Maintenance outsourcing

Without doubt, terminals across the globe are having to reassess equipment maintenance provision in the current global economic crisis.Whether it will ultimately be cheaper to shed proven in-house teams and sign up with third party providers remains the great debate.

There are early signs that terminals are taking the plunge: in the first half of 2008, for example, Kalmar secured more maintenance contracts than it did for the whole of 2007.

Mr Rob van Hove, president of Kalmar Services, tells Port Strategy: “In recent months, we have received a lot of customer requests for service contracts. This is because operators are interested in reducing their fixed costs. Outsourcing agreements can help create a more flexible cost structure for the customer, so they can easily adjust to the ups and downs of the market.”

The outsourcing of equipment maintenance is a growing trend in the container and material handling industries, he states, and there are multiple factors which can explain this shift in customer behaviour. In some regions, terminal and yard operators are faced with a lack of skilled labour. This is an issue because the design of new equipment is increasingly more technical and thus more complex to service. Outsourcing maintenance is also appealing because it spreads the risk and allows customers to focus on their core business. More ports are also privatising, which means that governments are selling their terminal operations, which include service operations.

“In the case of greenfield port development, many new terminals opt to outsource so they can be more flexible and cost efficient from the beginning. Performance-based contracts and the need for faster parts delivery are also on the rise,” claims Mr van Hove.

Not only are the major industry players choosing to outsource their maintenance operations, but medium- to small-sized terminals are also considering it as a viable option, he says.

“Equipment rental and leasing is also increasingly favourable, because it doesn’t require a large investment in capital, which is especially appealing to smaller operators. Off-balance financing means customers can plan better because their fixed-costs are known,” says Mr van Hove.

Asked why some terminals remain reluctant to outsource, he says that some see maintenance as one of their core competencies. For example, quay cranes are viewed as a critical component in the handling operations of terminal owners, therefore they prefer to rely on their own resources to perform that type of service. While most terminals outsource some of their maintenance, the type of service deemed “critical” will often stay in-house.

Mr van Hove is also adamant that outsourcing can offer customers greater flexibility, because resources can be adjusted to meet the demands of the market. As an example, he points out that third party providers can move service personnel between customer locations within the same terminal or region to fulfil certain requirements, but a customer cannot be as flexible with its own workforce.

Asked whether it could work out cheaper for an operator to reduce its own maintenance workforce and, instead, rely on outsiders or cancel external contracts and do all maintenance in house, Mr van Hove says: “It’s important for any customer to reduce their fixed costs, making them as variable as possible. Outsourcing service can do this, but operational costs must be measured with revenue. Outsourcing equipment maintenance offers advantages in operational flexibility and cost efficiency, because the customer can more easily adjust their financial model to the current economic situation.”

Integrating service agreements in the initial sale of new equipment is another trend gaining popularity, he adds.

Trygve Bostrom, director of port service at Konecranes, also agrees that equipment maintenance outsourcing is definitely on the increase. However, he adds that it is difficult to get a clear picture of quite how many ports and terminals are doing this at the moment.

“The main driver to looking outside the company for equipment maintenance services is that modern harbour equipment is getting more technically advanced. It’s often easier therefore to outsource rather than invest in training. Container terminals have a core business, which is handling boxes; some of them think that technical maintenance isn’t part of that core business,” says Mr Bostrom.

For new terminals built in remote geographical areas, a lack of technically competent or experienced staff also makes outsourcing attractive.

In the current climate, where few terminals can accurately predict throughput levels from one month to the next, outsourcing promises to convert a fixed outlay on maintenance into a flexible one, by linking the amount of work done to the quantity of traffic being handled.

“However, irrespective of the current economic situation, I do believe there are cost savings to be made by outsourcing maintenance,” says Mr Bostrom.

He nevertheless acknowledges that well-established terminal operators often already have both a well-trained maintenance workforce and a sophisticated maintenance management system in place.

In these circumstances, he concedes, the threshold of outsourcing is quite high.However, the many new operators coming into the market could get better quality maintenance by looking outside the company, Mr Bostrom adds, because it would take a lot of time and money to get an in-house team up to speed.

“There are also several obstacles for terminals wishing to go down the outsourcing route, not the least of which could be opposition from other stakeholders, such as labour unions,” he warns.

Mr Bostrom observes that the drastic changes being experienced by the industry because of the current economic downturn will encourage many terminal managers to re-assess the way they are currently doing things. Many operators face an insecure future and they don’t know if their business will grow, level out or even drop. They may have a cost problem now or they may face a cost problem in the future.

“Outsourcing maintenance is almost certainly being re-considered. And, at Konecranes, we believe we can help terminals save money. For example, we can adapt maintenance services to particular throughput levels in any given month. So, the terminals pay less when cranes are used less, saving them money.

“In addition, an outside provider can bring in modern technology and modern maintenance management systems, which really do help to improve equipment availability and reliability. If you can cut down on equipment downtime cost, like for instance demurrage penalties incurred while vessels are having to wait because a crane is not available, the cost picture changes totally,” says Mr Bostrum.