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Assets / Operations

What is Asset Management?

September 11, 2013 by Dr. Jon Warner in Assets / Operations

What is Asset Management?

Before we look at the whole topic of asset management let’s first define what we mean when we talk about assets. An asset can be anything that is deemed to be valuable by a team or an organization. This obviously then includes people, raw materials, equipment, plant, cash or capital and any other resources that are drawn upon or used by the business to operate or make profits.

Every one of the above categories of assets involves making an up-front investment. For example, hundreds of thousands or even millions in cash must be invested in fixed assets like buildings, factories, terminals, depots, warehouses, shop-fronts or selling outlets, road transport fleets and other real-estate. Even those in service industries such as banks and insurance organizations, find it necessary to be a substantial property owner, (even although in recent years, some of these organizations have reduced their property holdings through sale and lease back of premises, reasoning that these resources are tying up valuable capital that can be better employed elsewhere).

Because all of these varying assets always represent a significant investment, a rigorous asset-management strategy is always a critical requirement. What this means is that every leader and his or her team should appreciate not only the initial cost of an investment in any asset, but what this investment is likely to be over the whole of its life (which may be ten, twenty or even fifty years). For example, in many large enterprises, the cost of financing and owning large-scale assets (like buying a big piece of plant or equipment such as a big machine or a truck) exceeds the original cost of the assets by a factor of two or three times. Furthermore, lifetime maintenance of this kind of plant or equipment may exceed the original cost of the plant many times over. So, the costs of holding assets must be accurately calculated and the returns earned by physical assets must be critically assessed.

Once we have appreciated our entire investment over an asset’s whole life (and not just its initial purchase price), we can then more accurately assess the return we are likely to get on that investment over the period we intend to use it (although this will depend on making some assumptions of course).

The management of physical assets in particular (their selection, maintenance, inspection and renewal) plays a key role in determining the operational performance and profitability of industries that operate assets as part of their core business. But the same applies to buying raw materials to store in inventory or the hiring of people for example. These all have an up-front and ongoing cost to be considered.

Asset Management then is the art and science of making the right decisions about our various assets and optimizing the processes by which these assets are purchased and then operated or used.  A common objective across all assets is therefore to minimize the whole life cost. This usually involves not only making sure that the expected returns form the asset are greater than the total investment costs but also ensuring that the asset is as efficient or effective as possible. For instance, if we spend money buying a photocopier which would deliver copies at 5 cents a page at 30% utilization but actually utilize it only a third of what we expected or 10%, the real cost rises to 15 cents. At this price we could have used a third party company with a photocopier who charges 10 cents. We save 5 cents and no longer have to worry about the asset at all (which is now the responsibility of the third-party company).

This emerging professional discipline of whole-life asset management deals with the optimal management of all critical asset systems in an enterprise of any kind.  It usually represents a cross-disciplinary collaboration to achieve best net, sustained value-for-money in the selection, design/acquisition, operations, maintenance and renewal/disposal of the assets being evaluated.

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About Dr. Jon Warner

Dr. Jon Warner is a prolific author, management consultant and executive coach with over 25 years experience. He has an MBA and a PhD in Organizational Psychology. Jon can be reached at OptimalJon@gmail.com

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About the Editor and Primary Author

Jon Warner

Jon Warner is an executive coach and management consultant and in the past has been a CEO in three very different companies. Read more

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