pt2011 case-study watermaintenanceinpeakland

7/28/2019 PT2011 Case-study WaterMaintenanceInPeakland

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Strategy for water pump

maintenance in Peakland

Peak 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
http://www.civitta.lt/http://www.civitta.lt/


2/11

(2)

The company: PeakWater

PeakWater is a state owned company providing

integrated water systems for the citizens of Peakland.

Integrated water systems include Water supply,

Sanitation, and Wastewater treatment

The company was established in 2002, 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, PeakWater has mostly lived up to the

expectations and cut on costs. Water quality has been

improved thanks to extensive investments in water

sanitation facilities

State owned water supply company...

However, water supply disruptions have become more

prevalent. Planned disruptions grew continuously in duration

and caused discontent among citizens for their bad timing.

Moreover, supply system failures caused by unfavorable

external circumstances have become more frequent and are

taking longer to liquidate.

The management of PeakWater has been attributing the

above problems to the aging of the water supplyinfrastructure and to insufficient levels of investment to

renew it

In 2010 it was revealed that FixIt, a subsidiary responsible for

the maintenance of the water supply system, may be highly

inefficient and may prevent PeakWater from improving water

supply services

...which faces efficiency issues

-4-24

-136-166

-144-150-153-167

-45

2008 20102009200720062005200420032002

6,1325,5485,256

4,6724,380

2008 2010200920072006

Peakwater profit, millions of currency units, 2002 - 2010 Service downtime, minutes, 2006 - 2010


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(3)

FixIt: water pump maintenanceWhen PeakWater started operations as a merged company in early 2002, all maintenance activities were carried out by the companys own

resources. These maintenance operations include:

- Repairs of water facility

- Repairs of water pumps

- Repairs of real-time decentralized treatment doser- Operative help in the event of a water shortage

In 2007, the government advised that all maintenance activities for utility companies should be separated from their core activities, hence,

outsourced, in order to control costs and encourage savings through efficiency improvements. A few months later, in 2008, FixIt was born as a

subsidiary of PeakWater. FixIt was given all the employees and assets which were used in maintenance, in return for a 100% holding of its shares.

This meant that now PeakWater would buy maintenance services from FixIt. In theory, PeakWater could carry out public tenders to choose the best

contractor, however, to date PeakWaters managers have chosen to purchase almost all maintenance operations from FixIt in order to ensure that

FixIt received a constant revenue flow. At first this seemed like a success: maintenance costs dropped immediately after the separation of FixIt.

In addition to maintenance activities, another extensive activity by PeakWater is investment projects, such as laying new pipelines , renewing old ones,

or building new pumps and reservoirs. Most investment projects are contracted through public tenders. In 2010 FixIt decided that it should also start

entering these tenders. 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.

PeakWater is concerned that if FixIt is that inefficient for investments projects, it might as well be underperforming in the maintenance work on

which PeakWaters performance heavily depends. Moreover, if FixIt continues to lose all bids on investment projects, it will never ensure proper

funds for improving their operations.

215 216 216166 172 171

201020092008200720062005

FixIt (before 2008 - PeakWater itself)

External contractors

PeakWaters maintenance costs, millions of currency units

400 337 369493 453 452

201020092008200720062005

PeakWaters investment projects, millions of currency units


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(4)

What should PeakWater do with its maintenance work?

There are several strategic alternatives

Purchase maintenance

contracts in the open market

FixIt should compete

with other

companies: more

incentive to improve

Privatisation of FixIt

PeakWater would get

some revenue and the

new owner would be

eager to make FixIt

more efficient

Enforce restructuring of

FixIt to increase efficiency

PeakWater has little

competence to

improve FixIt, however,

any efficiency gains

would benefit

PeakWater directly

Insource Fixit, reintegrating

it back to PeakWater

Since FixIt is critical to the

success of PeakWater, the

company should closely

watch these activities and

ensure necessary support

Alternatives for PeakWatersmaintenance activities

Keep in mind:

Continuous supply of water is crucially important to municipalities water supply outagespose a substantial political risk

Emergency service needs to be operational 24/7 - some accidents have to be dealt with assoon as they happen

Both PeakWater and FixIt have inherited an old-school type of thinking. Employees arevery reluctant to adapt to changes in the market and say that the company has beenoperating well enough and that it should remain so

A private equity company has expressed an interest in adding FixIt to its existing portfolio ofsimilar companies, which would increase the risk of market monopolization


5/11

(5)

Your task

PeakWater shareholders have hired you to consult them on what to do with the water pump

maintenance function (currently performed by FixIt).

Your task:

Examine the situation and the possible solutions

Propose your solution, identifying its pros and cons (your proposal may be one of thesolutions suggested in this presentation, 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, as compared

to the base case (doing nothing)?

You must use the template provided. Please see further instructions on the front sheet of thetemplate.

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


6/11

Supplementary information

The following slides contain additional details for the case.

You are advised to use this information for your solution,

where relevant


7/11(7)

Investment activities in Peakland and around: competition

overviewThe CEO of FixIt, Mark Waterplumber, has been pressured to explain why FixIt can only carry out investment projects at such high

costs compared to the competitors. He insists that investment projects require higher competences and more elaborate

equipment than the regular maintenance work. Thus, according to Mark, FixIt is perfectly efficient in the usual maintenance

tasks, even if it cannot carry out the investment projects at the moment. Reluctant to believe him, you have collected whateverdata you could get about the companies which PeakWater has contracted over the past year for investment projects.

52%

5%

28%

16%

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1,000

1,200

Company A Company B Company C Other companies

Revenues from investment projects (millions of currency units), 2010; Market share in

Peakland investment projects (%)

In Peakland In neighboring countries "Market share in Peakland"

0

10

20

30


Average revenue per project in Peakland, millions ofcurrency units, 2010

0

20

40

60


Number of projects in Peakland

Note: although most investment projects are carried out by PeakWater (since it is the only water supply company in the country), there are

occasional projects of a similar profile carried out by private industrial companies for their own needs.


8/11(8)

Background information: P&L for PeakWater

Revenues 997.319 956.171 966.274 1,007.393 1,009.223 1,010.883

OPEX 426.797 428.799 430.136 399.220 400.964 402.882

Payroll* 194.410 194.682 194.935 195.734 195.957 196.545

Maintenance* 214.855 215.851 216.378 184.040 184.865 185.700

Other 17.532 18.265 18.823 19.446 20.142 20.638

EBITDA 570.522 527.372 536.139 608.174 608.260 608.001

Depreciation 714.667 694.167 673.667 653.167 632.667 612.167

Profit/Loss -144.145 -166.794 -137.528 -44.993 -24.407 -4.166

CAPEX 571.135 561.620 550.111 548.034 533.289 519.112

186185184216216215

519533548550562

571

-3%

-15%

201020092008200720062005

CAPEX

Maintenance

*Maintenance for 2005-2007 includes payroll of maintenance function staff

Note: all figures are in millions of currency units


9/11(9)

Background information: P&L for FixIt

2008 2009 2010

Revenues 184.040 184.865 185.700

OPEX 176.567 184.270 185.793

Payroll 85.423 84.062 85.313

Equipment 13.532 16.851 16.432

Material cost 23.546 27.34 26.865

Transportation 3.643 3.954 3.842

Other 50.423 52.063 53.341

EBITDA 7.473 0.595 -0.093

Depreciation 2.393 2.393 2.393

Profit/Loss 5.080 -1.798 -2.486

Income tax 0.762 0.000 0.000

Net profit 4.318 -1.798 -2.486


10/11(10)

Water pump maintenance in neighboring countries

Organization of the

maintenance business

Service downtime,

2010

Material cost

(maintenance, % of

the maintenance

companys revenues)

Maintenance services

Profit margin

Danura In-house engineering units

in 3 largest residential areas

600 min 8% 30%

Norevaea Dedicated companysubsidiary

5518 min 20% 5%

Cesabya Strategic alliance with

district heating companies

joint multifunctional

venture

1400 min N/A

(Cesabyas water

supplier pays a yearly

250 million service fee

to the strategic

partner.)

15%


11/11(11)

Background information - Peakland

Population

Indicator Peakland Norevaea Danura Cesabya

Area 79k sq. km. 154k sq. km. 241k sq. km 530k sq. km.

Population 4.05m 11.32m 19.93m 31.53m

GDP 106bn USD 231bn USD 374bn USD 893bn USD

Unemployment rate 10.1% 13.5% 8% 11%

Inflation rate (CPI) 3.2% 7.6% 2.2% 3.1%

Main economic indicators for Peakland and neighboring countries

Millmore

Lower Centerburg

Mount Painesport

Old Ogdenburg

Mansshire Ridge

Kenthunt

Westlawn

GDP per capita, USDRegions

19,880

20,874

21,850

28,740

33,774

25,030

20,197

8.3

15.3

16.2

11.0

11.3

9.2

8.3

Unemployment rate, %

Lower Centerburg 299235

Mount Painesport 337243

Mansshire Ridge 638554

Millmore 730604

Old Ogdenburg 1,5981,293

Kenthunt 227174

Westlawn 225193

DANURA

NOREVAEA

CESABYA

City

Suburbs

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