Case Study

Developing Custom Performance Measures

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A utility client asked us to develop a customized set of Key Performance Indicators (KPIs) to track the efficiency and effectiveness of its capital and maintenance programs.  

While the regulator in the client’s jurisdiction already collected a large number of operating and capital performance statistics, the client sought a customized set of measures that met the regulatory requirements and reflected the unique circumstances of its strategy,  operational capabilities, and service territory.  

Among the issues the client grappled with was the desirability of adopting unitized cost metrics related to particular asset installation types, such as the cost per utility pole installed and similar metrics frequently explored in regulatory hearings. The client’s rationale for exploring  these types of metrics was to explore the development of  robust and compelling measures that would help its  management and the regulator compare its performance to other utilities in the jurisdiction that conduct similar work.  

Ahead of making any recommendations, METSCO carried out extensive interviews with the client’s subject matter experts across the areas involved in the capital and maintenance work planning and execution, followed by in-depth data review.  

 METSCO’s Engagement Objectives:  

As we set out to tackle the client’s problem, we identified a  few key success parameters:  

  • Maintain a process-based view of the company’s  operations; 
  • Seek convergence between SMEs’ views of priority  areas / interests and areas with improvement potential; 
  • Supplement KPIs with discussion on key implementation steps and pitfalls;  
  • Identify areas where measurement and clarity can facilitate organizational cohesion—not just improvement.  

 

METSCO’s Approach and Findings  

Survey Others’ Practices, But Don’t Get “Anchored”: like most utility sector consultants, METSCO values the insights that can be obtained from “best practices” surveys. Unlike many of our competitors, however, we rarely start our projects from best practices surveys. This is a deliberate strategy, grounded in years of experience and key tenets of modern management science: 

  • Best practice scans are labour intensive —we prefer to dedicate our clients’ resources to active consideration of their problems—not learning about the status quo of others.  
  • Best practice scans impede innovation—learning how others approach an issue and replicating it, can  “anchor” the researcher, and prevent them from devising novel solutions that fit their situation better.
  • Best practice scans rarely present the full picture— search of public documents often suffers from incomplete data. While information on the practice itself may be present, this is not always the case for evidence on its practical implementation efficacy.   

Guided by these principles, METSCO surveyed the industry’s KPI practices, but only after developing a draft list of their own. In this manner, the scan acted as a stress test and completeness check, rather than a key guiding element of the process. 

In Unit Costing, Isolate the Effects of Operating Efficiency 

We advised the client that unit costing on the basis of total  “gross” cost components carries significant limitations in terms of comparability within and across the organizations.  This is because the total cost of a given unit is influenced by several factors, including:  

  • Scale-Based Factors: production costs are influenced by an entity's ability to operate at the optimal scale. Where an entity operates below the scale (due to factors it may not control), adjustments are required.
  • Strategy-Based Factors: companies make deliberate strategic trade-offs to enhance certain attributes of their products, with resulting cost implications. These must also be accounted for when comparing unit costs.  
  • Operational Efficiency Factors: this is the residual cost component, which actually speaks to the company’s efficiency in turning inputs into outputs— and is the only unit cost component that can be compared across organizations once the above adjustments are made.

We advised the client that performing such adjustments was advisable only if other utilities’ unit costs would be similarly adjusted for comparison. Since the client chose to develop custom metrics for its own use, we suggested pursuing a different avenue, grounded in gaining a better grasp of its own processes and how they impact asset unit costs (see below).  

Look to the Value Chain  

METSCO advised the client to track the unit costs of certain fully installed types of assets using a Value Chain approach  — where a final unit’s cost components are broken down across its entire value chain—from procurement of “raw”  equipment and materials, through warehousing,  engineering, design, and installation.  

By tracking the relative contributions to a pre-defined final equipment unit. Tracking the dollar and percentage contributions from each value chain component over time would then give the client a better sense of changes in its operations, identify improvement opportunities and provide a comprehensive process-based view of its own unit costs—instructive to management, compelling to external parties, and easier to replicate to make high-level cross-utility observations.  

Find Measures to Bridge Organizational Gaps 

In evaluating the client’s engineering process, we saw a  great deal of cohesion between the engineers and field staff. At the same time, our interviews with Supply Chain SMEs revealed that crews periodically request materials on the day of planned construction, which the warehouse may not have in stock. Putting the two insights together, we suggested that the capital planning sessions also include a Supply Chain SME to limit the issues of unanticipated orders. To track the effectiveness of this suggestion, we proposed a measure of On-Time and In-Full materials request completion ratio of all by the warehouse. Over time, this measure would foster ongoing dialogue and reinforce accountability across departmental lines.  

Chart a Long-Term KPI Development Strategy: at the end of the engagement, we provided the client with over 20 potential  KPIs across the various facets of its operations, reflecting a number of distinct outcome areas of its services. We advised the client to implement no more than 10 KPIs at a time, and position the others along a multi-year, multi-frontier path, reflective of its plans to enhance its technological capabilities, and with each frontier building on gains made in the prior one.  

METSCO’s Strategy and Operations consulting practice helps our clients identify and resolve complex pressure points that straddle departmental authority lines, extend across time horizons, and incorporate a significant degree of uncertainty.  

It is our conviction that utilities possess major incumbent advantages they can unlock and leverage to remain technology leaders and progress conduits for years to come.  

Contact us today and see why utilities and industrial customers across the continent trust METSCO to make things possible.