Honeywell.com 2014 Honeywell Users Group EMEA Maximizing the Value of Your Service Contract Steve Linton 1 Document control number Honeywell Proprietary
Agenda Business Challenges What is TCO? Reducing TCO Trade-Offs Decision Making / Negotiating Maximizing the Value of Your Service Agreement Summary / Q&A Let s Begin
Business Challenges Knowledgeable staff Maintain Manage Open technology Technology direction and applicability Know Ensure Alignment between support strategy and business strategy Risk and downtime Minimize Reduce Total cost of ownership Increasingly Challenging Environment
TCO What is it? Systematically accounts for all costs related to a technology investment decision TCO models were first applied to computers by Gartner Research in 1987 for IT investments Evaluates all costs, direct and indirect, incurred throughout the entire lifecycle stages of a technology asset, including: Procurement and deployment Operations and maintenance End-of-life management Cost of not upgrading (opportunity, higher costs, etc.) Get the Whole Picture
TCO Applied to Automation Similarities with IT Full lifecycle cost considerations Hardware and software assets Capital and operating budgets Integration Additional Considerations for Automation Longer lifecycles and variable life span within a system Reliability as a necessity Platform switching costs Disruption to operations Operations are often complex and retraining staff so that they achieve equivalent proficiency can be significant The Differences Matter
TCO Applied to Automation TCO = NPV (Deployment+ Operating Costs + End of Life Management) Blend of Capital and Operating Expense Budgets Procurement & Dep ployment Engineering & design Equipment including initial spares Software Implementation Documentation Installation (material & labor) Integration with adjacent systems Factory testing Site testing Commissioning Change-over time Initial operations & maintenance training Operations & Main ntenance General maintenance Cyber & physical security Repair Software upgrades Hardware upgrades Change management Backups Parts replacement Parts availability Floor space HVAC/power Proficiency training Auditing/asset tracking Downtime End-of-life Manag gement Risk planning Removal & disposal Direct and Indirect Costs Need to be Considered
Why Should We Care About TCO? Recession Hits Board & Exec Mgmt Banks Withhold Analysts Criticize Mgmt Customer affected & put the squeeze on Plant Management Plant Personnel Suppliers Squeezed Cost Pressures Never End
Two Key Areas of Focus Extend Lifecycle Reduce Operating Costs TCO = NPV (Deployment+ Operating Costs + End of Life Management) Blend of Capital and Operating Expense Budgets Include both Capex + Opex
Extend Lifecycle Example System 1: 10-Year Expected Life Operating Cost 28% Acquisition Cost 72% System 1: 10-year estimated life Acquisition $700K Operating expense $30K per Year TCO = $1M or $100K per year System 2: 30-Year Expected Life System 2: 30-year estimated life Operating Cost 60% Acquisition Cost 40% Acquisition $700K Operating expense $33K per Year TCO = $1.7M or $57K per year System 2 is 43% lower TCO/year Applied Lifecycle Duration Changes TCO Significantly
Automation Asset Lifecycle End of Life Management Procurement & Deployment 2.7% 5.4% 6.8% * 6-10 Years Upgrades Operations & Maintenance 14.9% 23.0% 11-15 Years 16-20 Years 21-30 Years 47.3% 31-40 Years More than 40 Years *Source: Trends in Operational Services & Process Automation System Lifecycle Management. Larry O Brien. ARC. 2010. Expected Lifecycle Varies Significantly
Lifecycle Varies Within an Automation Platform Average PAS component lifecycle in years Workstations & Consoles Displays Controllers I/O Termination Panels Wiring 0 10 20 30 40 Source: Trends in Operational Services & Process Automation System Lifecycle Management. Larry O Brien. ARC. 2010. Lifecycle is a Moving Target
How to Extend Life Buy systems with history of longer life Choose vendors with history of support Understand the implications of Open technology Incremental migration Plan for change Protect your IP Refresh HMI Keep software supportable Manage your cyber security Protect Your Investment
Services to Help Extend DCS Life SESP Keep your software current Discounts on hardware upgrades Hardware Refresh Keep your hardware current Lifecycle Planning Protect your investment to until you can upgrade Preventive Maintenance Protect your investment so it lasts longer Assurance 360 Worry free approach to your DCS We re Committed to Helping You
Reduce Operating Costs Example 350 300 250 200 150 100 50 Prod. Impact Support Parts Inventory Labor External Labor Internal 0 Self-Maintain Out-Task Out-Source Manage Look at all your costs, not just the service agreement Compare impact to production (reliability / optimization) Analyze Your Options Closely
How to Reduce Operating Costs Incident Prevention Faster Resolution System Optimization Management of Change Reduce, Resolve, Optimize and Change
Reducing Operating Costs Operating Costs Maintenance, replacement parts & upgrades Real estate Electricity (for related equipment, cooling, backup power) Testing costs Solutions Assurance 360 for all your operating costs. System upgrades to new technology SESP program for TAC & software support to reduce time to resolve & resolution time FSS program for instant, on-site service Parts programs to reduce spend and increase Downtime, outage and failure expenses availability Diminished performance (i.e. users having to Remote connect for faster resolution wait, diminished money making ability) Security (including breaches, loss of reputation, recovery and prevention) Backup and recovery process Technology training Audit (internal and external) Insurance Plant personnel Environmental compliance System performance monitoring for active monitoring and patch deployment Training solutions for changing technologies/work force Change Management and system testing Stepwise migration reducing the added operating costs (protecting IP) with new acquisitions Solutions are Available
Honeywell Services Increase Value & Reduce TCO Consider a service management partner to manage your automation system support. Safely Introduce new solutions, technologies, applications, hardware and processes Execute day to day tasks and prevent incidents Drive change to optimize cost, performance, capacity and availability of the system Resolve incidents, problems and requests quickly Outsourcing unburdens the organization's resources. The greater flexibility of third party maintenance providers also improves the probability of meeting mutually agreed upon goals and objectives. Source: ARC Insights, July 2009 Partner for Success
Service Management Outcome based Results not hours Aligned goals Bonus/Penalty Fixed Outcome Flexible delivery Improved reliability Cyber security Extended life Increased production Worry Free
Trade-Offs
Trade-Off Options + Only pay what you use Short term control of spend Vendor resource commitment Relationship with vendor Purchasing / P.O. Extras Accountability Few surprises Business alignment Shared risk - No long term control of spend No business alignment No vendor commitment Full risk No business alignment Limited vendor commitment Track volume or lose it Retain most of the risk Pay for sharing risk Committed relationship? Internal Vs. external costs Allocation of cost to events Transactional business Budget for events Service is a core business Augmentation of skills Committed partner Production is core Staffing challenges? Review Your Options
Alignment to Business Needs Understand what your business model is Transactional Committed Relationship Partners Clarify your needs Core skills Attrition / Staffing Evaluate vendor solutions Demand (spot) services Contracted volume (labor, parts, software) Committed outcome (Assurance 360) Align to Your Business Needs
Negotiations Level of commitment increases degrees of freedom Volume (labor hours, parts, etc.) Vendor / Partner Control (ability to manage resources) Outcome (hours or results) Period / Preparation (one time, annual, multi-year) Impact of commitment Transfer of Risk (financial penalty) Know Where You Stand
How to Maximize Your Value The higher the commitment, the greater your opportunity to increase value Utilize! Entitlements Resources Discounts Ask! Roadmaps Guidance Commitment New Solutions Communicate regularly Talk to Us
Summary We all have business challenges to deal with. TCO can be used to evaluate automation options. You can reduce your TCO by extending life and managing operating costs. There are trade-offs to consider in service planning. Align options with your business needs and understand your degrees of freedom. Maximize the value by using all the support you are entitled to. If you don t know, ask. Maximize the Value You Get