A Future Business Perspective for Managers
This topic has a brief overview and covers:
Advanced asset management introduces a concept of the four pillars to successful management of assets:
Critical issues will be level of service and cost of service.
The cost of service is relatively easy to determine but the level of service will be more difficult. How authorities handle the ageing asset problem and the associated risk will be extremely important. All service organizations owe a duty of care to their customers. They need a system that can defend them from litigation if an asset fails.
From a business point of view, this will amount to reducing the organization's costs and level of service to a point just above the level that would result in significant increases in customer complaints. However the problem with long-lived assets is the ability to predict, with a high degree of confidence, the time at which failure or a sharp decline in level of service is likely to occur.
Therefore, in recurrent expenditure, the efficiency and effectiveness of the organization's operations and maintenance activities will be paramount. The key strategy is to develop an economically justifiable level of maintenance and renewal to suit the needs of the assets, balanced against the needs of the organization's customers.
Organizations need to be aware that reduced or delayed maintenance and renewal will reduce immediate costs, but may also:
- Decrease levels of service
- Increase the risk of failures
- Shorten the effective life of the asset.
In capital investment, effectiveness should be based on an acceptable cost/benefit or return on capital, with new investment being made as late as possible (just in time). This requires accurate risk assessment.
If the organization delays investment in asset renewal, then they can expect greater numbers of failures. There is a risk cost (or a loss) to the organization from the consequences of these failures. This could be loss of service or system failure, litigation or even loss of life. Risk management (loss reduction) is a critical activity.
More competitive commercial environments require more flexible operations, faster rectification of failures, and other effective post-failure strategies. Being able to predict problems, develop strategies with customers and take the necessary action to address the strategies are vital to the organization's future.
Critical issues in the expenditure reduction battle will be staff endeavor (productivity), effectiveness and efficiency. The key here is effectiveness. What should the organization be doing? What is the best economically justified action?
There will also be competition between old and new services i.e. maintaining acceptable levels of service for existing services against the demands for new services and increased customer expectations e.g. environmental protection.
Risk management is a key ingredient of advanced life cycle asset management.
The future perspective for service authorities could be:
“Service authorities will be expected to show that they are providing an acceptable level of service for an acceptable cost in the most efficient and effective manner for present and future customers, and depending on ownership objectives, will be required to make a profit.”
In a competitive environment, it can also be argued that private & public enterprise must continue to add value in providing that service — they must do more with less in order to survive.
The manager's or the organization's performance will ultimately be judged by benchmark comparisons against other similar authorities on a target of "world best" practice.
Deviations from such target benchmarks may need to be justified to government regulators, shareholders and customers. Service organizations will therefore need to know far more than simple benchmarking factors such as rate of return on assets, numbers of staff, availability of assets, etc.
Organizations must develop a clear picture of the assets that provide the services, including:
- Current asset condition
- Decay profile
- Mode of failure.
Rehabilitation or replacement required to meet the minimum acceptable level of service, as expected by the customers, without compromising on the acceptable level of risk.
Risk cost to the organization needs to be assessed for all failures, from those needing minor maintenance to major catastrophic structural failures. The reduction or avoidance of risk needs to be quantified as a benefit to the business.
RISK COST | = | COST OF THE CONSEQUENCES OF FAILURE TO MAKE THE INVESTMENT | X | PROBABILITY OF THE FAILURE OCCURRING |
Deriving the potential benefits will require the analysis of detailed information on assets and matching them with the organization’s key objectives. Substantial information systems are required to achieve this.
Works programs generally fall into one of the following categories:
- New services that were not previously available
- Sustaining existing levels of service including:
- Maintenance activities
- Operations activities
- Rehabilitation or replacement activities.
- Meeting increased demand for existing services including:
- Growth in capacity
- Increased levels of service.
It is sometimes possible to have a single works program that meets more than one objective. For example, growth in the demand for a service may also coincide with the need to replace an existing asset due to physical decay, and the new asset can be designed to accommodate the growth expected.
Benefits for investment in new works are generally relatively easy to determine, e.g. projected new income, political and social benefits of providing new services.
It is also relatively easy where the works will improve the level of service only. The benefit primarily will be equal to what the customers are prepared to pay for the increased level of service. This can be determined by customer surveys. In some cases, additional social and political benefits may be achieved.
A critical issue is whether or not there is likely to be a major failure of the service. Major failure occurs when the asset suffers structural collapse and requires substantial repair. Some failures have minor impact. Some have catastrophic outcomes.
All decisions for investment of resources, either recurrent or capital, should be ranked based on a cost/benefit analysis, with risk reduction being assessed as a benefit. The investment opportunities may involve:
- Maintenance practices including condition monitoring
- Rehabilitation works
- Replacement works
- New works/augmentation for new services.
For maintenance, rehabilitation and replacement, the benefits include:
- Reduced maintenance, operations and management costs
- Extension of asset life
- Improved level or quality of service
- Reduced risk cost or the consequences of the failure to the business.
When all these benefits are identified, management can judge the relative merits of resource requirements between the various competing interests, such as roads, buildings and open space.
Likewise, within each asset or service group, management will need to allocate resources in the most logical manner. For example, which of the following should be given priority: capacity failures, performance (levels of service) failures or physical (structural integrity) failures?
These issues will significantly affect the risk posed to the organization. The validity of the cost/benefit ratios for all works, through the identification and quantification of the reduction in risk cost, cannot be over emphasized.
The main functional activities of risk management involve:
- Analyzing the risk of failure
- Determining the economic cost of the failure to the business (risk cost)
- Developing failure management plans for those failures that cannot be cost effectively avoided or predicted with suitable accuracy.
Risk management should be carried out as a normal part of asset management. The situations will change for individual assets, and for the systems of which they form part, throughout their lives, and as demands change for the service they provide.
It is a dynamic process that includes:
- Identifying the critical assets
- Analysing risk
- Developing risk reduction activities and failure management plans.
Risk management techniques should be carried out to derive a benefit for the organization. If no benefit results, then risk analysis is not achieving its purposes.
Responsible asset managers need to be able to:
- Determine the mode of failure e.g. capacity, performance, structural integrity
- Predict the point in time when failure is likely and therefore determine as accurately as possible the probability of failure as the asset decays
- Determine the relative merits for maintenance or renewal expenditure based on a verifiable cost benefit throughout the life of the asset
- Monitor maintenance costs, causes and rectification activities and take action to cost effectively:
- Eliminate or reduce the cause of the failure
- Reduce the consequences and the costs of rectifying the failure
- Analyze investments in proposed works programs for all assets, and determine priority between asset types and asset groups within the asset type. Direct finite resources to achieve the greatest benefits including risk reduction
- Apply control measures to those assets in which risk reduction is possible. In general pre-event control is more cost effective than post-event control, however, managers need to identify the most viable option.
Managers should only direct future resources to achieve greatest benefits (i.e. risk reduction/dollars spent). Control measures on pre-event or post event causes should be applied only to those assets most vulnerable to threats or failures.