SMARTER approaches in Asset Management www.saama.org.za
Value-based Decision Making
Boudewijn Neijens
Copperleaf, Canada
SMARTER approaches in Asset Management
Decision Making
• A global challenge
• 2 trillion underutilized assets in the USA alone
• Key driver of PAS 55 and ISO 55001
SMARTER approaches in Asset Management
ISO 55001
• Value
• Assets exist to provide value to the organization and its stakeholders
• Value can be tangible or intangible; positive or negative
• Asset management enables realization of value
• Alignment (“Line of Sight”)
• Asset management objectives align with organizational objectives
• Asset management decisions, plans and activities (technical, financialand operational) collectively enable the achievement of AM objectives
• Leadership
• Leadership and culture are determinants of realization of value
• Roles, responsibilities and authorities for AM are clearly established
• Employees are aware, competent, and empowered
• Assurance
• AM gives assurance that assets will fulfill their required purpose
• Assurance is derived from effective governance, controlled processes and robust management of risks
• Monitoring, evaluation, review and continual improvement
SMARTER approaches in Asset Management
A Day in the Life of an Asset Manager
I need a new
[insert asset here]
right away!
SMARTER approaches in Asset Management
Asset Investment Planning & Management
ASSET LIFECYCLE STRATEGY(<~20 YRS)
ASSET LIFECYCLE STRATEGY(<~20 YRS)
INVESTMENT PLAN(<~5 YRS)
BUDGETING(<~2 YRS)
OPERATING(IN FLIGHT)
CANDIDATEINVESTMENTS
EXPANSION / GROWTH OPERATIONAL IMPROVEMENTS
ASSESS VALUE
PREDICT OPTIMIZE
OPERATINGUPDATES
MANAGE
ASSET RISKUPDATES
SUSTAINMENTEMERGENT
ASSET BASE
Bottom-Up Top-Down
SMARTER approaches in Asset Management
Expert Opinion
• Very subjective
• Based on limited data
• Different versions of the truth
• Ad-hoc decisions
• “Decibel management”
• Incremental
• Salami approach
SMARTER approaches in Asset Management
Scoring Investments
• Objective evidence to describe:
• Condition / Health Index
• Criticality
• Cost
• Value / Benefit
• Using accepted metrics: NPV, B/C, IRR, EAC, etc.
• Beware of their limitations
• Used for “cut line” ranking
• Hard to do with multiple constraints
• Leaves money on the table
SMARTER approaches in Asset Management
Time-Based Decisions
• Deferring/accelerating a decision changes the business caseC
ost
Benefit
Ris
kR
esourc
es
Time Time
SMARTER approaches in Asset Management
Strategic Value
Stakeholder
• You
• Spouse
• Children
• Insurer
• Banker
• Customers
Values
Speed, looks, technology
Comfort, convenience, affordability
Entertainment, space
Safety, repair costs
Resale value
Image, price
Different values need not be weighted equally
SMARTER approaches in Asset Management
Options / Alternatives
A B
Value Repair Replace Upgrade Carpool Limo Transit
Affordable $ $ $ $ $ $ $ $ $ $ $ $ $
Look
Speed
Safety
Convenience
Space
SMARTER approaches in Asset Management
Evaluating Alternatives
ValueUnits
OPTION 2
Benefits:• Increased Productivity• Avoid 4 service
interruptions• Reduce safety risk by 14%
OPTION 3
Benefits:• Increased Productivity• Reduce safety risk by 9%• Reduce environmental risk
OPTION 1
Benefits:• Increased Productivity• Avoid 1 service
interruption
ValueFunction
SMARTER approaches in Asset Management
Competing for Resources
The optimal decision for oneproject might not be the optimal decision for a portfolio of projects
SMARTER approaches in Asset Management
The View From the Top
• Everything is:• Urgent• Important• Critical
• Comparing apples and oranges• Multiple constraints• How to select the optimal investments?
SMARTER approaches in Asset Management
Portfolios
• Investment projects & programs are grouped in portfolios
• Will be competing for resources & funds based on value
PORTFOLIO
SMARTER approaches in Asset Management
Portfolio Optimisation
• Derive the best value for the corporation
• Finding the optimal mix considering:
• Alternatives
• Value over time
• Risk over time
• Constraints
CONSTRAINTS OPTIMIZEDPORTFOLIO
OPTIMZEDPORTFOLIO
PORTFOLIO
SMARTER approaches in Asset Management
Optimization
• Simplex algorithm invented in the 40’s by G.B. Dantzig
• Large set of simple equationsdescribing objectives &constraints
SMARTER approaches in Asset Management
Efficient Frontier
HigherValue
LowerValue
Higher SpendLower Spend
Efficient Frontier
Exp
ecte
d R
etu
rn
Expected Spend
Decision Making Maturity
• Multiple alternatives can be modeled for each investment• Automatically propose alternatives to maximize portfolio value
• More systematic process is used to assess investments• Uses fixed scores based on more objective evidence
SCORING
• Value Framework aligned to the strategic organizational goals• Net value including both soft & hard benefits, and costs
STRATEGIC VALUATION
• Value based on risks or benefits that change over time • The impact of deferring investment is considered
TIME BASED DECISIONS
• Investments assessed on financials & qualitative criteria• Approval relies on discretion or persuasion
EXPERT OPINION
OPTIONEERING
SMARTER approaches in Asset Management
Summary
• Many different decision models
• Suitability dependent on complexity, criticality, magnitude of decision
• Data removes emotions from the equation
• Ensure all risks, costs, benefits are considered
• The use of a value function ensures consistent and thorough valuations
• Simple prioritisation leaves money on the table
• Optimisation is a complex mathematical problem, but techniques are well proven
• The subject is called Multi-Criteria Decision Analysis
• Decision Making is a journey – few companies are excellent at it across the board
SMARTER approaches in Asset Management
Value Framework Development
IDENTIFICATION:
Establish value drivers aligned to
corporate objectives
IDENTIFICATION:
Review and determine investment types
DEFINITION:
Establish the risk matrix
DEFINITION:
Establish the benefits questionnaires
DEFINITION:
Calibrate the value drivers against a common scale
VALIDATION:
Validate the value framework
VALIDATION:
Review & finalize the value framework
1 2
3 5
6 7
4
SMARTER approaches in Asset Management
1 – Value Drivers
• Strategic Objectives/Goals• What are we trying to achieve?
• What do we value?
• Examples:• “Lower customer bills by 20%”
• “Provide reliable, cost-effective distribution service”
• “Maintain the environment for generations”
• “Achieve industry top quartile in employee engagement”
• Sources:• Corporate Objectives and
Goals
• Corporate Values
• KPI’s
• Risk Management Framework
• Annual Reports
• Rate Filings
• etc.
SMARTER approaches in Asset Management
1 – Value Measures
• Map each value measure to the relevant strategic objective
• Assign an initial weight to each value measure
• Will be adjusted as the Value Function is tested and agreed
Strategic Objectives Value Measures Weight
Increase Customer Satisfaction“Provide reliable, cost-effective
distribution service”
Service Capacity Risk 1
Maintain Customer Service Reliability
Service Reliability Benefit
1
Environmental Stewardship“Maintain the environment for
generations”
Environmental Risk 1.2
Public Perception Public Perception Risk
Public Perception Benefits
0.8
0.8
“Increase shareholder value”“Optimize the rate of return”
Financial BenefitsSoft Financial
BenefitsFinancial Risk
Cost
10.5
1-1
Plant Reliability Lost Production Risk 1
Safety & Regulatory“Safety First for employees & our
community”
Safety RiskRegulatory Risk
1.50.7
SMARTER approaches in Asset Management
So What Metrics do People Actually Use?
• Canadian Transmission & Distribution Company
• Risks: Customer, Employee, Environment, Productivity, Reliability, Safety, Shareholder Value
• Benefits: Financial
SMARTER approaches in Asset Management
2 – Investment Types
• Ensure the Value Function can be used for the full scope of investment types:
• Each type will bring its own mix of typical benefits
Distribution Transmission Gas Production Water
Sustainment
Growth
Regulatory
IT
SMARTER approaches in Asset Management
3 – Risk Matrix
• The effect of uncertainty on objectives
• Probability x Consequences
• Investment benefit
= Mitigated risk = Baseline – Residual
Consequence
Pro
babili
ty
SMARTER approaches in Asset Management
Consequences
• Consequence levels aligned across different risk types
Event Type Negligible Small Minor Moderate Major Extreme
Safety On-site first aid injury
Injury requiring medical attention / near miss
Injury requiring medical attention / lost time
Multiple injuries requiring medical attention / lost time
Permanent disability Fatality / multiple fatalities
Environmental Minor impact / no remediation required
Minor impact / contained on-site / simple remediation
Minor impact / contained / moderate remediation
Limited impact offsite / contained / moderate impact on site
Detrimental impact / on or offsite / long term remediation
Catastrophic offsite / impossible to mitigate / uncontained
Financial < $100K $100K $500K
$500K $1M $1M $5M $5M $10M >$10M
Dx SAIDI < 1.5 h 1.5 8 h 8 16 h 16 80 h 80 160 h > 160 h
Tx Frequency of
Outages
<17 17 85 85 168 168 830 830 1660 > 1660
Lost Generation < 2 GWh 2 11 GWh 11 22 GWh 22 110 GWh 110 220 GWh > 220 GWh
SMARTER approaches in Asset Management
4 – Benefits Questionnaires
• Use pre-set questionnaires to ensure comparable valuations
• Per investment type• And possibly per asset type
• Per line of business
• Captures all assumptions,rates, etc.
• You might still want to use peer reviews to keep everybody honest
SMARTER approaches in Asset Management
5 – Common Scale
• Calibrate all value measures to a common scale
• Ideally monetary
• Or an internal value unit
• Intangibles can be aligned using pair-wise comparisons
SMARTER approaches in Asset Management
Calibration vs. Weighting
• Calibrating = find conversion factors to align all values
• e.g.: 1 SAIDI point = $637
• e.g.: 1 labour day lost = $240000
• Weighting = apply emphasis on particular values
• E.g.: safety is most important => apply 1.25 weighting to all safety benefits
Production
Loss
Safety
Risk
Environmental
Risk
Staff
Engagement
ReputationCost
SMARTER approaches in Asset Management
Calibration vs. Weighting
• Calibrating = find conversion factors to align all values
• e.g.: 1 SAIDI point = $637
• e.g.: 1 labour day lost = $240000
• Weighting = apply emphasis on particular values
• E.g.: safety is most important => apply 1.25 weighting to all safety benefits
• Calibration
Production
Loss
Safety
Risk
Environmental
Risk
Staff
Engagement
ReputationCost
SMARTER approaches in Asset Management
Calibration vs. Weighting
• Calibrating = find conversion factors to align all values
• e.g.: 1 SAIDI point = $637
• e.g.: 1 labour day lost = $240000
• Weighting = apply emphasis on particular values
• E.g.: safety is most important => apply 1.25 weighting to all safety benefits
• Weighting
Production
Loss
Safety
Risk
Environmental
Risk
Staff
Engagement
ReputationCost
SMARTER approaches in Asset Management
6 – Validation
• Use a sampling of different investment types
Compute value of sample
investments
Value > 0 when
expected?
Sort investmentsby value
Ranking matches expectations?
Optimize theportfolio
Portfolio matchesexpectations?
Adjust Value Function
Adjust Value Function
Adjust Value Function
Document&
Sign-off
SMARTER approaches in Asset Management
7 – Review and Finalize
• Unify all lines of business & align criteria
• Document the Value Framework (VFID)
• Formal sign-off
• Maintain & improve
SMARTER approaches in Asset Management
Value Framework Development
IDENTIFICATION:
Establish value drivers aligned to
corporate objectives
IDENTIFICATION:
Review and determine investment types
DEFINITION:
Establish the risk matrix
DEFINITION:
Establish the benefits questionnaires
DEFINITION:
Calibrate the value drivers against a common scale
VALIDATION:
Validate the value framework
VALIDATION:
Review & finalize the value framework
1 2
3 5
6 7
4
SMARTER approaches in Asset Management
Summary
• Value Function combines all of the value measures required to assess and compute the overall value that each investment is bringing to the organization, taking into account its financial benefit, impact on KPI’s, risk mitigation, and cost
SMARTER approaches in Asset Management
Thank You
Contact: [email protected] White Papers: www.copperleaf.com
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