Asset Reliability and Maintenance Management

Strategic Levers for Driving Shareholder Value

Complex asset owners, operators and service providers often view asset maintenance as expendable. In reality, the opposite is true. Trimming maintenance costs may save money in the short term. But over time, cost cutting can have safety, legal and financial ramifications. Moreover, proper asset management e.g., increasing equipment availability and reducing parts and labor consumption can actually reduce costs. Emerging performance-based business models are escalating the criticality of reliable assets in driving new, significant revenue streams.

The bottom line is asset reliability and maintenance should be an essential component of an asset intensive business strategy to achieve high performance. Accenture has developed an advanced set of tools that can help asset-intensive organizations identify priorities such as asset reliability, work management and capital utilizationall of which have a significant impact on shareholder value.

Shareholder Value Analysis for Reliability and Maintenance

Figure 1. Value Creation Roadmap.

Operating Margins ROIC

Value Creation
Total Return to Shareholders (TRS) Value of the discounted cash flows to shareholders or Economic Value Added (EVA)

Spread

Capital Efficiency Cost of Capital

Organic Growth M&A

Higher asset reliability and better maintenance can improve operating margins not just by reducing expenses but by increasing revenue. One reason is that higher equipment availability often increases production capacity for a soldout operation. Another (more common) scenario is improving profitability by maximizing the most profitable and productive units. Despite these benefits, reliability and maintenance are often overlooked levers for improving shareholder value (Figure 1). They are viewed as costs of doing business. Yet

the return on invested capital (ROIC) made possible by these initiatives is frequently reflected in operating margins and capital efficiency. Key ratios that may be positively impacted by effectively managing assets include opex/revenue, net PPE/ revenue and (to a lesser extent) working capital/revenue. Net PPE/revenue is the most strategic lever associated with improved reliability. By deploying a formal program for asset reliability and maintenance management, high-performance businesses both sustain the productive capacity of their equipment

and extend the equipments useful life. Getting longer and more efficient use from your equipment often makes it possible to defer capital costs for replacement. Improved reliability also affects working capital/ revenue by allowing for reduced spare parts inventories. For goods producers, this may be a relatively small impact compared to production and in-process inventories. However, a focused effort in spare-parts reduction can be a high impact, short-term initiative that can often pay for investment in reliability programs.

Figure 2. Power Generation Company ROIC Tree.

Opex / Revenue

Operating Margin
19.6%

66.6%

68.2% 2008

69.0% TTM

69.4% Peer

19.1%

18.1% TTM

20.9%

2007

Depreciation / Revenue

2007

2008

Peer

13.7% 2007

12.6% 2008

12.9% TTM

9.7% Peer

Pre-Tax ROIC
5.8% 6.8% 5.8%

10.8%
x

Operating Working Capital / Revenue

15.2% 2007 13.6% 2008 18.1% TTM 10.9% Peer

2007

2008

TTM

Peer

Net PPE / Revenue

285.2% 246.6% 270.0% 191.1%

Capital Efficiency
0.30 2007 0.36 2008 0.32 TTM 0.50

2007

2008

TTM

Peer

Net Other Assets / Revenue

-14.3% -14.1% -13.6% -13.0%

Peer

2007

2008

TTM

Peer

Goodwill / Revenue
50.4% 2007 35.4% 2008 36.8% TTM 26.6% Peer

The following examples illustrate the benefits from using some of the above measurements to drive operational improvements.

In the first case, a power generation company was behind its peers in opex/revenue, but 70 percent ahead of them in net PPE/revenue (Figure 2). The power companys analysis showed strong potential returns associated with improving the reliability of its low-cost production units. Although opex/revenue was trending upwards, a more detailed analysis found this to be due to rising fuel costs.

Figure 3. Mid-size Oil and Gas Producer ROIC Tree.

Opex / Revenue
72.8% 2008 79.4% 71.5% Peer

Operating Margin
27.1% 19.8% 9.3% 2007 2008 TTM 13.2% Peer

61.3% 2007

TTM

Depreciation / Revenue
11.6% 2007 7.4% 2008 11.4% TTM

15.3%

Peer

Pre-Tax ROIC
25.4% 24.7% 7.0% 2007 2008 TTM 14.7% Peer
x

Operating Working Capital / Revenue

1.0% 2007 2.3% 2008 5.6% TTM 10.4% Peer

Net PPE / Revenue

107.5% 78.2% 128.4% 145.1% Peer

Capital Efficiency
0.94 2007 1.25 0.76 TTM 1.29

2007

2008

TTM

Net Other Assets / Revenue

-4.7% 2007 -3.5% 2008 -6.2% TTM -7.5% Peer

2008

Peer

Goodwill / Revenue
2.6% 2007 2.9% 2008

4.6% TTM

4.2% Peer

In the second casea mid-size oil and gas produceroperating expenses were higher than peers while net PPE/revenue was lower (Figure 3). In this case, the benefits of improved reliability would come from reduced maintenance labor and materials costs. In effect, variation in net PPE was a result of capital improvements for a refinery during a planned shutdown. In order to costeffectively sustain capacity over time, improvements would be required in reliability analysis (do only the right work at the right intervals) and maintenance planning and scheduling (be more efficient when doing the right work).

Understanding the processes that have the greatest impact on shareholder value clarify what capabilities actually require detailed analysis. Accenture has developed a structured approach for identifying improvement opportunities that yield the greatest return on investment, while increasing safety and regulatory adherence.

Asset Reliability and Maintenance Management Diagnostic

High-performance businesses often approach maintenance in an organized and proactive mannerusing a holistic strategy to help achieve optimum asset reliability and performance. Sustained excellence in reliability is a comparatively small investment that reaps benefits in any business cycle. Four critical success factors are typically involved:
Strong interest and buy-in from executives.

effective, formalized and proactive strategy. Strong workforce morale and skills. Experience making sustainable improvements.

An

The process begins with a diagnostic phase focused on formulating an asset reliability and maintenance strategy that aligns with the organizations business objectives. The key differences between this strategic initiative and other endeavors are the link to shareholder value and a financially optimized decision-making process emphasizing high impact and readily achievable improvement opportunities. A structured, phased approach then is implemented to help ensure sustainable, long-term improvements. The objectives of this approach are increased safety, increased revenue and quantifiable

savings. Accenture helps companies achieve these objectives by offering customer insight coupled with in-depth problem solving. Deep attention to knowledge and capability transfer is equally key. High impact, high value opportunities identified early in the process help drive initial investment and encourage capability transfer, while support in later phases strengthens internal capabilities as knowledge and expertise are internalized. Our experience has been that, as the cost of capital rises, the importance of effective asset performance increasing important in minimizing operating cost.

Accentures Differentiated Approach

Accenture has developed extensive functional depth in operations strategy, talent optimization, organizational performance and supply chain management. These are invaluable for identifying and implementing asset reliability and maintenance management solutions that address clients unique business objectives. We are uniquely positioned to diagnose issues not only compared to industry standards but specific to the organizations business objectives and challenges. Our industry depth and functional breadth provides our clients with a partner to enable strategy through execution and sustained improvement.

Increasing Competitive Advantage through Asset Reliability and Maintenance Management

To increase competitive advantage, a mid-sized integrated oil company initiated a comprehensive maintenance improvement program. A main focus of this effort was on maintenance planning, the company integrated this function through process reengineering, training and system enhancements. The effort yielded significant benefits reduced maintenance costs by 30 percent, improved throughput by 5 percent and aligned leadership which had a positive impact on morale and overall operational performance for the company.

About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

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Contact For more information on how Accenture can assist your organization with the implementation of an asset reliability and maintenance management program, please contact: Thomas Schramm Senior Executive Munich Germany +49 89-93081-68289 Erik Olson Senior Executive Atlanta, United States +1 678-657-6104 Robert Giacobbe Senior Executive Atlanta, United States +1 678-657-6282 Patrick Scullin Senior Executive Austin, United States +1 512-912-6582