Saving 50% on a Large Mining Services Contract: 5 Lessons
Last year, we were asked to help with a mining services contract which involved the production of over 3mtpa (Million Tons Per Annum) of product. The operation was based in regional Australia for one of the world’s largest mining companies.
Below is a brief overview of the problem and the 5 lessons that we learned.
The Problem:
The contractor and the contract owner were constantly fighting over almost every component of the contract. The contractor was perceived to be difficult to manage and whenever the contract owner tried to reduce costs through operational changes, the costs were pulled out in one area only to appear somewhere else at the end of the month.
When we were brought in:
- The contract had been in place for a little over twelve months
- The contract was in its sixth (6th) variation
- When this contract was competitively tendered initially the business had achieved a 10% reduction in cost from the previous contract
- A new manager had just taken over responsibility of the area and had a feeling that there was an opportunity to reduce the cost of the contract by around 5%
- The new manager couldn’t quantify exactly where the costs would come out or a way to extract the value
- Previously, the mining company had tried to negotiate with the contractor to realise the potential opportunity
- As you can imagine, the supplier was not too amenable to adjusting their rates or the contract for what would be a 7th time
They were in a bind.
The Results:
Over the next 6 months, we evaluated and quantified the opportunity, developed an execution strategy and realised a cost improvement of 50% without any change to the business and the same supplier.
The result meant a cost improvement well in excess $1M per month.
The Lessons:
Below are the 5 key lessons we learned over those 6 months with the hope that other contract owners can replicate similar results.
1. When possible, buy the outcome
For the last 10 years, the operation had a requirement for this mining service and had several different contracts. The common thread between each of these historic contracts were that they were very descriptive. The contracts described the type of equipment was required to do the job, the minimum availability of that equipment, the number of people, and the shifts that were required. One way to describe this type of contracting is “buying the inputs”. They were effectively telling the supplier how to do their job. In reality, if the contractor was left alone, they had the ability to do things better.
We looked at this specific operation and through investigation, we found the underlying problem in the value chain of the operation. We looked at the business and asked “What do you really need?”. Initially the business said, “we need this type of equipment, with this much availability working two shifts, etc”. We asked again, “No, what output do you really need?” There was silence. Well, for a little while. Over the last 10 years, the business was so fixated on designing the optimal solution for running this services, they lost sight of what it was that they really needed in terms of the output.
We persisted in asking why; each time getting a deeper understanding of the underlying problem.
Once we then understood the problem, we could define the output required and then asked “What are ways can we achieve the same result?”
Video Lesson:
During the course of this project, we created the following short video “Buying the outcome” (6 min 45 sec) to help our client and others to understand different approach.
2. Touch & feel the problem
Mining operations are generally far, far, away. They are commonly hundreds (sometimes thousands) of kilometres away from major cities. This makes it difficult to touch and feel the problem.
We found that not only was the mining operation a flight away, most interactions with operations people were conducted in meeting rooms at a site office which was kilometres away from where the mining service being conducted. We noticed that due to additional effort required to see the supplier in operation, many of the procurement personnel involved in the contract rarely got out to touch and feel the services that was procured. We also noticed that as the service spanned many kilometres, it then took additional effort and time to get a detailed understanding of what obstacles the supplier had to overcome on a day-to-day basis.
Some of the biggest insights that allowed us to achieve a significant change to the contract came from spending lots of time, as we call it “touching and feeling the problem”. We did this by spending time in various equipment, viewing the activities, and asking questions.
Video Lesson:
During this project, we created the following short video story titled “The Sourcing Strategy & the Caterers” (2 min 55 sec).
3. Shoot for the moon, be curious, and generate alternatives
When you aim for 10%, the best you often get is 10%. When you aim for a 90% cost reduction, you will be amazed what you come up with.
By asking first, “how can we remove 90% of the cost” everyone was forced to think differently. This simple question forces people to leave their current thinking behind and search for other alternatives.
Often, through this process, some of the best ideas come from those closest to the problem. In this case, it was no different. A couple of engineers had some brilliant ideas that others had disregarded as too radical, or would take too much change to other existing process to be viable. When evaluated with the right lens, they were more realistic than were originally imagined.
Video Lesson:
During this project, we created the following short video titled “Are the big procurement savings really gone?” (3 min) to help illustrate this lesson in more detail.
4. Don’t negotiate
We are constantly told that to be a “Good” business person, we need to be a good negotiator. We learnt that to be a Great business person, you shouldn’t have a need to negotiate. Trying to negotiate with another party is often about compromise, giving something up or trading something of less value for something of greater value.
During this project, we designed a competitive process which removed the need for negotiation. The competitive process was specifically designed to generate the outcome we wanted by getting others to play the game we designed and removing ourselves as a player.
Video lesson:
During the course of this project, we created the short video “How to get a better deal by refusing to negotiate?” (7 min 27 sec) to help others understand our thoughts on the subject.
5. Check if Outsourcing is really what the business needs
Is is not uncommon for mining companies to swing on the pendulum of in-sourcing to outsourcing of their large mining services contracts. Often when a one of these mining services contracts comes close to expiry the companies seek to understand if they should in-source it and there is much debate about the pro’s and con’s of such a move.
In this specific example, we learned that while the worked had been outsourced for more than decade the business found it difficult to clearly articulate the reason why they were currently outsourcing the contract. We learnt that “legacy issues” or “legacy concerns” should be continuously tested to ensure that they still apply and whether or not, having an external party execute the work fits into the short, medium, and long term for the business.
Video lesson:
During the course of this project, we created the short video “Why did we outsource that?” (2 min 47 sec) to help others determine where potential problems reside.
Further Information:
For further information please contract Simon Thompson directly.
