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Why is PAM a good idea in an economic downturn

In business cash is king, especially in the midst of a downturn. When the storm clouds gather, businesses have a tendency to immediately start cutting back on ‘non-essentials’. On the chopping block you’ll usually find those activities that represent a current expense, but for which the benefits are only realised years down the line. The implementation of a new ERP system, employee training, consultants working on projects of a strategic nature and business optimisation activities that yield incremental benefits all fall within this category.

Yet we see governments doing the exact opposite. When the tough times arrive they launch infrastructure development projects to help offset the sagging economy. These are projects that represent a current expense, but yield benefits decades into the future. Sure, they might take on debt to do it, but by taking a longer-term view they foresee the benefits far outstripping the interest payments. Private companies tend to be driven by a relentless quarterly profit imperative, encouraging corporate myopia.

The cynic would argue that private companies don’t have the luxury of amassing massive amounts of debt, even if they could find a willing lender. They operate in a competitive environment where they cannot arbitrarily raise prices the way governments can raise taxes. However, in the modern world competition for investment between countries is as fierce as competition between companies, placing limits on tax rates. Business leaders owe it to themselves to at least question their typical knee-jerk reaction when times turn tough.

The question then becomes how a business can cut costs without undermining the long-term prospects of the enterprise. It’s like a ship in a storm that has to decide what it can jettison to stay afloat without undermining the longer-term goal of making it to the next harbour.

Consider for example the public health environment. This is an industry in a perpetual cash crisis as the need for services overwhelms the available funds. Hospital directors typically have a medical background, so their instinct is to redirect funds away from things such as infrastructure care towards patient care. This is done for one year, with no apparent adverse effects, so the next year they do it again, and again. After a few years elevators start failing, theatre equipment starts breaking down and paint peels from the wall where a pipe burst. The ability of the hospital to provide patient care is thus undermined by the poor quality of the facility and the assets therein.

Aside from the longer-term benefits of proper asset management, there are more immediate benefits, such as reducing the risk of a breakdown that could lead to a catastrophic (and expensive) outcome. Consider the backup generator that keeps the operating theatre running in the event of a power outage. If this piece of equipment were to fail, it’s possible that a life might be lost on the operating table, leading to much damage to the hospital’s name as well as possible legal repercussions. Or consider the gunshot victim who died because he could not be rushed to surgery as staff had to wait ten minutes for one of the few functional elevators. The manufacturing and mining environments are likewise littered with examples of equipment failures that could have serious economic, safety and environmental consequences.

Another way better asset management can reduce costs is by having it reduce insurance premiums. Insurers base their cost on risk profiles, and if a company can demonstrate that it has managed to reduce its risk profile, it should be easy to convince an insurer to reduce their premiums. The hospital with fewer people dying due to equipment failures need not pay the same insurance premium per bed covered as a less reliable one.

Another way physical asset management can save you money is by enabling you to better negotiate when procuring capital equipment. Most capital equipment nowadays is sold with a warranty or maintenance plan. A warranty is of course not free, even though it might not be a separate line item on an invoice. The equipment supplier calculates the money he’s likely to spend on the particular asset during the warranty period, adds a margin, adds some more to cover risk, and works that into the price. The supplier generally makes much higher margins on the service component than on the asset being sold. If the asset owner better understands his or her assets, and keeps proper track of their performance and maintenance history, warranty costs could be reduced or even avoided entirely by effectively guaranteeing assets yourself.

In summary, management should be wary of a short-term outlook, especially during downturns. It undermines long-term performance, and the downturn might end up running much longer than anticipated, as we recently discovered. Once the economy rebounds you might find you’re not well positioned to capitalise on new opportunities, resulting in lost market share. There are also many shorter-term reasons to invest in proper asset management. These include guarding against scarce but catastrophic breakdowns, reduced insurance premiums, and capital expenditure reduction.

Louis Volschenk

Pragma Solutions Engineer

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