Recapitalization Management

Predict the Life of an Investment

One of the important outcomes from life cycle management is that it allows management to know the expected life of an asset. This knowledge allows management and owners to plan its replacement. The goal of life cycle replacements is to maximize the useful life of the investment and have resources available at the time of replacement. There are many ways to assess the status of an asset, system, or component. Figure 5 explains how the industry views condition and replacement.

Figure 5. Assessment Types

Depending on the asset, the following assessments can be made. Each level focuses on how well the assets need to be managed.

• Levels 1 and 2: Wait for assets to run their course. No funding is usually tied to the assets, so funding becomes an emergency.
• Level 3: An analytical approach on how much funding is needed, though the approach does not isolate where to spend the funds.
• Levels 4 and 5: Condition surveys. This approach usually requires an outside firm that is hired to look at what needs to be done. The report estimates the work, usually by building, and gives a set of projects that need to be done. Projects are prioritized by importance. The institution justifies the funds and then goes to work getting the needs met. The bad side of this approach is that in three to five years there needs to be another survey of needs and another set of projects. The concern with this model is that it is expensive and not all the projects are done since new priorities show up. Money is wasted.
• Levels 6 and 7: An initial inventory of the assets that you chose to manage. There is a one-time cost to establish the inventory, which will be managed along with the assets. The inventory also eliminates the need for ongoing condition assessments. For Level 6, managers will collect the data needed to replace the assets and predict the future costs of managing the life cycle of the asset. For Level 7, managers will collect all the service requests, preventive maintenance orders, and other cost information about an asset. The largest amount of savings occurs at this level, because the inventory will show the lifetime costs of owning that asset and suggest when and how to maximize its return on investment.

Manage the Total Cost of an Investment

Life cycle management principles allow for management to make integrated decisions about assets. The goal of any investor is to make sure that the investment is maximized in the life cycle. Sometimes an asset is minimized because the usefulness of the asset was gone before the end of the life cycle. For instance, computers usually are not replaced because they are worn out, but because their useful life has ended. We make many of these kinds of decisions all of the time. There are some assets that cost so much that we expect years of return on our investment.

Total cost of ownership asset management, where all costs are being tracked, requires work but will save money. Collecting all of the asset costs in real life allows managers to monitor the cost to maintain an asset. If the monthly or annual maintenance costs start to exceed the value of the asset, you could choose to replace it to save future costs. These methods are used to maximize limited capital dollars and return the best value to the investment.

Managers have a tendency to over-maintain an asset. Some think that a longer life cycle is the best option. If a manager knows the total cost of owning an asset, it is good management practice to save the maintenance and further capital investment by replacing the item. This approach should become a best practice.

Decide to Replace an Investment

The decision to replace an asset, component, or system usually boils down to justification: resources, useful life spent, and real needs. Facility professionals are always making these kinds of decisions. Sometimes there is pressure to replace something that has not maximized its investment, in order to adopt the latest and greatest piece of technology or the latest tools. Life cycle management, however, provides management with data and information to make better decisions. Because the asset is monitored from the beginning of its life cycle, the total cost of ownership decisions are available during the life of the asset.

Example: An asset costs $10,000 and has a 10-year life cycle. The investment per year is $1,000. If the maintenance cost over the 10 years is more than $1,000 a year (unless there are known reasons for extra expenses), this asset is not worth keeping. If at the end of five years the cost to maintain this asset is greater than $5,000, management would have enough data to make a decision about whether to replace it.

Management’s role is to keep resource providers aware of needs. Defining the current capital needs and long-term needs is the responsibility of any facility professional. Life cycle management is a tool to help assess assets and their needs. Any asset that exceeds the cost to maintain it shows up for review, and allows managers to evaluate its usefulness. When do I need to replace the system or asset? Am I spending too much on maintenance for this asset? What funds do I need in the future? Should I recommend the same asset when I replace it? Is there a better asset that will reduce operating costs? All of these and other questions can be answered when life cycle management is working.

Figure 6. Historical and Projected 40-year Cash Flow Needs

Figure 6 shows the information from a database inventory. The left side of the chart shows the history of funding in green, with a black line that represents the needs for that given year. After reviews and inspection, the gap represents those items deferred. The right side of the chart shows the assets that will be coming up for review. Each column contains all of the assets over the next 40 years, with their cash flow needs. This means that assets with 10-year life cycles will show their remaining life, the next replacement, and the 10-year repetition. This graphic is used to show future needs and funding levels. The goal is to provide the level of funding needed to manage the recapitalization of the investment made.

Recommendation to Replace an Investment

The recommendation to replace an investment comes from the usefulness of the asset. Recapitalization management uses the following three decision criteria to allow the owner to feel that a proper return on investment has taken place:

Useful Life Spent

This is defined as the remaining life in the asset at the point when the usefulness of the asset does not meet the mission or future vision of the owner. As in the computer example above, the investment may be obsolete before the end of its life cycle.

Life Cycle Is Spent

When the life cycle drives the replacement, meaning that risk of failure is close, then the replacement happens because an asset is worn out and no life cycle remains. This does not mean that the color has changed, or that it needs repairs or a retrofit; this means that a similar replacement is needed to maintain the function of the investment. Deferred renewal comes into play when managers risk keeping an asset beyond its life cycle. This usually results in emergency funding, and the cost of not planning results in more expense than needed. Maximizing the life cycle is the job of facility managers.

Too Expensive to Maintain Investment Life Cycle

At some point in an asset’s life, it becomes too expensive to maintain. A rule of thumb to determine when the asset’s maintenance is costing too much is to take the value of the asset ($10,000) and the life cycle (10 years) and come up with the annual replacement amount needed for the life of the asset ($1,000). This figure could be adjusted for inflation. By tracking all of the costs each year that are spent on the asset (service requests, preventive maintenance, repairs, etc.), you will get an idea of the cost to maintain it. By accumulating those expenses over the years against the amount it takes to replace the item by month, you will soon find out if the expense crosses the replacement amount. Very few assets cost more to maintain than they are worth. The owner needs to determine how much to spend on maintenance before replacement.

History of the ROI of an Investment

Life cycle management allows facility managers to know the real return on investment of a given asset. Measuring the actual life of an asset and knowing all of the costs that it takes to manage that asset are important information and knowledge. Knowing what kinds of assets to recommend for a new building based on experience and real numbers gives the owner and the facility manager the best long-term investment it can make. Keeping a history of each asset allows the organization to cut costs, not only in operations and maintenance but also in capital funding. The asset libraries are always adjusted by new and improved assets, but the cost of the function of the new assets can always be measured against the history. For example, if you had a history of roofs and what a roof costs to buy, install, operate, and maintain, and you know its actual life based on experience rather than a manufacturer’s recommendation, the whole process of maintenance and funding will benefit from that knowledge and understanding. Building a history of critical assets can ensure sustainability for a number of years.