08 September 2011

The meaning of life (cycle)

What is an asset lifespan? What do we mean when we say life cycle, and whole life planning? John Woodhouse, Chair of the Experts Panel for the IAM, has been addressing these issues in his role as representative for the UK on the ISO PC251 development of asset management standards (ISO 55000 family). Here, he outlines the issues and some of the options being considered.
recognition of need through to disposal and any residual risks or liability period thereafter (from lust to dust see gure 1). This proved a good catalyst towards long-termism and better consideration of asset requirements in the rst place. And it certainly has helped to break down barriers between engineering design and projects, procurement, operations or asset usage, maintenance or asset care, and renewals or decommissioning. But what is optimal life cycle asset management for the assets that pass from one organisation to another for example, buying and selling (see Figure 2 on page 10). Or, indeed, for which responsibility might be split, either functionally (such as construction

here is plenty of lively debate underway about the appropriate terminology and scope for such things as asset life cycles, whole lives and life cycle activities. At the simplest level, the principles are clear: for a discrete component with a creation stage and a period of usage, leading to ultimate disposal we have no problem with the concept of a life cycle. It becomes more complicated, however, when we acknowledge two common realities: 1. The cycle stages may not be clear-cut, and may even be iterative rather than a one-off sequence for example, assets that pass through multiple lives via sale/purchasing, recycling and changed usage. 2. An asset can have an innite life if it is seen as a functional system, rather than just an individual free-standing component. Through maintenance and periodic renewal of component elements, some asset systems can be sustained indenitely.

Asset life cycle stages and responsibility periods

The rst issue arises from the difference between seeing the asset from a physical existence point of view, or from an asset management (stewardship, ownership, usage, responsibility) viewpoint. In PAS 55, we dened life cycle from the asset management perspective from the
Figure 1: A simple asset life cycle

Identification of need

Acquire/ create

Dispose/ renew

Residual liabilities

Utilise and maintain

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by one company, and usage entitlements by others), or by systems elements for example, when part of a complex system is owned or managed by one organisation, but managed or assigned to the responsibility of another? Who then is the asset manager with a whole life cycle viewpoint and optimisation motives? We clearly need a wider range of terms with which to dene the various expectations and responsibilities for better management of assets. The workshops at the IAM conference in June reinforced this message; over 90 per cent of participants conrmed the need to differentiate between the physical existence period for an asset (whoever owns or manages it) and the responsibility period, during which different activities must be optimised to deliver best value for money by a specic organisation. Clearly, we also have to constrain the life cycle term to one or other of these viewpoints, because it cannot be used for both without causing confusion! In the ISO discussions, we have been exploring Lifespan, Whole Life and Responsibility Period as potentially useful additions to the asset management vocabulary. There are also many other existing standards already using such terms, albeit with varied application. The jury is still out, therefore, on which words or phrases will be adopted for what purposes in ISO 55000, so any good ideas are still welcomed.

Life cycle costs (LCC)

Combining capital and operating expenditures into a total (life cycle) cost yields better decision-making than segmented budget thinking. Just think about the purchase, operating costs and technology overtake horizons of, say, ink-jet printers. Even though several LCC standards exist, and desirable good practices are widely understood, there is still broad variation in actual practice. Opinions also differ around what elements should be included, over what presumed time periods, how time-cost of money (discounting) should be applied and what other cash ows should be included such as risks and lost-opportunity costs. In the context of this article, it is the determination of life cycle that is a problem. Even if the assets whole physical life lies within a single organisations responsibility period, the assumptions about achievable life can be crude, and can ignore the fact that different mixes of capital investment and operating/maintenance expenditure might have a substantial effect on the economic lifespan (up to and including innite life if not constrained by other factors). The only solution for this is to quantify lifetime costs in units that allow comparison between different options with different life cycles for example, EAC instead of the overly-used Net Present Value.

Life cycle and other planning horizons

One of the most important practical requirements for sorting out the asset life cycle language is in the establishment of appropriate horizons for strategy, planning and optimisation of what to do, when and why. PAS 55 does provide a useful starting point in linking asset management strategies and plans to the fullment of an organisational strategic (business) plan. Such strategies and plans should aim to cover the whole life cycle of assets or in the event of indenite asset lives, for example they should cover at least the duration of the business plan. This presumes, however, the pre-existence of a strategic business plan! If this is not available, or is insufciently long-term to enable good value optimisation across asset life cycle stages, then good asset management practice will need to select an horizon for achievement of optimised steady-state costs, risks and performance. It will also need to demonstrate the longer-term impacts of any shorter-term business goals. While on the subject of planning horizons, it is worth emphasising the differences between strategic plans for managing the assets and any plans for developing and improving asset management that is, the capability and performance of
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the management system. The strategies and plans for assets ranging from individual equipment life cycle plans, to asset systems and their long-term management plans, right up to whole portfolio management plans will have appropriate horizons that are widely different, depending on technology turnover rates (obsolescence), demand forecasts, asset degradation timescales, asset maintainability, optimal renewal timings, and so on. (See Figure 3.) Plans for the progressive improvement of the management systems and the maturity of asset management, on the other hand, have remarkably consistent practical horizons. They are strongly inuenced by three things: human factors, industry sector volatility/ uncertainty, and any regulatory or political accountability cycles. Of these, it is the rst that usually has the greatest practical impact on deliverability of the plan. A time horizon of less than three years has little chance of truly embedding any necessary behavioural or process changes. Yet, a plan of longer than ve years tends to be too remote and full of uncertainties to engage the full commitment and motivation of those who need to deliver it. Finally, we must not forget that some horizons are forced upon us. Contractual or license periods, nite resources (such as mining or oil/gas reservoirs), or loss of demand for a particular service or asset function can create hard-edged boundaries in terms of asset management remit and

Figure 2: Sequential responsibility periods for an asset

Responsibility period for organisation 2

Identification of need Acquire Dispose

Residual liabilities

Utilise and maintain

Utilise and maintain Create Indentification of need Dispose Residual liabilities

Responsibility period for organisation 1

opportunities. Clearly, this can have an override effect on plans and realisable asset value, so any optimisation must occur within these non-negotiable constraints. Dont forget, that even in these apparently predetermined horizons, there lies a surprising

Figure 3: Different planning horizons in asset management

Planning horizons

Corporate/ Organisation Management

Corporate/ business planning horizons PA5 55 AM System 3-5 years

Manage Asset Portfolio Indefinite optimised steady state, or to constraint horizon Individual asset or asset class lifespans Maintain Renew /Dispose

Manage Asset Systems

amount of secondary opportunity. For example, the end-of-mine- (or end-of-eld-) life, or a declining demand for a service, is actually an economic cut-off decision. Managed decline including progressive re-optimisation of expenditures, residual risks and life extension opportunities holds good scope. Even in contractual/license termination cases, the hand-back condition, assurance of on-going sustainability and performance or condition criteria may be justied by future business, stewardship reputation or re-licensing opportunities. It is a short-sighted and foolhardy asset manager who plans for assets to fall to pieces shortly after the end of his or her responsibility period. Remember too that, whatever life cycle terms we use, a good asset manager will consider any residual liabilities after decommissioning, sale or termination of the asset utilisation phase.
Authors biography John Woodhouse is Managing Director of The Woodhouse Partnership Ltd, which he launched in 1995. He is also a founder and Fellow of the UK Institute of Asset Management, and author of Managing Industrial Risk (Chapman & Hall, 1993)

Manage Assets Create /Acquire Utilise