Physical Asset Management and Great Companies

Since the turn of the century we have seen physical and financial asset management drawing closer and closer together. Particularly with some of the work that has gone into the fields of asset economics in the UK Utility and Rail industries.

And the timing could not be better. Since about the mid 1990's we have been firmly on the radar of corporate management. Initially as a source of costs to be controlled, but over time enterprises around the world have come to realize that physical asset management is source of significant competitive advantage.

In fact the recent Aberdeen report on asset reliability shows that 46% of respondees had adopted asset management initiatives in an attempt to achieve a competitive advantage. A far cry from where we were a merre decade ago.

Aberdeen Group 2008However, 49% also adopted it in order to improve their return on assets.

This is where I often have problems when speaking with maintenance and reliability managers.

What exactly do companies mean by return on assets?

The initial response is to go where they are comfortable - issues like reduced costs or increased revenues.

And while that is pretty accurate, it doesn't really get to the heart of the deal. And the heart of the deal is that it is really all about maximizing Net Present Value for a given level of performance and risk.

And this takes the entire issue from one of costs, which is often a short term view, to one of Whole-of-Life costs - or the long(est) term views.

When discussing these issues I find that managers and even reliability engineers have no idea of what Net present Value is. But lets take it further and try to link the goals of asset management to the goals of the organization.

As an investor for most of my life I have spent a lot of time analysing company performance and trying to work out if they are good companies or not. This has led me to believe that a good company is one that is able to achieve the following metrics. (Among other things...)

  • An average growth in the earnings per share of at least 15% over at least 5 years.
  • An average growth in the companies book value of at least 15% over at least 5 years
  • An average growth in the companies cashflow of at least 15% over at least 5 years

These issues are fundamental to organizations and they touch on a great number of areas. But for asset intensive companies these figures are not achievable without strong and consistent asset management practices.

I think here are very few people even thinking about these issues, and even fewer people who are writing about it. So I am going to spend some time over the next few weeks analyzing this and working through some of the areas that physical asset management not only contributes to, but actually drives, the viability of many companies that we work in.

Next posts in this series:

  • Physical asset management and Earnings per Share.
  • Predictability / NPV and the costs of capital.
  • WoL asset management.

I wrote an article that spoke about some of these issues many years ago which you can read on this site here.

I am aware that this particular theme isn't for anyone, but I really think it is vital that some form of discussion on the issue is initiated. It will change your ideas of competitive advantage - and it will show you how to make the case for billions, rather than merely millions in benefits. (As things should be with these sorts of industries)

 I hope you will stay around, post your comments, and let me know if I am talking about issues that are relevent to you and how you make the case for asset management.

You might also want to use the links on this post to subscribe to the RSS feed and have it turn up in your feed reader as I post them.

Good Luck!