute 10-20% to the bottom line profitability of the plant.

CPI Industry accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided here.

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