When Alcoa engaged Honeywell to automate its seven global alumina refineries, the company reached deep into Honeywell’s service menu and outsourced its plant automation entirely to Honeywell. In 2002, Alcoa wrote a 10-year contract, turning over its automation systems in all seven of its plants to Honeywell. The goal was to standardize the seven plants and give Honeywell responsibility for providing monitoring and regular updates in a long-term “manageability” contract.
One of the hallmarks of the contract is the standardization of the systems at all seven of Alcoa’s global alumina refineries. “Control applications, advanced process control and information applications are deployed on standard infrastructure,” says Judy Moser, information and process systems manager at Alcoa World Alumina, Atlantic Division, in Pittsburgh, Pa. This standardization allows Alcoa to add new applications simultaneously across all plants. “One of the hard things is rolling out applications. It’s difficult to roll out across multiple locations,” says Moser. “Standardization makes it possible.”
Moser sees the standardization as the most significant plus that comes from the manageability agreement. She notes that with standardized plants, upgrades can be made simultaneously. In the past, improvements were implemented site-by-site. “We’re no longer relying on each site to upgrade when they feel like it,” says Moser. The agreement also anticipates regular improvement. “We have a technology refresh that’s built into the agreement,” says Moser.
Another feature of the implementation is the remote monitoring Alcoa receives from specialized Honeywell staff. Because Honeywell is monitoring seven plants that are on the same system, the company can more easily devote specialized engineers to monitor the plants from a centralized remote location. “We get onsite support—which is ordinary—but it’s supplemented by remote support from specialized support centers,” says Moser. “We get automatic notification when a loop is out or a program is not running.” This is effectively preventive healthcare for the automation system. “We proactively identify problems and see reduced outages.”
The agreement puts Honeywell right in the control hub of the alumina refineries, with its hands on the controls and responsibility for performance. “We entered into a contract where the customer is not at risk because Honeywell is taking over the automation,” says Bob Lahey, director of services at Honeywell Automation and Control Solutions, in Minneapolis. “They turn over the keys and we give performance guarantees.” The agreement between Alcoa and Honeywell is no small matter. It spans 10 years and tops $300 million. “This is a big stinking deal. It’s a huge corporate agreement,” says Lahey.
Another notable element of the agreement is that the emphasis on services actually changes the deal from an acquisition of hardware to the purchase of services, which shifts its position on Alcoa’s balance sheet. “This takes the contract from capital expense to operating expense,” says Lahey. The difference can deliver significant positive balance-sheet consequences, as operating expenses get written off as they occur, while capital expenses are amortized over many years.
The growth in the importance of services benefits both manufacturers and suppliers. Services provide manufacturers with improved performance, preventive maintenance on their automation systems, remote monitoring by specialists that cannot be on site in every plant, system integration, and increasingly, shared risk. Manufacturers are beginning to shift some performance control and responsibility to their suppliers. As they do so, the automation system itself becomes a service, driving its shift to the operating cost side of the ledger. For suppliers, an expanded service offering translates to an expanded revenue base. In a world in which hardware is becoming more and more commoditized and fewer plants are being built, the service portion of the pie can still grow in double digits. Companies such as Honeywell report a shift in their billing from 40 percent labor to 60 percent labor in the last few years. For suppliers, labor is service. Suppliers now compete on their service menus and have signed contracts in which portions of plant performance are guaranteed. Some suppliers get rewarded with benefit sharing tied to performance improvements. A new form of outsourcing is budding. Suppliers are taking responsibility for the performance of their automation systems.
Control room takeover
“Suppliers are seeing how they can help manufacturers get more out of these systems,” says Bill Swanton, vice president at Boston-based AMR Research. ”That includes calibration services, analytic services and monitoring what’s going on in the plant.” He notes that the logical extension of this goes to outsourcing. “People like Honeywell are taking on outsourced maintenance duties,” says Swanton. “They’re taking over the control room.”
Swanton also points to service-based agreements that go even further, enabling suppliers to share in proceeds of the automation system, as well as the risk. If the company saves X percent, the supplier receives a portion of the savings. In some cases, though, shared proceeds agreements backfire. “At one chemical company, the savings were so large, the company renegotiated the contract,” says Swanton. “The company said, ‘Why aren’t we just buying this?’ and turned the agreement into a traditional sale.”
Services offered by automation control vendors are shifting from fixing a broken-down system to making sure the system is running smoothly and delivering data to the manufacturer’s information technology backbone. “We’re moving from a break/fix mode to a predictive mode,” explains Peter Cobb, industrial plant business unit manager at Siemens Energy and Automation, in Alpharetta, Ga. “And we’re moving into a process mode with customers. They want to know how they can squeeze more out of their production.”
Siemens has developed services that address the predictive elements of automation as well as speed up the process. “We’ve been involved in optimizing process, and we’ve also developed systems with a focus on the real world of maintenance planning,” says Cobb. He notes that the future of automation will be in the development of services.
Monitoring goes remote
The expansion of automation services, from remote monitoring of plant systems to risk sharing agreements has become a competitive factor among control suppliers. One growth area is in remote monitoring of plant operations. Remote monitoring allows the supplier to put highly specialized engineers in touch with plant operations on a round-the-clock basis. “Remote monitoring allows you to bring the problem to the specialist rather than sending the specialist to the problem,” explains John Eva, vice president of customer services for Invensys Process Systems, in Foxboro, Mass. “The inherent advantage is better time-to-response and high caliber people,” says Eva.
Eva notes that suppliers compete on their service offerings and their willingness to absorb some of the risk involved in plant operations. “Yes, it does become a competitive factor,” says Eva. Customers are looking beyond the cost of hardware, software and control. They’re looking at overall costs.” For manufacturers, those overall costs include performance monitoring, risk management and performance management. So the supplier that takes on the greatest degree of these factors, contributes the most to overall savings.
“Manufacturers are trying to maximize the utilization of their assets. They’re trying to maximize the quality. They’re trying to assess availability,” says Eva. So suppliers are including service-based elements in their agreements that take responsibility for maximizing the use of plant production. “In agreements, we enter into an arrangement where we agree to a baseline and target for the utilization of those assets.” In other words, the supplier guarantees the plant will operate at least X amount of the time, with the goal of operating Y amount of the time. In that setting, hardware sales have become a very small portion of the overall agreement.
“Control vendors have stumbled around how to do MIS [management information services] for years, and it’s going to take off in a year or two,” says AMR’s Swanton. “They have a huge soapbox at the manufacturer, since the manufacturer has made a huge investment in (enterprise resource planning, or ERP, software from) SAP, Dresden, Germany. They want to take another step and leverage both the ERP and control system.” The hurdle, according to Swanton, comes down to sales. He notes that Milwaukee-based Rockwell Automation acquired MES vendor Interweave Technology in January 2003 partly because Interweave has the skills to pitch system integration to the manufacturer’s IT team.
The shift to services by automation system providers is likely to grow. To manufacturers, it’s clearly a relief that suppliers are willing to manage the technology advancements that continually improve plant automation. For suppliers, they’re delighted to accept the responsibility for automation advancement, as it allows them to move in with their customer and set up nearly permanent residence.
See sidebar to this article: Getinge & Rockwell: Supplier and Partner
