Improve Asset Investment Planning to Avoid Value Leakage

When I got off the phone I couldn’t quite believe what I’d heard. My organization had been doing some sharing with another organization in the same industry about asset management.

My counterpart had just given me a detailed account of how they were intending to improve their asset investment planning practice to make better capital allocation decisions.

It all sounded reasonable except for one big thing that bothered me. The new target practice for their organization sounded exactly like where my organization had been already for several years. And I had a long list of reasons why my company’s practice wasn’t good enough.

In asset investment planning, research suggests the difference between best practice and what most organizations have is somewhere between 8–20% in value. This means an organization with a sustaining annual capital spend of $200M will effectively lose somewhere between $16–40M each year. This means either they’re spending too much or not getting enough risk mitigation. Either way, a good chunk of their spend is inefficient.

Where did this loss go? Nobody knows because it is an open system. The loss can’t be proven true or false retroactively because there’s no alternate universe with which to compare. Nevertheless, poof — it is gone. This is one of many reasons companies find themselves scratching their head in second or third quartile benchmark performance.

I discovered this value leakage through a series of hard knocks as a manager of investment planning for group operations. This is where I began to differentiate leading asset investment planning practice from one that was merely mediocre.

My first exposure to proper asset life cycle costing coupled with capital investment decision support had come a few years prior. I had the pleasure to work with David Mauney who came from the Utility sector in the US and had co-written what would become my bible, Risk-Based Methods for Equipment Life Management. David commercialized those principles in a simple but effective set of spreadsheet tools he called Financial Risk Optimization. It was from David I learned how technical people must present the problems and solutions in terms that financial people can understand to successfully make their business case. This work, more than anything helped me set my expectations on best practice for asset investment planning.

Before we dive into details of the practice, there are several prerequisites, each a topic on its own. First, we must utilize a systematic approach to identify all the problems worth managing, rather than the default method by exception. Next, we must apply good structured problem-solving methods such as A3 and resist the temptation to jump into solutioning. Then, we will apply risk-based assessments but don’t fall into the trap of assuming people are good at understanding uncertainty. Fortunately, people can be calibrated and trained to become very good risk assessors.

Dismiss these foundations at your peril. I’ve seen many underestimate their power and thereby guarantee a mediocre result. Garbage in, garbage out.

So that gets us to the starting line.

The first question of an asset investment planning practice is, what question are you asking? Many organizations aren’t asking or answering the best question.

The question most organizations ask is, “What are the best projects we can implement given a spending constraint?” A better question to ask is, “What performance do our assets need to provide and what are the lowest life cycle cost strategies to achieve that performance at a risk tolerable to the organization?” It’s a mouthful but answering this question is worth every ounce of effort as it forces a holistic view on performance, spends and risk.

There is a difference between prioritization and optimization to reach the best decisions. Prioritization consists of force ranking your projects on a cost-benefit ratio until the money runs out. The risk is not doing the project. The cost consists of the new capital and hopefully, routine operations and maintenance spend changes.

Optimization, however, can consider multiple solution alternatives and multiple objectives simultaneously. Some math is required but through simple modelling, you can solve for the best sets of solutions. A key benefit of optimization is you can solve for the best spend rather accept a constraint often established with little consideration for asset life cycle needs.

The best form of optimization will integrate a fully quantitative approach. Most organizations have practices that are deterministic, rather than probabilistic. Making decisions under conditions of uncertainty is the case in all asset investment planning. There is a competency most practitioners and leaders must gain to think and act probabilistically because we are deterministic by nature.

The proper way to express and uncertainty is the answer and your confidence around that response. The uncertainty about your answer is just as important as the answer itself. Great decision-making requires a quantitative risk-based approach. This will be an unpopular and controversial opinion but throw your risk matrices and heat maps away! Research has shown they do not add value for decision support.

Lastly, you get to choose the scope for which your capital projects compete. Is it just within one spend bucket, one facility or across an operational business unit, region or the entire enterprise? Do you encourage competition between Capex and Opex? Managing all your spend buckets as Totex is preferred. Do you allow projects to compete beyond operations to growth, IT and other corporate services vying for capital? As your practice matures you will gain confidence in competition yield better decisions in broad capital allocation.

Despite the arguments above, many organizations continue to stubbornly believe their asset investment planning practice is good enough. Nothing to see here. This is fine.

You might think the leading practice features I’ve described require significant incremental effort. Not necessarily. Many organizations already spend plenty of time and energy on this practice. There is research to suggest you might be able to lower your overall effort by as much as 20%. That said, there is an incremental investment in your peoples’ competencies and appropriate decision-support tools. Considering the massive continuing value leakage that investment is very small, presenting an excellent ROI opportunity.

Judge for yourself whether your organization has a leading or mediocre asset investment planning practice.

If there was a reasonable way to achieve best practice with a superior decision support tool to recapture 8–20% of your sustaining capital portfolio value — would you, could you change your asset investment planning practice?