The difference between OEM and independent service providers in the offshore energy industry: The characteristics and performance of a maintenance contract

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MSc Thesis: Service logistics for offshore energy

The difference between OEM and independent service

providers in the offshore energy industry: The

characteristics and performance of a maintenance contract

By

Siefko Jager S3808505

s.jager.6@student.rug.nl University of Groningen Faculty of Economics and Business

Supervisors: dr. O.A. Kilic and dr. J. Veldman

24th_{of August 2020}

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Abstract

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Preface

I want to express my sincere gratitude to Dr. Kilic and Dr. Veldman for their guidance and their constructive feedback throughout this entire project. The completion of this project

would not have been possible without their help and support.

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List of tables

Table 1 Contracting issues (Murthy et al. 2015) ... 8

Table 2 Interviewed persons ... 19

Table 3 Coding example ... 19

Table 4 Overview contract findings ... 21

Table 5 Overview characteristics of service providers ... 26

List of figures

Figure 1 Overview of maintenance strategies (Jonge de, 2017) ... 11

Figure 2 Concepts of PBC (Hypko, et. al, 2010) ... 14

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1. Introduction

The offshore energy market has become highly competitive with the introduction and rapid expansion of renewable energy sources (Ministry of Economic Affairs of the Netherlands, 2013). Producing oil and gas becomes more and more expensive every year, almost half of all expenditures concern service agreements with external parties (Energy Academy Europe, TNO, & ECN, 2016). The agreements are formalised by using contracts. In this research contracts with service providers are evaluated.

Before the 1970s, most maintenance was carried out in-house, but due to the increased complexity of today’s assets, only specialized personnel can carry out the maintenance (Ding, Lisnianski, Frenkel, & Khvatskin, 2009). Therefore, relying solely on in-house resources is, in many cases, too expensive. Specialized engineers are needed; they need the training to keep up with current technologies (Jackson & Pascual, 2008). Therefore, to maintain the high capital-intensive equipment in a cost-efficient manner, companies tend to turn towards the original equipment manufacturer (OEM), since the OEM has the most extensive knowledge about the equipment (Raddats, Burton, & Ashman, 2015). When a manufacturer transitions from only selling equipment to also maintaining the equipment, then it is called servicetization (Lin, Luo, Ieromonachou, Rong, & Huang, 2019; Weigel & Hadwich, 2018). The manufacturer provides the equipment and the additional maintenance service. Another possibility is that the maintenance is not executed by the OEM but by an independent service provider (ISP). This cooperation between parties (operator and service provider) needs to be formalized. The main purpose of a contract is mitigating risks that are created by conflicting incentives (Corts & Singh, 2004; Vanneste & Puranam, 2010). Hypko, Tilebein, & Gleich, (2010) conducted a literature review to structure the approaches of performance-based contracting in manufacturing industries, and they constructed a conceptual model based on the findings of their literature review.

OEM service providers and independent service providers are different from each other as they have different capabilities (Story, Raddats, Burton, Zolkiewski, & Baines, 2017). These different capabilities will possibly result in different contractual agreements. This study will address the differences in contracts by investigating the various characteristics of three maintenance contracts by using an adapted version of the conceptual model of Hypko et al., (2010). Secondly, the motives behind the different characteristics in the contracts are investigated. This case study allows researching multiple maintenance contracts of a heavy capital asset of an offshore platform. In contrary to other case studies that focus on one type of contract (Howard, Wu, Caldwell, Jia, & König, 2016), or a non-vital service, like cleaning services (Nullmeier, Wynstra, & van Raaij, 2016). This information is useful because efficient maintenance is an important factor in keeping an offshore platform operating and profitable. Other players in the industry will encounter similar challenges. It is possible that the other offshore operators can benefit from the insights due to their similarities in characteristics (capital intensive, long life-cycle) (García Márquez, Tobias, Pinar Pérez, & Papaelias, 2012; Leporini, Marchetti, Corvaro, & Polonara, 2019; Shafiee, 2015).

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7 • Which contract characteristics are crucial for a service contract with an OEM service

provider?

• Which contract characteristics are crucial for a service contract with an independent service provider?

• Why do these differences between OEM service contracts and independent service contracts exist?

• How do these differences in characteristics influence the contractual performance? To answer the research questions, a case study will be done at the NAM, an offshore drilling platform operator in western Europe. The offshore drilling industry is a mature industry which opens up the possibility for independent service providers to compete beside the OEM. NAM has experience and contracts with both OEM and independent service providers. The findings give the offshore platform operators and offshore service providers more insight in the motives and performance of different contracts.

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2. Theoretical Background

This thesis focuses on maintenance contracts in the offshore energy industry and analyses the differences between OEM and independent service provider maintenance contracts. In this chapter, the different contract characteristics are discussed and the contractual

performance in the form of customer satisfaction is discussed.

2.1 Contracts

When the decision has been made to outsource maintenance activities to another company a contract will be used to formalize the collaboration between the parties. It is important to know which parties are involved. Each party has different goals or objectives. At least two parties are involved in a maintenance contract; the customer and service provider. According to Murthy, Karim, & Ahmadi, (2015), two main contracts can be classified; the standard contract and the customized contract. The standard contract contains extended warranties for consumer products and service contracts for commercial products (e.g. lifts in buildings), the service provider decides the terms. And on the other side, there’s the customized contract which are used for complex plants. Customized contracts are, in most cases initiated by the owner of the plant, but the terms of the contract are decided together with the service provider.

Each contract asks for a different kind of detail. It is important to reduce the ambiguity to a certain extend to make sure everybody knows what is expected from him/her. Murthy et al., (2015) divided several contracting issues in three categories: technical issues, economic issues and legal issues. Each category had multiple sub-issues which need to be taken into consideration when setting up a maintenance contract, see Table 1 for an overview of all issues:

Technical issues Economic issues Legal issues

Type of maintenance tasks (preventive/corrective)

Payments Terms of contract

Details of the tasks Penalties Contract duration

Types of component/parts used for maintenance

Risks Dispute resolution

Turnaround time Insurance Guarantee/warranty

Documentations Force major issues

Table 1 Contracting issues (Murthy et al. 2015)

Hypko et al., (2010) used a total of 8 criteria to construct a conceptual model of different contract characteristics: service providers background, ownership during the contract period, ownership after the contract period, responsibility for maintenance personnel, responsibility for operation personnel, payment model (pay for availability, pay per unit/use or pay for economic result), location of operation, exclusiveness of operation.

Weigel & Hadwich (2018), identified several success factors of a service network from the service supplier’s perspective. Process of partner selection, partner manager,

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9 strong effect on long-term partner retention. Also, professional competence has also a great effect on customer satisfaction and long-term partner retention. This indicates that SLA and professional competence of the service provider have great influence on the satisfaction of the customer with the contract and therefore are important things to take into account when designing a contract.

Not every contract would require the same characteristics. For this research a combination of all three lists of topics will be used to characterize the contracts. The following

characteristics will be used; type of maintenance tasks, contract type, contract duration, guarantee, and responsibility to provide personnel, tools and logistics. Not all characteristics will be discussed in detail since some of them are very straightforward for example the contract duration, guarantee and responsibility. The following characteristics will be discussed further: payment method, type of maintenance tasks, and relationship quality. 2.1.1 Service provider background

In this research a main distinction is made between an OEM service provider and an independent service provider. The differences between the service providers are mainly based on their capabilities and their origin.

The OEM service providers originate from the manufacturing industry. They have experience in manufacturing the equipment but to fortify their advantages they started offering service to the equipment. Their competitive advantage comes from the extensive product knowledge and intellectual property rights (Ulaga & Reinartz, 2011). The OEM has their hands on more essential information and necessary tools to conduct the maintenance of the equipment compared to an independent service provider as well as the customer (Wang, 2010). However, to offer services, the OEM need to acquire new capabilities. Developing a service culture, risk management, and the ability to generate efficiency gains in service methodologies or processes (Story et al., 2017).

OEM service providers have, in terms of product knowledge, a more competitive position compared to independent service providers (Johnstone, Dainty, & Wilkinson, 2009). However, it is not clear how true this is for services in the offshore oil and gas industry. For example, independent service providers may have access to a large service network to provide service rapidly.

2.1.2 Contract type

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10 Sols, Nowick, & Verma (2007) researched how four different contract types optimized both party’s incentives and motivation. Shafiee, (2015) distinguished two main contract types. A lump-sum contract and a pay per failure. The lump-sum outsources the responsibility to keep the machine operational to the service provider. the pay per failure keeps that responsibility at the operating party. If a failure occurs, the operating party will ask for the service provider to fix the failure. The lump-sum is a form of performance based contracting, rather than inputs and processes. If the contract is based on performance rather than inputs and processes, an incentive needs to be present to collaborate for a longer period otherwise the service provider not see the benefits of investing in it (Sols et al., 2007). According to Eisenhardt (1989), a performance based contract is more effective if the outcomes are clearly measurable. If the outcomes are uncertain, but information is available and the tasks are clearly defined, then a behaviour-based contract (also known as time-based contract) would be more effective. Performance based contracts put the desired output ahead of the inputs and processes and leaves flexibility to the service provider (Selviaridis & Norrman, 2014). Tsang (2002) made a distinction between three contract types; work-package contract, performance contracts and facilitator contracts. But he also include the responsibility for personnel and equipment. The work-package contract is the basic contract in which the service provider is only providing the personnel and maintenance tools. In this case the service provider is paid per hour. The performance contract is based on the outputs of the system. The service provider is steered by certain performance measurements (failure rate, availability etc.). This gives the service provider some flexibility to achieve the desired performance. The last contract is the facilitator contract. In this contract the equipment is owned and maintained by the service provider, it is only used by the buying company. All these different contract types all have their strengths and weaknesses and share a common ground. Basically all contract types are based on a fixed payment plus a bonus rate for the output. In some cases the bonus rate is the interesting part for the service provider (e.g. performance based contracts) while in other contract types it is in the fixed payment (e.g. work-package contract). The contract types of Tsang, (2002) give a good overview of different contract types and add an important aspect which affects costs greatly, the responsibility for personnel and tools. Therefore, the contract types Tsang, (2002) will be used in the conceptual model.

2.1.3 Maintenance types

The different maintenance types will be one of the characteristics to determine the different contracts. The following maintenance types will be explained: corrective maintenance, condition-based maintenance, time-based maintenance and opportunistic maintenance.

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11 approach in recent years. The focus is not only on the reducing the costs but maintenance is seen as a possibility to increase performance, reduce costs, and reduce risks (Parlikad, Márquez, & Macchi, 2020).

The literature provides many different views on maintenance strategies for maintaining capital goods. Many companies search for their own mix of maintenance strategies because not all equipment benefits from the same maintenance strategy (Waeyenbergh & Pintelon, 2002). Different maintenance strategies can be distinguished. Main maintenance strategies are preventive/predictive and corrective maintenance. (Van Horenbeek et al., 2013). Maintenance strategy can heavily affect the uptime of a piece of equipment, but it also affects the cost-efficiency. Therefore, it is important to distinguish the different strategies in this case study. Maintenance can be divided into two major strategies, corrective maintenance and preventive maintenance.

Figure 1 Overview of maintenance strategies (Jonge de, 2017)

Figure 1 shows an overview of the commonly used maintenance strategies. This figure divides preventive maintenance into time-based maintenance, condition-based maintenance and opportunistic maintenance.

Corrective maintenance is the most basic strategy. Maintenance is performed as fast as possible when a failure occurs. Preventive maintenance is more complex, it can result in lower costs. Preventive maintenance can be divided in different sub-strategies; time-based maintenance, condition-based maintenance and opportunistic maintenance. Main goal of preventive maintenance is preventing the asset from breaking down.

One of the sub-strategies of preventive maintenance is time-based maintenance. This can be defined as age-based maintenance or block-based maintenance. The objective of age-based maintenance is to maintain the asset according to the age (Jonge de, 2017). For example, the bearings have to be replaced every 8 months.

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12 one of the most extensive forms of maintenance. Gathering all the data, analysing it and making decisions on the analysed data is resource intensive (García Márquez et al., 2012). The last sub-strategy is opportunistic maintenance. With opportunistic maintenance some parts are replaced because of dependencies (Van Horenbeek et al., 2013). For example, when a certain part needs to be replaced but it takes a lot of time and effort to reach that specific part it is more cost efficient to replace all the parts which are hard to reach at once. Preventing them from failing close after the first part is replaced.

2.1.4 Relationship quality

In business-to-business contexts the buyer-supplier relationship is one the main issues. To collaborate efficiently the relationship between both parties needs to be good. To determine relationship quality the factors trust and commitment are often emphasized (Dorsch, Swanson, & Kelley, 1998; Kumar, Scheer, & Steenkamp, 1995; Walter, Müller, Helfert, & Ritter, 2003). Commitment is an essential part of any long-term relationship. It is the intention to build and maintain the long-term relationship (Anderson & Weitz, 1992). Trust constitutes the belief attitude or expectation of a party that the relationships partner’s behaviour or its outcomes will be for the trusting party’s own benefit (Kwon & Suh, 2004). The trust and commitment from both sides is required to benefit from the collaboration. When a company has no control over certain activities anymore it is important to trust the other party and commit to the agreement made, otherwise the collaboration is doomed to fail.

The last construct of relationship quality is the extension of previous contract. This can be defined by a long-term relationship between both parties. This defines the durability of the relationship between both parties (Weigel & Hadwich, 2018). A different definition with similar meaning would be repeated interaction, when both parties have interacted with each other on previous occasions, a shared understanding can be build up (Corts & Singh, 2004; Vanneste & Puranam, 2010). As a result, repeated interaction can solve incomplete contracting problems because the both parties know what to expect from each other.

2.2 Collaboration

When a company decides to outsource certain activities, they have to collaborate with other firms. Collaboration is a form of a cooperative relationship between firms. The type of relationship is different based on various factors (Hingley, Lindgreen, Grant, & Kane, 2011). Different forms of collaboration can be distinguished. Vertical collaboration is the collaboration within the supply chain, whereas horizontal collaboration is the collaboration across supply chains. Collaboration has several benefits it can enhance innovation and performance (D’Antone & Santos, 2016; Soosay, Hyland, & Ferrer, 2008) or provides more flexibility in combining and sharing their capabilities (Mason, Lalwani, & Boughton, 2007). Collaboration with other firms is required when certain parts or certain activities are not produced or executed inhouse.

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13 goods. The largest challenges for procuring services are posed by the characteristics of services; intangibility, heterogeneity, inseparability and perishability (Kleemann & Essig, 2013). Åhlström & Nordin (2006) identified four problem areas when establishing a collaborative relationship with third parties concerning services. The first problem area is writing a good contract. The intangibility of the service makes it hard to evaluate and specify it inside a contract. The second problem are concerns processes and how things are done. The third problem area is the difficulty specifying the exact responsibilities that are handed over. The hand-over can be felt as risky and uncertain. The fourth and last problem area is the risk of losing the relationship with the final customer. Even though their paper is written from the manufacturer perspective the areas are helpful to identify problems occurring in the offshore industry from a customer’s perspective when establishing a collaboration with a third party.

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14 In a triadic relationship, various other possible concepts can be constructed. A triadic relationship is also known as a service triad. In a service triad a buyer sets up a contract with a supplier to deliver directly to the customer instead of the buyer delivering to the customer (Wynstra, Spring, & Schoenherr, 2015). Depending on the initiating party, the roles (buyer, supplier and customer) of the actors can change. For example, the equipment manufacturer (buyer) sets up a contract with an independent service provider (supplier) to deliver directly to the operator (customer). The equipment manufacturer does not interfere in the process. The roles of each party need to be defined so the relationships between the different contracts can be compared. The relationship also influences the trust and commitment factors. These factors rely heavily on the relationship with the other party. When the agreement has been made that the OEM provides the service and in reality, an independent service provider arrives to provide the service, then the trust between the two parties is damaged. To understand the reasons why certain characteristics have been put in the contract it is important to know what the roles of the different parties are. However, the largest challenge in procuring services are capturing the intangibility, heterogeneity, inseparability and perishability of the service activities.

2.3 Contractual performance

The contractual performance is defined by three constructs: satisfaction, performance and renewed contract.

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15 The construct ‘Performance’ measures if the contractual agreements are met. This measurement has been generalized because not all contracts contain the same contractual agreements. Renewed contract is comparable to “extension of previous contract” construct of relationship quality. Only Renewed contract determines if the contract will be renewed in the future. Customer satisfaction has been used in many research studies as a performance measurement (Weigel & Hadwich, 2018). It can be seen as the evaluation of a customer over the overall purchase.

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2.4 Conceptual model

Based on the characteristics mentioned in the previous sections, a conceptual model has been constructed (see Figure 3). The main distinction between contracts will be made between the OEM service provider contracts and the Independent service provider

contracts. The contract characteristics are the input for the maintenance contract. However, relationship quality can affect the extent in which certain characteristics are being put in. The inputs will change If one party does not fully commit or trust the other party. The other party wants to avoid risks and therefore changes the inputs to more strict ones. Eventually, the contract will be assessed according to the contractual performances.

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3. Methodology

This section describes how the data sources are selected and the procedure which is followed to conduct the research.

The aim of this study is to identify the differences between an OEM and an independent service provider and the corresponding challenges when constructing a proper service contract for high-capital equipment. Given that this relationship is not yet explored, the appropriate method will be a qualitative case study research. Case studies can help with describing, understanding and explaining the phenomenon. The unit of analysis is a piece of capital-intensive equipment in the offshore industry.

This study is conducted to fulfil two purposes. The first purpose is to research the dichotomy between OEM and independent maintenance contracts.

The difference in contracts between OEM and independent service providers will be studied by comparing the contracts according to the characteristics of the conceptual model. After categorization of the contracts, the reason why this dichotomy exist will be researched by conducting interviews with the stakeholders. In addition to this the performance of the contract will be measured. This performance will be determined by the satisfaction of the stakeholders with the service providers.

The results of this research will be used to answer the research questions and consequently come up with recommendations to improve the performance of the contract according to the three performance measurements.

3.1 Case selection and description

The unit of analysis is an off gas-compressor and the corresponding maintenance contracts, the empirical data has been collected at the NAM. The NAM is a Dutch company which operates in western Europe. The core business of the NAM is exploring for and producing oil and gas, both onshore and offshore in the Netherlands. Since an offshore production platform is an extremely large and complex asset, a complete research for a complete platform would not be possible. Therefore, the decision was made to focus solely on the service contracts of an offshore compressor train. This piece of equipment is maintained by both, the OEM service providers as well as the independent service providers. By selecting a specific asset of a platform, it is possible to compare different contracts with each other to increase the internal validity of the results.

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3.2 Data sources:

All data will be gathered by visiting the company. The data will primarily come from two sources: semi-structured interviews, and contract documents.

3.2.1 Contracts

The conceptual model is used to compare the contracts with each other. The conceptual model consists out of different aspects; the service provider’s background (OEM or independent service provider), the contractual characteristics, relationship quality and contractual performance. All aspects consist out of different sub-categories. At first the contracts will be read and if a certain contract characteristic is mentioned in the contract it is written down. This will be done for all contracts. Afterwards the findings were compared, the differences and interesting findings are noted down and presented in the contract findings section.

In total, three service contracts of the same assets were available to analyse. One contract with a OEM service provider, one with a independent service provider which also is the OEM for certain parts and the last contract is with a pure independent service provider. This analysis is done by spitting through the contract and categorising the contracts based on the information inside the contracts. For example: Contract A is based on a work-package contract type, a time-based maintenance type, is effective from 2015-2020, does not provide any guarantees and the service provider is responsible for the personnel during the job. This gathered information will be presented in a table in order to make a comparison between the contracts with the OEM and the other service providers. The contracts themselves contain confidential information and will be kept in confidence.

3.2.2 Semi-structured interviews

Interviews are an important data source of this case study. The interviewees were selected based on their function at the NAM and their involvement with service contracts. If a contract is not constructed in the right way they will encounter problems in their daily work. All interviewees have different functions at NAM, this will result in insights from multiple perspectives. In total 9 individuals were interviewed.

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Function: Duration

Plant Manager 35 minutes

Head of rotating equipment 55 minutes Rotating equipment engineer 1 85 minutes Rotating equipment engineer 2 50 minutes Maintenance manager 80 minutes

Buyer 45 minutes

Work-planner 65 minutes

Base-crew supervisor & technician 65 minutes

Table 2 Interviewed persons

3.3 Data analysis

The data in this research sources from the contracts and from interviews at first the contracts were analysed separately according to the conceptual model. This is the within-case analysis. Secondly a cross-case analysis will be conducted in which the outcomes of the within-case analysis’s are compared to each other. This will be done to find to find any differences between an OEM service provider contract and an independent service provider contract. The interviews were used to find a deeper understanding of the patterns and linkages found in the contracts but also to find which parts are important in a contract and how the contracts perform. At first, the interviews were transcribed. The transcripts were analysed with the coding software of ATLAS.ti. After finishing coding, the data was exported to Microsoft Excel. Data from each interview was analysed separately. First, the responses that were considered useful received a code explaining in a few words what is in the quotation. Secondly it would get put into a category, for example “contract type”. The last code a quotation would get was one of the characteristics of the conceptual model e.g. Contract. This way the interview findings could be linked to the contract findings since they both use the same characteristics. Table 3 shows an example of the coding (see appendix 2 for a coding tree example)

Quotation:

“When that happens we escalate the situation to the contract owner because we need these persons on our plant. You need to make deviations, and this results into an internal fight with the contract owner: ‘This is the 10th_{deviation already..’, we have to explain why}

it is needed: ‘Yes, but it is required because the service provider cancelled a week before the planned maintenance action’. We noticed that the service provider would make up excuses but you don’t have a stick to wield. NAM as a company is acting too kind.”

1st order code: SP uses excuses to avoid sending personnel to platforms without consequences from NAM

2nd order category: Contract type

3th order category: Contract

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4. Findings

In this chapter, the main findings from the contracts and the interviews are elaborated. The findings from the contracts and the interviews are presented according to the characteristics of the conceptual model.

4.1 Off gas compressor

An off gas compressor is a mechanical device which increases the pressure of a fluid and decreases the volume of this fluid. The benefit of increasing the pressure and decreasing the volume is being able to transport larger amounts of gas through the same pipe over longer distances. These compressors are built to last a lifetime. The majority of the NAM compressors have been bought and installed in the 1970s until 1990s. Most critical parts of the compressor are the rotating parts. Parts like; valves, stuffing boxes and capacity regulators are very important parts for the compressor to function properly. In earlier years these parts had to be replaced multiple times per year, nowadays the operational lifetime of these parts increased significantly.

The majority of the compressors used by NAM have been build and barely ever fully replaced. A compressor itself costs millions and installing it is an even bigger investment. Therefore, the main goal is to lengthen the lifetime with the help of maintenance and modifications. Environmental and safety regulations are most important when it comes to making decisions about modifying the compressor. Another reason to modify the compressor would be the supply and demand of gas.

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4.2 Contract findings

The conceptual model was used to analyse the different contracts. Three service contracts were analysed. The first contract is with the original equipment manufacturer (OEM). The second contract concerned an original parts supplier (ISP 1 (Mix)), they also deliver parts to the OEM. The third contract concerned an completely independent service provider (ISP 2). From the moment the NAM bought the compressors until five to six years ago, NAM had an exclusive contract with the OEM. This means that the OEM was the only SP providing service to the compressors. Five to six years ago this contract was terminated and replaced by three non-exclusive contracts. This made it possible for other service providers to also provide service to the compressors for the NAM. This is also the reason why the contracts are not as extensive as an exclusive contract and look very much alike.

OEM ISP 1 (Mix) ISP 2

Maintenance type Corrective & Preventive

Corrective & Preventive

Contract type Work package Work package Work package

Contract duration - - -

Guarantee - 3 Year guarantee on

stuffing boxes

-

Responsibility parts - Responsible for repairable parts of the compressor - Responsibility personnel SP – specialised personnel SP - specialised personnel SP - specialised personnel

Responsibility tools Hand tools Hand tools Hand tools

Performance measurement

Standard score matrix (5 KPI’s) & a 5 question survey & a yearly review

Table 4 Overview contract findings

Maintenance type

In the contracts no maintenance type is specified. There is only a distinction between preventive maintenance and corrective maintenance. The main reason for this broad distinction is because the NAM decides on which type of maintenance will be conducted. The distinction in the contracts between corrective and preventive is used to define different prices (corrective maintenance actions are more expensive than preventive maintenance actions).

Contract type

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22 provide a hourly detailed planning for the requested job. This is a result of switching from an exclusive contract with a single SP to non-exclusive contracts with multiple SPs.

Contract duration

The contracts did not have an duration specified. Therefore, the contracts end until termination or further notice from one of the parties.

Guarantee / Warranty

In terms of specific guarantees there are no guarantees. The SPs are responsible for the parts and jobs they repaired/replaced until the next maintenance job. The only specific guarantee given is meeting emission requirements and a three year service life guarantee on stuffing boxes by ISP 1 (Mix): “If ISP 1 is not able to meet the emission requirements and a service life

of 3 years for the stuffing boxes (as a result of Contractor’s lacking technical developments for the abovementioned goods).”

Responsibilities

Personnel

All companies are responsible for their own personnel. No specification is given on how many personnel. It does include a small list of expected competences according to the role. Each service provider is allowed to subcontract the labour to a party, provided that the third-party is compliant with the health- safety and environment requirements.

Tools

The contracts make a division between hand tools, special tools and equipment. All the hand tools are the responsibility of the service provider. The special tools are the responsibility of the NAM.

Spare parts

The only contract which states something about spare parts is the contract with ISP 1 (Mix): “Spare part management of compressor repairable parts”. This article describes the handling of compressor parts regarding the repair, stocking and insurance, transportation, responsiveness of repair and transport. For repair of components, ISP 1 only uses original OEM parts and the standard repair time is set on two weeks after approval of the quotation.

Logistics

Logistics of personnel to the worksite is done on fixed routes and days. This is the responsibility of NAM. Logistics of spare parts to the worksite will be done by a logistics service provider which is approved by the NAM. The transport from the SP to the logistics service provider is the responsibility of the SP.

Performance measurement

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4.3 Interview findings

In this section, the research findings are elaborated. The main findings of each interview are presented in groups based on the characteristics of the conceptual model.

4.3.1 Contract

In this section the different topics defined by coding the data concerning the contract are explained.

Contract type

Contracts can be made up based on different types as explained in the theoretical background. All the interviewees were asked about the different types of contracts and their opinions on the different types of contracts. Approximately five years ago the NAM changed from a full service contract with the OEMSP to work package contracts with the OEMSP, ISP 1 and ISP 2.

Main reason for switching from a full service contract to work-package contracts were the costs: “I think we arrived at a point in time in which it will be easier to switch to other SPs

because of the low gas prices resulting in a lot of pressure on the costs”. In a full service

contract the goal is to get a high availability and performance of the machines but in reality this didn’t worked like it should. The head of rotating equipment described it fittingly: “You

cannot make someone responsible for the performance of a piece of equipment without giving them full access to this piece of equipment”. Since the NAM has a gas delivery

obligation to the Dutch government the SP was not able to stop the production whenever they would have liked to. When the SP cannot follow their optimal maintenance strategy they cannot guarantee a certain availability.

Another reason to step away from full service contracts is the technology used in the equipment. The current equipment is already 20+ years old. The technology is well known within the market and therefore more parties are able to provide the same service for a large variety of jobs. The equipment can be compared to a car: “You can visit a regular car

garage for a lot of problems, but for the complex or brand-related problems you need to visit a certified dealership”. However, the OEM still needs to perform the jobs in which the

required information cannot be found in the manuals. The maintenance manager thinks there should be more contracts with SPs because for some jobs the SP just knows he’ll get it since he is the only one who can execute it of the current SPs: “More flexibility would be a

good thing. As long as we have a contract with them we can ask them, otherwise it is not possible. Now some parties just know they will get the job”. This became a little bit better

since the NAM switched to non-exclusive contracts but now they are still bound to the three SPs.

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24 contract, they do not have to compete with the other SPs to get the job and therefore can use a higher price. With the change to non-exclusive contracts, this competitiveness between SPs returned which positively effects the prices.

Contract duration

The duration of a contract does not influence the contract substantially. The buyer of the NAM as well as the head of rotating equipment mentioned the duration is not really important when having non-exclusive contracts since there are pretty much no obligations for the SPs. The SPs are only executing the jobs the NAM gives them. However, reassessing the contracts after a couple of years (5 to 7 years) is required to be available to new SPs.

Accountability

A big challenge the interviewees faced was the accountability within the contracts. Mainly the accountability of the SP. Since the NAM switched from a full service contract based on performance to a work-package contract the accountability decreased.

According to the maintenance manager the contracts barely make it possible to make a SP accountable for their actions. He gave the following example: “We made an appointment with a SP to do some maintenance. One day beforehand they called in sick. SPs uses these excuses to avoid sending out personnel to offshore platforms. Reason for this are the fixed boat transfers (once or twice per week), SP personnel has to stay for a week on the platform even though the maintenance can be done in one day. We cannot do anything about it. The only thing we can do is escalating the situation to the contract owner at the NAM”. The contract owner

When different SPs are allowed to work on the machines it will also be harder to make some SP responsible for their previous work. If a problem occurs, the first intention is to ask the SP who most recently worked on the machine. As described in the Contract type

section, the non-exclusive contracts do not contain 24/7 availability clauses. This means that there is a possibility that the SP who most recently worked on the machine is not available when a problem occurs. To get the machine running as fast as possible another SP will be asked to conduct the maintenance. Afterwards, it is impossible to make the first SP

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25 4.3.2 Service provider background

The background of a service provider is the backbone of this research. As described in the theoretical background differences between an OEM and an ISP can be distinguished and affect the way a service provider acts and performs. In this section differences between the service providers will be discussed. The interviewees were asked to describe the different service providers and were also asked about the differences between the service providers working for the NAM. After coding the quotations the following codes stood out, namely the reasoning behind selecting a SP, the characteristics of the SPs and the inhouse maintenance.

Selection process

Since the NAM works with a tendering process, several service providers can apply for a maintenance job. However, the NAM makes a pre-selection before announcing their SPs the maintenance jobs. Based on a combination of several factors the right service provider will be selected for the job. The following factors were mentioned in the interviews:

- The importance of the equipment (strategic or non-strategic equipment) - Is it a corrective or a preventive maintenance job

- Expected root cause of the problem

- Who performed the last maintenance actions - Strengths and weaknesses of the SPs

- Availability of NAM personnel (engineers and base crew)

A combination of all abovementioned factors results in the decision to call out a SP or not. The head of rotating gave the following example about a maintenance project at one of the compressors: “One of my proposals was to assign one of the maintenance engineers

completely to that job. By fully committing one maintenance engineer, I would agree to call out ISP 2 for the job. While if we do not fully commit one maintenance engineer to the project, I do not trust it and I am inclined to move towards the OEM for the job”. This

decision process cuts on both sides, it enables the NAM to get the best SP for the job. While a SP who probably cannot conduct the maintenance properly is protected from spending time and resources on getting a quotation ready. According to the Buyer of the NAM, the decision to move towards the OEM is embedded within the culture of the NAM: “Currently

it is within the culture of the NAM to turn towards the OEM”. This conception was agreed

upon by the base crew: “In many cases is the OEM our supplier. I always have the feeling

that the OEM gets the preference when selecting a supplier.” This gut-feeling to turn

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26

Characteristics of the service providers

In the interviews different views were shared with respect to the different service providers. Each of the service providers have differences in terms of the kind of jobs they execute, the background they have, their strengths and weaknesses

Table 5 Overview characteristics of service providers

Table 5 shows the different characteristics of each service provider according to the general views of the interviewees. Each of the characteristics will be shortly revised below.

Jobs

When looking at the different jobs each SP gets, it is mainly based on the complexity of the job. If the job is highly complex, then the OEM will be asked for the job. While if it

concerned a regular mechanical job with a low complexity, ISP 2 will be asked to conduct the maintenance. ISP 1 will be asked if the job complexity is in between and concerns repairing or replacing the critical parts of the machine (valves, stuffing boxes, capacity regulators).

Engineering

The OEM has a large engineering department. They are the company which engineered the machine. Therefore, their overall knowledge about the machine is impeccable compared to the other SPs. ISP 1 has a great engineering background when it concerns the valves, stuffing boxes and capacity regulators but is less experienced in engineering crankshafts or compressors.

Prices

According to the majority of the interviewees the price of the OEM is higher comparted to the price of the ISPs. The reason for the higher price is because the OEM calculates their price in a different way compared to the ISPs. The costs made to engineer the machine are charged. While the other parties do not charge these costs. It is questionable if the costs of engineering a product should still be charged after it has been around for 20+ years.

Another point of attention would be to look at the prices of SPs operating outside the

OEM ISP 1 (Mix) ISP 2

Jobs High complexity jobs. Mostly replacing old parts with new.

Medium complexity jobs. Replacing as well as repairing the parts.

Low complexity jobs. Repairing most parts (have their own workshop)

Engineering Large engineering department Medium engineering department Little or no engineering department

Reaction time Slow Medium-slow Fast

Price $$$ $ $

Strength Reports and advice about the machine

Valves, stuffing boxes, capacity regulators

Response time

Weakness Reaction time Bid low to get the job – limited complexity

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27 offshore industry. The work planner mentioned that costs of maintenance will skyrocket if it concerns a piece of “offshore” equipment compared to a normal piece of equipment with practically the same function.

Strengths

Each service provider has their own strengths. The strength of the OEM is revolves around the extensive knowledge about the equipment as a whole. This results in very good reports after each job with great recommendations. ISP 1 is the OEM for stuffing boxes, valves and the capacity regulators. Therefore, their strength is within that area of the machine. While ISP 2 is more focused on reacting fast.

Weakness

The biggest weakness of the OEM is the reaction time, when NAM has questions about the machine

Inhouse maintenance

The knowledge gap between SPs and NAM’s own mechanical base crew is one of the topics which returned regularly during the interviews. Each SP has their own strengths and

weaknesses, it is up to the NAM to combine these strengths of the different SPs in a way that the weaknesses will not be encountered as prominently. Some actions can also be performed inhouse by NAM’s own mechanics. Views on executing maintenance inhouse are varying across the organisation.

Keeping maintenance inhouse is the general aim within the NAM as the maintenance manager said: “Our first intention is to maintain the machines by ourselves. We also have

the people who are capable of doing that.” Conducting maintenance inhouse is good way to

keep the costs down. All interviewees were positive about conducting the maintenance themselves but also agreed on the fact that they still need the SPs for the more complex jobs. However, people within the company are not on the same page when it comes to estimating the inhouse capabilities. The head of rotating equipment, the maintenance engineers and also the buyer are not sure the current base crew is not capable of stripping and rebuilding the compressor while the mechanical base crew does believe they are

capable of doing it. A small nuance is that the mechanical base crew of NAM did agreed that they needed the OEM for the complex jobs.

4.3.3 Relationship quality

The quality of a relationship with a SP can affect the content of a contract negatively or positively, e.g. if the relationship is good then both parties trust each other and this results in less strict contracts. According to the interviewees the relationships with the current SPs can be classified as good, however they do mentioned a small decrease in the relationship quality with the OEM after terminating the lucrative contract.

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Trust and commitment

Trust and commitment of both parties is vital for a good relationship. In this case the NAM trusts the SPs with their equipment and expects a fully committed SP. The trust between the SP and the NAM will be tested in various phases of a maintenance project. After each job the SP is expected to combine their findings and deliver a report in which they advise about improvements that can be made or parts that should be repaired or replaced. The interviewees were asked if the advice which is provided by the SP will be followed. Not all interviewees could answer this question since they do not get to see this report. But the interviewees who could provide an opinion said that they always wanted to check it

themselves before accepting the advice. This advice is always checked by the NAM in order to make sure they are not replacing parts when it is actually not needed. Trying to sell extra parts or expanding the job is one of the ways for a service provider to make an extra profit. In most cases the advice will still be accepted as one of the maintenance engineers said: “We always check the improvement points, but in approximately 80% of the cases we follow

the advice after checking it.” Reasons for not blindly following the advice is because the SPs

do not know the full maintenance strategy and both parties having different agendas. For example, the machine will get another stop in a few weeks, then it can be beneficial to postpone the additional changes to that second stop. The head of rotating equipment said the following about the different agendas: “In my opinion, the SPs mainly act to serve their

own interests by generating an income. So they will do their best to keep work at the NAM but they do not concern about the welfare of the NAM. Therefore, it is not possible to start a partnership if one party profits from the other.” This is also agreed upon by a maintenance

engineer by mentioning that sometimes the SPs try to generate some extra income by saying some parts need to be replaced because they are damaged while in reality they are not. The fact that a SP tries to make some extra money does not affect the relationship between the NAM and the SP, as a maintenance engineer said: “It is up to us to be sharp

enough to avoid receiving costs we did not asked for”. Releasing certain SPs will not be done

due to the relationship the NAM has build with the SPs: “We have built a good relationship with them, it is something you will not throw away that easily”

Market position

Market position affects the willingness of the SP and the attitude they are having towards the NAM. If the SPs can use the revenue because they have a lack of customers, then they are more willingly to assist the NAM with their maintenance jobs. While if they are

swamped with work, they are more likely to skip the NAM. Reason for this is the market position the NAM is in right now. The market position of the NAM changed drastically in the last couple of years. As a maintenance engineer said “Previously, the NAM and Shell were

big entities in the offshore energy business, we were first on the list. Nowadays this changed and we are more watching our costs which changed the willingness to work for us.” A

common misconception within the NAM is that SPs still want to work for the NAM, but at this moment the NAM is not a really interesting party to work for. As the maintenance manager said: “We have to share the SPs with other customers. When you strip down a

lucrative contract it will get less interesting to work for us, so you have to be realistic and accept that they are not available every second anymore”. The NAM changed from a

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29 4.3.4 Contractual performance

Satisfaction

The satisfaction among the interviewees was good. None of the interviewees were unsatisfied with the service providers at this moment. Although some minor problems occurred when working with one of the ISPs, this did not decrease the satisfaction.

Performance

Performance measurements are mentioned in the contracts. However, the service providers are not yet measured in terms of their performance with the help of KPIs and reviews. The environment to asses the service providers properly is not yet installed.

Open for renewal

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5. Discussion

This research set out to uncover the differences between an OEM and an independent service provider and how these differences influence the performance of a service provider. At first the literature will be put beside the contract and interview findings and in the next section the research questions will be answered.

The literature mentioned multiple important service contract characteristics (Hypko et al., 2010; Murthy et al., 2015; Weigel & Hadwich, 2018). The conceptual model was based on a certain input of five contract characteristics; maintenance type, contract type, contract duration, guarantee/warranty and responsibilities. These inputs should lead to a contract and a contractual performance which could be measured by the satisfaction and if the contractual agreements were fulfilled. The expectation was that service providers with a different background would end up with different contracts. However, when analysing the contracts it we came to the conclusion this was not the case. All three contracts were almost identical in terms of contract type, maintenance type, responsibilities, . The reason for these uniform contracts is the switch from a exclusive contract with the OEM to non-exclusive contracts with the OEM and ISPs.

The literature was right about the different characteristics in a maintenance contract since almost all characteristics could be found in the contracts (with the exception of duration). Although, the researcher did expect more elaboration about the characteristics in the contract. The interviews made it clear the elaboration on for example the details of the tasks would follow in a specific quotation and proposal. The current contracts are only used to set out the rules and guidelines and each job will be worked out in detail separately. Even though there are only minor differences between the contracts in this case. According to the interviews there are some issues which should be covered in a contract but are not right now. For example the accountability. Accountability is barely covered in the contract but it does cause some issues when working with the SPs on a non-exclusive basis. Murthy et al. (2015) described several contracting issues, among which “penalties”. By

implementing penalties into the contract nonconformity could have be avoided. Weigel & Hadwich (2018) mentioned service level agreements as a success factor of a service network. Agreements about the service level could also help avoiding future issues with service provider who do not fulfil their part of the agreement.

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31 when complexity of the jobs increase, while the ISPs developed their service culture in a better way resulting in faster reaction times.

Another success factor for service networks mentioned by (Weigel & Hadwich, 2018) is the process partner selection. It is important to have a well defined process to rationally select a suited service provider, this will increase the satisfaction, performance and the relationship. Since the NAM has the flexibility to switch from service provider with each job, this process should be well defined and should be second nature to the ones who select the service provider. In the contracts this selection process is not defined in any way. The contracts mention that every service provider can send in a quotation to get the job. However, after interviewing the employees of the NAM it showed that in reality there is a certain selection process and in some cases a service provider is excluded from sending in quotation because they do not fit the job. The factors of this selection process are not written down. This makes the selection process prone to errors because people will tend to follow their instinct when they have done the same process a couple of times instead of following the fixes list without forgetting some factors. Following a well-defined process and communicate this process through the contract, will result in a better understanding of the reason why a service provider is not selected for the job. The contracts lack an approach to cover this selection process in the contract to avoid choosing service providers based on ‘gut-feeling’. According to the interviews, the prices used by the OEM were higher compared to the ISPs. Reason for this price would be the fact that the OEM engineered the machine. An

investment which needs to be earned back. However, the machine is already 20+ years old , the technology is well known within the market. Is it still fair to charge development costs for a machine of 20+ years? The other SPs chose to use a different model: calculate the development costs into maintenance for the first 10 years, after those years cut out the development costs and only charge the pure maintenance costs. To improve the

relationship

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5.1 The research questions

“Which contract characteristics are crucial for a service contract with an OEM (1) or

independent (2) service provider?”

Almost all the contract characteristics mentioned in the literature background and used in the conceptual model are crucial for a service contract with any service provider, regardless of background. However, the backgrounds have different advantages and disadvantages. It is important in a contract to make use of the advantages and reduce the possibility to encounter the disadvantages to a minimum. One of the disadvantages of working with an OEM service provider according to the interviews was the reaction time. The literature mentioned one of the reasons an OEM could react slowly was the lack of a service culture within the company. The lack of a service culture combined with the lack of accountability in the contract will result in a OEM who will not change the way they behave in the future.

A disadvantage of the ISPs would be the lack of good reports and a limited complexity. By incorporating the selection process into the contract the ISPs know why they are not selected for certain projects. This increases their insights in the process and will allow them to invest in their weaknesses and improve them.

“Why do these differences between OEM service contracts and independent service

contracts exist?”

The third research question is easily answered. The differences between OEM service contracts and independent service contracts do not exist. In case of the NAM the contracts are almost completely identical. However, the results showed that it would be wise to adjust the contracts to the characteristics of the service provider in order to make use of their advantages and reduce the possibility to encounter their weaknesses.

Apparently, it does not matter if the contract is with an OEM or with an ISP because the differences in the contracts are minimal. The major points of attention would be based on the characteristics of the service provider and not specifically based on the background of the service provider. However, it is possible the characteristics of each service provider is influenced by the background of the service provider.

How do these differences in characteristics influence the performance of a service provider?

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6. Conclusion

In this chapter, a conclusion is provided by answering the research question. Afterwards, the limitation and directions for future research are discussed.

In this study, the difference between the service providers backgrounds is researched due to a case study at the NAM. The literature is studied and based on the literature a

conceptual model is constructed to assess the service contracts present at the NAM. These contracts and the people who work with the contracts provided the insights for this thesis. Since the difference between the service providers backgrounds is the core of this research a case is required in which both service providers backgrounds are present. This is only possible in mature industries in terms of technology developments because in immature industries the technology developments are not yet widespread across multiple service providers. The NAM had both service providers background present which made it a suitable case. The aim was to get a better understanding of the differences in background and how this affected the contracts.

The findings contribute to the theory by addressing the gap that existed, as no other study (to the best of the author his knowledge) had the possibility to examine multiple

maintenance contracts of an offshore platform asset. Most case studies focused on one type of contract (Howard et al., 2016), or the investigated service is non-vital for the buying company (Nullmeier et al., 2016). Therefore, the NAM is a valuable case since it offers insights in contracts with OEM service providers, independent service providers and even a mixed service provider (partly OEM) regarding the maintenance of a heavy capital asset. Even more important than the theoretical contribution are the insights for the managerial perspective. At the moment contracts are not tailored according to the specific service provider. The same contract will be used for multiple service providers which is possible if the service providers all work in the same way. However, this is not the case. The main job of a contract is to formalize an agreement and taking away the ambiguity so every party knows is expected from each other. Companies can benefit from the presented findings because this thesis showed that it is important to adjust the contract to the characteristics of a service provider to avoid issues like a lack of accountability. And improve the

satisfaction of the people that have to work with the contracts.

6.1 Limitations and directions for future research

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The difference between OEM and independent service providers in the offshore energy industry: The characteristics and performance of a maintenance contract

MSc Thesis: Service logistics for offshore energy