In a recent post on LinkedIn I remarked that Capital Asset Management™ is the art and science of making sure there are no bad surprises. Many people seem to “like” that notion but it also gives rise to questions. It is not intended to become just another buzzword, so let me explain more fully – something I love to do as an author!
Cost and value are not the same thing at all. Cost is what you pay. Value is what something is worth. The former is always measured in units of local currency (e.g.: USD), latter may be measured in currencies other than that (e.g.: historical heritage, enables transport of commerce within our economy, houses our educational institution, produces x quantity of product y to market at a profit margin of z%, etc.). The financial world manages costs and investments with an eye to delivering purely financial benefits. In the world of physical assets we manage the delivery of value. As explained in my book, “Uptime – Strategies for Excellence in Maintenance Management”, Introduction page xl, value is explained notionally as:
Value = (Output x Service) / (Cost x Risk x Time).
The financial world looks at one element in the denominator and the single aspect of cash inflow (revenue) generated by the numerator. The risk, safety and environmental management world(s) tend to focus on one element in the denominator only (risk). Production / operations people tend to focus on the numerator and sometimes the time element in the denominator if it is relevant to delivery against targets set for the numerator (and often their bonuses). Few of us consider the entire picture and I want that to change. “Asset Management” is a relatively new term in the world of physical assets so let’s make sure we get it right.
The term, “Asset Management” is a bit vague and requires definition for specific audiences. Financial people and we in the world of physical assets have different perspectives and although there is some overlap, it is unlikely that financial people would describe it the way we have codified in ISO 55000. Even within our world of physical assets, unless we’ve read the standard, many of us probably wouldn’t describe Asset Management quite the way ISO 55000 does either. In the ISO we include “tangible” and “intangible” assets. The former is evident to us, the latter is somewhat confusing – what is / is not included? I didn’t write the standard, but I’d argue that “intangible” is far too vague a term leaving us open to all sorts of claims of compliance to a standard intended for physical assets when there are no physical assets being managed.
Some of us preface Asset Management with the word “physical.” That does provide clarity but we then omit the often forgotten, yet critical and intangible, information that goes with it (i.e.: drawings, manuals, etc.). Without proper management of that particular set of intangibles we risk having our “information plant” getting out of synch with our physical plant. That particular malady lies at the heart of many errors in maintenance plans, store room stocks and does nothing to stop us from making errors with physical configuration. Daily maintenance challenges like, “what part can I use to replace the one that just broke,” are left to the creativity of our maintainers in the field who may or may not understand why specific parts or their specified attributes (which are often hidden from them) are required at a moment when they can’t find it in a storeroom because of poor planning and communication between planners and stores.
Preface AM with the word, “Enterprise,” and we find ourselves in discussions of computer systems that may be capable of operating across a multi-site enterprise with one instance or in other cases be little more than a maintenance management “system” with a sexy name. Sales people know that we love to buy systems that make what we do seem very important so they give those systems impressive names.
I like and chose to preface AM with the word “Capital.” To me it is very specific and inclusive at the same time. It is specific to those physical and related intangible assets that we spend large sums of money to acquire and later to maintain. It includes the plant and whatever we buy with it, most importantly information in the form of technical manuals, drawings, loop diagrams, etc. that must also be maintained to keep our information plant (a high level capital asset) in tune with our physical plant. It would include our computer systems needed to manage that physical plant and whatever information accompanies it.
Here I use the term “plant” rather loosely – it could mean a building, road network, transmission system, distribution system, water works, portfolio of buildings, factory, production line, fleet of vehicles, transportation system, etc. It is our built infrastructure, our resource extraction and processing, production facilities, logistics capabilities and their assets, and the delivery networks for utilities.
The financial world understands capital assets and how to treat them financially to allow for taxation treatments in accordance with local jurisdiction laws. They depreciate the capital cost. But they don’t depreciate the “value” of what the asset delivers. While that value generation capability or capacity may degrade over time, it may also remain constant or even increase depending on what it actually is doing. For example, an ore processing plant built for a particular mine may actually increase in value if the grade of the ore body is actually better than originally forecast. The cost of the plant will be depreciated but its value to the organization actually increases. An electrical distribution network may be depreciated to zero long before its utility to the public that uses the electricity it delivers vanishes. Given what we have seen in the explosive growth of technologies that use electricity, that network that is now worth nothing on the books it actually delivering more value than it ever did in the past. The financial world on its own does not account for this.
That lack of accounting for this value creates a hurdle (sometimes a very challenging one) for those of us who wish to deliver more value via the physical assets that have degraded. The justification of new investment to sustain delivery of value that is going to be lost if we don’t make the investment puts
If we do good Capital Asset Management™ we will understand the value of our assets, not just the depreciated cost and condition. If we understand that better we might actually allow for future investment to sustain the value we continue to derive from sustaining our assets’ functions. We’ll allow enough Opex to pay for maintenance and provide enough Capex to replace or renew. Of course that will not get around the perennial political induced problem of spending capital in public works to garner votes but it will provide ammunition for those who might want to call it for what it is.
We manage capital assets because they deliver value – a return on our investment, whether we measure it that way or not. We invest capital to build and renew them, we do so while balancing risk, cost and performance, and we include the entire asset with its suite of information essential to successfully managing it over its life cycle. This is full life cycle Capital Asset Management™. Financial management has its own rules for how to handle the costs, we have ours to handle the delivery of value.