Public Utilities Fortnightly
18 December 2014
The real thing demands a culture shift toward long-range thinking
Most utilities are adept at managing their physical assets. They respond systematically to problems as they arise, with the application of technical solutions. This is a sound approach. It generally allows for appropriate solutions, even if not always oriented toward the long term.
Managing assets, however, is not asset management. True asset management requires integrating these kinds of specific engineering solutions with the broader business processes such as life-cycle planning, performance analysis, and risk management that optimise the utility value chain and delivery mechanisms.
Contrary to common thought, asset management is not just about the proactive planning and maintenance of a utility's physical infrastructure. Rather, asset management denotes a comprehensive organisational strategy that provides utilities with the means to meet their top challenges such as aging infrastructure, high attrition, and high customer expectations. To be complete and effective, however, asset management must be adopted at the enterprise level across the entire value chain, embedded in decision-making processes and structured into the organisation as a business model based on asset value.
Consider, for example a utility's transmission and distribution system. It is complex, constantly in flux, and inextricably linked to the utility's greater business operations. As assets fail or are upgraded repeatedly but not strategically, the utility business feels financial conflicts/contradictions and receives undesirable regulatory or customer attention.
Traditional asset management has for several decades been defined as the proactive and adaptive system that allows a utility to link its business of managing assets to its business of managing the utility. With the new requirements under ISO 55000, -001, & -002 , (see sidebar, ISO Standards - A Definitional Framework), the concepts of maximising asset value and stakeholder management are added to the core principles of asset management.
With either traditional or updated definitions, asset management practices exert an enterprise-wide impact upon a utility's business. To be successful, true asset management must be treated by the utility as a long-term business commitment focused on outcomes that allow a utility to simultaneously optimise cost and risk while improving performance and value - a business proposition that no utility can pass up in times of aging infrastructure, increased customer demands, new technology choices, and regulatory scrutiny.
A True Business Model
The core foundation of adopting an asset management business model is to shift the focus off the asset itself and onto the value that the asset provides to the organisation. The goals of lowering costs and risk, heightening performance, and managing stakeholders are neither mutually exclusive nor interdependent, but they are interrelated. In point of fact, transitioning to an asset management business model can often require a short term increase in spending for both capital and operations and maintenance (O&M) in order to stabilise asset performance and manage costs over the long term. Although utilities resist making these kinds of expenditures when money is tight, it is at times the only way to ensure asset value is captured and sustained over the long term. The point, after all, is to extract full value from assets, not avoid immediate costs and overwork assets past their useful life.
Adopting asset management as a value-based business model across the enterprise is therefore fundamental to a successful asset management program. The best asset management process flow for a utility to adopt depends on the scope of the assets it wants to cover under its business model and the boundary of each asset management organisation which manages those assets. With the new requirements under ISO 55001, any and all assets can be included under the asset management umbrella. These assets most often include physical components such as generation, transmission, distribution, fleet, property, and facilities. However, they can also include information technology hardware and software, data, people, and intellectual property.
Regardless of which assets are included in the business model, there are basic processes that are included in most organisations that successfully apply a model that is able to extract the full value of its assets enterprise-wide. They are not solely engineering-based, but are decision-making processes that link assets of all kinds to the larger utility business in terms of cost, risk, and performance. Cost. Adopting a life-cycle strategy allows the utility to manage the cradle-to-grave cost process for all types of assets under a single, integrated framework. The core concepts include managing net present value based on initial cost, lifetime O&M spend, residual and salvage value, and funding options. It encompasses the initial decision on where to invest in assets, why the investment is justified, and the financial mechanisms (equity/debt) that help support the decision. That allows the entire organisation to collaborate on consistently extracting full value from its assets. Performance.
Here lies the heart of what most utilities see as effectively managing assets. Maintenance optimisation, when incorporated into an overall asset value business model, governs how assets are maintained in line with the utility's business, market demands, and customer objectives. It focuses on repair, replace, rebuild, retire, and run-to-fail decisions based on rigorous data collection, analysis of risk and the level of service for which customers are willing to pay.
A utility's standards process must also be tied to the overall business model. This process becomes responsible for developing and maintaining the specifications for planning, designing, and building the system infrastructure. It includes capacity, reliability and redundancy planning; material specification; electrical and mechanical design criteria; and construction specifications. These decisions support and sustain an appropriate risk-emphasis and understanding how to mitigate the exposure appropriately. The classic structure for a true asset value business model is the vertically integrated one based on technical skills. It provides clear areas of delineated responsibility. The second option is based around asset group or business units. It fosters technical interaction between departments on a project basis. The third option, and most common in mature asset management organisations is a process-based structure. It provides clear accountability for outcomes and is performance driven. It blends the necessary skills and competencies under one umbrella to enable better teamwork and communications. While it can be a bit more complex it is worth the effort as it takes the best skills and competencies from each process area.
The asset value business model can even extend to incorporate resources outside of its own walls. For instance, resourcing is one of the key components in a solid asset management business model. It requires utilities to clearly calculate internal versus external service providers, define core competencies, skill requirements and the cost of acquiring them from outside sources compared to developing them internally. That is especially important for utilities that are struggling to retain knowledge and capability against high attrition and retirements. Making the Transition New data collection processes and systems must be put in place or upgraded, and also must be integrated into operations, so that financial, risk, and performance information can be channeled into operational decisions in a way that supports the overall business strategy. Further, asset risk profiles must be developed for individual assets and asset groups and linked to asset financial and operational performance and integrated with ongoing budget requirements. The mature model, which is process-focused, supports this approach completely. Again, the complexity is worth the effort.
Organisationally, an asset value business model requires that the enterprise will adopt new organisational values of collaboration and standardisation. No longer can functions be insular; rather, information must be exchanged readily and usefully across functional lines and decisions must take a system-wide view. Obviously this will necessitate a culture shift toward long-range thinking. The recommended business model supports this.
Transitioning to an asset management business model will require a short term increase in both capital and O&M spending in order to stabilise asset performance and expenditures. That requires a tolerance for short-term uptick in spend in order to achieve a long term, strategic gain. It requires agreement the leadership levels to adopt and embed an enterprise-wide strategy that can sustain the enterprise objectives and meet stakeholder needs, and those of regulators and customers.
The Bottom Line Lack of attention to asset needs will result in excessive maintenance cost, premature replacement, asset failures and the resulting outage and collateral damage, regulatory intervention, fines, penalties, image degradation, and a host of related problems. As a solution, asset management is a fact-based decision platform that allows utilities to extract maximum value from their assets at optimal cost. The major distinction of adopting an asset value business model is a notable decrease in corrective maintenance due to better optimisation of predictive maintenance and fewer asset failures. In addition, asset capital costs decline over time due to improved maintenance and longer asset life. The amount of time it takes to reach a mature asset management state depends upon how aggressive the asset management implementation program is and how much internal change is required. It can be as short as two years or as long as ten.
Companies that have successfully transitioned to an asset management business model have reported annual savings in capital and O&M combined of around 15 percent. By moving from an engineering-driven asset management model to one driven by leadership at the enterprise level, a utility will expand the benefits of asset management beyond the physical to encompass all its business objectives: higher performance, lower cost, less risk, more customer focus.
Scott Sidney is an energy expert at PA Consulting Group
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