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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


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


A Day in the Life of an Asset Manager

I need a new

[insert asset here]

right away!


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


Example: I Need a New Car!


Emotions


Expert Opinion


Expert Opinion

• Very subjective

• Based on limited data

• Different versions of the truth

• Ad-hoc decisions

• “Decibel management”

• Incremental

• Salami approach


Data and Scoring

Car Theft by Colour

Reliability Ranking


A Perfect 0/10


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


The Effect of Time

Resale price

Breakdown risk


Time-Based Decisions

• Deferring/accelerating a decision changes the business caseC

ost

Benefit

Ris

kR

esourc

es

Time Time


Value Changes with Time

3

18

2330 43

60

83

AGE


The Cost of Not Doing


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


Options / Alternatives

A B

Value Repair Replace Upgrade Carpool Limo Transit

Affordable $ $ $ $ $ $ $ $ $ $ $ $ $

Look

Speed

Safety

Convenience

Space


Strategic Value


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


Competing for Resources

The optimal decision for oneproject might not be the optimal decision for a portfolio of projects


The View From the Top

• Everything is:• Urgent• Important• Critical

• Comparing apples and oranges• Multiple constraints• How to select the optimal investments?


Portfolios

• Investment projects & programs are grouped in portfolios

• Will be competing for resources & funds based on value

PORTFOLIO


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


Optimization

• Simplex algorithm invented in the 40’s by G.B. Dantzig

• Large set of simple equationsdescribing objectives &constraints


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


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


VALUE FRAMEWORK


Strategic Value


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


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.


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


So What Metrics do People Actually Use?

• Canadian Transmission & Distribution Company

• Risks: Customer, Employee, Environment, Productivity, Reliability, Safety, Shareholder Value

• Benefits: Financial


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


3 – Risk Matrix

• The effect of uncertainty on objectives

• Probability x Consequences

• Investment benefit

= Mitigated risk = Baseline – Residual

Consequence

Pro

babili

ty


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


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


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


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








• Calibration

Production

Loss

Safety

Risk

Environmental

Risk

Staff

Engagement

ReputationCost








• Weighting

Production

Loss

Safety

Risk

Environmental

Risk

Staff

Engagement

ReputationCost


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



Document&

Sign-off


7 – Review and Finalize

• Unify all lines of business & align criteria

• Document the Value Framework (VFID)

• Formal sign-off

• Maintain & improve


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


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


Thank You

Contact: [email protected] White Papers: www.copperleaf.com

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