Some characteristics of the large population asset re-investement programs:
The totall asset population is >1000. Replacement of 1 asset is labour intensive and it requires specific skills to do the replacement. The cost for replacing one asset are significant >100kEuro. Replacing all assets will take at least 10 years. The impact on the annual investment plan is significant. A commitment to the replacement prgram would make 20%-60% of the investment budget “mandatory”.
Examples of these such programs:
- Nekaldiet sleeve
- Grey cast iron
- Gasvalve
- Houseconnection
Recently a large utility asked us to participate in an evaluation of their re-investment program. They had started up a large scale replacement program of a certain asset type. The scope coverred a large populations over a widely spread service area. In the years before the program started they were confronted with some near safety accidents caused by degradation (aging) of certain components. They undertook detailled analyses of the historical failure reports and could identify a pattern of raising failures over the years.
They realized that the population of assets was over 50 years old and in fact getting at end of life. Just continuing the strategy of “good maintenance” and case by case replacement would not be sufficient and it became clear that they needed to start a structured program for the replacement of this large population of assets.
They started with some basic assumption while setting up the program. So first they targetted at replacing of the complete population in a time frame of 15 to 20 years. Then they simple calculated back what number per year they needed to replace in this given timeframe. This already indicated some major challanges. The cost of such program per year would already be equal to about 50% of the current annual investment budget. It would take them several years just to “ramp up” a program. It was difficult to determine what level of structural replacements needed after the re-investement wave. And how would they be able to find specialistic resources to staf the program, not to talk about the components needed and the specific equipment to be able to do the replacement work.
For most of these technical issue they were able to define solutions. However the biggest challange was to convince the excecutive board of the need of the re-investement program. The executive board kept on asking question: what is the risk if we would take 30 years instead of 20? Are there other less expensive solutions possible (e.g. repair of assets)? Since the program took 50% of the annual investmentplan for the next 15 to 20 years, the room for decidion making regarding investment strategies was significantly reduced. The excecutive board challanged and stretched the boundary conditions of the program in search for more flexibility, and more room for decision making.
Finally they decided to add a verification process to the program. So each year they would take a sample of the replaced assets and send these to a specilized research centre to examine the severity of degradation. The outcome of this technical research was used for “calibration”of the overall program.
So they had developed a rigid process to run this re-investment program. It started with setting the scope in terms of overall budget and budget need per year, number of years the “ramp up” would take, number of years the investment wave would take and the indication of the “plateau” level. These requirements were all set as guiding pricipals for the program from a long term perspective.
Second step in the process focussed on the defining the scope per year and per service area. They applied a prioritisation method based on integrety assements. They built up a log of all potential integrety issue and scored these. Then they applied this score to all asset of the population. This resulted in a ranking of the asset population. It appearred that there were service areas with many high priority assets and areas with less. They realized that it would be an issue to allocate staff from one service area to another so they took a more practicale approach. They took the totall number of assest to be replaced that year and divided this number by the number of regions. This gave a target level per region. Then they took the prioritised list and selected the number of assets per region with the highest score. With this approach they had found a way to distribute the workload per region equally, and they replaced assets ranked high on the priority list. Looking over a longer period priority list would be balanced.
After this scoping per region the work was handed over to the asset strategy department. Strategic Asset managers started technical studies with the focus on the assets that were selected to replace. They started combining, clusterig and re-designing to find the best possible technical solutions from a totall cost of ownership approach. For each topics they designed several alternatives and then selected the optimum based on Nett Present Value calculation and additional to that strategic considerations of topics like compliancy, safety etc.
This resulted in projects that were added to the overall portfolio. The portfolio was managed strong commitment to the agreed budget limits.
Each year a sample of the replaced assets were send to a reasearch centre and based on the outcome of the degredation scans the overall requirements were adjusted.
A solid program, but still this company asked UMS to do a second oppinion on the implemented approach. Especially they were interested how they could improve the risk approach, since the executive board kept on asking for the actual risk position and how much risk was mitigated per year. They experienced that this question was difficult to answer.
To built up a “second opinion” a method was designed to asses the approach applied. This method was based on the maturity assesment of ISO 55000. Per process step the characteristics per development stage have been described. After completion of this assesment framework a questionairre was developed which was used to capture information in a structured way. Then a group of peer companies was selected. These companies were approached and asked if they would be willing to cooporate and share some insigths. In totall seven companies have been assesed with the developed method. It resulted in a scoring of the maturity of each process step for each of the peer group companies. Besides that information was gathered per processstep to be able to understand the different practices applied that caused the different levels in scoring.
All captured information was gathered and 2 subject matter experts independantly scored each step of the process on process maturity, content and tools and methods applied. This resulted in a scoring for each of the stages.
All scores were gathered and a reporting tool was used in line with the reporting of maturity as would be applied in PAS55 or ISO55000 gap analyses. Looking at the result, remarkable differences were found in scores between the seven reference companies. Which of course was interesting because it raises the question what practices are applied by the different companies. The biggest spread in results was identified in portfolio optimisation. Were all companies scored relatively close to each other in the mitigation Strategy step.
All captured information was gathered and 2 subject matter experts independantly scored each step of the process on process maturity, content and tools and methods applied. This resulted in a scoring for each of the stages.
The best practice process to manage the re-investment strategy appears to be a process which is built around a two step decision making process. Where in the first step from a long term perspective direction is set based on preset requirements, which include the risk tolerance. The scope of this perspective is 10 years or more. In a second stage an optimisations is added at region (service area) level focussed on riskreduction from a short term perspective (1 to 3 years). The interesting consequence of this two step approach is that in a certain time window it migth appear that decision are taken that navigate in the opposite course of the long term direction!
At the beginning of the re-investment proces a new step is introduced. This is the negotiation regarding the risk tolerance. This risk tolerance is added as an additional requirement which is negotiated and approved by the excecutive board. A relevant questions that needs to be discussed and agreed upon for example is how long the excecutive board is willing to accept a high risk. This in relation to the re-investement strategy sets the requirements for the “ramp up” time of a program, the pace in which the investement wave needs to be excecuted! On a querterly basis the risk position is updated and reported to the executive board. Since this is now a known risk at excecutive board level it becomes from a “good governance”principle mandatory that risk reporting is developed and implementent.
The second major change in the proces comparred to a good practice is found after the the mitigating strategies have been developed. In the companies that implemented this best practice, shophisticated skills, methods and tools were applied to be able to perform a short term scenario testing and risk optimisation. This portfolio management process starts with gathering all projects that are defined in a service area (region). So not only the replacement programs but all projects including maintenance inspections etc. Then the library of project is enriched with scoring data. Each project was evaluated on added value to the strategic opjectives and on the risk effectivity (risk mitigation per euro spend). For this scoring tools were used to asure consitentcy of scoring. Then requirements like budget and or resource constraints were set for the next year and an optimisation of the project portfolio within this region was done. For the scenario testing tools were used that had intelligent logic to solve the mathematical equations. One company had developed an own tool two others used for this step a specific software solution.
Mapping the indentified best practice on the “good practice” re-investment process shows how the two step decision model is added.
Short summarry:
Added to the requierements of the program is the risk tolerance and risk reporting
First step is the definition of scope from a long term totall cost of ownership perspective.
After this step detailed solutions are developed within service area’s
All projects within a region are gathered.
The portfolio is optimised againts risk effectivity from a short term perspective.
The impact of the implementation of this process is 10% to 20% more flexibility in the portfolio. In fact what has been created is option for decision making. Suppose in a certain year your budget is tigth and some innovation ideas are competing for the budget with replcements end strategic topics. Which one to select? The companies that implemented this process will run several scenarios and calculate what for that point in time will be the best scenario.
