Asset Management Insights. Celso de Azevedo

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.

      Ever since prehistoric times, the social man has striven to better his production of tools, then of machines—in short, of assets. But up to the Industrial Revolution, and, to some extent, even in our modern times, assets that were to be operated have been regarded as ends within themselves, thus neglecting the optimization of value whose realization they would permit. Reflections of life cycles have not been useful up to now, because the notion had not been proven to embody a true necessity. Historically, designers have been allowed to create in total freedom from external constraints, since what was expected from them was to design a tool responding to a precise need, and whose function was immediate.

      Until the introduction of CAPEX/OPEX trade-offs (which establish a relation between procurement investments and maintenance costs in the production phase), costs had been somewhat absent from this historical scheme. Since the task that had been set consisted solely of responding to a functional imperative, it seemed unnecessary to take into account risks of degradation and aging of the assets and machines. Thus, I’ve been invited a countless number of times to take part in broadly chance-based projections of operational and maintenance costs, sometimes as early on as in the context of a call for tender where all too often the practice, even today, is to appear as the concurrent able to display the smallest “ignorance coefficient” in regard to the operational costs of the life cycle. We can take pride in having participated, throughout the last three decades, in the implementation of a culture which takes operational reliability and life cycle costing much more seriously; however, this culture has yet to impose itself as a true industrial standard.

      To this day, one can deplore a lack of anticipation regarding the life cycles of different assets. Even in the case of organizations that have begun to open up to an Asset Management line of thought, the profile of professionals sought after for this type of mission is radically distinct from that expected for other missions. This can induce a lack of coordination, and therefore of alignment, in corporate perspectives. Once more, we can observe that organizational segmentation is harmful to the optimal efficiency of decisions tied to the assets. The reality is therefore that of a complex mix of needs: that of the implementation of a more “long-term focused” vision, of a transformation of traditional leadership, and of a more holistic management for the different segments of the assets’ life cycles.

      Let us stop to consider the role attributed to design offices in the organizational chart organigram: these offices are responsible for the assets’ conception, design, and specification. Thus, they are exclusively made up of engineers, trained and habilitated to consider the asset in terms of its sizing and functionality, but not specifically in terms of its life cycle.

      By no means do we intend to minimize the usefulness of the engineers’ work, which is more often than not very well executed and remains entirely necessary; our intention is rather to bring forth a redefinition of the value that this engineering work generates. It is obvious that engineers produce a certain value, were it only of a commercial nature. But in order for us to be able to talk about “value” in the sense of “value extraction,” inherent to the best practices of Asset Management, the designer-engineers themselves should be taught and trained on the fundamental concepts of Asset Management; once more, the absence of a proper coordination of the different segments that make up the traditional organization is an obstacle to the optimal realization of value from the assets.

      This “coordination” that we’ve brought up allows for an optimization of the alignment between corporate objectives (expressed by the organization’s decision makers) and the work of the engineers. It is a crucial factor in the creation of a high-value asset, and one whose importance can be observed from the very