What CEOs need to know about asset life cycles

The con­cept of asset man­age­ment has grown up in the infra­struc­ture and trans­port sec­tors. In so doing it has gen­er­at­ed a raft of con­cepts and tech­nolo­gies which may seem alien to a chief exec­u­tive with a track record of improv­ing the for­tunes of busi­ness­es focused on man­ag­ing finan­cial assets or IT sys­tems.

To make things even more com­pli­cat­ed, any new­com­er has quick­ly to get to grips with terms which even asset man­agers say are not pre­cise­ly defined.

Life cycle complexities

John Wood­house, chief exec­u­tive of TWPL and chair of the Pan­el of Experts at the Insti­tute of Asset Man­age­ment, says: “There is plen­ty of live­ly debate about appro­pri­ate ter­mi­nol­o­gy and scope for such things as asset life cycles, whole lives and life-cycle activ­i­ties. At the sim­plest lev­el, of course, the life cycle con­cept is clear: for a dis­crete com­po­nent that goes through a cre­ation stage, a peri­od of usage and pos­si­ble main­te­nance, lead­ing to ulti­mate dis­pos­al or replace­ment.

“It becomes more com­pli­cat­ed, how­ev­er, when we acknowl­edge two com­mon real­i­ties. The life stages may not be clear-cut, and may even have phys­i­cal exis­tence peri­ods that span mul­ti­ple cycles of acqui­si­tion, usage and dis­pos­al by dif­fer­ent organ­i­sa­tions.

“Sec­ond­ly, an asset could have an infi­nite life if it is defined at a func­tion­al sys­tem lev­el rather than just a free-stand­ing and dis­pos­able item. It may be pos­si­ble, for exam­ple, to sus­tain a sys­tem-lev­el ‘asset’ indef­i­nite­ly through main­te­nance and renew­al of com­po­nent ele­ments.

“So the devel­op­ment of asset life-cycle plans or eval­u­a­tion of invest­ments based on life-cycle costs, and ‘opti­mis­ing’ hori­zon for such plans and costs, can be prob­lem­at­ic. What hori­zons should we use in such com­plex cas­es? What does life cycle mean in these cas­es, if any­thing?”

Mr Wood­house says the first com­plex case aris­es from the dif­fer­ences between see­ing the asset from a phys­i­cal exis­tence view­point or from an asset man­age­ment per­spec­tive that is to say respon­si­bil­i­ty, usage and val­ue real­i­sa­tion. “In devel­op­ing the [British Stan­dards Insti­tu­tion] PAS 55 stan­dard, we defined life cycle from the asset man­age­ment per­spec­tive – cov­er­ing the peri­od from recog­ni­tion of need for the asset through to dis­pos­al and any resid­ual risks or lia­bil­i­ty peri­od there­after,” he says.

He says this has pro­vid­ed a good cat­a­lyst for organ­i­sa­tions to con­sid­er oper­a­tions, main­te­nance and longevi­ty when spec­i­fy­ing or invest­ing in assets, and in devel­op­ing strate­gic main­te­nance and renew­al plans. “It has cer­tain­ly helped to break down some of the depart­men­tal bar­ri­ers between engi­neer­ing design and projects, pro­cure­ment, oper­a­tions or asset usage, main­te­nance or asset care, and renewals or decom­mis­sion­ing,” he adds.

Proving ROI

Richard Edwards, glob­al tech­ni­cal direc­tor at AMCL and pres­i­dent of the Insti­tute of Asset Man­age­ment, says asset man­age­ment “boils down to mak­ing sure that asset invest­ment deci­sions direct­ly cor­re­spond to busi­ness results”.

He says: “The con­flict for a chief exec­u­tive or finan­cial direc­tor comes when they are under pres­sure to demon­strate short-term finan­cial results when the asset in ques­tion is a build­ing or piece of infra­struc­ture, such as a road, a bridge or part of the rail net­work, where the rela­tion­ship between invest­ment and return plays out over sev­er­al years or even decades.”

Accord­ing to Mr Edwards, jus­ti­fy­ing this invest­ment comes down to artic­u­lat­ing risk effec­tive­ly – what could hap­pen in the long term if spend­ing is with­held and what the ulti­mate cost could be.

Chief exec­u­tives often have a short­er tenure than the assets that are such a core part of busi­ness­es

“Increas­ing­ly, we are able to define this risk in a way that deci­sion-mak­ers can under­stand through more effec­tive and con­sis­tent mea­sure­ment of an asset’s con­di­tion, and also much more accu­rate fore­cast­ing of how it will per­form over time. This in turn enables chief exec­u­tives to iden­ti­fy what the finan­cial and organ­i­sa­tion­al con­se­quences would be for the busi­ness,” he says.

Chief exec­u­tives often have a short­er tenure than the assets that are such a core part of busi­ness­es involved in the run­ning of infra­struc­ture and trans­port. What he or she can achieve may be affect­ed by the long-term nature of such sys­tems.

David Mil­lar, joint own­er of Mor­phose, believes the short-term imper­a­tive can work side by side with long-term strate­gies. He is a char­tered sur­vey­or by pro­fes­sion who has worked in health­care, util­i­ties and telecom­mu­ni­ca­tions in the UK and inter­na­tion­al­ly.

“A CEO’s ambi­tion is ulti­mate­ly dic­tat­ed by the sta­tus of a com­pa­ny and its under­ly­ing trad­ing as well as oper­at­ing fun­da­men­tals,” he says “In a pub­licly trad­ed enti­ty, the CEO will always be behold­en to the major share­hold­ers’ desires, so the asset man­age­ment strat­e­gy must align close­ly and achieve their inter­ests, which can restrict change. How­ev­er, if the busi­ness is pri­vate­ly owned, then the sit­u­a­tion is slight­ly more flex­i­ble where the own­ers can take a much longer time hori­zon on pay-back and intrin­sic val­ue.”

Accord­ing to Mr Mil­lar, while the own­er of a pri­vate com­pa­ny will still dic­tate much of the imme­di­ate and long-term direc­tion, there is more room for a chief exec­u­tive to take the reins and make longer-term asset com­mit­ments.

He says it is imper­a­tive organ­i­sa­tions keep a lean port­fo­lio of assets to nego­ti­ate the dis­crep­an­cy between senior man­age­ment changes, cus­tomer demands and avail­able cash, bal­anced along­side a long-term asset man­age­ment plan that pro­tects stake­hold­er inter­ests.

Essen­tial­ly, this dis­crep­an­cy has to be approached on a case-by-case basis. No two busi­ness­es are the same, with his­tor­i­cal cir­cum­stances play­ing a large role in the dynam­ic. An asset-rich busi­ness that is look­ing to down­scale its port­fo­lio will be pre­dis­posed for con­sid­er­able sav­ings and the incum­bent chief exec­u­tive tasked with this will typ­i­cal­ly have imme­di­ate suc­cess.

Anoth­er chal­leng­ing area for chief exec­u­tives is risk because there can be short-term and long-term con­se­quences of tak­ing or not tak­ing risks. Accord­ing to Oliv­er Pritchard, a mem­ber of Arup’s infra­struc­ture advi­so­ry team: “His­tor­i­cal­ly, infra­struc­ture assets and net­works have been con­sid­ered in iso­la­tion in terms of risk. How­ev­er, net­works are becom­ing more and more reliant upon each oth­er, with increas­ing inter­de­pen­den­cies, which neces­si­tate their con­tin­ued func­tion.”

As pres­sures increase on own­ers of infra­struc­ture, trans­port and util­i­ties to max­imise the val­ue of assets, those chal­lenges are like­ly to con­cern chief exec­u­tives and their boards for some time to come.