Asset Investment Planning 101
Overview
In most asset-intensive organizations, it happens once a year. Management retreats produce an updated strategic plan that outlines long-term business objectives around financial return, customer satisfaction, safety, and the environment. It is usually accompanied by a multi-year list of capital projects, another multi-year list of operating and maintenance activities, a summary of administrative costs, and a head count forecast for the near term.
Invariably, there are more projects than budget, especially for organizations faced with upgrading aging infrastructure. Priorities are recommended by each operating group, rolled up for review and assessment – which usually involves many spreadsheets and much consternation – and then decisions made about where select investments will happen across the entire organization. These budget choices are often not understood by those outside the decision process, nor are they always clearly aligned with an overall long-term plan. While the decisions may not be poor, they often do not come supported with clear and documented links between factors such as corporate and plant strategic direction, asset performance, condition, and risk.
Sound familiar? This is not capital planning; this is budgeting. This classic style of budgeting is not effective in asset-intensive organizations dealing with the challenges of managing aging infrastructure. Rarely do the lengthy capital project lists focus on the most important part of the business: the value of the assets and how investment choices today support the value-based business objectives of tomorrow. Connecting these distinct budgeting and planning processes is an important step towards meeting stakeholder needs for governance, transparency, risk management and communications.
To ensure good investment decisions are made, asset-intensive organizations are migrating to a process that allows them to model their asset base relative to their operating environment and long-term objectives.
We call this Asset Investment Planning (AIP).
- What is AIP?
- What can AIP do for me?
- Why is AIP important now?
- What will my organization need in order to achieve effective asset investment planning?
- How can CopperLeaf help?
What is AIP?
AIP is a new approach to capital planning and budgeting. It employs a variety of strategies, tools, and processes to ensure that an organization uses, cares for, invests in, and disposes of its physical assets and facilities in alignment with its overall corporate objectives and business environment. By planning for all investment activities simultaneously, organizations are better able to optimize the allocation of resources to achieve performance objectives within their financial constraints and risk tolerances.
What can AIP do for my organization?
Is your organization challenged by things like:
- Meeting growth targets with aging assets?
- Communicating spending plans effectively to all stakeholders?
- Balancing diverse and changing objectives?
- Pressing capital constraints?
- Improving customer service targets?
If so, making the shift from a traditional, silo-inspired capital planning model to an integrated asset investment planning model can help a great deal:
- Develop a common understanding of planning and performance
- Present a comprehensive picture of future spending plans and resulting levels of performance
- Align operating plans and asset management strategies with corporate objectives, balancing cost, reliability, and risk
- Make more rigorously and accurately informed investment decisions, encompassing multiple financial and non-financial attributes
- Better explain and defend financial plans to key stakeholders, thus increasing their likelihood of acceptance
- Improve the efficiency of planning, budgeting and reporting processes
- Realize higher return on investment (ROI) and overall performance from asset investments
Why is AIP important now?
The infrastructure that we rely on daily evolved over the course of the 20th century. Up until the 1970’s, most organizations were managing massive growth during a period of major construction. Executives were focused on managing growth, emphasizing project management and execution processes and technologies. In the 1980s, organizations faced the debt pressures resulting from this period of major construction and refocused on cost control and efficiency. More recently, deregulation, Y2K, and the internet have caused organizations to emphasize cost control to the point where we’re starting to see infrastructure failings. These failings are the combination of a number of business issues, such as aging infrastructure and demand outpacing supply in a time of financial constraint.
Executives are now concerned with how to ensure asset performance not only for the upcoming year, but for the expected remaining life of the asset. The focus is now on insight, transparency, governance, and risk management in all investment decision processes. Planning to protect the long-term viability of an organization’s asset portfolio relative to the long-term returns of the overall organization is a critical business activity. Asset planning is especially important given the magnitude of asset-related spending and the extent to which decisions impact corporate performance. At a time when reinvestment in aging infrastructure is necessary to sustain reliability, improving asset planning processes will help asset-intensive companies establish sustainable levels of performance through long-term plans based on asset condition and value.
Download Asset Investment Planning Best Practices White Paper
What will my organization need in order to achieve effective asset investment planning?
To achieve effective asset investment planning, organizations need to implement three major initiatives:
- Integration of processes
- Processes that effectively and efficiently share planning information throughout the organization
- Links between processes that are not normally considered (e.g. work management and revenue requirements)
- Budgeting and performance management
- Activity-based budgets that reflect the long-term plan for the asset
- Long-term financial performance forecast using pro forma financial statements
- Measurement and forecasting of risk and non-financial metrics
- Targets and incentives that reinforce execution of the plan
- AIP software
- Single, multi-year repository of planned and proposed asset expenditures without needing to create projects and work orders in the transactional systems
- Long-term forecasting of both revenues and expenses, and creation of pro-forma income statements
- Single modeling framework using common assumptions that can be used for both discounted cash flow analysis and presentation of pro forma financial statements
- Capability to analyze expenditure alternatives ranging from individual projects to entire investment portfolios
- Multi-attribute expenditure analysis and prioritization
- Capability to forecast impacts of expenditure scenarios on revenue requirements, customer rates, and non-financial outcomes
How can CopperLeaf help?
CopperLeaf’s product, ESP, is the only capital planning solution on the market that can help you optimize budgets and plans, forecast performance, profile investment risk, and compare investment options – i.e. manage your asset investments – effectively.
ESP is the most comprehensive AIP package available. It is an enterprise-wide, purpose-built software solution that provides the analytics and reporting to support planning and budgeting of expenditures over multiple years given financial constraints, performance obligations, and risk tolerances. Advanced modeling and decision support analytics allow users to leverage information about their assets, the market, financial constraints, risk tolerances and business objectives to drive long-term asset performance. Scenario-building and sensitivity analysis are key elements of the modeling framework.
With ESP, managing your organization's aging infrastructure has never been easier.