Disarming the naysayers: forecasting renewal needs across your entire asset portfolio

Some practitioners will assert that financial management and asset management are very different and, therefore, should be kept separately.  It is not an unreasonable argument.  The most common defence for this position is that financial valuation and capitalisation processes look backwards at the consumption of assets, whereas asset management renewal forecasting looks forward at treatment needs to meet defined service levels.  This is 100% correct.  However, relying on this to avoid integration of business functions is short-sighted and limiting. 

What’s the alternative to predictive modelling?

When it comes to renewal forecasting, asset intensive businesses will often invest in sophisticated predictive modelling tools.  These tools allow businesses to analyse ‘what if’ scenarios that can inform renewal program investment needs and establish candidate treatment priorities for further site investigation.  For asset intensive businesses, the use of predictive modelling tools should be encouraged since they generate significant benefits by informing evidence-based investment decisions.  Because these sophisticated tools generally take substantial time and effort to set up, they are mostly adopted for high-value and/or high-risk asset types.  But what about assets that aren’t either of those things?  How can their ongoing renewal needs be forecasted? Alas, for these assets, many organisations choose the reactive ‘fix it when it breaks’ approach.

When the expense of sophisticated predictive modelling tools cannot be justified, using financial valuation information is a suitable proxy to determine program level renewal needs.  As noted above, financial valuation looks backwards at asset consumption, so many practitioners believe this isn’t an appropriate approach to assess renewal requirements.  While it’s not ideal for identifying individual assets for treatment, at a program level it can provide a reasonable approximation of long-term average renewal needs, and help inform future planning; thereby, filling the gap that predictive modelling techniques sometimes leave behind.  This approach is particularly viable for organisations that manage public infrastructure, where a Depreciated Replacement Cost valuation approach is adopted.

To data or not to data- that is the question

Another argument against the use of financial valuation information to identify future renewal needs is the concept of materiality.  Materiality is an accounting principle related to the influences on economic decisions by those who use financial statements.  In financial management, materiality is often used as a basis for limiting the level of recognition, a potential root cause for low value/low risk asset types not being valued. In effect, materiality is used as a reason not to collect data for financial valuation purposes, because, from a finance management perspective, the cost of data collection may outweigh its benefits.  

However, asset management functions are not constrained by the accounting concept of materiality.  There are often good maintenance management reasons why data is required on low value/low risk asset types. In these circumstances, data can be used to create a more complete financial management function; whereby, the organisation would not only better understand the value of their broader asset portfolio, but may also use the financial valuation information to identify long term average renewal needs for low value/low risk asset types.

The availability of some form of renewal forecast for all asset types across an organisation’s infrastructure portfolio is a pragmatic requirement, ensuring due diligence of investment need analysis and mitigation of unplanned service interruptions.  If an organisation is unwilling to invest in sophisticated predictive modelling tools for all asset types, then it will have a gap in its estimate of portfolio renewal needs unless it finds an alternative means of assessment.  Where asset management considerations are used to inform the level of asset componentisation for financial valuation processes, the outputs can be used to provide a more complete picture of renewal needs across an organisation’s asset portfolio.