B. Integrating an entity's strategic outlook with it's asset portfolio
2.5 Program delivery options
A broad objective for most entities is to optimise the use of available resources in order to meet program delivery requirements. From an asset management perspective, optimising available resources is achieved through strategic planning that establishes which programs need to be delivered and the optimal mix of assets to deliver them. When an entity determines its program delivery requirements, it will consider the core principles of efficiency, effectiveness and value-for-money in achieving them. In deciding the optimal mix of assets to achieve its program delivery requirements, an entity has a range of alternatives which it can consider, as illustrated in Figure 2.4 below.
Figure 2.4: Program delivery options
The range of alternatives as shown above, may include non-asset solutions.
The program delivery requirements may be best met by the outright acquisition of new assets that will also meet the efficient, effective and value-for-money considerations.
An assessment will determine whether an entity is able to make its program delivery less asset-dependent by redesigning how it is able to deliver some services. For example, and subject to other operational or policy considerations, it may be possible for recipients to apply for the entity's services online, negating the need for it to maintain regional shopfronts.
It may be beneficial to outsource aspects of program delivery, thus eliminating the need to acquire assets. Some advantages of outsourcing may include:
- lower service delivery costs;
- demonstration that the service delivery option is competitive and contestable;
- access to skills, experience and the latest technology;
- rationalisation and standardisation of services, possibly leading to better quality and more efficient service delivery; and
- a release of internal resources to focus on core service delivery objectives.
In deciding whether to outsource a service delivery, an entity would usually consider a number of matters including:
- the ongoing viability of the outsource provider;
- the costs and benefits of outsourcing;
- existing in-house skills, resources and expertise and whether the outsource provider can replicate these;
- the risks associated with outsourcing, including the loss of corporate knowledge and the impacts on business continuity; and
- the extent to which highly sensitive and protected information may need to be divulged to the outsource provider.
Finance leases result in the recognition of an asset at the time the transaction (contract) is entered into, which gives rise to treatments similar to those if the asset was purchased outright. Alternatively, some of the advantages and disadvantages of entering into an operating lease for assets as opposed to outright purchase are listed below.
- costs are spread over the term of the lease as opposed to an upfront major capital outlay;
- reduced disposal costs at the end of the useful life;
- risks of ownership may remain with the lessor;
- assets may be replaced more frequently over the lease term, allowing access to the latest technology; and
- the entity may be able to access economies of scale from the lessor’s purchasing power, leading to lower lease costs.
- the assets are not owned;
- assets may not be able to be modified to suit changing business requirements without lessor approval and attracting fees;
- lease terms are generally fixed so asset replacements and early terminations at the request of the entity may attract penalties and fees; and
- there may be a capital outlay required if purchasing the asset at the end of the lease term.
Refer to Section 4.3 of this Guide for a summary of the key advantages and disadvantages of both leasing and outright purchase, and a lease-versus-buy calculator based upon net present value (NPV) analysis.
Reconfigure the existing asset base
As part of its strategic planning, an entity can use an asset divergence analysis to identify an optimal asset mix, and what is required to address any identified gaps. Asset performance indicators are also a key tool in accessing the functionality, operational importance and use of the existing asset base. This is discussed further in the following section on asset performance indicators. Asset condition audits are another useful tool to help determine the ‘shelf life’ remaining on existing assets that are identified as serving an ongoing purpose.
The outcomes from the asset divergence analysis and asset condition audits may include reconfiguring the asset base to:
- not replace existing assets at the end of their useful life as program delivery objectives can be achieved without them;
- replace assets at the end of their useful life with new lower capacity assets at a lower replacement cost;
- increase existing asset use;
- increase existing asset capacity;
- change the ability of an asset to meet its designated purpose in achieving program delivery outcomes;
- extend the useful life, thus deferring the need to replace an existing asset with a new asset; and
- relocate assets to achieve better use of them.