With significant investment comes the expectation of sustainable return, and asset owners are increasingly focusing on successfully managing existing investments to meet desired business objectives.
That said, in our recent experience working with asset-intensive government, resources and energy clients, the road to realising high-performing investment portfolios isn’t straightforward and success lies more and more in identifying and managing risk. Let me explain:
The International Standard (ISO 55000) defines asset management as “the coordinated activities of an organisation to realise value from assets”. For those in use, gaining optimal value is a constant challenge for organisations that need to balance productivity with the associated degradation of the asset and the ongoing maintenance costs. This is complicated by the difficulty in successfully characterising their condition to inform the optimum mode, extent and timing of investment.
Asset management professionals typically use qualitative or semi-quantitative risk-based approaches to characterise an asset’s condition and how much value can be obtained from its remaining useful life. Many professionals or businesses gauge the likelihood of asset failure against an associated consequence, based on a company-specific standard or set of asset-focused likelihood and consequence criteria.
There are three challenges associated with this company-standard approach that appear to be common across infrastructure, resources and energy asset owners – all stemming from how risk is perceived and estimated.
First, risk is defined by the International Standard (ISO 31000) as “the effect of uncertainty on objectives”. Therefore, from a top-down organisational management perspective, the greatest risk for an asset owner stems from those objectives where there is greatest uncertainty in achievement. Strategic risk identification is typically performed within this framework. However, especially for large organisations, identification and rating of asset risk is the responsibility of individual asset managers at a site level. They use a standard company risk framework with fixed consequence categories that aren’t explicitly linked to either the objectives or the unique level of certainty in achieving them.
Secondly, in business today, changes in objectives (including change to associated strategic risks) are more frequent than changes made to standard risk consequence scoring criteria. For example, we recently worked with an Australian power transmission company to develop a 20-year network vision in response to their entire business model becoming disrupted by the rapid uptake of solar panels by residential customers. Their business goals were materially evolving on an annual basis, whereas their standard company-wide risk framework, used to guide the assessment of risk likelihood and consequence, had not changed in over ten years.
Lastly, in organisations with large integrated investment portfolios such as water utilities and resources companies, determining asset risk by operations generally use a standard company-wide risk framework that is typically applied to evaluating consequences of asset failure to the site, and not the entire integrated system. Depending on the relative importance of the site to the entire system, it can result in a very misleading analysis of the consequence of asset failure.
Another example was a project with a resources company to develop a framework to identify and prioritise sustaining capital projects across their integrated portfolio of mine, rail and port reserves. One site had identified a project to mitigate risk associated with conveyor downtime, which would improve throughput and was therefore seen as a highly valued project. But this ignored the reality that site production was constrained by available rail capacity, prompting the need for additional stockpiling…which was an even greater risk.
While the approaches used by organisations to identify and evaluate strategic ‘top-down’ and ‘bottom-up’ asset risk may be correct in their own context, the disconnect between the often more dynamic strategic risks and the more fixed frameworks, practices and responsibilities plays out every day, across many industries. For organisations of all sizes and types, improving harmonisation of these approaches represents a significant opportunity for increasing business value.
From our most recent experiences with asset-intensive clients across the government, resources and energy sectors, we’ve identified four ‘low-hanging fruit’ improvements that organisations can introduce to gain greater value and more certain outcomes from their investments. These focus on how they identify and manage risk:
In most large asset-intensive organisations – from global mining companies to utilities to state education departments ‒ assets are not only large and valuable, they underpin the ability of the organisation to meet its objectives of delivering services and generating revenue. Accordingly, it is crucial that senior leaders invest in using and harmonising the right approaches to identify and manage the individual asset risks to ensure they are optimally performing to deliver the desired business outcomes.
Mayuran Sivapalan is Principal and Regional Lead – Risk Advisory at Aurecon.