How Well Do You Understand Your Assets? The most successful organizations are able to make good financial and operational decisions when they understand what assets they own and what the specific need of those assets are.
We are excited to discover, with you, the key commonalities and best practices that allow both public and private organizations from capital intensive industries to become stronger at managing their assets over time.
Learn more at: www.durablecapitalindex.com
Ben Parker:
Today, we're going to talk about the importance of understanding the assets that your organization is responsible for. Welcome to The Durability Podcast. This is for those that are passionate about helping their organizations plan and prepare for the inevitable future. My name is Ben Parker, Management Consultant, Chemist, Creator, Entrepreneur, Co-founder, and member of the Durable Capital Group. I'm excited for you to join me as we discover what successful organizations do to build long-term durability. We explore the tactics and strategies that allow great organizations to combine the financial wisdom of asset management, the practical street smarts of the maintenance subculture with the real world paranoia of managing risk to ensure their organizations' blast. We uncover what great leaders are doing from all types of capital intensive industries to make decisions, build strong management teams, and prepare to meet the future in whatever form it comes. This is The Durability Podcast.
Hello, and welcome back to The Durability Podcast. Today, we're going to talk about one of the core fundamentals of building durability and durable capital asset management. And one of these key fundamental principles is understanding what your organization owns in terms of assets. And the core question is really, how well does your organization understand what it owns? How deeply do you know what equipment you have? Do you know what equipment you have? Do you know what assets you have? Do you know the critical value of those assets? And are you aware of the different types of needs of those assets? Many times in business and in many other organizations, we get a little bit complacent with how we think about the assets that we have. We focus so much on being able to budget and being able to plan financial revenue goals and being able to track costs, that sometimes many organizations misalign some of the real asset needs with their strategic business objectives.
For example, many times on publicly traded companies, they obviously have a quarterly cycle where they are pricing themselves in a market competitive situation, that they're being leveraged in a variety of financial ways that are really disconnected from the day-to-day operations of the value creation part of the business. And so what ends up happening is there become constraints, whether artificial or short term, that then are placed on different, tangible, physical assets that basically then create a incentive to focus on the financial short-term objectives, versus the actual physical needs of what the business needs to create value and what the life cycle cost of creating that value actually is.
Let me give you a couple of tangible examples. When large manufacturing facilities or power plants are built, many times they are funded based on a financial premise that a certain amount of revenue will be returned for that business and to make financial sense, to proceed with the project. And that's critically important. I don't want to give the perception like we're demeaning the financial aspects of that business in any way. It is super important. However, many of the successful organizations have been able to find alignment in not just their financial incentives and drivers, as well as their financial constraints, but also knowing deeply what the business physical assets, the things that you are spending a lot of money on, what the true needs are.
For example, in specialty chemical industry, manufacturing plants, processing plants, we're talking about reactors, pumps, big equipment. Those pieces of equipment have varying life cycle costs. And when you look at the value, the economic value of a project, of the market, being able to bring a product to market, building a production line, the cost of that production, the ongoing operations, many times organizations will pay consultants, engineering, outsourcing EPC contractors, that's engineering procurement and construction contractors. They don't always understand what they're purchasing and it leads them to a position of limited decision-making capability, where they don't understand the variables that they need to consider and the factors that they need to play into their long-term business model and their capital improvement or asset management plans.
So tanks, pumps, reactors, those types of physical assets in the specialty chemical world, obviously they have a life cycle, they have a cost, they will not last forever. There's a certain amount of maintenance involved. And that many times when you have an organization that's only focused on the financial piece, they get blindsided by additional needs and higher operating costs, than what they originally anticipated. And in emerging industries, like the solar industry, where you have a lot of new equipment, it becomes even harder because then those models don't necessarily have enough long-term data to be able to say when a inverter is going to go out in a solar field or when you're going to have transformer issues and that type of thing.
There's a significant advantage to companies who understand well what the needs of their assets are. And that allows them to leverage their financial capabilities, their financial decisions, and other practices that can enhance their long-term life cycle cost of their equipment, because they know it informs what equipment they need to buy. It informs what investment practices they should deploy, specifically around buying equipment. It's easier to install more infrastructure during a construction phase than have to go in retrofit a plant or a piece of equipment after the fact. Two very well known examples is the size of a building and the size of transformers or power infrastructure going into a facility.
Personally, I've had both of those experiences where you get to a point where you think you do a good job with building a building and then you get five years into it and you realize it was probably twice as small as it should have been because of the cost constraints, because of some of the assumptions that went into the original model. And you've learned fairly quickly that it's cheaper in many instances to install critical infrastructure upfront. But if you don't understand the core needs of the business and the core needs of the organization, of the products that you're producing and the services you're providing, it's harder to make those decisions long-term. And so what happens is, is you take on more risk in a lot of cases.
In many organizations, if they're solely focused on the financial investment side, do not understand what they're purchasing, whether they're buying a company, whether they're buying equipment. And so as a result, their risk level increases and they take on higher risk, which ultimately just costs them more money in either lifecycle costs or value to the business. When you go to sell it, it's not as worth as much as they originally planned it being worth. That happens many times in the private equity world. It also happens many times with the family owned businesses, where the owner is forced into a position where they need to either retire or sell the business and their assets are not worth what they thought they were, because they really didn't understand some of the core needs.
So that's my rant on making sure that as a durability focused manager, in a variety of whatever organization you are focused on, that you take the time to make sure someone on your team, your maintenance department, your finance department, your engineering, your operations, have a good understanding of what the needs of your assets are, that you know what your assets are, and you're able to track and manage those things according to your specific financial drivers and your long-term goals. Thanks again, have a fantastic day and I will catch you next time on The Durability Podcast.
Hey, everybody. I just want to share with you something that has been super effective at helping organizations to really kickstart the conversation around how they're going to build a long-term durability into their management practices. And if you stop what you're doing right now, and go to www.durablecapitalindex.com, that's durablecapitalindex.com, you can sign up to take a very special assessment. This is the durable capital index assessment. It's a baseline assessment, and it'll show you exactly where you're at currently with fundamental best practices for building durability. And it will give you a very detailed feedback report that you can take and share with your team. So if you go to www.durablecapitalindex.com, sign up, take the assessment and share with your team and really start that conversation around building long-term durability into your organization.