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Physical Assets Custodianship: The Organizational Paradox

Updated: Mar 6


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Generally, companies delegate the managerial responsibility for defining and auditing strategies and tactics related to the management of failures of physical assets (chain value) to the Maintenance Departments, an organization inserted in a hierarchical operational or supervisory layer, with no voice at the top management level (known as corporate leadership or C-level), as opposed to the organizational treatment for other strategic assets, which are managed directly by senior management, such as financial assets, human assets, information technology assets, etc.


By analogy, it makes no sense to leave the management of the physical assets, which are critical players for the business value chain and have a relevant and fundamental strategic role for the success of the business itself, relegated to a secondary condition (considered at an inadequate organizational level) or even, in some extreme cases, simply omitted (not considered) from the organizational structure, instead of being integrated, without intermediaries, with senior management, so as to be in a position of authority and with adequate jurisdiction to act as facilitator and referee for the matters that concern the management of the integrity of these assets in the current operational context to which they are submitted.


This contradiction, given the risks it offers to the business, seems to constitute an organizational paradox that needs to be corrected.


OBJECTIVES OF PHYSICAL ASSETS CUSTODIANSHIP


Custodianship (trusteeship) of physical assets involves satisfying and sustaining the expectations of three different clients (stakeholders):

  • Asset Owners: These are satisfied if the physical assets return on the investment made and if they are profitable over the service life.

  • Asset users (usually the operators): These are satisfied if the physical assets continue to do what they want it to do, within the performance standards that they – the users – find satisfactory (including the notion that the risk of death or injury caused as a result of failures should be reduced to acceptable levels)

  • Society as a whole: It is satisfied if the physical assets do not fail in such a way that they could pose threats to physical integrity and/or the environment (affecting neighboring or faraway populations)

As can be inferred from the expectations listed above, the importance of physical assets is strategic for the business value chain (physical production systems, that is, processes and/or machineries that add value) in which they will be inserted throughout the operational phase of its life cycle.


PHYSICAL ASSETS MANAGEMENT AND MAINTENANCE MANAGEMENT


The Brazilian standard ABNT NBR ISO-55000 defines Asset Management as “the coordinated activity of an organization to obtain value from assets”.


Maintenance Management can be defined as the set of actions for planning, scheduling and controlling the activities and resources necessary to maintain the functional integrity and performance of the components of production and utilities systems.


Maintenance Departments generally carry out repairs, inspections, and condition monitoring tasks required by physical assets. However, more recently, the incorporation of some attributions related to the operational reliability of physical assets, has expanded the scope and attributions of Maintenance Departments to encompass functions related to the management of physical assets.


With the consolidation of this expansion of the scope traditionally attributed to the maintenance function, which adds responsibilities regarding the reliability of physical assets, the disconnection between the physical asset management function and the senior management, in turn, is gradually being evidenced.


As a result of this disconnection and the importance of rethinking the most appropriate insertion for the physical asset management function in the organizational structure of the business, some questions arise:


Does the current organizational practice, that is, maintenance departments aggregating the physical asset management function, meet the strategic and tactical needs of the company in a coherent way?


What are the limitations of the current organizational practice?


What are the possible solutions for an adequate forwarding of the organizational matter?


Should physical asset management be on an equal footing with the management of other strategic assets for the business?


The following paragraphs present some aspects of the current corporate mindset regarding physical assets management, seeking to develop a critical analysis that allows a better understanding of the issue in focus in order to enable an adequate solution for the issue on the organizational structure.


FINANCIAL ASSETS CUSTODIANSHIP: AN ANALOGY


In 1494, a Florentine friar named Luca Bartolomeo de Pacioli invented the double-entry accounting system, which established itself as the basis of the financial custody process. To this day, more than 520 years later, financial analysts and accountants use Pacioli's insights as a basis for managing financial assets on behalf of the people who own, earn and spend the money.


In the financial world, responsible custody means ensuring that all financial transactions are accounted for, recorded on balance sheets and audited to the last penny at the end of each fiscal period.


Procedures, rules, regulations and specific documentation necessary to carry out this management process have become standardized, as well an integral basis of the best practices that govern corporate finances, even if it is intensive in resource allocation requirements and expensive.


PHYSICAL ASSETS CUSTODIANSHIP


The understanding of the scope and responsibilities of the discipline called physical asset management, which in turn is very recent and with less than 50 years of experience, develops in the midst of the enormous technological transformation underway, and which has as one of its results a generation of increasingly complex physical assets, with increasingly higher operational performance requirements, used in production systems with an intense level of automation, with productions that demand increasingly challenging performances (output, quality, safety, environment, costs, etc. ), inserted as part of just-in-time production chains, as well as subject to increasingly stringent regulatory requirements and legislation.


Despite this extremely complex scenario, the discipline called physical asset management, with attributions completely different from those assigned to the maintenance function management, is still not properly studied and understood regarding its strategic importance and real dimension as a facilitator and responsible for matters related to the reliability of the value chain of production processes.


As a result, organizations are behind in this area of strategic risk management, omitting or disregarding the inclusion of physical asset management as part of the top management of industrial companies.


Using financial custody as an analogy, it is possible to say that the “currency” for the custody of physical assets is the failure mode/cause.


However, to ensure responsible custody of physical assets, considering failure modes/causes alone is not sufficient. It is necessary to go further.


In summary, those responsible for the custody of physical assets need to detail and neatly address other aspects related to the management of failure modes/causes, such as:

  • accurately describe the effects of each failure mode/cause in its operational context

  • assess the severity of the consequence of each failure mode/cause

  • identify and select failure management strategies to mitigate the identified consequences, that meet the technical criteria required for their applicability and are cost-effective

  • ensure that right strategies are executed in the right way, at the right time and by the right people

  • define and implement performance indicators (KPIs and scorecards) suitable for monitoring the reliability of the physical asset in question and,

  • Periodically audit the reliability strategies in place, using internal resources and/or independent third parties

Evaluating the above topics, which constitute typical responsibilities assigned to the physical assets management organization, it becomes clear that it is not appropriate to simply transfer or add, such a complex and wide scope of work to the Maintenance Departments. These departments are usually overloaded with their default scope of work, which is also complex and broad, but of a different nature and focused on direct support to operations on keeping the plant running.


It should be noted that this document is limited to discussing the desirability of correctly inserting the physical asset management function in the organization chart of corporations. As a result, it does not discuss or question the technical and managerial capacity of engineers and maintenance technicians, who accumulate attributions related to the physical asset management.


The main scope of Maintenance Departments generally covers, among a multitude of activities, the following ones:

  • carry out repair interventions

  • execute the proactive strategies (predictive and/or preventive actions) under their responsibility

  • troubleshoot unexpected failures and perform repair

  • develop/update procedures for carrying out maintenance actions

  • plan the work orders

  • plan human resources

  • plan outsourced resources

  • plan cranes, scaffolding resources

  • work risk assessment

  • schedule the execution of work orders according to the priorities of the operations and programs of systems availability for maintenance tasks

  • close work orders, ensuring appropriate quality information for use in asset maintenance and reliability performance indicators

  • guarantee the quality of the services performed, preventing rework

  • interact with the supply chain

  • collaborate in the definition of spare parts stock level

  • identify critical spares

  • develop procedures for managing spare parts inventories,

  • actively participate in reliability studies (analyses)

  • participate in root cause analysis of failures, especially those not previously identified and those with high consequences

  • participate in the planning, scheduling and management of turnarounds

  • participate in the management and quality control of outsourced services

  • coordinate the ongoing training needs of available human resources

  • etc.

Indeed, as can be inferred, the scope of maintenance departments is complex, broad, with many interfaces, which combined with the nature and complexity of the production processes becomes a major challenge that will intensively occupy the management and the associates of these departments.


In other words, it is a highly specialized and extensive scope of work, which consumes a lot of time and requires specialization of the engineers and technicians involved in its management and execution.


In the context of the financial asset management analogy, compare what happens when things go wrong in the financial management and physical asset management worlds:


The worst consequences of irresponsible custody of financial assets are that a company can go to the bankruptcy and its custodians sued and eventually arrested.


However, the consequences of incorrect or irresponsible custody of physical assets are even more serious, as one or more people can be injured or even perish, as well as the environment can be severely affected.


As a result, the scope and additional responsibilities assigned to maintenance departments, combined with their organizational and structural limitations for the proper exercise of this custody, offers a potential corporate risk that needs to be measured, as it does not consider the strategic characteristics and particularities of this new discipline.


In fact, the risks to the business represented by the inadequacy of the organizational structure are increasing with the complexity of state-of-the-art physical assets and the operational contexts in which they operate, including the requirements imposed by regulatory bodies (at various levels of government). Such factors imply increasing corporate attention to the effectiveness of physical asset management policies/strategies in place.


Ultimately, there is growing pressure from stakeholders (owners, users and society) for senior management to demonstrate that they are directly involved in the prescribed measures and in practice in the organization in order to mitigate the consequences of asset failures. to acceptable levels in a sensible and defensible way.


THE ORGANIZATIONAL PARADOX


The organizational paradox: operational reliability, aka (physical) asset management is located in a low level organization.
Fig. 1 - Typical Companies Organization Chart

The organizational paradox becomes evident as companies identify and recognize the need to reconsider some organizational issues, such as:


  • maintenance departments are responsible for functions beyond their scope and functional expertise

  • physical asset management is a new discipline, with its own complexity, as well as being as strategic for the business as those already recognized (finance, human resources, etc.)

  • the urgency to promote this new (which has been in existence for less than 25 years) strategic discipline at the senior management level (C-level)

PHYSICAL ASSET MANAGEMENT: ORGANIZATIONAL PARADIGM CHANGE


The management of failures/causes of physical assets in their respective operational context encompasses measuring and mitigating the severity of their consequences in relation to:

  • Occupational health

  • Safety (injured people and fatalities) Environmental integrity

  • Production Losses (output, costs, downtime, etc.)

  • Quality (products and/or services)

  • Profitability

  • etc.

The strategic nature of this emerging discipline, due to its highly specialized and broad field of action, requires independence of action to facilitate and audit the use of best failure management practices for physical assets, demanding a dramatic change in the current organizational paradigm, to promote and incorporate this new discipline to senior management (C-level) in order to effectively assume their relevant corporate role and responsibilities.


Because of this organizational paradox, companies in general are not still ready to make effective corporate efforts to effectively implement a new culture of physical asset management, as recommended by international standards such as ISO 55001, PAS-55 and ISO 31000.


The PAS-55 standard, for example, defines asset management as follows: “systematic and coordinated activities and practices through which an organization optimally and sustainably manages its assets and asset systems, their associated performance, risks and spent throughout their life cycles in order to achieve their strategic organizational plan."


Therefore, regarding physical asset management, there is a missing link: the very organization needed to support the physical asset management function!


Hence, the priority of the top management of companies in assessing the strategic importance of this new discipline for their business is clear, in order to guide a possible adjustment to the corporate organization chart, as well as define the guidelines for its attributions and profile of the necessary human resources.


In summary, it is likely that in medium and large companies, where failures can involve significant business impact, the strategic recommendation should be:


To include, at the senior management level (C-Level), an organization to take over the management of physical assets, as this is the organizational paradox to be resolved!


Additionally, the Maintenance Departments also need to start reviewing the current organizational paradigm used for reliability management, in order to propose to the senior management an open debate on the unjustified, unnecessary and even dangerous "extra dose" of responsibilities for the maintenance departments, which may, at the end of the day, represent a potential risk to the business itself.


It is time to take this burden off the shoulders of the Maintenance Departments, allowing greater focus and quality in the execution of their not least important activities and contributions for the sustainability (maintenance) of the physical assets required operational reliability (functional performance).


The concept of the necessary organizational redesign, as well as the rationale for its adoption, will be discussed in detail in a separate article.


Establishing a new organizational paradigm for the management of physical assets is a building still under construction. Your comments and suggestions are welcome!


Thank you



Article updated on 03/05/2022ew Organizational Paradigm

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