How to select the right OM&M company

You have decided to contract with a private firm for operation of your water and/or wastewater system. You have undergone a procurement process in conformance with state, local and federal laws and have received several good proposals. Now you must select a single firm to which you will entrust this vital public service. How do you go about making this selection?

It is helpful to understand that the evaluation and selection process is both quantitative and subjective. The proposal’s financial and technical content, as well as the firm itself, are being evaluated. It is also important to understand that the priorities and perspectives of the members of the selection committee, mayor, council and other influential persons will likely change during the selection process.

As a result, the publication of rigid selection criteria can be self-defeating.

Reading the proposals will often reveal approaches, technologies or value-added alternatives not previously considered. The selection committee members’ knowledge of the system’s requirements and their understanding of the concerns of the employees usually increase throughout the selection process.

Lobbying by any of the stakeholders and increasing political opposition can also affect perceived priorities.

Usually, one or more consultants are engaged to provide expertise in one of a number of areas, including the procurement process and document development; general experience with privatization; procurements and system operations; contract development and negotiation; financial evaluation and comparison; legal analyses including bond counsel opinion and applicable laws and regulations; and/or knowledge about capital improvements, design, construction and engineering. In-house counsel, engineers and financial officers may be also used to supply this expertise.

Generally, the need for outside consultants significantly increases once the required services exceed a term of five years, require capital investment or involve capital improvements. On the other hand, procurement costs increase and communications suffer as the number of involved persons increases.

Any outside firm, of course, should offer competitive fees and be fully capable of operating the system. Since there usually are a number of qualified proposers, final selection is often heavily based on economics even though most procurements classify the services as professional. More often than not, the firm with the greatest financial benefit (lowest fee, most savings and optimum cash flow) is chosen. However, evaluation of financial benefit must consider the firm’s financial health and guarantees and terms along with the actual fee or savings.

Inclusion of the actual contract in the procurement document along with requiring the bidding firm to identify any changes, exceptions or additions to the contract is a valuable evaluation tool.

This is especially true for contracts exceeding five-year terms that require capital investment or capital improvement. In such cases, the procurement document should include both the general contract and the guarantor agreement.

The technical proposal must adequately provide all the required services. It should be specific enough to show careful thought and application of the firm’s resources and experience with your system. Additionally, the technical proposal should discuss resolution of all major problem areas of the system and address long-term system requirements.

“Boiler plate” proposal language does not demonstrate the firm’s capability to best operate and improve your system.

Following are several criteria that may be used to evaluate and select a private firm. They should not be the only criteria, and their relative importance in the selection process is unique to each system and procurement process:

• Financial Resources

  In some situations, a firm’s financial resources are more important than its technical resources. Financial resources allow the private firm to hire technical resources as well as to devote its own time and resources to correct difficult or chronic problems. Those financial resources, however, must be sufficiently pledged to the project, since profitability may be more important than revenues;

• Local Presence

  The availability of other projects or facilities operated by the private firm within a reasonable drive from your system can be advantageous. It benefits employee out-placement, emergency support, management oversight, employee transfers and career growth and general technical support and training. Keep in mind, however, that firms starting a project in a new area distant from most of their current operations tend to assign their best managers to the project. Also, there are ways of accomplishing emergency support locally, and the use of computers has improved the ability of operations firms to monitor remote projects.

• Number of Projects

  The number and size of projects that a private firm has under contract relates to its potential capability to operate and improve your system. Having managers with experience operating multiple water and/or wastewater systems is one of the greatest benefits of private firms. Availability of such managers and other broadly experienced personnel should increase with the number of projects a firm operates. However, if the firm is growing at a rapid rate, such personnel may not be available regardless of the firm’s size. Also, a firm with fewer projects could hire a manager with the required level of experience specifically for the project.

• Experience With Large Projects

  Project size can be measured in several ways, including average flow, peak flow, design flow, number of employees, project revenue, number of persons served, number of connections, cost of facilities and number and complexity of treatment operations. Certainly, experience with large systems is important to large cities seeking a private operator. However, the interest of large cities in private contracting is relatively new in North America. For this reason, few firms have domestic experience with more than one or two large systems, although several have international experience. It is important, however, to realize that the larger firms in this business started out small and took on larger and larger systems successfully.

• Client Reference Checks

  This is one of the most revealing ways of evaluating a company’s technical and administrative capabilities and client relations philosophy. Have they met all contract requirements? Is the client satisfied? Have they exceeded the contract requirements in any area? Are the employees happy? Has the firm requested additional fees for services not precisely defined within the contract?

  Besides the named reference for each project, speak to other municipal officials as well. A bad reference does not immediately mean the firm should be rejected, but it does indicate that further research is warranted. Everyone makes mistakes or has a situation go wrong. It is important to determine if the same problem occurred with other clients and if multiple clients would not have chosen the firm if they could begin the procurement process all over again.

• Private Firm Organization Diagrams

  It is important to consider the chain of command for your specific project up to the CEO of the ultimate parent company(s) and the legal and financial relationships between the proposing entity and the parent company including all intermediate companies. Resources reporting directly to each person in the chain could be made available to the project.

• Technical Resources

  The everyday availability and application of technical resources is an important evaluation criterion, perhaps more important than the amount of technical resources to which a firm has potential access under its corporate umbrella. Transfer of technology from one sister company or division to another is one of the greatest challenges facing a CEO. The emphasis on the bottom line as well as the frequency of reorganizations, divestitures and acquisitions can interfere with the development of a working relationship between internal companies. Hiring an outside contractor to provide technology or services can sometimes be easier to control, faster and even less expensive. Look closely at actual examples of the introduction of technologies into projects, regardless of where they came from.

  In procurements where large capital improvements are involved, the firm’s ability to design, build, finance and operate under a single seamless liability umbrella is important. Whether it is advantageous to select a contract operations firm that can also provide professional engineering services, has two answers, both of which have proven successful.

  If you want to minimize day-to-day administration or to speed up capital projects, the engineering capability is beneficial. If you are more interested in establishing internal checks and balances on both the operations and engineering functions, using an engineering firm that is independent from the operations firm is beneficial.

• Operating or Project Approach Plans

  Diverse opinions exist as to the level of content that should be included in an operating plan. If the plan is very specific, the companies not chosen feel they have given away valuable information for free. If the plan is too general, it fails to reveal the firm’s ability to solve the specific problems of this system.

Regardless, the best plan should reveal the application of a variety of ideas and proven approaches to the solution of each of the system’s technical problems, as well as to its overall improvement.

The selection of the best private firm for your system involves objective as well as subjective decisions. Priorities should be carefully set after considering or involving all stakeholders including ratepayers, employees and city council members. Then those priorities should govern. Additionally, the need for both structure and flexibility in the selection process must be balanced, and start-up problems should be expected.

Remember that contract operations has a very good record. Most contracts are renewed. And long-term contracts, while too new to have a history, do offer an alternative funding source.

Frank Mangravite is president of Public Works Management, Morris Plains, N.J.