With any investment comes the expectation of a sustainable return, and asset owners are grappling with identifying investments they can be confident will deliver a return given the currently evolving nature of their objectives and, given the uncertainty in the extent and duration of the COVID-19 pandemic.
That said, while asset owners are currently faced with a much greater degree of uncertainty than normal, they are routinely required to deal with uncertainty when making asset investment decisions. In our experience, working with high-performing asset managers, those that outperform their competition are better at characterising uncertainty and the potential impact on their business objectives. They use this lens to guide identification and prioritisation of their responses and investment decisions. The common denominator in completing these steps is an emphasis on using risk as the primary vehicle to translate uncertainty into successful asset investment decisions. Let us 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. The dynamically changing and evolving priorities of business leaders during the current COVID-19 pandemic is a case in point. 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. Currently, we are seeing business goals and priorities changing on a monthly basis.
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 asset risk to ensure the organisation is optimally performing to deliver the desired business outcomes.
In the current environment of heightened uncertainty due to the COVID-19 pandemic, the importance of risk-based approaches to characterise uncertainty and inform decision making has become especially pertinent. Asset owners already subscribing to this approach are likely to continue being more resilient in the current environment and emerge with competitive advantage as business conditions become more certain.
This thinking paper is part of a collection of insights and expertise from Aurecon as it explores leading through and beyond the COVID-19 disruption. Explore our insights here.
Mayuran Sivapalan has over 15 years of experience in the consulting industry, with specialist skills in risk advisory and capital investment decision making. Mayuran has worked in the engineering, oil, gas, infrastructure and power sectors in Australia, USA, Canada and Middle East with multinational clients around the world.