Performance based contracts in railways ibraheem sheerah

Performance Based Contracting in RailwaysMiddle East Rail Conference & Expo 2016By Ibraheem Sheerah, PhD Strategy & Business Planning/Contract ManagerSaudi Railways Company (SAR)

Dated March 09 2016

SAR Copyrights @2016 All Rights Received

Agenda• Saudi Railways Company (SAR)

• Understanding the benefits of performance based model for Railways

• Mitigating risks and ensuring smooth contractor-client relationships

• The role of performance based contracts for improving effectiveness of the maintenance function

• Developing specific, realistic performance standards – SMART (Specific, measurable, achievable, results-orientated, timely)

SAR Copyrights @2016 All Rights Received2

Saudi Railways Company (SAR)

Overview • The SAR was established in 2006 to

develop and operate the North SouthRailway (NSR)

• The NSR is around 2,840 Km on twomain lines.– SAR Common line 450 Km– Passenger line with the common section

1,482 km– Mineral line with the common section and

all branches (Bauxite, Wa’ad Al Shammal)1,808 km

• In 2011, mineral line operations startedwith the initial shipments ofphosphates from the Al Jalamid mineto the port at Ras Al-Khair.

• In 2011, the development of the SaudiLand Bridge project, a 950 Km doubletrack line linking Jeddah Islamic Portwith Riyadh, started

• The connection to Wa’ad Al Shamel.SAR Copyrights @2016 All Rights Received

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Infrastructure and Asset Investment Planning Infrastructure Development & Construction

Permanent WayBridges & BuildingsSignalingCommunications

Infrastructure Maint. & Renewal Inspection Failure Recovery Maintenance Renewal

Network operations SchedulingOperationsPath Management and Monitoring

Rolling Stock Maint. & Provision Heavy Maintenance and Workshop ManagementLight MaintenanceWagon CleaningInspection & Provision

Train Operations Rolling Stock PlanningOperations Control

Train OperationsFailure RecoveryCapacity Management

Marketing and Sales Product DevelopmentService PlanningSales Customer ServicesOther Services

Station Management Planning and DevelopmentMaintenance & RenewalOperations

Customer Management Bulk intermodalWholesale intermodalBulk RetailPassengersKey Account

Facility Management Facility Maintenance & ManagementCleaningGround MaintenanceOffices, Workshops, warehouses

Saudi Railways Company (SAR)-

Primary Activities

SAR Copyrights @2016 All Rights Received

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Understanding the benefits of performance based

model for Railways

• Performance-based contracting • the contractor provides to the client certain service levels within

specific time frames to achieve specific outcomes that support the client in realizing his long and short terms strategic objectives.

• PBC Includes:1) objectives and indicators by which to measure contractor performance, 2) information and data on the performance indicators to assess the extent to

which the contractors are successfully implementing the defined services and

3) provision of incentives or imposition of sanctions.

• PBC is a results-oriented contracting model that focuses on how a railways company safely, efficiently and effectively operates its railways infrastructure and assets to achieve its financial targets by realizing the desired operational excellence objectives and maintain sustainability.



model for Railways


• What is the company's Value Chain? • What are the company’s core businesses? • Outsource or not to outsource, this is the Question!! • What are the Strengths, Weaknesses, Opportunities and Threats?

Customer

Support activities

Primary activities


model for Railways

Performance Based Contracting (PBC) process:

Step (1): Prepare a Business Case - a document that defines (Why, How, What, When, and Which activities to outsource) and reviews potential risks, benefits and other potential impacts on the company

Step (2): Define the expected Outcomes - a short statement reflecting the desired result or final deliverable of the contract (Benchmarking is essential)

Step (3): Define the required Measures - define a set of performance measures that collectively measure the organization’s performance against the outcome statement (Benchmarking is essential). It is significant to know what to measure, how to measure it, why its measured and when to measure it.

Step (4): Define the Service Levels - set performance levels for the performance measures, i.e. how well the contractor needs to perform (Benchmarking is essential) - (Performance Targets)



model for Railways

Performance Based Contracting (PMC) process:

Step (5): Define the remuneration scheme or Payment - develop a set of payment curves which set out the pay for performance regime i.e. how much the contractor gets paid for their performance level

Step (6): Define the variable remuneration scheme or Incentives - set out a group of incentives that encourage positive behaviors and discourage negative behaviors

Step (7): Prepare the Contract - draft, review, workshop and finalize a contract which covers all aspects of the performance, payment and terms and conditions of the relationship

Step (8): Continuous monitoring - Review - conduct an analysis of the outcomes, taking into account the differing definitions of success from the different groups involved in the contract.



model for Railways


Efficiency, Effectiveness, Reliability, Availability, Quality, Productivity, Punctuality , etc…


model for Railways

In a general sense, implementing a Performance Based Contracting framework has a broad range of benefits for organizations and contractors, including:

1. Improved contracting outcomes2. Reduction in Total Cost of Ownership (TCO)3. Ability to accurately forecast cost within contract bounds4. Improved accountability for performance5. Development of a clear understanding of performance requirements6. Promotion of strategic benefits for Contractor7. Integration of all contracting aspects in a single set of performance

measures8. A 'Fair' contract outcome9. A greater understanding of life-cycle costs


Mitigating risks and ensuring smooth contractor-client

relationships

In order to mitigate risks and ensuring smooth contractor-client relationship the followings should be considered as early as possible:

1. Clearly define performance metrics2. Ensure that an outcome measurement infrastructure is in place3. If possible, use 3rd party monitoring/assessment of performance4. Permit leeway for uncontrollable risks (e.g., unanticipated events and

fluctuations)5. Appropriately limit responsibilities and liability to reduce likelihood of

disputes6. Develop mutually agreed-upon benchmarks/targets at the beginning of

the project7. Ensure transparency in communications and data exchange


The role of performance based contracts for improving

effectiveness of the maintenance function

The realization of the railways operational goals depends on the achieving of specific performance levels of Rolling Stock (Locomotives and Wagons) and specific performance levels of Infrastructure.

The Performance Based Contract can improve the effectiveness of the Rolling Stock Maintenance and Infrastructure Maintenance through , for example:

Operations Target per period = Operations Performance (Trip Cycle Time )x %Overall Rolling Stock Effectiveness x %Overall Infrastructure Effectiveness x Financial Performance rate x %Safety x …..x Other risks

Overall Rolling Stock Effectiveness = %Reliability x %Maintainability x %Availability x %Productivity x %Quality x %Utilization x %Financial Performance rate x %Safety x …..x Other risks

Overall Infrastructure Effectiveness = %Performance rate x %Reliability x %Availability x %Quality x %Financial Performance rate x %Safety x …..x Other risks


Developing SMART, realistic performance standards

(Specific, measurable, achievable, results-orientated, timely)


Effectiveness: The degree to which objectives are achieved andthe extent to which targeted problems are solved. (Source 2011UNIFE – IRIS)

Efficiency: The comparison of what is actually produced orperformed with what can be achieved with the same consumptionof resources (money, time, labor, etc.). It is an important factor indetermination of productivity. (Source 2011 UNIFE – IRIS)

Building SMART KPIs through Benchmarking and Balanced Scorecard Cascading

What to Benchmark

Understand current

performancePlan Study Others

Lear from data

Use findings

Developing SMART, realistic performance standards

(Specific, measurable, achievable, results-orientated, timely)


Top Down Approach (Interdependent KPIs)

Planned Business Target= Delivery of specific # of Freight/Passengers by year 2016

Actual Business Target= Suppliers Effectiveness % x Shared Services Effectiveness % x Business Support Effectiveness % x Safety % x Sales Effectiveness % x Risks % x Operations Cycles

Customer

Supplier Customer

Shared Services

Infrastructure FreightOperations

Rolling StockCorporatePassengersOperations

GovernanceControlAuditKPIs

Suppliers KPIs Shared Services KPIs Business Support KPIs Operations KPIs

Targets

Sales KPIs

Takeaways


• Understand your Value Chain (primary activities and Capacity/Competency) • Conduct Cost-Benefit Analysis and Business Cases before making such decisions• Know your baseline and take-off from there • Benchmarking is a mandatory but wrong benchmarking costs a lot • Outsource or not to Outsource, this is the question!!• It is all about relationship and communication • Risks must always be monitored (move on and record lessons learned)• Contractor’s KPIs/Targets/Initiatives/individual performance measures…. MUST align with your

company’s strategic objectives • Always plan the entrance and plan the exit (Handover Process and Checklists are so helpful)• Put in place a robust governance • KPIs must not only be SMART but CLEAR:

• Collaborative (KPIs should encourage Contractor’s staff and your staff to work together collaboratively and in teams)

• Limited (KPIs should be limited in both scope and duration)• Emotional (KPIs should make an emotional connection to all staff

tapping into their energy and passion)• Appreciable (Large KPIs should be broken down into smaller KPIs so

they can accomplished more quickly and easily for long term gain)• Refinalble (As new information arise, refine and modify your goals)

Performance based contracts in railways ibraheem sheerah

Engineering

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