This is the fourth of a series of posts by Mark Neasbey, a director in the Australian Centre for Value Management examining the role of the planning budget. In the first Mark considered the differing attitudes that may be taken to strict adherence to the budget and in the next two, he gave examples of the problems this had created for a major teaching hospital and for a mining operation. In this, the last of the present series, Mark considers how a planning budget can be constructed and utilized to smooth the path of the capital budget.
It’s good business practice to require planning for asset projects to look well ahead of the short-term i.e the current financial reporting period. This is because assets typically last many years and impose long-term costs to the business or government service.
Good practice also involves life-cycle planning around the asset project – what it costs to establish, what needs to be spent to keep it operating, periodic costs for replacement and renewal of plant and equipment and also periodic refurbishment necessary to sustain functionality, safety, image etc. This extends to considering disposal – when an asset is no longer needed – what has to be done to get rid of it. This principle applies equally to physical assets and soft assets such as computer software or systems.
So when an initial concept is proposed, what sort of things need to be addressed and what’s the significance of these to the budget?
Well a key starting point has to be determining its purpose – what is the asset supposed to do? What are the business or service functions that the asset must accommodate or support? Why can’t these functions be undertaken some other way, without the need for the asset project?
These questions can’t be answered without research, we need to test and clarify the scope of the project so we can set a reasonable capital budget. That means we have to start with a planning budget so the planning and analysis work can be done to decide a) the functions that the organisation needs to deliver; b) the options that should be considered for delivering those functions – including non-asset strategies; c) determine the relative merits of the options – key pros and cons, including business (service delivery) risks.
But the thinking cannot be just limited to what is to be spent on the asset project – thinking must put it into the context of the corporate objectives and performance requirements and the existing asset portfolio. This is because any capital project is not just about the asset – it has to consider the other organisational resources involved in delivering the functions and services. Not just on day one of having the new asset, but for it’s whole life cycle.
In saying this it’s important to recognise that this sort of planning is not an exact science and will often entail significant uncertainty – but that’s not an excuse to avoid it – rather it is the challenge to apply a planning and analysis process that highlights the uncertainty and implications and how these are to be addressed and managed through the process.
The outcome of the preliminary planning should be a scope of detailed planning work to reach a decision-point, including a reliable forward budget estimate figure. Not the solution – but the scope of work to determine the most appropriate solution.
Decision Point Number One So decision point number one is to say Yes or No to listing the capital project in the forward program. If Yes – then the budget figure becomes an important regulator for the outcomes of subsequent planning and decision-making. But it is only an early estimate, subject to change based on what emerges from the detailed planning.
Changing Scope & Budget What happens if the detailed planning work raises a challenge to the original budget? It is nearly always the case that early estimates will not be the final or correct amount. But that must be based on some rationale relating to the business objectives and functions that the asset project is meant to support AND based on the options that have been tested and compared.
Good practice processes will engage relevant senior management in making the call on what the asset project must deliver and so what the financial commitments of the organisation will be as a result – what they determine is affordable – not what the project sponsors want.
There are multiple examples from private and public sector where there has not been effective organisational control of asset projects and their purposes, budgets and risks – leading to serious business failures, diminished returns and loss of service capability.
Question for today: What questions do you have for Mark?
My question for Mark is in relation to the relationship between the practice of ‘value management’ (AS 4183) and ‘asset management’ (ISO 55000): how does he understand value management within the context of the AM system?
The little I’ve read about VM (including Mark’s posts), seems to suggest it apply at the PROJECT level: quantifying ‘value’ of a range of options (in relation to business objectives) and lifecycle cost of each to determine the best ‘value for money’ option.
AM (ISO 55k) applies similar ideas, but at an ORGANISATIONAL level: AM or ‘functional’ objectives (e.g. as achieved via a project, although I’d argue the analysis extends to non-asset related activities: anything of value is an asset!) are established in the context of organisational objectives. I like to think of this process (which occurs – or is at least documented – in the SAMP) as a story we’re continually revising and refining that covers the following points:
1. where we’ve come from
2. where we are now
3. where we’re headed (the path we’re on e.g. current resource allocation)
4. where we want to be (identifying the sacrifices we have to make)
5. how we’ll get there (activities, resources and timescales – the AMP)
6. are we getting there?
Mark’s points about the planning budget help us refine points 3 and 4, and the capital budget eventually informs point 5.
Thinking in terms of this ongoing conversation or story substantially the issues Mark raises in the last paragraph about a lack of “effective organisational control of asset projects and their purposes, budgets and risks – leading to serious business failures, diminished returns and loss of service capability”.
I’m interested to know if this aligns with Mark’s (and the IVMAM/ACVM’s) ideas?
Mark’s posts led me to read up on VM and given the similar language and ideas, I think clarifying the relationship between this body of knowledge and AM in the context of ISO 55k would be helpful – I haven’t read anything in this regard.