Performance based contracts in railways ibraheem sheerah

1. Performance Based Contracting in Railways
Middle East Rail Conference & Expo 2016
By Ibraheem Sheerah, PhD
Strategy & Business Planning/Contract Manager
Saudi Railways Company (SAR)
Dated March 09 2016
SAR Copyrights @2016 All Rights Received

2. Agenda
• Saudi Railways Company (SAR)
• Understanding the benefits of performance based model for
Railways
• Mitigating risks and ensuring smooth contractor-client relationships
• The role of performance based contracts for improving effectiveness
of the maintenance function
• Developing specific, realistic performance standards – SMART
(Specific, measurable, achievable, results-orientated, timely)
SAR Copyrights @2016 All Rights Received
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3. Saudi Railways Company (SAR)
Overview
• The SAR was established in 2006 to
develop and operate the North South
Railway (NSR)
• The NSR is around 2,840 Km on two
main lines.
– SAR Common line 450 Km
– Passenger line with the common section
1,482 km
– Mineral line with the common section and
all branches (Bauxite, Wa’ad Al Shammal)
1,808 km
• In 2011, mineral line operations started
with the initial shipments of
phosphates from the Al Jalamid mine
to the port at Ras Al-Khair.
• In 2011, the development of the Saudi
Land Bridge project, a 950 Km double
track line linking Jeddah Islamic Port
with Riyadh, started
• The connection to Wa’ad Al Shamel.
SAR Copyrights @2016 All Rights Received
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4. Infrastructure and Asset Investment Planning
Infrastructure Development & Construction
Permanent Way
Bridges & Buildings
Signaling
Communications
Infrastructure Maint. & Renewal
Inspection
Failure Recovery
Maintenance
Renewal
Network operations
Scheduling
Operations
Path Management and Monitoring
Rolling Stock Maint. & Provision
Heavy Maintenance and Workshop
Management
Light Maintenance
Wagon Cleaning
Inspection & Provision
Train Operations
Rolling Stock Planning
Operations Control
Train Operations
Failure Recovery
Capacity Management
Marketing and Sales
Product Development
Service Planning
Sales
Customer Services
Other Services
Station Management
Planning and Development
Maintenance & Renewal
Operations
Customer Management
Bulk intermodal
Wholesale intermodal
Bulk Retail
Passengers
Key Account
Facility Management
Facility Maintenance & Management
Cleaning
Ground Maintenance
Offices, Workshops, warehouses
Saudi Railways Company (SAR)-
Primary Activities
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5. Understanding the benefits of performance based
model for Railways
• Performance-based contracting
• the contractor provides to the client certain service levels within
specific time frames to achieve specific outcomes that support the
client in realizing his long and short terms strategic objectives.
• PBC Includes:
1) objectives and indicators by which to measure contractor performance,
2) information and data on the performance indicators to assess the extent to
which the contractors are successfully implementing the defined services
and
3) provision of incentives or imposition of sanctions.
• PBC is a results-oriented contracting model that focuses on how a
railways company safely, efficiently and effectively operates its railways
infrastructure and assets to achieve its financial targets by realizing the
desired operational excellence objectives and maintain sustainability.
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6. Understanding the benefits of performance based
model for Railways
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• What is the company's Value Chain?
• What are the company’s core businesses?
• Outsource or not to outsource, this is the Question!!
• What are the Strengths, Weaknesses, Opportunities and Threats?
Customer
Support
activities
Primary
activities

7. Understanding the benefits of performance based
model for Railways
Performance Based Contracting (PBC) process:
Step (1): Prepare a Business Case - a document that defines (Why, How,
What, When, and Which activities to outsource) and reviews potential
risks, benefits and other potential impacts on the company
Step (2): Define the expected Outcomes - a short statement reflecting
the desired result or final deliverable of the contract (Benchmarking is
essential)
Step (3): Define the required Measures - define a set of performance
measures that collectively measure the organization’s performance
against the outcome statement (Benchmarking is essential). It is
significant to know what to measure, how to measure it, why its measured
and when to measure it.
Step (4): Define the Service Levels - set performance levels for the
performance measures, i.e. how well the contractor needs to perform
(Benchmarking is essential) - (Performance Targets)
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8. Understanding the benefits of performance based
model for Railways
Performance Based Contracting (PMC) process:
Step (5): Define the remuneration scheme or Payment - develop a set of
payment curves which set out the pay for performance regime i.e. how
much the contractor gets paid for their performance level
Step (6): Define the variable remuneration scheme or Incentives - set
out a group of incentives that encourage positive behaviors and
discourage negative behaviors
Step (7): Prepare the Contract - draft, review, workshop and finalize a
contract which covers all aspects of the performance, payment and terms
and conditions of the relationship
Step (8): Continuous monitoring - Review - conduct an analysis of the
outcomes, taking into account the differing definitions of success from the
different groups involved in the contract.
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9. Understanding the benefits of performance based
model for Railways
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Efficiency, Effectiveness, Reliability, Availability, Quality, Productivity, Punctuality , etc…

10. Understanding the benefits of performance based
model for Railways
In a general sense, implementing a Performance Based Contracting
framework has a broad range of benefits for organizations and
contractors, including:
1. Improved contracting outcomes
2. Reduction in Total Cost of Ownership (TCO)
3. Ability to accurately forecast cost within contract bounds
4. Improved accountability for performance
5. Development of a clear understanding of performance requirements
6. Promotion of strategic benefits for Contractor
7. Integration of all contracting aspects in a single set of performance
measures
8. A 'Fair' contract outcome
9. A greater understanding of life-cycle costs
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11. Mitigating risks and ensuring smooth contractor-client
relationships
In order to mitigate risks and ensuring smooth contractor-client
relationship the followings should be considered as early as possible:
1. Clearly define performance metrics
2. Ensure that an outcome measurement infrastructure is in place
3. If possible, use 3rd party monitoring/assessment of performance
4. Permit leeway for uncontrollable risks (e.g., unanticipated events and
fluctuations)
5. Appropriately limit responsibilities and liability to reduce likelihood of
disputes
6. Develop mutually agreed-upon benchmarks/targets at the beginning of
the project
7. Ensure transparency in communications and data exchange
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12. The role of performance based contracts for improving
effectiveness of the maintenance function
The realization of the railways operational goals depends on the achieving
of specific performance levels of Rolling Stock (Locomotives and Wagons)
and specific performance levels of Infrastructure.
The Performance Based Contract can improve the effectiveness of the
Rolling Stock Maintenance and Infrastructure Maintenance through , for
example:
Operations Target per period = Operations Performance (Trip Cycle Time
)x %Overall Rolling Stock Effectiveness x %Overall Infrastructure
Effectiveness x Financial Performance rate x %Safety x …..x Other risks 
Overall Rolling Stock Effectiveness = %Reliability x %Maintainability x
%Availability x %Productivity x %Quality x %Utilization x %Financial
Performance rate x %Safety x …..x Other risks 
Overall Infrastructure Effectiveness = %Performance rate x %Reliability x
%Availability x %Quality x %Financial Performance rate x %Safety x …..x
Other risks 
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13. Developing SMART, realistic performance standards
(Specific, measurable, achievable, results-orientated, timely)
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Effectiveness: The degree to which objectives are achieved and
the extent to which targeted problems are solved. (Source 2011
UNIFE – IRIS)
Efficiency: The comparison of what is actually produced or
performed with what can be achieved with the same consumption
of resources (money, time, labor, etc.). It is an important factor in
determination of productivity. (Source 2011 UNIFE – IRIS)
Building SMART KPIs through Benchmarking and Balanced Scorecard
Cascading
What to
Benchmark
Understand
current
performance
Plan Study Others
Lear from
data
Use findings

14. Developing SMART, realistic performance standards
(Specific, measurable, achievable, results-orientated, timely)
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Top Down Approach (Interdependent KPIs)
Planned Business Target= Delivery of specific # of Freight/Passengers by year 2016
Actual Business Target= Suppliers Effectiveness % x Shared Services Effectiveness % x Business
Support Effectiveness % x Safety % x Sales Effectiveness % x Risks % x Operations Cycles
Customer
Supplier Customer
Shared
Services
Infrastructure Freight
Operations
Rolling StockCorporate
Passengers
Operations
Governance
Control
Audit
KPIs
Suppliers KPIs Shared Services KPIs Business Support KPIs Operations KPIs
Targets
Sales KPIs

15. Takeaways
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• Understand your Value Chain (primary activities and Capacity/Competency)
• Conduct Cost-Benefit Analysis and Business Cases before making such decisions
• Know your baseline and take-off from there
• Benchmarking is a mandatory but wrong benchmarking costs a lot
• Outsource or not to Outsource, this is the question!!
• It is all about relationship and communication
• Risks must always be monitored (move on and record lessons learned)
• Contractor’s KPIs/Targets/Initiatives/individual performance measures…. MUST align with your
company’s strategic objectives
• Always plan the entrance and plan the exit (Handover Process and Checklists are so helpful)
• Put in place a robust governance
• KPIs must not only be SMART but CLEAR:
• Collaborative (KPIs should encourage Contractor’s staff and your staff
to work together collaboratively and in teams)
• Limited (KPIs should be limited in both scope and duration)
• Emotional (KPIs should make an emotional connection to all staff
tapping into their energy and passion)
• Appreciable (Large KPIs should be broken down into smaller KPIs so
they can accomplished more quickly and easily for long term gain)
• Refinalble (As new information arise, refine and modify your goals)

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