Since the latter half of 2002, the industry has been in a back-to-basics mode
of operation. The focus, once on unregulated businesses and acquisitions,
has returned to obtaining better utilization of the physical and human assets
in the regulated portions of the business.
This focus is not new. Energy and utility companies have been methodically
taking 3 to 5 percent of cost out of the business for the past decade. However,
the situation today is quite a bit different than it has been in the recent
past. Financial markets continue to apply pressure for double-digit earnings
growth, yet are punishing companies that either remain in unregulated businesses
or fail to focus on the core regulated business itself (which is a 2 to 3 percent
As a result, access to capital is constrained. Couple this with increased customer
demands and enhanced regulatory scrutiny, particularly from an environmental
perspective, and the situation is tenuous.
If that were not bad enough, the market is different than it was a decade ago.
First, most of the infrastructure assets are nearing the end of their economic
and practical life. This will require large quantities of capital (more than
$100 billion in North America over the next decade) to either refurbish or
replace these assets.
Second, a large portion of the workforce will retire over the course of the
next three to eight years, taking with them large quantities of institutional
knowledge that hasn’t been captured or passed on to younger employees.
Third, a couple of disruptive technologies, namely nanotechnology and the hydrogen
economy (see Web link) are poised to change all aspects of the regulated electric,
gas, water, telecommunications, cable TV, and consumer goods purchase and repair.
This last point is mainly an early warning indicator to businesses because,
while one can debate the specific timing of when these technologies will change
the game, one cannot debate that it will be within the depreciation lifetime
of the new assets that companies are deploying today.
Couple these industry-specific findings with the horrible track record of most
CIOs and technology deployments over the past five to seven years and you have
the recipe for some interesting industry dynamics for the next three years
Given this dilemma, what is the head of the energy delivery business unit
The Asset Management Context
Deregulation, for all its warts and pains, did provide the industry with a
different way of viewing the business. This new view is from the perspectives
of the asset owner, the asset manager, and service providers who implement
various parts of the asset management program on behalf of the asset manager.
The asset owner:
- Allocates capital (human and financial) to the asset manager(s). There
may be one each for wires, pipes, generation, or exploration and production;
- Financially manages a portfolio of assets; and
- Establishes the risk adjusted rate of return that each asset manager must
use in evaluating capital projects
Think of the asset owner as an investment banker.
The asset manager:
- Establishes the programs, service level agreements (SLAs), key performance
indicators (KPIs), and market clearing mechanisms necessary for the service
providers to function efficiently and effectively; and
- Optimizes the performance of the assets in accordance with the financial
goals established by the asset owner.
Think of the asset manager as a program designer and administrator.
Service providers may or may not be from the same organization as the asset
manager, and they provide one or more of the services shown in Figure 1 on
behalf of the asset manager.
Carefully sorting one’s core from noncore competencies has been a buzz
phrase from consultants for the past decade or more. However, that is not the
direct focus of this model. This model emphasizes the need for each portion
of the business to realize that it provides products and services to other
portions of the business. Setting up each of these functions as businesses
within a business and establishing the market-clearing mechanism for these
products and services to be bought and sold is the key to making this model
work. This effort will develop a clear and comprehensive understanding of what
it costs to do these functions internally. Once these costs are understood
and the KPIs and SLAs are established, it is much easier to benchmark the sourcing
of these same products and services externally.
Innogy, the privatized name for the former British Energy non-nuclear assets,
is the best example of how to effect this transformation.
Work and Asset Management
It’s important to establish effective work and asset management programs.
They are where most of the gains in workload and effectiveness of the workforces
can be expected. Work and asset management phases, described below, can be
viewed as a pyramid (see Figure 2).
Many times, companies jump into implementation of applications or programs
without having the right leadership and foundation in place. Such endeavors
have very predictable results: projects that fail to deliver the touted economic
value. As a result, we offer the following advice to asset-intensive industries,
like energy and utilities, when looking at work and asset management program
and application changes.
Successful work and asset management program changes and implementations start
with a strategy grounded in the fundamentals of asset management and 100 percent
committed by the leadership of the organization. The kind of commitment we
want to see from leadership is best exemplified by the following analogy.
One day on the farm, the chicken and the hog got into a discussion over who
was the most committed to the farmer and his wife’s breakfast meal each
day. The chicken started the debate by boasting how she laid these wonderful
and copious quantities of eggs for the farmer and his wife to enjoy each morning.
The hog, after listening for a few minutes, got rather disgusted with such
bravado, and said one simple statement of disgust: “at least you are
still alive to talk about it.”
What we are looking for from leadership when it comes to support for these
sorts of programmatic changes is hog commitment to breakfast.
Once the strategy and leadership commit-ment are respectively formulated and
secured, one can move into laying a firm and strong foundation on which to
build a robust and sustainable work and asset management program. The foundation
phase includes the following activities:
- Implement standardized design throughout the business unit;
- Implement configuration control wherein the as-built configuration is
reflected in the critical design and operations documentation in a timely
- Identify all your physical assets;
- Ascertain the health of your physical assets;
- Resolve budget bucket behaviors that cost the business money – e.g.,
picking up and redeploying a no-load transformer is an operations
and maintenance expense whereas getting a new transformer out of the yard
and installing it
is a capital expense;
- Prioritize and allocate capital budget based on improved engineering
tools and techniques as opposed to the old new-load growth, refurbishment
performing feeders or circuits, and storm restoration bucket approach;
- Do the right work for the right reasons – implement a robust reliability
centered maintenance (RCM) program;
- Invest in industrial engineering to measure direct activity;
- Build effective work orders and job plans;
- Build effective planning and scheduling processes that match the physical
maintenance work to the physical assets in the field
so as to reduce transport time, materials
logistics, and set-up and tear-down time;
- Utilize a comprehensive asset database to capture and store information
about asset health and work history; and
- Utilize your work and asset management system effectively.
As a result of laying this firm foundation for a work and asset manage-ment
program, one should expect to see a 20 to 30 percent reduction in maintenance
workload from implementing an RCM program and a 5 to 10 percent increase in
crew direct activity.
Once the foundation is laid, one can move into the continuous improvement phase.
In this phase you want to drive for efficiencies in the overall program. During
this phase, companies implement the following types of programs and processes:
- Continue investment in industrial engineering to measure and report everything
causing non-direct activity;
- Invest in forensic skills to definitively identify causes of failures;
- Implement post-work order completion reviews with craft as major participants;
- Implement advanced kitting and staging of materials; and
- Move to condition-based maintenance.
During this phase you can really drive crew-direct activity.
Today, crew direct activity, representing the actual hands-on time working
on an asset, ranges from 20 to 35 percent depending on the business unit. Generation,
transmission substation, compressor stations, and gas liquids processing facilities
are on the higher end of the range while line crews and pipeline crews are
at the lower end of the range. So for every eight hours worked, only 1.6 to
2.8 hours of that day are hands-on working.
Companies that have successfully implemented the continuous improvement programs
have seen the following productivity increases in direct activity:
- Generation: 60 percent direct activity is top-quartile and best-in-class
achieved by Tennessee Valley Authority in fossil. Hydro generation in a highly
environment was 75 percent direct activity;
- Transmission Substation, Compressor Station, and Gas Processing
55 percent direct activity is top-quartile; and
- Field Crews: 45 percent direct activity is top-quartile.
Now that you have
been through the continuous improvement phase, you are ready to look to some
advanced technologies to drive process and human asset effectiveness
even further. We intentionally leave some of these technologies for consideration
in this phase, because moving to them prematurely will cause more frustration
and disappointment than good.
These advanced technologies include:
- Trucks as rolling warehouses;
- Mobile dispatch of crews based on skills and proximity to the work;
- Just-in-time materials delivery; and
- Exploitation of pervasive computing.
The additional crew productivity and process efficiencies delivered from the
deployment of these advanced technologies is unknown in the energy and utility
industry for a couple of reasons. First, we are unaware where anyone had done
most of these. Second, where companies have deployed mobile dispatch, there
have been some foundational issues that prevented the full realization of the
business benefits from this technology.
However, one only has to look to other industries such as Wal-Mart in retail
and the automotive industry to see the potential that these advanced technologies
have for our industry.
The generation and regulated wires and pipes portions of the business are
under more pressure than ever to drive better utilization of physical
and human assets.
Laying the right foundation and building continuous improvement on top
of that foundation is critical. Following this approach can help answer
the call and
effectively respond to the pressures being brought on by the asset owner
in response to a variety of external market forces.