Asset Management Insights. Celso de Azevedo

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СКАЧАТЬ savings, which will indubitably have a negative impact on the reliability and the efficiency of assets throughout their life cycles—and which could well result in a heavy and undesirable financial expense later on. Furthermore, the compartmentalized approach of the industrial organization chart, which opposes engineers and financiers, strikes us today as inefficient and anachronistic, whatever we’d like to think of the issue. Indeed, the alignment of objectives, which allows for the maximum extraction of value, cannot occur in a context of separation of powers within an organization.

      Research on the means by which one can improve the preoperational life of assets was not born from Asset Management: indeed, as early as the end of the Second World War, engineer Lawrence Delos Miles had begun to reflect on the most adequate methods of design while working for General Electric, and he consequently came up with an approach nowadays known as value analysis. This innovative process prefigures, albeit at an embryonic level, the approach championed by Asset Managers in the sense that it connects the notion of economic potential to a fundamental pragmatism that aims to limit costs in a rational manner.

      It is worth remembering that in 1973, the first crash of the oil market brought about a meteoric rise of production costs at the organizational scale. Savings became the primary and central constraint in the engineering sphere— designers were thus requested to take into account stricter and stricter budgetary constraints, which allowed for value analysis, in the form of design-to-cost, to take a durable foothold in the industrial culture of conception. It would be unwise on our part to make a value judgement on this trend, seeing as it was above all a response to a new economic context where budgets were appearing as the primordial criteria of reflections on conception. Therefore, design-to-cost was tied to the issue of competitiveness, or even of economic survival.

      Nonetheless, it is clear that if we consider it from the perspective of an Asset Manager, design-to-cost is inherently a flawed model. Hence, it does not take into account life cycle costing or value extraction. Indeed, this approach of design takes its base solely on CAPEX, and therefore on short-term investments, without generating any reflection on OPEX (the costs tied with the operational phase) or on the life cycle. We could therefore postulate that despite its innovative touch, design-to-cost is diametrically opposed to the practices and rationales inherent to the logics of Asset Management.

      This argument is in fact tied to a very contemporary problem, in the sense that the rationale of savings (which has derived from the budgetary constraints of the 1970s) has consistently influenced corporate culture to this day.

      Thus, organizations have not been able to break free from a certain approach that places the limitation of costs as a finality in itself, a fact that can largely be attributed to a lack of sensitization on behalf of management experts—in this case, of Asset Management experts. Yet, we know that the rationalization of costs depends primarily on an analysis of the predicted reliability of the assets and on an appraised anticipation of the risks tied to these assets—a problem that design-to-cost inherently neglects. It is therefore up to the professionals and experts of Asset Management to democratize a new techno-economic culture and to shine a light on the limitations of an anachronistic model.

      All too often, industrial and infrastructural managers base their decisionmaking on the sacrosanct financial indicators derived from the theories promoted in major business schools worldwide, while feigning to ignore that a capital-intensive installation will always be faced with crucial equipment reaching its end-of-life and whose renewal is therefore vital to the proper function of business. If they are seldom viewed as a priority according to these indicators, it is, however, clear that these end-of-life assets will have to be replaced, regardless of their ROI (Return on Investment) or of their IPR (Internal Profitability Rate), and despite the organization’s cash flow situation. In fact, they will have to be replaced even at the cost of postponing other, more profitable investment options.

      We can’t overstate the fact that in the Asset Management perspective, the value of an asset is to be extracted over the course of its life cycle. This is because the reliability of equipment (as opposed to purely economic indicators) is not recycled according to fiscal years (or capitalization periods) but according to the “biological” life cycle of machines, which cannot be reproduced¹ to fit the comparison of NPV calculations when the economic frames of concurring projects differ.

      A few lines earlier, we deplored the lack of an “appraised anticipation of risks” in the context of design-to-cost. One should always be careful to demonstrate a methodical conceptual rigorousness when dealing with such a vast topic. It would be misguided to assert that risks are not taken into account in a serious engineering or industrial system. It is quite the contrary, as they have always been at the core of the theoretical priorities of design managers; however, risk monetization, which refers to its appraised quantification, is a phenomenon that has only emerged with the rise of Asset Management in the 1990s.

      Until then, the acknowledgement of risk, dictated by a minimal or nonexistent corporate and preoperational alignment, was not a qualitative indication—and was bound to remain, therefore, both limited and imprecise. This was not the result of bad will on the part of the designers, but rather of a lack of technical means, especially in terms of calculation—a strong hindrance to an efficient strategic program. Indeed, U.S. Military Standard 1629A (the FMECA standard that defines risk analysis and the criticality of engineering systems) was only published in 1967. As it happens, every notion impacting on design and the ponderation of values (including risk) made its way into the scientific discourse around the same era and slowly grew in precision and clarity. The place of risk within the process of analyzing the value of an asset in its preoperational phase was therefore very different at the time than today; it was perceived as a “ponderation criteria” but its monetary translation was very marginal in design offices.

      In order to give more substance to this outline of a reflection on risk, one needs to be equipped with a technical arsenal that allows for a quantitative assessment of risk itself. This was the main input of life cycle costing, or LCC, a method developed by NASA and MIT researchers for the benefit of the U.S. military in the late 1970s. It should be noted that the great economic reforms pushed by Margaret Thatcher and Ronald Reagan are very much tied to these initiatives. For the first time, the entire life cycles of assets were taken into account from the earliest stages of the preoperational phase. However, the transition between these two opposite poles (design-to-cost and life cycle costing) was not a simple one, and it would take many years for a rigorous economic translation of technical risks to see the day.

      This historical perspective on the evolution of the way value has been perceived is very telling. It shows that the notion of quantified anticipation of an asset’s value as well as reflections on the most appropriate means by which to extract its optimal value are very recent fields of thought that have yet to become regarded as utmost priorities within design and engineering offices.

1.2 Designing: A “Distinct” Activity

      Throughout my career, I’ve been given the opportunity to observe the various phases of the assets’ life cycles in numerous contexts, and from distinct perspectives inherent to the specific affectations I’d been given. It must be noted that the preoperational phase of industrial assets is all too often regarded as an activity “within itself” in the industrial process. Thus, it is broadly believed that it is “distinct” from other phases, which implies that it has its own “end,” in the same way that the processes tied to this phase of design or procurement themselves have a beginning, an evolution, and an end. Intuitively, this can appear as a reasonable belief. However, it is in fact a valid indication as to the gap that yet prevails between the traditional industrial culture and the perspective offered by Asset Management culture. Indeed, regarding the preoperational process as a “distinct” phase marks a clear opposition to the very notion of an asset’s global life cycle.

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