Download HOW TO CUT COSTS RESPONSIBLY – A REVIEW OF CURRENT

HOW TO CUT COSTS RESPONSIBLY – A REVIEW
OF CURRENT METHODS TO ACHIEVE EFFICIENT
AND SUSTAINABLE ASSET MANAGEMENT
Mathew Oakey, AMCL
Summary: The NSW Government made a guarantee to the people of NSW that network charges will
be lower in 2019 than they were in 2014. There are many ways of achieving this goal, but what
should be guiding us? Are leaders thinking short term and instantly downsizing or are there better
asset management techniques for the regulator and managers to adopt? Is there an opportunity to
reduce our costs even further, while improving our levels of service and providing a sustainable
outcome for the community, customers and owners?
This paper presents a series of case studies exploring how cost reduction across operating and
capital expenditure has been achieved based on experiences across various industries and cultures.
In targeting waste, unnecessary costs and poor work practices, the paper considers how the use of
data, knowledge and management systems can lead to strategies to reduce the risks and increase
the opportunities, while maintaining performance that may involve some counter intuitive investments
to realise sustainable benefits.
Keywords: Strategy, Planning, Data, Competency, Capability, Process, Life Cycle Costing Analysis
COST CUTTING FOR LOWER PRICES
Customers would like lower prices and normally without any adverse impact on the level of service.
The NSW Government aimed for lower prices for customers in 2015 when it guaranteed ‘Network charges will be lower in
2019 than they were in 2014’ [1]. The NSW Government identified methods to achieve this objective included cutting
waste and unnecessary costs in the electricity business, curtailing union rorts and work practices that have pushed up
prices, ensuring no return of “gold plating” of the networks and passing on savings from greater efficiency to consumers,
in accordance with the AER’s Efficiency Benefit Sharing Scheme.
GUIDANCE FOR ACHIEVING EFFICIENT AND SUSTAINABLE ASSET MANAGEMENT
In driving utilities to deliver lower prices, reduced costs, and sustainable service at an appropriate level, it is not always
clear what should be guiding us: are our leaders and ourselves limiting our thinking to the short term, or are we allowing
ourselves the options of long term strategies and planning.
There are many options when it comes to decisions. If we are guided in our thinking to consider only the short-term needs
of business and political survival we are likely to select the best of the short-term options, and discount the longer-term
outcomes.
Community and business objectives should guide us to use appropriate asset management techniques and goals, and
consider the trade-off between short-term and the longer-term options, resulting in more efficient and sustainable
outcomes for stakeholders, customers and community.
However, making these decisions requires appropriate datasets, information, and analysis using asset management
techniques such as lifecycle costing analysis, risk analysis and utilising prioritization criteria.
THE PROBLEM WITH SHORT TERM COST CUTTING
The Short Term Thinking Catch
When leaders, regulators and asset managers only consider the short term of the next 1 to 5 years and ignore the long
term, we get behaviours that are not preferred. These behaviours can impact assets, people and organisations, and
strategy.
Asset impacting behaviours include the focus on temporary repairs and patch jobs which can lead to ongoing asset,
system or infrastructure failure or increased maintenance and operations activities. Alternatively, decisions focus on
replacing equipment to fix an immediate issue resulting in unnecessary capital projects.
People and organisation impacts include continual or frequent re-organisation generally involving painful downsizing
through redundancy (both voluntary and involuntary). Furthermore, it often results in needing to re-engage people within
one to two years of them leaving to address a gap in the organisations capability.
Strategic impacts of short term thinking include focusing on very limited goals and objectives, only solving current
problems and undertaking strategies that will meet political expectations.
The Short Term Thinking Principles
We risk operating using short term thinking principles of “whatever it takes” or “whatever”. We stop caring about achieving
an efficient and sustainable outcome and just do what it takes to get through or to meet the stated objective.
What Happens in Short Term Thinking
Short term thinking may lead to shortcuts on getting to decisions. It may mean defining incomplete solutions with the
expectation ‘things will get worked out as we go’, and a lack of commitment to solving all the issues including process
change, data management and information system support.
Short term solutions may not gather the appropriate information. For example, during re-organisations knowledge held by
people leaving the organisation is not captured resulting in this knowledge being lost, especially when the more
experienced people are made redundant. Alternatively, solutions may not undergo a rigorous lifecycle cost analysis
because “the option was politically the right one”.
We may not be clear on the capabilities required by our teams to address the needs. If we do not define the required
business capabilities and align our available competencies we may end up impacting our ability to provide the required
services.
The Short Term Thinking Timeline
As a short-term decision has a short life they need to be revisited regularly, requiring additional effort and workload with
the potential of chopping and changing approaches. This can lead to work force frustration, lack of confidence and nonoptimal solutions.
This is not to say short term cost cutting won’t continue, and these sorts of short term decisions, behaviours, attitudes and
timelines can be stopped, but it is worth considering what alternatives decision processes exist.
ALTERNATIVE APPROACHES TO COST CUTTING
A range of approaches to decision making exist: from the “wet finger in the air”, through the ‘high level study team’ to a
strategically-driven top-to-bottom data derived analytical decision. Each of these, and points in between, can be used
depending on the impact of the decision under consideration.
For cost cutting and to make the cost cutting ‘stick’ with a sustainable outcome, it is necessary to move towards the more
detailed end of this range of approaches.
A Suggested Approach to Cost Cutting
As an industry, asset management has been defined as “coordinated activity of an organisation to realize value from
assets … balancing costs, risks, opportunities and performance benefits” [2]. A suggested approach to sustainable cost
cutting is to use the principles and approaches of asset management. This will lead to creating strategies based on
detailed analysis and informed decision making that will result in solid plans. It will also involve considering changes in
the enabling support, operation, performance evaluation and improvement functions.
The activity of cost cutting requires the capability of change management. Cost cutting involves change and to make
these changes sustainable they need to be managed. Sustainable cost cutting may require broad changes in the
operating model of a business impacting people, organisation, location, information, systems and management.
A Counter Intuitive Approach to Saving – Spend More Wisely
This leads to the question of where through the lifecycle of a decision do we need to put our effort. We know for large
infrastructure projects with assets with a long life it is necessary for the design phase to be sufficiently completed prior to
moving to the building phase. Design should optimise the mix of operational and capital spend through the life of the
asset with a focus on the lifecycle cost rather than just the capital cost.
The logic for large infrastructure projects applies to other decisions we make in our business about service provision,
asset operations, maintenance and people. If we were to increase our effort on design, we would move closer to
identifying what an efficient and sustainable business would look like.
Improving design across our business
The design of our business starts with our processes: the plans, controls, inputs and mechanisms adopted through the
business to determine what and how we deliver.
We would look at our strategy and plans for the provision of services and operation of assets. We would look at asset
enablers in the business including asset information, risk and review, and organisation and people. Questions during
design would be raised about controls, inputs, and mechanisms we use to deliver services.
We would consider modifying our controls of processes to ensure there is appropriate governance, defined decision
criteria, suitable objectives and outcomes with appropriate targets.
We would be working with appropriate inputs including quality data, sufficient information and suitable analysis, which is
combined wisely in proportion with mortal knowledge (knowledge held by individuals).
We would be providing appropriate mechanisms, like competent people, with tools to manage each stage of the
processes efficiently.
When redesigning the business to achieve cost cutting, it needs to not just consider the organisation structure, but also
consider processes, where we operate from, what we deliver, how we are governed, how technology is sourced and
utilised, and our management systems.
CASE STUDIES
The following case studies show a mix of poor and good practice in the design of business processes and decision
making, and their impact on cost, performance and risk.
Case Study – Improving Opex And Capex Mix
A water utility in Australia has set a limit on the operating expenditure (opex) budget value significantly lower than the
unconstrained opex forecast while capital expenditure (capex) is relatively easy to obtain.
The impact of constrained opex budget has been to reduce inspection, performance and monitoring programs, delay or
cancel maintenance, and an increase in early rehabilitation and replacement supported by capex funds.
So, while opex is positively perceived as not increasing, a negative effect is being seen in asset risk and performance.
The lack of inspection and maintenance is resulting in asset failures. For asset failures with unacceptable consequences
the assets are being rehabilitated or replaced earlier than the expected design life, and analysis would likely show a
higher lifecycle cost profile.
Appropriate re-design of this process would include review of criteria used to set funding limits and alternative processes
to inform the governance team. This may result in a better overall outcome, with increased opex and reduced capex
through a suitable analysis of the life cycle costing for various assets and networks.
Case Study – Improving Capability and Competency Assessments
A natural resources operation in Australia removed asset information managers from the group as part of a
reorganisation.
The impact of this change after three years was described as: a loss of confidence in the organisations data; no one
assigned responsibility for information technology maintenance or improvement; and a lack of governance and direction
on asset information management. After three years’ positions were re-created for two asset information managers.
So, while initially the operation head count was lower and costs were reduced, decision making was negatively impacted
through low confidence making the reorganisation unsustainable.
Appropriate re-design of the process at the second reorganisation considered the required capabilities and competencies
of the team members, and added the capabilities and competencies back into the team.
Case Study – Testing Strategy Options
A study of financial support to homeless people reviewed the cost offset of two strategies:
1) Keep chronically homeless people homeless,
2) Move chronically homeless people into permanent supportive housing.
Through analysis over a one year period, people who were chronically homeless used state government funded services
that cost approximately A$48,000 each. Over another one year period in which they were moved into permanent
supportive housing, the same people used services that cost approximately A$35,000. In addition to the cost reductions
there were benefits to the individual and society in terms of reductions in criminal offences, being victims of crime, time in
custody, use of short term crisis accommodation, and use of mental health services. [3]
As this case study demonstrated, you can achieve unexpected results when you take a structured well-designed
approach to analysing opportunities. This approach uses a cost model, with real data, leading to informed decisions, that
ultimately results in improvements in cost, risk and performance.
ARE WE USING OUR ASSET MANAGEMENT TECHNIQUES TO REDUCE COST AND MANAGE PERFORMANCE
AND RISK?
We need to continue challenging what is best for stakeholders, customers and the community. We should not get stuck in
thinking ‘it’s the way we do things’. We should instead be willing to respectfully argue with our managers and leaders
about what sustainable means, and how we could better reduce lifecycle costs.
There are a range of techniques to responsibly cut costs, manage performance and risk, and support discussions with
managers and leaders.
There is evidence we are not using the asset management techniques and practices that have identified. A review of
company results from maturity assessments of over 140 organisations against each of Global Forum for Maintenance and
Asset Management (GFMAM) “The Asset Management Landscape” 39 Subjects [4] showed a range of strategy level tools
that are immature in many organisations. Table 1 shows the lowest ranked (i.e. most immature) Subjects.
Table 1 Select GFMAM Maturity results
GFMAM Landscape Subject
Ranking based on average maturity
Asset Management System Monitoring
39
Asset Information Strategy
38
Lifecycle Value Realisation
37
Operations and Maintenance Decision Making
36
These four Subjects are the lowest ranked of the 39 Subjects. This means these Subjects are less mature compared to
the other 35 Subjects and potentially indicate these subjects are poorly developed and implemented. The type of artefacts
and activities expected for these Subjects are steering group meetings, asset information strategy and business
requirements, lifecycle value analysis, asset capability requirements, and maintenance requirements analysis.
Improvements in these four Subjects will positively improve decisions through improved governance, and understanding
of the assets attributes, cost and performance requirements.
CONCLUSION
As shown by the previous Baird Government in NSW, there are attempts to improve the cost without negatively impacting
the service provided. There is a risk that short-term thinking will be used to achieve the cost cutting that will likely result in
unsustainable solutions, particularly since evidence shows many organisations are not using the tools we know we should
be using to inform cost cutting decisions. However, if organisations were to apply well-established asset management
techniques they will be able to make better informed decisions, in particular through life cycle costs analysis, risk
assessments, and asset management frameworks, strategies and plans. Improved design of cost cutting using asset
management techniques will make the changing situations more sustainable over the long term.
REFERENCES
[1] Guaranteed Lower Prices for Electricity Customers”, nsw.liberal.org.au/guaranteed-lower-prices-for-electricitycustomers, NSW Liberals, 2015
[2] ISO 55000:2014 Asset management – Overview, principles and terminology, Switzerland, ISO, 2014
[3] Cameron Parsell Research Fellow, homelessness, social welfare, and poverty, The University of Queensland,
Supportive housing is cheaper than chronic homelessness, The Conversation, 2016
[4] “The Asset Management Landscape”,2nd ed, GFMAM 2014