Performance Management

Performance Management in Asset Management

Introduction to performance management

Much has been said about performance management where an organization has to measure its progress towards achieving its goals and objectives. In fact, most successful organization put much emphasis on performance management as one of the major management tools. Performance management has evolved from a mere financial reporting tool to become a major decision-making tool. Much of its success comes from the fact that organizations have become so big and widely dispersed all over the country and the board of directors needs to know the well-being of its company fast and real-time. Furthermore, performance management has become the most effective system in creating a goal-oriented culture in government agencies.

Performance management involves establishing data collection system, analytical tools, periodic or regular monitoring and reporting, communicating the performance, continual improvement programme and lastly, using suitable indicators. Even the display of the periodic monitoring and reporting mechanism, has evolve from a mere paper-based report to a more sophisticated online or real-time electronic system, which is predominantly known as dashboard. Some would say that performance management is only meant for the chairperson, board of directors or the head of an organization, but this is not the true scenario now. Performance management is a must for any dynamic and learning organization.

Performance is measured at every level and unit, which is the cascading approach in performance measurement. This is because that in every level and unit, the unit’s performance will reflect back on the overall performance of the organization and the unit must be aligned to the organization’s objective(s). Their performance indicator is not the key performance indicator of the organization, but their indicator merely shows the unit’s contribution to the overall performance of the organization. It shows their commitment and involvement in realizing the organization’s objective(s).

Nevertheless, the top-to-bottom cascading nature of indicator(s) in an organization is an important fundamental element in performance management. Rightfully, the lowest of the personnel must know the key performance indicator of the organization because their involvement is important to the success of the organizational performance management and for the organization to be able to see the actual big picture of its performance.

Performance management is not only meant for an organization but it is also meant for products and services rendered. It also focus on the effectiveness of the organization’s delivery system and aligning the whole organization towards achieving its goals and objectives. This is done by having a performance management plan (which incorporates the processes, systems and communication plan) and suitable key performance indicators.

The benefits of using performance management are as follows:

1. A systematic measurement system for the organization
2. True understanding of the organizational behavior
3. Enabling a continual improvement program
4. Allow benchmarking against other related organization or industry players
5. Creating a performance based culture in the organization

What are indicators?

There are three (3) types of indicators, which commonly known as:

1. Key Performance Indicator
   A measurement for the performance and progress of achieving the organizational business goals and this is the main performance indicator for the organization
2. Performance Indicator
   Measurements for activities or initiatives that are complementing the critical activities of the organization
3. Result Indicator
   Measurements of output from processes

Performance Management Process

In balanced scorecard concept, vision and objective are important input to measures. Hence, there are four (4) perspectives that need to be considered when putting up measures. The four (4) perspectives are as follows:

1. Financial
2. Learning and growth
3. Business processes
4. Customer

When identifying the key performance indicators, organization must reflect the above perspective(s) besides fulfilling the SMART requirements, otherwise the indicators are either results or performance indicators. The two (2) indicators will however demonstrate the overall picture of the organization, but not its performance.
(SMART: S= specific, M= measurable, A= attainable, R= realistic, T= time-bound or timely)

In establishing the key performance indicator, the top-down is more commonly used rather than bottom-up process. An illustration of this approach is shown below.

Typically, the performance management process specifically for asset management is as follows:

It is a simple process to implement, but the fundamental of this process is that key performance indicator directly relates to the objective(s) of the organization.

Preferably, various management tools should be used to identify the key performance indicators. The tools, amongst others are as follows:

1. Benchmarking
2. Scenario analysis
3. Brainstorming
4. SWOT analysis
5. PESTLE analysis
6. Gap analysis

Using Key Performance Indicators in Asset Management

In asset management, service level is an important aspect of measurement, which measures the ability of the asset to provide service. Amongst the key performance indicators in asset management are:

1. Facility condition
2. Deferred maintenance
3. Customer satisfaction
4. Sustainability
5. Whole life cycle
6. Maintenance norms or operating and maintenance cost
7. Reliability
8. Response time

A few key performance indicators above can be used, but a word of advice, it is far better for the organization to establish its own key performance indicators. The involvement of the whole organization in establishing and implementing a performance management system is ultimate goal of any organization. This is due to the fact that the whole workforce of the organization will be aligned to the same objective(s).

Resources:

1. Department of Public Works, Queensland Australia
2. The Balance Scorecard Institute

Topics of interest

(Please follow the links to read the topics)

Asset Management Tools

1. System Thinking in Asset Management
2. Risk Management
3. Whole Life Cycle Costing

Asset Management Fundamentals:

1. Asset registry
2. Roles and responsibility
3. Asset objectives
4. Service criteria
5. Asset condition and performance
6. Asset life cycle
7. User expectations
8. Asset stakeholders
9. Asset management objectives
10. Asset planning

System Thinking in Asset Management

What is a system?

The late Austrian Biologist Ludwig von Bertalanffy wrote “A system is an entity which maintains its existence through the mutual interaction of its parts”.

Therefore, a system is an interconnected items or dynamic activities performing as a single unit or entity whereas system thinking is simply the art of organizing the interactions between the interconnected and interdependent activities or items. In the case of a building, every item in the building contributes to a proper functioning and the building is a system. As such, every item is interconnected and interdependent of each other.

We have to look at building as system rather than as a rigid object. The item in a building is a subsystem of the building system and that building is a sub-system of a complex of buildings, and that building complex is a sub-system of a commercial hub, and so forth. If any of the sub-system failed, it will create a chain reaction to the sub-system and the system as a whole.

Furthermore, the earth is a system by itself and therefore we must look at system. To do that, we must possess system thinking. Fritjof Capra said that "the property of network is its nonlinearity as it goes in all directions. It may travel along a cyclical path and becomes a feedback loop".

The important concept of system thinking is that system thinking looks at multiple perspectives and emphasizing on the behavior as a whole not the parts, focusing on goals and performance not the output.

In asset management, we have to look at the asset as a whole and also, as a system. Every major activity in an asset life cycle is a system and it becomes a sub-system to the asset. We look at all angles, crossing disciplines and knowledge and we look beyond the fundamentals. Furthermore, community is a living system and assets are a sub-system to the living system.

As such, system thinking is fundamental and important ingredient to an excellent asset management.

How do we use system thinking approach in asset management?

1. Firstly, we must look at the asset as a system or maybe a sub-system to a bigger system
2. Then, develop a pattern of behavior for the asset, which is basically the asset life cycle (never use a single perspective of the asset, look at multiple perspective crossing boundaries and discipline)
3. Develop a model behavior of the asset
4. Simulate the behavior of the model
5. Develop an alternative approach
6. Simulate the alternative approach
7. Develop feedback loop

By simulating, we are asking questions about its behavior as a whole and we are looking beyond the fundamentals, and that is the beauty of system thinking.

Reading material:

1. http://www.systems-thinking.org/index.htm
2. http://www.fritjofcapra.net/index.html
3. http://www.thinking.net/
4. http://www.systemdynamics.org

Risk Management

Asset Risk Management

Risk can be defined as the combination of the probability of an event and its consequences (ISO/IEC Guide 73) and the possible effect can be either negative or positive. Nevertheless, risk management is focused on the management of the prevention and mitigation of the risks. Gone are the years when flipping a coin will give you a decision, now risks are identified at an very early stage. Hence, risk management is just a state being prepared for the worst, which we are always on top of it.

To manage an asset, there a number of risks involved that need to be assessed, such as:

1. External risk
2. Internal risk

A simple asset risk management model is shown below:

Risk Identification

External risk comes from external factors such financial risk, strategic risk, operational risk and hazard risk. Internally, the risks are nearer to the organization such as information systems, work force, internal financial control and so forth. The risk must be identified all activities and processes of an asset life cycle. There is risk in human behaviour such as unexpected behaviour and misinterpretation of instruction, which can categorized in any of the external and internal risk.

A simple template or even a questionnaire such as the figure below will assist in identifying all risks.

Risk Analysis

Once the organization has identified all risks that will be encountered, the risks are rated according to the probability of occurrence, criticality, impact and importance. All risks must rated to determine its mitigation priority, and it is done systematically by first looking at its probable effect to the asset. For example, unexpected human behaviour will cause rapid deterioration to the asset due to, such as, uncontrollable anger towards the asset. Another example would be that changes in customer would make the asset obsolete in shorter period, which new asset need to be planned and this mean capital expenditure.

A sample template is shown below:

Risk Evaluation

Risk evaluation involves processes to establish the costs, compliance to legal requirements or even environmental factors. This is done after risk analysis, which involve primarily rating the risk. There are a few factors that need to be considered in proposing a treatment such as the cost of mitigation, the effectiveness of treatment and compliance to existing legal environment.

Furthermore, risk evaluation involves decision-making on the risk and the impact of the risk to the organization and the asset concern whether to accept the risk without treatment or with the proposed treatment. Once the decision to treat the risks is accepted, the next step would be to treat the risk.

Risk Mitigation and Treatment

Risk mitigation and treatment is the process to reduce or even nullify a risk using the appropriate or proposed method. The process needs to be constantly monitored and communicate back to the stakeholders on the treatment effectiveness.

Risk Review

Risk review is a process of monitoring of the risk mitigation/treatment and emergence of new risks. Risk review also will highlight the effectiveness of the treatment, any issues in implementation of the mitigation measures and so forth. These reviews will be the basis of effective risk mitigation and treatment whilst acting as a knowledge database.

Risk Reporting

The risk management team shall generate and distribute periodic reports to stakeholders on implementation of the risk management program. The stakeholders need to know that the risk is effectively treated and the actual cost the organization has to bear.

Risk Management Plan

At the end of the day, the organization will have a risk management plan comprising of the above topic. The plan shall contain amongst others the structure for risk management, risk management policy, role and responsibility, monitoring frequency and so forth.

Publication

1. The Institute of Risk Management
2. Australian Standard 4360 Risk management portal

Whole Life Cycle Costing

Whole life cycle costing

Whole life cycle cost is the total costs of the asset throughout its life cycle from its acquisition until disposal, amongst others includes:

1. Capital costs
2. Operating costs
3. Maintenance costs
4. Risk exposure costs
5. Rehabilitation costs
6. Administrative costs
7. Depreciation and disposal costs
8. Insurance and tax costs (if relevant)

Whole life cycle cost is important in order to determine the actual cost that will be incurred in the future, the benefits that will be derived, the cost of operation and maintenance, the capital expenditure needed and so forth. Previously, we would be satisfied if we only know the capital cost as it is the easiest to do, but it is not the true cost of the asset.

Cost of the assets relates to the design and shape of the asset, the equipment employed, the type of material used, type of operation and maintenance deployed and so forth. Before making justifiable and the right decison, an organization needs to know all costs, which become future liabilities. These liabilities would cut into the profit margin and the organization will be non-profitable for the asset it holds. This scenario is not a good business case if the organization needs to venture and explore new business areas.

Nevertheless, if an organization acquires the predicted costs of actually having the asset, then a predicted cast flow is known throughout the asset life span, which can span more than 25 years. A good business decision is ensured and the decision to acquire the asset is well justified.

Capital cost

Capital costs, amongst others, include:

1. Design and supervision cost
2. Cost of acquiring or purchasing land
3. Interest and funding cost
4. Construction or installation cost inclusive of all electrical
   and mechanical facilities, incidental equipments and others
5. Cost of permits, levies and approval from local authorities
6. Project management costs
7. Consultation cost

Operating cost

Operating costs are cost incurred when operating or using the building, amongst others, include:

1. Telecommunication bills or usage
2. Electricity bills or usage
3. Gas, Water and sewerage bills or charges
4. Chilled water bills or usage
5. Tenancy fees or charges
6. Local authority or central government taxes or duties relating to the
   property
7. Insurance and tax costs (if relevant)

Maintenance cost

Maintenance costs are costs incurred to ensure that the building functions as designed and costs to upkeep the building, such as:

1. Custodial and up keeping
2. Routine maintenance
3. Unplanned or breakdown maintenance
4. Planned or scheduled maintenance
5. Security services
6. Unplanned or planned inspection and assessment costs
7. Special arrangements

Risk exposure cost

1. Increase in insurance, mortgage or interest rates
2. Mitigation costs

Rehabilitation costs

1. Installing new technologies within its functional life
2. Major maintenance works to meet new customers’ demands

Administrative costs

1. Management cost
2. Direct and indirect costs relating to the management of the
   asset and et cetera

Depreciation and disposal costs

1. Renewal cost inclusive any design, demolishing, and et cetera
2. Disposal costs
3. Replacement cost
4. Depreciation cost

Typically, a whole life cycle cost curve will look lik this: