By Vance Scott, Aaron Schultze, Todd Huseby and Nikhil Dekhane
Skilled labor is expected to be both costlier and more difficult to acquire in the next 10 years. Utilities and process industries will be among the hardest hit as they face the stark realities of an aging workforce and a new generation of workers not interested in jobs in the skilled trades. Beyond the obvious three R’s of human resources-recruit, retrain and retain-there are ways to ensure that today’s skilled workforce is still up and running tomorrow.
Industries that use skilled laborers are increasingly concerned at the prospect of a skilled labor shortage. Major utilities and other capital intensive process industries have already announced increased project costs due to the rising expense of skilled labor. This trend could have profound strategic and operational implications for industrial employers, leading to longer planned outages, slower investment payback times and lost revenues.
Existing studies often focus on this problem at a macro level, and frame the solution in terms of public-private initiatives, education and skills retraining. Fortunately, there are more immediate steps a company can take to improve its supply of skilled labor. One of the most powerful options is to combine strategic sourcing with work schedule and productivity optimizations. By examining every stage of the outage or turnaround process, companies can identify major weaknesses and develop effective strategies for improving their operations.
No Question-There Is A Skilled Labor Shortage
Analysts attribute the looming shortage of skilled workers in large part to the forecasted increase in demand for new construction. In the United States, construction in key nonresidential areas (which use the majority of skilled workers) is expected to grow at an annual rate of anywhere from 5 to 11 percent. At the same time, demographic and educational trends suggest a diminishing pool of talent. Average ages for most skilled trades today are in the late 40s or early 50s. For example, the average age of an electrician is 47, and a utility line worker is 55. A large percentage of the current skilled labor workforce is expected to retire in the next decade. Many young people in today’s computer and technology savvy world are not drawn to careers in the skilled trades. High school graduates increasingly prefer to enroll in college and study for higher paying careers. Overall, the skilled labor force is expected to increase by only about 1 percent per year while U.S. construction will grow at a rate of 5 percent or higher. Consequently, skilled labor is expected to be both costlier and more difficult to acquire in the near future. As a major employer of skilled craft labor, the utilities industry has a lot to lose.
Mitigating the Shortages
Over the long term, the most rational response to a skilled labor shortage is to recruit new workers, retrain existing labor, and retain as many craftsmen as possible by keeping them challenged and rewarded. More immediately, we recommend employing a four-pronged approach to the shortage: use a strategic sourcing program to partner with a small set of long-term contractors, adjust work schedules to local conditions, increase productive time on-the-job, and plan for the future now. The following offers details of each, using the utilities industry as an example:
Source contractors strategically.
Utilities usually hire contractors in one of two ways: on a fixed price, project-by-project basis or a time-and-material arrangement. Often, the same utilities use different local contractors at different sites. However, A.T. Kearney analyses consistently find that the most effective method for sourcing contractors involves signing longer-term agreements with a single contractor (or a small set of contractors) and extending the agreement across multiple sites. A durable partnership increases contractors’ insight into the company’s needs and through financial incentives encourages them to provide preferential treatment for its assignments. Most important, it aligns the economics of both firms. As contractors beat mutually agreed targets for safety, cost and schedule, owners share a fraction of the benefits with the contractors. Similarly, as contractors miss targets, they share in the pain through penalties. With these incentives in place, contractors are significantly more likely to staff A-team workers who are familiar with the owners’ facilities, improving the experience for both owners and laborers.
One of the benefits of an integrated relationship is that contractors are brought in right at the conceptual design of each project, and the owner—now working with the same contractor across sites—is encouraged to standardize its own operations enterprisewide. This standardization reduces complexity and inefficiency and increases transparency.
How does a firm determine which contractors to source? What qualities define the best contractors? In general, larger contractors are more efficient and have the scale to tolerate greater risk. Companies cannot afford to subsidize the inefficiencies of smaller contractors. If the project runs over budget or an unexpected event intervenes with a deadline, they will be left shouldering most of the expense. Ideally, firms should come up with a detailed analysis of possible suppliers, including their relative strengths and vulnerabilities. This way, they can highlight the key differences during the bidding process and use them as leverage in negotiations. The point is to achieve the right mix of scale advantages and risk for the company.
Adjust outage work schedules to local conditions.
Work scheduling optimization takes more planning and resources to make a significant impact on potential labor shortages. Skilled workers do not work consistently all year around—especially those who work for more than one contractor. They work when new construction jobs are initiated and during planned outages at various plants. The rest of the time, they are likely to be available. Companies can take advantage of this downtime by understanding local and regional labor demands by trade. If a firm knows when large projects and outages are taking place, it can work around these high labor demand times to ensure that it will have adequate resources to staff the job. This may require coordination with other large users of skilled labor when appropriate.
Increase productive time on the job.
For many companies there is room for improvement in terms of productivity. A.T. Kearney conducted a task analysis at one of our utility clients and found that craft laborers were only using about 50 percent of their billable time doing productive work. Productivity diminished due to late starts and early quits (18 percent total) and idle time (22 percent). At key moments during the day—breaks and lunches, for example—the workflow stalled as hundreds of workers left their posts to jostle for limited space in the contractors’ trailers and in elevators. Meanwhile, well-located temporary break rooms went unused.
Among the most effective solutions to this problem is to replace “mass breaks” with staggered smaller crew breaks. Crews often leave work sites early to beat the rush to elevators and trailers, setting in motion a chain reaction as members of other crews exit early, too. A staggered break schedule removes the need to leave work early.
Another strategy is to design (and enforce) overlapping shifts, especially for critical path jobs. Overlapping ensures a continual work process rather than one with frequent interruptions due to shift changes, and keeps production up and running at peak levels longer. Any additional overtime expenses that a firm might incur will be minor compared to the drain from lost productivity.
By applying these strategies, our client increased productivity by 12 percent within the first year alone. It increased time spent working (direct work) to 40 percent, nearly double what it had been before, and reduced idle time by more than 30 percent. This increase also set the basis for future improvements. Overall, in the first four years of a craft labor alliance with its contractor, the company expects to save $40 million from a combination of reduced labor costs, fewer capital expenditures and increased revenues from shorter planned outages.
Employ future sourcing strategies.
Develop strategies now for sourcing craft labor needs to ensure that you have the skilled resources for future projects and outages. If appropriate, work with the local union business manager and contractors to make sure they can supply the company’s needs in the future. If a firm is working with contractors that only have the ability to pull local labor, it may want to consider developing some new contractors that have the ability to pull labor from a broader area when the labor market gets tight. Some trades are more likely than others to travel to where the work is. But contractors must be able to pull outside resources when needed.
Prepare for a Preemptive Strike
While the industry as a whole should be involved in the macro issues surrounding skilled labor, companies have several options on the table to manage their current supply of workers. A combination of strategic sourcing, revamped scheduling and improved productivity can benefit both the top and bottom lines. By applying these steps now, you can ensure that you get the most from your skilled labor investments later.
Vance Scott can be reached at [email protected]
Aaron Schultze can be reached at [email protected]
Todd Huseby can be reached at [email protected]
Nikhil Dekhane can be reached at [email protected]