“Do what you do best and outsource the rest” has become an internationally recognized business tagline first coined in the 1990s by Peter Drucker. Self-performance versus the outsourcing of GSE maintenance is a frequently discussed topic in the ground support industry.
Full discloser - I sell outsourcing of GSE maintenance. But before you quit reading, as a vice president of operations in a former company I “sold” our executive team on the idea of self-performing maintenance on our $1M worth of equipment. We brought maintenance service in house. Over the past 25 years I’ve had hundreds of conversations regarding the process of deciding to self-perform or outsource a business function.
There are compelling reasons to choose either approach. One size does not fit all.
Outsourcing GSE maintenance at Newark Liberty International Airport (EWR) may be the best approach, while self-performing at San Francisco International Airport (SFO) might be best for the business unit.
What follows is the framework we are using with our customers to assess self-performance versus outsourcing.
The assessment of outsourcing has historically been driven by three key considerations:
- A desire to lower costs.
- A need to see better reliability.
- The service to be outsourced is not a core competency.
However, an emerging consideration for outsourcing is:
- The diminished talent pool means poorer or less maintenance threatening relationships with customers.
There are four phases in the assessment of self-performance versus outsourcing.
The first phase is an honest internal discussion about the current state of the self-performed maintenance program. In most cases, this discussion should be location specific and the results may be very different. The team in Miami International Airport (MIA) may have strong maintenance skills while the team in O'Hare International Airport (ORD) may not.
Key questions are:
- Are your current costs meeting expectations and/or is there a near-term, known factor that may immediately drive up those costs? (Health care costs and mandated wage changes are examples.)
- Are you meeting current in-service, safety and reliability metrics?
- What would your customers say about your maintenance service and how it impacts their operation?
A corresponding requirement for completing the assessment is to know the metrics required to answer the questions above (typically defined as key performance indicators or KPIs):
- How costs are measured and what are the targets?
- How in-service rates are measured and what are the targets?
- How customer satisfaction is measured and/or how is the impact of maintenance on our customers tracked?
Once consensus has been reached by the stakeholders regarding the current state of the maintenance program, the assessment moves to phase two: an honest internal discussion on company capabilities.
- Is GSE maintenance a core competency? (Again this may be location specific.)
- Are there limiting factors that could/should be removed for the team to successfully self-perform?
- If maintenance is not a core competency, does the company have the time and resources to implement the changes that would yield the targeted improvements (lower costs, better reliability and better customer satisfaction)?
- Can a service provider be identified who specializes in maintenance, or where maintenance is a core competency, and are they definitively better today? Who are they?
- Can a service provider really deliver lower costs and better reliability than the organization?
- The provider may propose that they can implement better processes. Is that true?
After phases one and two are complete, the leadership team should have an understanding of how well its self-performed maintenance program is meeting cost and quality goals. The team also should have a clearer picture of GSE maintenance as a core competency and whether there are concerns about the program’s impact on the company’s relationship with its customers.
If the leadership team has decided to explore outsourcing the next steps create the framework for the return on investment (ROI) discussion.
Phase three is to determine the cost of self-performing GSE maintenance. The team will need to decide what aspects of the business will be considered in the assessment.
- Direct costs such as:
- Direct labor performing the service.
- Rent and other facility costs.
- Vehicles, tooling, equipment and other shop operation costs.
- Specialized technical support (if it comes from another location).
- Parts inventory (including carrying cost and shrinkage).
- In-direct costs such as:
- Support services being provided to the operations (HR, accounting, management).
- Revenue potential from third-party contracts.
- Impact on other core competencies.
- Impact on customer relationships.
- Impact of job vacancies from shrinking labor force.
During this phase, requests for proposal (RFP) should be sent to any potential outsource service provider that was identified in phase two as definitively better. Note that an assessment that only uses direct costs will almost always be lower than a service provider’s hourly bill rate. The service provider has to include in-direct costs in their rate in order to assure some level of profit and to make providing the service sustainable.
The final phase is to complete the ROI assessment. The relatively easy assessment is from the financial perspective. This may require converting RFP responses and the self-performing cost assessment into a common denominator such as estimated annual spend. Then, what is the comparison of estimated annual spend, self-performance versus outsourcing? Divide the outsource number by the self-perform number to get a factor. Any resulting factor over 1 means that outsourcing provides a better financial ROI than self-performance. Factors under 1 mean that outsourcing, from the financial perspective, could be more costly.
The more challenging assessments are the financial impact of:
- Better reliability.
- More resources available for core competencies.
- Better relationships with customers.
Any of those objectives can move the ROI factor up or down. For example, if better reliability is not assured, then a factor over 1, may not be good enough to justify a change. If reliability will be consequentially better, an ROI factor of less than 1 may be acceptable.
The assessment of self-performance versus outsourcing GSE maintenance is not a one-size-fits-all proposition.
We’ve identified 40 factors that should be considered. And while we support Drucker’s notation to “do what you do best and outsource the rest,” we also recognize that a good outsource service provider must be able to say that outsourcing is not the best solution in every case.
If you are preparing to assess the ROI of outsourcing, be sure to consider direct costs, in-direct costs, and impact on reliability, core competencies and customer relationships.