Strategy for water pump maintenance in PeaklandPeak Time preliminary round case Disclaimer: all data is fictional, yet based on real life business patterns Case study prepared by Civitta – Analytics & Management Consulting www.civitta.lt PeakWater is a state owned company providing integrated water systems for the citizens of Peakland.548 6. The management of PeakWater has been attributing the above problems to the aging of the water supply infrastructure and to insufficient levels of investment to renew it In 2010 it was revealed that FixIt. supply system failures caused by unfavorable external circumstances have become more frequent and are taking longer to liquidate.which faces efficiency issues • However.132 Peakwater profit. millions of currency units. a subsidiary responsible for the maintenance of the water supply system. when the ruling government made a decision to merge all local municipality water utility companies to achieve economies of scale and introduce more modern management and investment practices • So far. 2006 . Planned disruptions grew continuously in duration and caused discontent among citizens for their bad timing.The company: PeakWater State owned water supply company. PeakWater has mostly lived up to the expectations and cut on costs. Sanitation. 2002 . Moreover. water supply disruptions have become more prevalent.256 5. Integrated water systems include Water supply.2010 4.... and Wastewater treatment The company was established in 2002.2010 -45 -153 -150 -144 -136 -24 -4 -167 -166 2002 2003 2004 2005 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 (2) .. may be highly inefficient and may prevent PeakWater from improving water supply services Service downtime.380 4. Water quality has been improved thanks to extensive investments in water sanitation facilities . minutes.672 5. PeakWater could carry out public tenders to choose the best contractor. It immediately became apparent that FixIt is uncompetitive – the prices they could offer for investment projects were 20-30% higher than those of other contractors. renewing old ones. millions of currency units PeakWater‘s investment projects. if FixIt continues to lose all bids on investment projects.Repairs of water facility . in order to control costs and encourage savings through efficiency improvements. however. or building new pumps and reservoirs. At first this seemed like a success: maintenance costs dropped immediately after the separation of FixIt. FixIt was born as a subsidiary of PeakWater.Repairs of water pumps . This meant that now PeakWater would buy maintenance services from FixIt. PeakWater‘s maintenance costs. PeakWater is concerned that if FixIt is that inefficient for investments projects. Most investment projects are contracted through public tenders. in return for a 100% holding of its shares. In 2010 FixIt decided that it should also start entering these tenders.PeakWater itself) . in 2008. hence. another extensive activity by PeakWater is investment projects. outsourced. millions of currency units 215 2005 216 2006 216 2007 166 2008 172 2009 171 2010 External contractors 400 2005 337 369 2007 493 2008 453 2009 (3) 452 2010 2006 FixIt (before 2008 . to date PeakWater‘s managers have chosen to purchase almost all maintenance operations from FixIt in order to ensure that FixIt received a constant revenue flow. it might as well be underperforming in the maintenance work on which PeakWater‘s performance heavily depends. it will never ensure proper funds for improving their operations.Operative help in the event of a water shortage In 2007. Moreover. FixIt was given all the employees and assets which were used in maintenance. A few months later. all maintenance activities were carried out by the company‘s own resources.Repairs of real-time decentralized treatment doser . the government advised that all maintenance activities for utility companies should be separated from their core activities. In addition to maintenance activities. In theory. These maintenance operations include: . such as laying new pipelines .FixIt: water pump maintenance When PeakWater started operations as a merged company in early 2002. which would increase the risk of market monopolization (4) . any efficiency gains would benefit PeakWater directly Insource Fixit. reintegrating it back to PeakWater PeakWater would get some revenue and the new owner would be eager to make FixIt more efficient Since FixIt is critical to the success of PeakWater. however.some accidents have to be dealt with as soon as they happen » Both PeakWater and FixIt have inherited an “old-school” type of thinking. the company should closely watch these activities and ensure necessary support » Keep in mind: » Continuous supply of water is crucially important to municipalities – water supply outages pose a substantial political risk » Emergency service needs to be operational 24/7 .What should PeakWater do with its maintenance work? There are several strategic alternatives Alternatives for PeakWater‘s maintenance activities Purchase maintenance contracts in the open market FixIt should compete with other companies: more incentive to improve Privatisation of FixIt Enforce restructuring of FixIt to increase efficiency PeakWater has little competence to improve FixIt. Employees are very reluctant to adapt to changes in the market and say that the company has been operating well enough and that it should remain so » A private equity company has expressed an interest in adding FixIt to its existing portfolio of similar companies. Your task: » Examine the situation and the possible solutions » Propose your solution. as compared to the base case (doing nothing)? You must use the template provided. You will be evaluated based on these criteria: » » » » How clear and to-the-point your proposed solution is Argumentation of your proposal: well identified merits and drawbacks Choice and argumentation of the next best alternative Arguments to prove that your proposal is better than the next best alternative » » (5) . or one that you have come up with yourselves) » Identify the next best alternative to this solution » Explain why your solution is better than the identified alternative » Solve a mini-case: what impact would this solution have on the company. Please see further instructions on the front sheet of the template.Your task » » PeakWater shareholders have hired you to consult them on what to do with the water pump maintenance function (currently performed by FixIt). identifying its pros and cons (your proposal may be one of the solutions suggested in this presentation. You are advised to use this information for your solution.Supplementary information The following slides contain additional details for the case. where relevant . Investment activities in Peakland and around: competition overview The CEO of FixIt. 2010 30 20 10 0 Number of projects in Peakland 60 40 20 0 Company A Company B Company C Other companies Company A Company B Company C Other companies Note: although most investment projects are carried out by PeakWater (since it is the only water supply company in the country).000 800 600 400 200 0 Company A In Peakland Company B In neighboring countries Company C Other companies "Market share in Peakland" 5% 28% 16% 52% 60% 50% 40% 30% 20% 10% 0% Average revenue per project in Peakland. you have collected whatever data you could get about the companies which PeakWater has contracted over the past year for investment projects. Thus. Revenues from investment projects (millions of currency units). Reluctant to believe him.200 1. Market share in Peakland investment projects (%) 1. (7) . even if it cannot carry out the investment projects at the moment. FixIt is perfectly efficient in the usual maintenance tasks. millions of currency units. there are occasional projects of a similar profile carried out by private industrial companies for their own needs. 2010. Mark Waterplumber. He insists that investment projects require higher competences and more elaborate equipment than the regular maintenance work. according to Mark. has been pressured to explain why FixIt can only carry out investment projects at such high costs compared to the competitors. 289 2010 1.220 195.007.993 548.265 527.532 570.034 2009 1.667 -24.957 184.135 2006 956.167 -4.638 608.223 400.040 19.734 184.410 214.112 *Maintenance for 2005-2007 includes payroll of maintenance function staff Note: all figures are in millions of currency units (8) .700 20.667 -137.167 -44.797 194.378 18.139 673.171 428.794 561.883 402.407 533.010.166 519.935 216.855 17.682 215.009.446 608.Background information: P&L for PeakWater -3% Maintenance CAPEX 571 562 550 548 533 519 215 216 216 184 185 186 -15% Revenues OPEX Payroll* Maintenance* Other EBITDA Depreciation Profit/Loss CAPEX 2005 997.174 653.393 399.260 632.964 195.522 714.823 536.145 571.620 2007 966.372 694.001 612.882 196.136 194.528 550.865 20.799 194.851 18.142 608.545 185.319 426.667 -144.111 2008 1.167 -166.274 430. 567 2009 184.063 0.546 3.080 0.000 -1.318 84.865 184.423 7.341 -0.062 16.093 2.393 5.313 16.34 3.643 50.486 0.393 -2.762 4.Background information: P&L for FixIt 2008 Revenues OPEX 184.700 185.486 (9) .000 -2.270 2010 185.423 13.393 -1.954 52.851 27.842 53.473 2.432 26.865 3.532 23.793 Payroll Equipment Material cost Transportation Other EBITDA Depreciation Profit/Loss Income tax Net profit 85.798 85.040 176.595 2.798 0. 2010 Material cost (maintenance.) 15% (10) . % of the maintenance company‘s revenues) 8% Maintenance services Profit margin Danura In-house engineering units in 3 largest residential areas 600 min 30% Norevaea Dedicated company subsidiary 5518 min 20% 5% Cesabya Strategic alliance with district heating companies – joint multifunctional venture 1400 min N/A (Cesabya‘s water supplier pays a yearly 250 million service fee to the strategic partner.Water pump maintenance in neighboring countries Organization of the maintenance business Service downtime. 880 Unemployment rate. km 19. km.2 11.6% Danura 241k sq.2% Cesabya 530k sq.Peakland Main economic indicators for Peakland and neighboring countries Indicator Area Population GDP Unemployment rate Inflation rate (CPI) Peakland 79k sq.0 16.3 11.030 8.774 28.3 9.2 15. km.05m 106bn USD 10.874 19.32m 231bn USD 13.740 21. USD 33.93m 374bn USD 8% 2.197 25.Background information . 11.1% Old Ogdenburg NOREVAEA DANURA Kenthunt Mansshire Ridge Mount Painesport Millmore Lower Centerburg CESABYA Westlawn Regions Old Ogdenburg Millmore Mansshire Ridge Mount Painesport Lower Centerburg 604 554 243 235 337 299 Population 1.598 GDP per capita. 4. 31.1% 3.293 730 638 1.3 (11) .850 20.53m 893bn USD 11% 3.2% Norevaea 154k sq. km.5% 7. % 8.3 Westlawn 193 225 Kenthunt 174 227 City Suburbs 20.