Considerations for Outsourcing Laboratory Equipment Maintenance

Pharmaceutical Technology, Pharmaceutical Technology-08-01-2005, Volume 2005 Supplement, Issue 5

New maintenance models focused on efficiency improvements can deliver cost savings and enhanced service quality.

Until recently, the costs of maintaining laboratory equipment were not a major factor in the cost-savings initiatives of many pharmaceutical companies. Concerns over compliance, equipment uptime, and quality of results meant that using multiple maintenance contracts with multiple vendors remained a normal practice. But now, initiatives have become edicts as no stone is left unturned in the search for organizational efficiency and profitability. Today's pharmaceutical company is less risk-averse and aggressively pursuing cost savings on laboratory equipment maintenance by implementing internal initiatives and working more closely with outsourced maintenance providers.

The maintenance models summarized in Figure 1 show the options available to pharmaceutical companies. The benefits this model can provide vary according to policy, history, makeup of a company's decision-making unit, and the amount of internal resources currently allocated to equipment support. The definition of service quality also varies among companies. In this article, the definition is based on basic service delivery comprising initial response time, first-time fix rate, quality of repair, on-time delivery of preventive maintenance, and robustness of the qualification regime.

Figure 1: Cost savings and quality according to maintenance model.

The amount of cost savings depends on how much effort the company has already put into reducing costs. For example, if a company operates an outsourced asset-management program, then it would not realize the same savings as a company currently contracting to original equipment manufacturers (OEMs), if both moved to an on-site triage model. Figure 1 assumes OEM contracts are in place and that OEMs set the quality standard because they design, manufacture, and provide applications support for their products—even though some do not live up to this standard in practice. The figure also assumes that independent service providers have lower costs but inferior service to OEMs, when in practice some are more agile, flexible, and responsive than the OEMs.

The asset-management model manages the work of OEM maintenance providers on a call-out time-and-materials basis to deliver cost savings, whereas the on-site engineer model delivers savings through increased labor efficiencies. The on-site triage model combines the strongest attributes of these last two models into a single solution. Figure 1 claims the on-site engineer and triage models provide higher service quality than OEMs. (This claim is justified later in this article.)

Does that mean the triage model is the best model? The answer depends on each company's business priorities and its ability to gain the support of and mobilize multiple scientists and functional stakeholders to drive organizational change. Some models require more thought-process changes than others.

Traditional OEM contract model

A typical pharmaceutical research and development (R&D) and manufacturing organization deals with at least 150 laboratory equipment providers and has key contracts in place for the most prevalent mission-critical equipment, including high performance liquid chromatography (HPLC), fast performance liquid chromatography (FPLC), ion chromatography (IC), mass spectroscopy (MS), centrifuges, plate readers, and robotic liquid-handling systems. At a typical site, HPLC represents 35–50% of equipment by volume, but MS support will constitute the highest aggregate maintenance spending, followed closely by HPLC.

Significant internal time is needed to manage the commercial aspects (e.g., the service level and response time) of major contracts and to ensure service levels meet the needs of the overall business as well as those of specific laboratories. Each equipment provider has unique preventive maintenance and qualification protocols, response times, and service reports, thereby creating significant ongoing administrative challenges.

It also may be difficult to understand clearly the real value that each contract provides. Contracts pass risks onto the provider. If equipment is reliable, then contracts are very profitable to the service provider. But the converse also is true. Knowledge of equipment failure rates, uptime, and cost of ownership all would help companies make better risk assessments, but companies rarely find the resources to collate and manage such asset knowledge effectively. Therefore, most companies committed to OEM contract regimes usually focus on price reviews with their OEMs rather than on performance, risk, and service-level efficiency opportunities that could benefit their business. Reducing price without improving efficiency is achieved by persuading an OEM to reduce its margins, with cost reductions of as much as 10% attainable in some situations (especially if the company also is buying significant quantities of new product). Stakeholders also have an opportunity to move away from contracts altogether and work with an OEM on a time-and-materials call-out basis, in which contracts are placed for scheduled preventive maintenance only. In this model, financial risk is passed to the pharmaceutical company, with opportunities for cost savings of more than 10%. But companies rarely have the asset knowledge to be confident enough to make such a decision.

Scientists often favor OEM contracts or a time-and-materials approach because they maintain the long-standing personal relationships that played a major role in their decision to procure a specific product in the first place. Conversely, managing multiple contracts is expensive and it squeezes OEM margins rather than focusing on efficiency improvements, which means there are minimal opportunities to reduce costs in subsequent years. Moreover, there is always the danger that prices will increase as OEMs strive to win back margins demanded by their shareholders.

Independent providers

In some localized regions, independent providers offer maintenance support for OEM equipment. These organizations often have weaker technical-support infrastructures than OEMs. They are prepared to work at lower margins, however, so their prices often are significantly lower. Moreover, some independent providers offer multivendor maintenance support, which gives companies the opportunity to consolidate service providers and reduce the number of contracts they manage. Many of these providers are staffed by former OEM engineers who may have pertinent factory-training certificates but may not be up to date on modern equipment. Therefore, companies should check the level of training at an early stage of their evaluation process. In addition, some firms are staffed with lower cost but lower skill engineers, so quality may be questionable. Most independent providers are small family businesses, and it may be unlikely that they will have the support infrastructure and processes required to meet scientists' service-quality requirements or corporate remits to standardize suppliers and processes across sites or countries.

In-house frontline

Many large pharmaceutical companies have their own laboratory equipment maintenance teams, whose activities range from contract management to financial reporting, or company-employed in-house engineering staff that performs maintenance in laboratories or workshops. In the former case, it is, of course, important that the maintenance model (discussed later) integrates with these groups to prevent work and cost duplication.

Although the industry trend is shifting away from having in-house groups, there are a few companies seeking to roll out the in-house implementations that were successful at the local sites to their other sites around the world. In some cases, these in-house teams provide metrology services. In other cases, they provide workshop services for apparatus or a laboratory bench–based frontline service for various equipment. The advantage of this frontline support is that response rates are much faster than calling in an off-site OEM. An in-house resource can be on site in less than 1 hour, compared with the typical 48-hour response time from an OEM. A faster response increases equipment uptime, which in turn increases scientist productivity. In-house teams typically have a 30% success rate of making a repair without recourse to an OEM. Of course, the cost saving must be weighed against the cost of employing the team and maintaining its technical expertise. The challenge of this model is to ensure in-house teams are sufficiently trained so that parts consumption is contained and OEMs are only used as a last resort. Otherwise, the company pays twice for the same maintenance. In fact, many companies no longer view the skills required to effectively deliver equipment maintenance as a core activity and therefore have abandoned this model.

Asset management

Maintenance models based on asset management are becoming increasingly popular in the pharmaceutical industry. In this model, a pharmaceutical company has one contract with a provider that takes full responsibility for managing the maintenance process and all the OEMs that provide the service. Cost savings result from cancelling OEM contracts and managing service on a call-out time-and-materials basis, although some complex equipment or scientist-defined equipment is still backed by an OEM contract. The provider, through a team of administrators, scrutinizes OEM invoices and service-level agreements to ensure work performed matches that invoiced and that no unnecessary work is performed. The provider records maintenance activities and costs incurred in their own system or in a company-wide asset-management system that manages all site assets (not just laboratory equipment). This process allows them to generate reports that detail, for example, current asset value, asset performance, asset location, and asset cost of ownership, thus providing their clients with a greater understanding of maintenance spending and equipment lifecycles.

Asset management providers often use financial and statistical models originally developed by actuaries working in the pension, life insurance, and medical insurance industries to calculate risk. These models calculate the spread of risk for all on-site equipment, which is then factored into their price proposals. OEMs use these basic techniques to calculate the price of service contracts. The scale here, however, is much larger; therefore, the opportunity for risk management and mitigation is much greater.

A wide range of different business models can support the asset management model. For example, a fixed price is quoted for all services, and risk is transferred to the asset management provider. The advantage in this case is that stakeholders realize their savings up front. The downside is that they are still paying for the provider to assume the risk. Another example is a variable price proposal based on labor and parts used, with the provider taking a management charge and a performance bonus based on achieving agreed cost-savings targets. The disadvantage in this case is that cost savings are only realized with time; however, risk is transferred to the company, which means costs savings will likely be greater over time, especially when the provider has an incentive to reduce costs.

The asset management model relies on an OEM to carry out preventive and repair maintenance, which can make the model transparent to scientists if managed correctly. Nonetheless, companies should be aware that providers working in a fixed-price contract or under a cost saving–based incentive may have to reduce service quality to reach their targets. This task is often achieved by limiting the frequency of call-outs or the situations in which call-outs are allowed or by implementing additional approval steps to authorize the use of certain spare parts, which may compromise service quality. Many stakeholders have witnessed a decrease in quality from other company outsourcing initiatives and may view the lab equipment initiative with suspicion. Therefore, great care must be taken when defining the service level agreement. To ensure all asset management data are recorded, some providers route all calls for assistance through their own call center and then call in the OEM on the scientist's behalf. This process must be carefully planned to prevent delays of getting an engineer on-site or a hotline support call returned. In addition, many OEMs provide priority response to contract customers over call-out time-and-materials customers, so service response times may get longer.

By adopting this model, companies can expect to save 15–20% of their maintenance spending compared with full-price OEM contracts and soft-cost savings in terms of reduced administration expense. Moreover, they can expect to gain a much better understanding of the location, condition, and cost of ownership of their assets.

On-site engineers

Typically, more than 80% of a pharmaceutical R&D and manufacturing company's maintenance expense can be attributed to five or six key equipment technology groups. It is in this dynamic that the on-site engineer model delivers the greatest cost savings compared with standard OEM contracts.

In this model, engineers are deployed permanently on-site to provide preventive and repair maintenance for all equipment from one or more key technology groups. For example, a site containing 5000 pieces of equipment may have 500 complete HPLC systems, so HPLC is a key technology group. To calculate the number of engineers needed to carry out maintenance, the number of hours required to deliver the specified service level is divided by the utilization efficiency of a single engineer. For example, if the system predicts the hours required as 10,000 and the utilization is 1430 hours, then the number of engineers required is seven. The service provider's knowledge system shows line item information of the labor hours and parts usage from historical data gained from other sites to assist with this calculation. Companies usually pay a provider a fixed price for the labor, with spare parts and consumables given at either a fixed price or as used, within an agreed upon margin. This approach depends on whether the company wishes to assume or transfer financial risk.

The financial make up of a typical OEM service contract comprises parts, labor, travel (typically 20%), and profit. Travel is not incurred with an on-site model, therefore this expense is immediately a cost saving. The provider, however, will have ensured the on-site team is fully utilized to contain cost. In practice, a provider can help by smoothing out preventive maintenance peaks and troughs and by providing value-added labor services that would otherwise be charged for, including equipment moves, salvages, and software and firmware updates, as part of the contract. Dedicated on-site teams do not have the same cost-overhead burden as field-based teams, and this may lead to lower costs. Spare parts for supported equipment are kept on-site, which drives first-time fix rates from approximately more than 70% to greater than 90%, thereby reducing revisit costs.

Overall, this model should produce a 20–25% hard-cost savings compared with full-price OEM contracts as well as soft-cost savings. On-site engineers provide maintenance and administration for all equipment of a specified technology regardless of vendor. Therefore, there are opportunities to standardize maintenance and qualification protocols across the technology, which minimizes the cost of compliance. Having engineers permanently on-site means breakdown response can decrease from more than 48 hours (typical OEM response time) to less than 1 hour, thereby reducing the amount of backup equipment required and freeing scientists to conduct analysis rather than repair equipment.

To deliver effective on-site multivendor maintenance requires in-depth technical backup, recruitment, training, parts sourcing, and information technology systems. Therefore, it is likely the most capable providers will be global equipment providers who see a business opportunity in maintaining equipment manufactured by their industry peers and competitors. The information technology system used will need to record every maintenance event and cost transaction to match the capabilities of the dedicated asset management model. The provider also will need the systems and processes to manage the complete maintenance process at smaller, less well-resourced manufacturing sites of 500–1000 items of equipment and be able to dovetail into in-house resources, systems, and processes at larger sites of at least 5000 items, where in-house maintenance management or maintenance delivery groups provide support to scientists.

Will scientists believe a multivendor on-site engineer model can deliver higher quality service than their OEM? Not initially. They will have many questions relating to engineer training, competence, parts availability, and software support. Therefore, it is vital to engage laboratory personnel early in the evaluation process so that their concerns can be addressed by means of the proof statements available from those companies already successfully implementing this model. Often companies implement the on-site model on a small scale at first and then use this success to win over more skeptical stakeholders.

Equipment triage

Each of the models previously described offers cost and service level benefits. One current industry trend sees the asset management, frontline, and on-site models merging into a single combined triage model (see Figure 2). The model can work independently of in-house maintenance groups or in conjunction with in-house maintenance groups as required. This model consolidates all laboratory equipment maintenance under one overall provider with one contract and one invoice point.

Figure 2: Laboratory equipment maintenance triage.

An on-site engineer team directly maintains the most prevalent, mission-critical equipment to provide the highest service level and the biggest cost savings. Less prevalent equipment is maintained by managing the OEM on a call-out time-and-materials basis or by procuring a contract from the OEM. The exact split between direct maintenance and OEM management is derived by understanding the needs and concerns of scientists and balancing those needs against the speed with which the company wishes to make cost savings. In some cases, the on-site team may be initially restricted to one or two technologies or to a restricted number of cost centers to prove the viability of the model. Maintenance events and transactions for all equipment are recorded in the same information technology management system, providing comprehensive asset management capabilities and service-quality performance monitoring regardless of whether the equipment is maintained by an on-site engineer or external OEM.

Irrespective of the initial triage, equipment can be migrated from the OEM to direct on-site maintenance over time, as scientists become comfortable with the performance of the on-site team. Equipment usually transitions to on-site engineer maintenance by means of the frontline model, which gives the on-site team the opportunity to hone their skills before taking on full maintenance responsibility.

Cost savings realized with the triage model will be a combination of those described with asset management (15–20%) and on-site engineer (20–25%), depending on how equipment is split between the two models. Service quality for equipment maintained by the on-site team will be the highest, as described previously. Transition to the more efficient on-site model over time releases further costs savings (typically 5–7%) and improves service quality for a greater percentage of equipment, protecting the maintenance solution from demands for further cost savings in subsequent years.

Summary

Cost reduction is a driving force in the pharmaceutical industry, but companies should not forget the critical role maintenance plays in generating high-quality results that get their products to market faster. Reducing quality to achieve savings will increase costs elsewhere. Fortunately, new maintenance models focused on efficiency improvements can deliver both cost savings and enhanced service quality.

Martin Long is the sales and marketing director at PerkinElmer LAS, Laboratory Services SBE, Chalfont Road, Seer Green, UK HP9 2FX, tel. 144 1494 679183, martin.long@perkinelmer.com