Decision Making for Outsourcing and Privatization of Vehicle and Equipment Fleet Maintenance (2011)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

29 The outsourcing decision model described in Chapter 4 is designed to support a full range of outsourcing decisions, such as day-to-day outsourcing decisions at a shop level, opera- tional decisions at a regional level, and statewide strategic out- sourcing. To accomplish this objective, the process model is designed to be flexible. The actual procedures of executing this model can vary from case to case. The following are the general guidelines on applying this decision model: • Process 1—Identify Critical Internal and External Con- ditions is a planning step for the entire model. It can be performed once during the fiscal year (e.g., at the begin- ning of the fiscal year when budgets are finalized) or when there is a significant internal or external condition change (e.g., major policy changes within the DOT or changes in competitive vendor market). Once the analysis is per- formed, it does not need to be repeated for every decision scenario. • Process 2—Analyze Internal Demand and Capabilities is a critical step that must be performed under every decision scenario. This is mainly because the balance between work- load and resource availability can vary from time to time, presenting different tactical and strategic situations for the agency. For example, maintenance demand and shop capabilities, characterized by adequacy and sufficiency of available resources, can change on a daily basis at a shop depending on the operational circumstances. • Process 3—Evaluate External Service Providers is a key step to evaluate external market conditions. However, it does not need to be performed every time unless market condi- tions have changed or the geographic location/coverage for the outsourcing decision has changed. • Process 4—Analyze Cost and Performance Trade-Offs is another critical step that must be performed under every decision scenario. • Process 5—Synthesize and Finalize Outsourcing Decisions is a step that mainly applies to strategic outsourcing when the decision makers need to aggregate the individual deci- sions to arrive at a strategic decision at the regional or statewide level. This process may not be applicable in day- to-day situations. Table 13 provides guidance on how these processes should be applied under different outsourcing decision scenarios. The following two case studies illustrate the application of these process models. 5.1 Case Study Context In hard economic times, state governments throughout the country face severe budgetary pressures and declining tax receipts. To minimize the burden on its citizens, state govern- ments look for innovative ways to boost revenue and aggres- sively reduce costs to balance their budgets. The pressures from the top trickle to the bottom, where the state governments’ operating departments are expected to aggressively cut their expenses, fund only the bare minimum of programs, and provide services at acceptable quality levels without unduly affecting the customer experience. For programs such as state DOT fleet and equipment maintenance, this means cutbacks on major capital programs, diverting resources to ensure that the fleet and equipment are in service for emergency opera- tions, and performing just enough maintenance to keep the fleet operating with the expectation that better conditions in the future will enable investments that will improve asset con- ditions. However, this becomes a new norm as future-year budgets do not quickly return to pre-cutback levels, result- ing in years of underinvestment. This leads to the declining condition of assets, which shifts the focus away from preven- tive maintenance to a reactive mode in which the staff are burdened with repairing assets to ensure availability. In the long run, this results in severe resource shortage (human and monetary), which puts a huge burden on the maintenance department. C H A P T E R 5 Case Studies

Against this backdrop, this section demonstrates the prac- tical application of the outsourcing decision framework using two case studies: 1. Case Study A: A policy directive from the DOT executive management has resulted in the fleet and equipment divi- sion evaluating whether to outsource fleet and equipment maintenance over the long term. The evaluation process applies the outsourcing decision framework and conducts a logical step-by-step analysis to arrive at an informed decision. 2. Case Study B: Illustrates the day-to-day fluctuation in maintenance needs by demonstrating the application of the outsourcing decision framework for a single type of repair for a particular vehicle on a case-by-case basis. For simplicity, the case studies use the equipment class and maintenance types defined in Chapter 3. 5.2 Case Study A—Strategic Outsourcing Decision In this case study, a state DOT is evaluating the feasibility of outsourcing all fleet and equipment maintenance within the state. However, the state plans to conduct a pilot study to eval- uate the feasibility of outsourcing all maintenance services cov- ering all fleet and equipment maintained in three facilities within the state. The three facilities were selected because the set of fleet and equipment maintained was diverse and the con- ditions at these facilities provided a representative sample of challenges the state DOT faced. The subsequent discussion applies the outsourcing decision process described in Chapter 3 to the case study problem. To aid the decision maker, Appendix B provides the forms and templates to be used as guides to logically walk through the decision-making process. 5.2.1 Process 1—Identify Critical Internal and External Conditions Before initiating the detailed technical decision analysis, the aim of this process was to analyze a series of internal and exter- nal conditions and finalize a list of outsourcing candidates for further analysis. This includes creating an initial list of outsourc- ing candidates; identifying legal, policy, and regulatory drivers and constraints; conducting a core competency analysis to eval- uate the criticality of the outsourcing candidates to achieve the DOT’s goals, missions, and objectives; and conducting a high- level evaluation of the external market competition. The intent of this analysis was to narrow the list of candidates for further analysis in subsequent processes. The initial identification of the outsourcing candidates was based on the problem statement that all maintenance services and all fleet and equipment maintained in the three locations were eligible candidates for outsourcing. A careful evaluation of the outsourcing candidates from a legal, policy, and regulatory perspective found that there were no constraints: • There were no regulatory or legislative constraints to out- sourcing the candidate functions. • Outsourcing the candidate functions would not result in violation of civil service rules or labor agreements. 30 Process Outsourcing Decision Scenarios Day-to-Day Outsourcing Decisions Operational and Strategic Outsourcing Decisions Process 1 – Identify Critical Internal and External Conditions Execute this process periodically or during major changes in internal or external conditions. Execute this process every time outsourcing analysis is conducted. Process 2 – Analyze Internal Demand and Capabilities Analyze demand and capabilities of the shop every time outsourcing decisions have to be made. Based on the context of outsourcing analysis, conduct this analysis by shop or by region every time outsourcing analysis is conducted. Process 3 – Evaluate External Service Providers Evaluate available private vendors once and update periodically when market conditions change. Cost information should be obtained every time outsourcing analysis is conducted. Evaluate available vendors to service shops that are distributed throughout the region and/or state every time outsourcing analysis is conducted. Process 4 – Analyze Cost and Performance Trade-Offs Evaluate outsourcing options and cost every time outsourcing decisions have to be made. Evaluate outsourcing options and cost every time outsourcing analysis is conducted. Process 5 – Synthesize and Finalize Outsourcing Decisions This analysis may not be required. Execute this process to summarize the decisions by aggregating individual recommendations made at the shop or regional level. Table 13. Guidance to apply outsourcing decision framework.

• The state did not have any statutory limitation on the types of outsourcing to be considered in this analysis. However, further clarification was required to determine whether managed competition would be an accepted option. A core competency analysis was also completed to determine whether outsourcing candidates were critical to the accomplish- ment of the DOT’s mission and goals and delivery of services. Table 14 shows the factors considered in the core competency analysis. The following observations were made after the completion of the core competency analysis: • Outsourcing candidate functions were not typically con- sidered the core or mission-critical functions within the DOT. Fleet and equipment were viewed within the DOT as support functions. From this perspective, outsourcing can- didate functions will not adversely affect the DOT’s accom- plishment of its mission and goals. • No confidential information will be divulged as a result of outsourcing. • Poor performance could adversely affect the DOT func- tions that depend on the fleet and equipment to support their operations. However, this should not deter the DOT from further evaluating the feasibility of outsourcing. • Pending results of the evaluation, outsourcing might result in value-added benefits to the DOT in terms of lowering costs and increasing ease of access to specialized skills and equipment. Finally, an assessment of external market conditions was conducted to ensure that there were enough capable vendors in the market to promote healthy competition. This was a high-level assessment focusing on the availability of enough vendors with knowledge and expertise required to service the vehicles; the distance between the maintenance shop and vendor facilities to understand its impact on service time and cost; and the impact of outsourcing on impeding market competition over the long term. In addition to using the data from historical work orders, other sources like yellow pages and the Internet can be employed to determine the available vendors within a reason- able distance from the maintenance shop. Local market con- ditions and geographic location of the facility will define the reasonable distance. This case study assumed that the avail- ability of at least three vendors within a 30-mile radius repre- sented healthy competition. A key consideration in this assessment is the availability of a competitive market such that outsourcing should not lead to market monopoly and result in loss of price and quality control 31 Factor Assessment Importance of outsourcing candidates to agency’s operations The fleet maintenance functions are not viewed as inherently governmental functions within the state. The executive management clarified this to the maintenance department. Impact on agency’s mission and delivery of services The majority of the fleet maintenance functions are not critical enough to adversely affect the agency’s mission and delivery of its services. For heavy- duty and specialized equipment, lack of availability might be a concern because there is not enough of this equipment to serve as backup. Based on discussions with senior fleet managers, it was concluded that these issues are not insurmountable. Impact on business process and organizational change From the customer’s (state agencies that send their fleet to be repaired or maintained by the maintenance department) perspective, there will be no significant changes because they will still interact with the maintenance department for any maintenance needs. There will be several changes within the maintenance department because the department’s focus will shift from execution to vendor oversight and administration. Ability to retain skilled personnel The agency anticipates some downsizing as a result of outsourcing. The agency will study the available options based on the outcomes of this analysis. Fleet ownership The DOT will not lose ownership control over its fleet. Sale or transfer of the DOT fleet is not anticipated as a result of outsourcing. Confidential information No confidential information that will undermine the DOT or the state’s interests will be divulged as a result of outsourcing. Impact on other dependent agency functions The outsourcing of maintenance functions should have minimal impact on other agency functions. Experience with outsourcing similar functions Many cities, municipalities, and state DOTs have outsourced fleet maintenance services to private vendors and have had varying levels of success. The state is familiar with outsourcing, including several highway maintenance functions within the DOT. Table 14. Case Study A—core competency analysis.

for the DOT over the long run. Vendors that maintain heavy and specialized equipment are usually limited, especially in remote locations. In such cases, competition is limited and the agency may not have many options at its disposal. However, careful attention should be paid to instances where competi- tion is limited for common maintenance functions that typ- ically can be provided by multiple vendors. At this stage of the analysis, it is important to highlight and document these cases. There are several ways to mitigate this problem, includ- ing adopting a policy of spreading the work across available vendors. Tables 15 and 16 summarize the results from Process 1. Although the tables’ formats are meant for summarizing the results of this process, the content may be customized to highlight the relevant strengths and specific issues or concerns. The overall goal of this summary is to capture the final list of outsourcing candidates that will be evaluated further for demand, capacity, cost, and quality in the sub- sequent processes. For example, in Table 16, the result of Process 1 is to consider all candidates except the heavy-duty and specialized vehicles from Facility 1 due to weak exter- nal market conditions, despite high internal costs. In addi- tion, this summary allows the formation of a comprehen- sive picture of major issues that decision makers might face that are outside of the purview of this decision-making framework. 32 Outsourcing Candidates Internal and External Condition Analysis Equipment Class Maintenance Type Facility Availability of Competitive Market Multiple Vendors Available Vendor Capability Potential for Market Monopoly DOT's Past Experience with Vendors Small engine All except on-road repair All Available Capable Low risk Limited experience Seasonal attachments All except on- road repair All Limited Capable Low risk Limited experience Light duty PM, minor All Available Highly capable Low risk Limited experience Light duty Major All Available Highly capable Low risk Good experience Light duty Overhaul and rehab All Available Highly capable Low risk Good experience Medium duty PM, minor All Available Highly capable Low risk Limited experience Medium duty Major All Available Highly capable Low risk Good experience Medium duty Overhaul and rehab All Available Highly capable Low risk Good experience Heavy duty All except on- road repair Facility 1 Very limited Not capable Medium risk Limited experience Heavy duty All except on- road repair Facility 2, 3 Limited Capable Medium risk Limited experience Specialized All except on-road repair Facility 1 Very limited Not capable Medium risk Limited experience Specialized All except on-road repair Facility 2, 3 Limited Capable Medium risk Limited experience All fleet and equipment types On-road repair All Available Capable Low risk Goodexperience Table 15. External condition analysis.

5.2.2 Process 2—Analyze Internal Demand and Capabilities The purpose of Process 2 is to determine whether the selected candidates are viable for outsourcing by analyzing the main- tenance demand and the shop capabilities. In this two-step process, a gap analysis is first conducted to determine whether there are adequate and sufficient resources to conduct the maintenance activities. Then, if there are any imbalances, the feasibility of adjusting capabilities to meet demand is evalu- ated. To conduct these analyses, information from the state DOT’s maintenance practices as well as data available from the state DOT’s FIMS are used. 5.2.2.1 Assessment of Optimal Staffing Levels The fleet and equipment shops routinely monitor the demand for the maintenance services to determine optimal resource requirements. In this example, the maintenance demand is estimated using a common technique called the vehicle equivalency analysis (15); however, other methods may be used to determine maintenance demand. Table 17 illustrates the vehicle equivalency analysis (for one of the facil- ities under consideration). In this example, the maintenance repair factor for the equipment is estimated using a light-duty vehicle as the base maintenance unit; the maintenance repair factors are shown in the table for illustrative purposes. State DOTs are expected to use historical data or established stan- dards in their demand analysis. Although this analysis is shown at a higher level, to be more accurate, it may also be conducted at a more disaggregate level, by equipment class or maintenance type. For example, light vehicles can be further broken down into compact cars, mid- size sedans, and full-size sedans. In that case, the results of the analysis can be aggregated to the equipment class and then applied in the decision framework. 33 Outsourcing Candidates Internal and External Condition Equipment Class Maintenance Type Facility Internal Operational Condition Legislative Policy Constraints Mission Critical External Market Condition Consider for Further Analysis Small engine All except on-road repair All Very old equipment None No Strong Yes Seasonal attachments All except on- road repair All Aging equipment None No Average Yes Light duty PM, minor All Rapidly aging equipment None No Strong Yes Light duty Major All Rapidly aging equipment None No Strong Yes Light duty Overhaul and rehab All Rapidly aging equipment None No Strong Yes Medium duty PM, minor All Rapidly aging equipment None No Strong Yes Medium duty Major All Rapidly aging equipment None No Strong Yes Medium duty Overhaul and rehab All Rapidly aging equipment None No Strong Yes Heavy duty All except on-road repair Facility 1 High internal costs None Minimum Very weak No. Do not outsource Heavy duty All except on- road repair Facility 2, 3 Good capability, high internal cost None Minimum Average Yes Specialized All except on- road repair Facility 1 High internal costs None Minimum Very weak No. Do not outsource Specialized All except on-road repair Facility 2, 3 Staff shortage None Minimum Average Yes All fleet and equipment types On-road repair All No in-house capabilities None Minimum Strong Yes Table 16. Summary of internal and external condition analysis.

The estimated demand can be converted to the number of FTE technicians required. First, the technician availability is computed by subtracting the employee benefits from the total annual paid hours, as shown in Table 18. This information should be readily available within the agency. By dividing the annual maintenance mechanic hours by the technician avail- ability, the FTE technician requirements can be computed, as shown in Table 19. The estimated staff demand of 41.2 FTEs to meet the serv- ice levels at the facilities can then be compared with the FTEs currently in the shop. A huge disparity between the optimal and current staffing levels will identify understaffing (most typically) or overstaffing. Depending on data availability from the FIMS, FTE requirements by equipment class can also be estimated. Industry and agency practices can be used to determine how many supervisors, managers, inventory tech- nicians, and other staff are required in the facility. The analy- sis in Table 20 illustrates the assessment of staffing levels in the three facilities. 5.2.2.2 Assessment of Staffing Capabilities This is a qualitative assessment in which the agency should develop an inventory of the skills required and evaluate whether the maintenance technicians possess these skills and techni- cal knowledge. This analysis should be completed by facility, equipment class, and maintenance type. The strengths and weaknesses should be rated. Table 21 summarizes the staffing capability assessment. Table 21 shows that the staff at the three facilities appear to have adequate skills and knowledge to maintain small engine and seasonal attachments. On light- and medium-duty vehi- cles, the facilities have either average or adequate skills to con- duct preventive maintenance and minor repair, but have aver- 34 Equipment Class Number of Assets Maintenance Repair Factor Maintenance Hours per Base Unit Annual Maintenance Technician Hours Facility 1 Facility 2 Facility 3 Facility 1 Facility 2 Facility 3 Small engine 75 50 125 0.5 20 750 500 1250 Seasonal attachments 175 125 225 0.5 20 1750 1250 2250 Light duty 125 80 150 1.0 20 2500 1600 3000 Medium duty 80 40 75 3.0 20 4800 2400 4500 Heavy 50 30 40 5.0 20 5000 3000 4000 Specialized 80 40 50 8.0 20 12800 6400 8000 Total 585 365 665 — — 27600 15150 23000 Table 17. Illustration of vehicle demand analysis. Maintenance Technician Availability Hours Total paid hours 2080 Vacations -120 Holidays -80 Sick time -80 Breaks -80 Training and meeting -40 Other -80 Available man hours per technician 1600 Table 18. Maintenance technician availability. Facility Annual Maintenance Technician Hours Available Man Hours per Technician FTE Technicians Facility 1 27600 1600 17.3 Facility 2 15150 1600 9.5 Facility 3 23000 1600 14.4 Total 65750 4800 41.2 Table 19. Manpower requirements. Resource Facility 1 Facility 2 Facility 3 Est. Actual Est. Actual Est. Actual Tech I 6 5 4 4 7 7 Tech II 12 9 6 4 8 6 Washers 2 2 1 1 2 1 Inventory tech 1 1 1 1 1 1 Supervisor 3 2 1 1 2 2 Facility manager 1 1 1 1 1 1 Table 20. Facility staffing level assessment.

35 Outsourcing Candidates Assessment of Maintenance Technician Skills and Knowledge Equipment Class Maintenance Type Facility Facility 1 Facility 2 Facility 3 Small engine All except on-road repair All Adequate Adequate Adequate Seasonal Attachments All except on- road repair All Adequate Adequate Adequate Light duty PM, minor All Adequate Adequate Adequate Light duty Major All Inadequate Inadequate Average Light duty Overhaul and rehab All Inadequate Inadequate Average Medium duty PM, minor All Adequate Adequate Adequate Medium duty Major All Inadequate Inadequate Average Medium duty Overhaul and rehab All Inadequate Inadequate Average Heavy duty All Facility 1 Average N/A N/A Heavy duty All Facility 2, 3 N/A Inadequate Inadequate Specialized All Facility1 Average N/A N/A Specialized All Facility2, 3 N/A Inadequate Inadequate All fleet and equipment types On-road repair All Average Average Average Table 21. Staffing capability assessment. age to inadequate skills to conduct major repairs. For heavy and specialized equipment, Facility 1 staff have average skills, while the staff in the other two facilities have inadequate skills. 5.2.2.3 Assessment of Facility and Equipment Finally, the shop facilities and equipment should be evalu- ated against their adequacy to conduct the required mainte- nance. This qualitative assessment should assess the adequacy and sufficiency of key requirements like maintenance bays, lifts, tire and parts storage, and other equipment required to maintain the fleet. Table 22 shows an illustration of the facility assessment. 5.2.2.4 Can Capability Be Adjusted to Meet Demand? The end of the previous analysis identified the areas where the shop is capable and deficient. This process evaluates whether enhancing the capability of the shop in the areas in which it is deficient is feasible, considering the current budget- ary conditions, and whether this option is less time consuming and cost-effective relative to outsourcing. This determination will result in either an insourcing or outsourcing inclination and serve as the entry point to Process 4 to analyze cost and performance, as shown in Table 23. 5.2.3 Process 3—Evaluate External Service Providers The objective of this process is to identify the potential exter- nal service providers for the purpose of conducting cost and performance analysis in Process 4 (see Table 24). This involves identifying the potential private vendors and collecting back- ground, cost, and performance information. For strategic out- sourcing reasons, the purpose of this evaluation is not to select the providers but rather to consider them for further cost and performance analysis. Many agencies contract with private service providers on a routine basis. This information should be captured in the FIMS or financial management systems. Identifying the vendors and collecting their cost and performance data can be accomplished

by tapping into these systems. However, the agency may not have experience with certain vendors or with certain services provided by a vendor. In such cases, sound assumptions can be made of what can be reasonably expected from the private vendors. It is important to use conservative estimates because these assumptions will be the basis for outsourcing decisions at the end of Process 4. This analysis should be conducted by each facility, equipment class, and maintenance type. 5.2.4 Process 4—Analyze Cost and Performance Trade-Offs Depending on the outcome of Process 2—Analyze Internal Demand and Capabilities, the entry point to Process 4 can be to evaluate the performance of in-house or outsourced options. This step involves determining which option will result in a satisfactory maintenance service experience. Subsequently, the cost analysis will be conducted to evaluate whether the inter- nal costs are better than external costs, in which case insourcing will be recommended, or if the external costs are better, out- sourcing will be recommended. 5.2.4.1 Performance Analysis Irrespective of the insourcing or outsourcing inclination, the performance analysis is used to evaluate the overall experience of the two options. Nationally recognized industry-standard fleet performance metrics that were defined earlier are used to evaluate whether the current performance standards are within the acceptable ranges found in the fleet maintenance industry. For outsourcing, this determination includes making a recom- mendation on not only the service quality but also other fac- tors such as vendor competency, capability, and capacity. 5.2.4.2 Cost Analysis The cost analysis involves comparing the in-house and out- sourced costs. Table 25 illustrates the computation of direct labor costs, and Table 26 illustrates the comparison of in-house and outsourced costs. To estimate the direct labor costs, the agency should account for the wages and fringe benefits of the employees in the shop. The wages of the employees can be accessed from the payroll systems along with the additives for fringe benefits. Table 25 illustrates the computation of direct labor costs. This table illus- trates a bottom-up approach, where the quantity of resources required (estimated based on service levels) is multiplied with the unit cost of each resource to estimate the total cost. The number of FTEs by position represents the resources required, and the salaries and fringe benefits per FTE represent the unit cost of the resource. This includes the direct management of the facility. For example, if a facility manager is dedicated to the maintenance function, then the entire cost should be represented. However, if a facility manager has responsibili- ties that extend beyond the maintenance functions or across multiple facilities, then the shared costs should be distributed proportionally—based on staff managed or budget managed. The bottom-up method described above tends to be more data intensive and time consuming. Alternatively, the agency can use more aggregate information to derive unit costs—for example, by dividing the historical maintenance expenses proportionally based on completed activities or vehicles main- tained in a facility. These unit costs can then be used to fore- cast the maintenance costs by multiplying them with the activity levels or vehicles to be maintained for the time period considered in the analysis. In indirect costs, apart from the overhead expenses, all other expense items should be recorded in the FIMS or the agency 36 Facilities and Equipment Facility 1 Facility 2 Facility 3 Light vehicle bays Inadequate Average Average Heavy vehicle bays Adequate Inadequate Inadequate Other vehicle bays Adequate Adequate Inadequate Light duty lifts Inadequate Average Average Medium duty lifts Inadequate Inadequate Inadequate Heavy duty lifts Inadequate Inadequate Inadequate Parts storage Average Average Average Tire storage Adequate Adequate Adequate Overhead bridge cranes Adequate Inadequate Adequate Air compressor Adequate Adequate Adequate Exhaust ventilation system Adequate Adequate Adequate Waste oil heater Adequate Adequate Adequate Vehicle storage Inadequate Adequate Adequate Drive-through wash Adequate Adequate Adequate Fuel island Adequate Adequate Adequate Employee locker rooms Average Average Average Tow trucks Not available Not available Not available Other Average Average Average Table 22. Facility capability assessment.

37 Outsourcing Candidates Internal Demand and Capability Assessment Feasible to Adjust Capability to Meet Demand Process 4 Entry Point Equipment Class Maintenance Type Assessment of Optimal Staffing Levels Staffing Capability Assessment Facility and Equipment Capability Assessment Small engine All except on-road repair Adequate in all facilities Adequate in all facilities Adequate in all facilities Not required 4.1 – insource inclination Seasonal attachments All except on- road repair Adequate in all facilities Adequate in all facilities Adequate in all facilities Not required 4.1 – insource inclination Light duty PM, minor Adequate in all facilities Adequate in all facilities Inadequate in Facility 1 Average in Facilities 2, 3 Feasible 4.1 – insource inclination Light duty Major Adequate in all facilities Inadequate in Facilities 1, 2 Average in Facility 3 Inadequate in Facility 1 Average in Facilities 2, 3 Not feasible 4.3 – outsource inclination Light duty Overhaul and rehab Adequate in all facilities Inadequate in Facilities 1, 2 Average in Facility 3 Inadequate in Facility 1 Average in Facilities 2, 3 Not feasible 4.3 – outsource inclination Medium duty PM, minor Adequate in all facilities Adequate in all facilities Inadequate in Facility 1 Average in Facilities 2, 3 Feasible 4.1 – insource inclination Medium duty Major Adequate in all facilities Inadequate in Facilities 1, 2 Average in Facility 3 Inadequate in Facility 1 Average in Facilities 2, 3 Not feasible 4.3 – outsource inclination Medium duty Overhaul and rehab Adequate in all facilities Inadequate in Facilities 1, 2 Average in Facility 3 Inadequate in Facility 1 Average in Facilities 2, 3 Not feasible 4.3 – outsource inclination Heavy duty All Inadequate in Facility 1 (staff shortage) Average in Facility 1 Adequate N/A N/A Heavy duty All Inadequate in Facilities 2, 3 Inadequate in Facilities 2, 3 Inadequate in Facilities 2, 3 Not feasible 4.3 – outsource (staff shortage) inclination Specialized All Inadequate in Facility 1 (staff shortage) Average in Facility 1 Adequate N/A N/A Specialized All Inadequate in Facilities 2, 3 (staff shortage) Inadequate in Facilities 2, 3 Inadequate in Facilities 2, 3 Not feasible 4.3 – outsource inclination All fleet and equipment types On-road repair N/A Average in all facilities Equipment not available in facilities Not feasible 4.3 – outsource inclination Table 23. Summary of Process 2—Internal Demand Capability Assessment.

financial systems. The overhead expense, which is an allocated cost, should typically be available from the state DOT finance or budget department. Chapter 4 discusses approaches to allocate overhead expenses. Each agency should exercise judg- ment on the appropriate level of upper level management over- head to include in the cost estimates. It should be commen- surate with their level of involvement and time spent dealing with the maintenance-related issues. Some examples of allo- cating management overhead include an allocation based on the number of FTEs in each activity or by total direct costs associated with each activity or by one or more bases that serve as a good surrogate to the direct costs. Table 26 shows the comparison of in-house and outsourced costs. A cost comparison ratio (shown at the bottom of the table) below 1.0 means that insourcing is less expensive than outsourcing, and a ratio above 1.0 means that insourcing is more expensive than outsourcing. In this example, insourcing is less expensive during the first period due to the one-time dis- location costs reflected in the outsourced costs. During the sec- ond and third periods, the outsourced costs are 8% to 9% less expensive than outsourcing. Over the 3-year period, the out- sourced and insourced costs are approximately the same. Upon completion of Process 4, the results of this cost and performance analysis can be summarized, as shown in Table 27. 5.2.5 Process 5—Synthesize and Finalize Outsourcing Decisions Table 28 summarizes the results of the outsourcing evalu- ation for all three facilities. Summaries in other formats (e.g., similar to Figure 10) of the outsourcing evaluation can also be created. Finally, in this process, the impact of insourcing and out- sourcing decisions should be assessed against the existing program. If alternatives are chosen for insourcing, the agency should identify why the candidates were originally selected and analyzed for outsourcing. Also, any deficiencies identi- fied as a result of the outsourcing analysis should be listed. Addressing these deficiencies, in terms of additional training, facility enhancements, or hiring additional staff, are oppor- tunities to improve internal operations. This outsourcing analy- sis can provide justification for additional improvements in- house. If alternatives are chosen for outsourcing, the impact on the staff and facility should be determined and appropriate actions considered, such as preparation to relocate or retrain the to-be-displaced employees, preparation for transition, dis- posal of existing assets, and termination of existing leases if the outsourcing decision results in closing an entire facility. In addition, the recommendations should be provided to the appropriate groups for consideration. 5.3 Case Study B—Day-to-Day Outsourcing Scenario Many state DOTs outsource their work periodically to manage peak workload or to deal with repairs for which skills/ capabilities are not available in-house. From a high level, the 38 Outsourcing Candidates External Service Providers Equipment Class Maintenance Type Facility Facility 1 Facility 2 Facility 3 Small engine All except on- road repair All Toto’s Penske RMS Belmont Penske RMS Brandell Penske RMS Snow removal All except on- road repair All Penske Clarks RMS Penske Amboy RMS Penske Ace RMS Light, medium PM, minor All TSS Penske Penske R&S Vehicle Care Penske Light, medium Heavy All Penske Serco Penske Serco Penske Serco Light, medium Overhaul and rehab, special All Penske Serco Penske Serco Penske Serco Table 24. Illustration of shortlisted external service providers. FTEs Employee Level Median Annual Income Payroll Additive Direct Labor Costs 2 GS 1 $25,000 $11,231 $72,462 4 GS 4 $30,000 $13,477 $173,908 4 GS 5 $31,000 $13,926 $179,704 1 GS 10 $38,000 $17,071 $55,071 1 GS M1 $47,000 $21,117 $68,117 TOTAL $549,262 Note: Adapted from Deis, Watson, and Wilmot, 2002 (15 ) Table 25. Illustration of direct labor cost computation.

logic used to evaluate the decision to insource or outsource follows the same process that is laid out in the outsourcing decision framework. The following are illustrations of the out- sourcing decision framework applied to a day-to-day, single- vehicle–specific, single maintenance type situation. Although some processes may not be applicable, the framework guides the evaluator through a logical step-by-step procedure that can be adapted without affecting the integrity of the overall logic process. This case study was included only to emphasize the flexibility and applicability of the framework to tactical sit- uations. Hence, figures and tables are not included. 5.3.1 Process 1—Identify Critical Internal and External Conditions 5.3.1.1 Subprocess 1.1—Select Candidates for Consideration • Shock absorbers on a tandem truck in the facility need imme- diate replacement. A tandem truck is required for pullout the following day. • The few in-house technicians who are knowledgeable are already engaged on scheduled preventive maintenance work on another vehicle. • Based on an analysis of FIMS data, the fleet manager observed that a previous replacement of shock absorbers on a tandem truck took longer than expected and involved more staff resources than planned. However, there were no quality issues with the completed work. • The fleet manager has two options: – Divert resources and complete the job in-house, or – Explore external vendors and outsource the job. • The fleet manager decides to evaluate whether outsourcing is a feasible option. 5.3.1.2 Subprocess 1.2—Identify Legislative and Policy Drivers • The fleet manager already has a procurement method that can be used for these types of maintenance needs. Violation of procurement rules is not anticipated. 39 In-House Maintenance Costs Cost, by Period Period 1 Period 2 Period 3 Total Direct labor costs $549,262 $563,000 $577,000 $1,689,262 Indirect costs Overhead $32,000 $33,000 $34,000 $99,000 Facilities and equipment $25,000 $28,000 $23,000 $76,000 Utilities $12,000 $13,000 $14,000 $39,000 Other overhead expenses $5,000 $5,000 $5,000 $15,000 Other direct costs Fuel and lubricants $15,000 $16,000 $17,000 $48,000 Parts $150,000 $150,000 $150,000 $450,000 Other materials and supplies $50,000 $50,000 $50,000 $150,000 Other expenses $25,000 $25,000 $25,000 $75,000 Total In-House Maintenance Costs $863,262 $883,000 $895,000 $2,641,262 Outsourcing Costs Period 1 Period 2 Period 3 Total Contractor cost $800,000 $750,000 $750,000 $2,300,000 Contract administration Procurement $50,000 $0 $0 $50,000 Contract management $15,000 $15,000 $15,000 $45,000 Payables management $15,000 $15,000 $15,000 $45,000 Quality management $30,000 $30,000 $30,000 $90,000 Other contract administration costs $10,000 $10,000 $10,000 $30,000 Dislocation cost Personnel expenses $50,000 $0 $0 $50,000 Termination of existing leases $0 $0 $0 $0 Other costs $10,000 $0 $0 $10,000 Total Outsourcing Costs $980,000 $820,000 $820,000 $2,620,000 Cost Comparison Ratio = In- House/Outsourced 0.88 1.08 1.09 1.01 Table 26. Illustration of in-house and outsourced cost comparison.

40 Outsourcing Candidates Cost and Performance Analysis Equipment Class Maintenance Type Facility Process 4 Entry Point Result Next Step Result Next Step Result Next Step Recommendation Small engine All except on-road repair All 4.1 – satisfactory in-house options Yes 4.2 – cost strongly favors insourcing Yes None N/A None Insource Seasonal Attachments All except on-road repair All 4.1 – satisfactory in-house options Yes 4.2 – cost strongly favors insourcing Yes None N/A None Insource Light duty PM, minor All 4.1 – satisfactory in-house options No 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing No 4.5 – cost and performance trade-off Insource Light duty Major All 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing Yes None N/A None Outsource Light duty Overhaul and rehab All 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing Yes None N/A None Outsource Medium duty PM, minor All 4.1 – satisfactory in-house options No 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing No 4.5 – cost and performance trade-off Insource Medium duty Major All 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing Yes None N/A None Outsource Medium duty Overhaul and Rehab All 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing Yes None NA None Outsource Heavy duty All Facility 1 N/A NA N/A NA N/A NA None Insource Heavy duty All Facilities 2, 3 4.1 – satisfactory in-house options Yes 4.4 – cost strongly favors insourcing Yes None NA None Outsource Specialized All Facility 1 N/A NA N/A NA N/A NA None Insource Specialized All Facilities 2, 3 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing No 4.5 – cost and performance trade-off NA None Outsource All fleet and equipment types On-road repair All 4.3 – satisfactory outsourced options Yes 4.4 – cost strongly favors outsourcing Yes None NA None Outsource Table 27. Summary of cost and performance trade-off analysis.

5.3.1.3 Subprocess 1.3—Determine If the Candidates Are Mission Critical • This analysis is not critical for these types of tactical day- to-day operational scenarios. 5.3.1.4 Subprocess 1.4—Determine External Competing Market Conditions • The fleet manager is already aware of the two vendors that are capable of replacing the shock absorbers. 5.3.1.5 Subprocess 1.5—Organize Outsourcing Candidates • Outsourcing candidate: Replacement of shock absorbers on the tandem truck. • Operational reasons: High internal cost, work order turn- around time. 5.3.2 Process 2—Analyze Internal Demand and Capabilities 5.3.2.1 Subprocess 2.1—Assess Capabilities Against Demand • Staffing levels: Currently, there is enough maintenance work for the available shop technicians. An assessment of the out- standing work orders for the day from the FIMS reveals that the knowledgeable staff are already programmed for other service requests for the day. The shock-absorber replacement was unanticipated work in addition to planned work. • Staff capability: Available technicians who can be reposi- tioned lack the technical skills and knowledge required to fix shock absorbers on the tandem trucks. Knowledgeable tech- nicians are not available because they are already engaged in other work. • Facility capability: Maintenance bay and other equipment required is available. • Result: The shop has adequate facilities to accommodate regular maintenance work. However, because this was not anticipated, there is no staff capacity to meet the demand in-house without causing disruptions. 5.3.2.2 Subprocess 2.2—Can Capabilities Be Adjusted to Meet Demand? • During tactical situations like these, fleet managers have few options at their disposal that will enable them to adjust capabilities to meet demand. • Result: Capabilities cannot be adjusted to meet demand. The result is an outsourcing inclination. The entry point to Process 4 is Subprocess 4.3. 5.3.3 Process 3—Evaluate External Service Providers 5.3.3.1 Subprocess 3.1—Identify Appropriate Service Providers • The fleet manager has already identified two vendors (A and B) in the area. 41 Equipment Class Facility PMs Minor Major Overhaul and Rehab On-Road Small-engine equipment 1 In* In In In Out 2 In In In In Out 3 In In In In Out Seasonal attachments 1 In In In In Out 2 In In In In Out 3 In In In In Out Light duty 1 In In Out Out Out 2 In In Out Out Out 3 In In Out Out Out Medium duty 1 In In Out Out Out 2 In In Out Out Out 3 In In Out Out Out Heavy 1 In In In In Out 2 In In Out Out Out 3 In In Out Out Out Specialized 1 In In In In Out 2 In In Out Out Out 3 In In Out Out Out *Note: In = Insource; Out = Outsource Table 28. Recommendations from outsourcing evaluation.

5.3.3.2 Subprocess 3.2—Collect Data on Service Providers • Based on some quick research, the fleet manager determined that: – Both shops are qualified and have the adequate resources – Vendor A is located within 30 minutes of the shop, whereas Vendor B is located about 60 minutes from the shop – The fleet manager accessed FIMS data from previous work orders involving Vendor A. The fleet manager analyzed the cost, turnaround time, work order sched- ule commitment, and work quality. The fleet manager is convinced that Vendor A would be a good option. – The fleet manager has not worked with Vendor B, but checked with the references and is convinced of the qual- ity of work. – Cost quoted by the vendors is within 10%. However, Vendor B has higher transportation costs than Vendor A. 5.3.3.3 Subprocess 3.3—Rank Service Providers • Based on experience and lower cost, the fleet manager ranked Vendor A ahead of B. 5.3.4 Process 4—Analyze Cost and Performance Trade-Offs 5.3.4.1 Subprocess 4.1—Satisfactory Insourcing Options • This subprocess is not required because the result from Process 2 was an outsourcing inclination. 5.3.4.2 Subprocess 4.2—Cost Favors Insourcing Strongly • This subprocess is not required because the result from Process 2 was an outsourcing inclination. 5.3.4.3 Subprocess 4.3—Satisfactory Outsourcing Options • The fleet manager concluded that the outsourcing options are satisfactory based on the following factors: – Prior experience with Vendor A showed good quality work. – Vendor was located within reasonable distance of the shop. – Vendor was capable of conducting the maintenance job; the vendor had the knowledgeable staff and required facilities and equipment. – Turnaround time promised was within the industry standards for maintenance work of similar scope. Also, turnaround time promised by the vendor was less than the in-house staff. – Availability of the vehicle by the following morning was guaranteed. 5.3.4.4 Subprocess 4.4—Cost Favors Outsourcing Strongly • The fleet manager compared the cost of outsourcing versus insourcing. • The following components were included in the cost of outsourcing: – Shop maintenance cost (labor + parts + other) and trans- portation cost quoted by Vendor A, and – Contract administration costs estimated at 15% of shop maintenance cost, as advised by the procurement department. • To compute the cost of insourcing, the fleet manager com- pleted the following steps: – Based on a previous work order to replace shock absorbers from FIMS, the number and hours of techni- cians required was estimated. – Direct labor costs were estimated by multiplying the hourly wage rate of the technicians, which includes wages and benefits, with the number of technicians and hours required. – Parts cost was obtained from the inventory technician. – Overhead expenses and other facility-related expenses were estimated based on the method suggested by the DOT accounting department. – Direct labor costs, parts cost, overhead expenses, and other facility-related expenses represented the total insourcing cost. – Comparison of the in-house and outsourced costs revealed that outsourced costs were 12% less expensive than the in-house costs. • Based on the collected facts and the completed analysis, the fleet manager makes a final decision to outsource the work. 5.3.5 Process 5—Synthesize and Finalize Outsourcing Decisions The final recommendation resulting from the evaluation is to outsource the work. The steps in Process 5 are only applica- ble for strategic outsourcing decisions where the facility-wide maintenance across all facilities in the region or statewide are evaluated for outsourcing consideration. Hence, they are not required to be completed for this analysis. This concludes the outsourcing analysis. 42