A Conversation with Marcus Scholes: Poor Asset Management Risks Business Integrity
Growing risk awareness and recent natural disasters, such as Hurricane Katrina, may have prompted an increasing number of companies to invest in disaster recovery (DR) as part of the business continuity program – but how safe is that investment?
Just what, indeed, is being recovered? Few organizations have any real insight into the true extent of their corporate assets. In fact, on average, upwards of 50 percent of assets on the register cannot be located.
Not only does this challenge the validity of the DR solution but it also raises huge questions in the event of an insurance claim. Without excellent, up-to-date information about asset type, value and location, how can an organization feel confident in its business continuity investment?
Given the growing acceptance that business continuity is an essential component of 21st century business, why are so many companies willing to compromise that investment from day one by failing to retain control over essential asset information?
Asset management is a fundamental business process. It determines corporate value and has a direct impact on profitability. Yet how many multi-national organizations are truly confident in the value of corporate assets? While most have good systems in place for recording initial investments, they pay lip service at best to managing later asset disposal. As a result, at least 50 percent of assets on the books are either so poorly described or are no longer in use, that they cannot be located during a physical audit.
Disturbingly, the majority of companies believe the asset register is, at worst, 5 percent inaccurate – and are therefore shocked by the results of a complete physical asset audit. In fact, on average, physical audits reveal 40 percent of assets are well described on the register and can be easily found; a further 40-50 percent probably exist but are so poorly described it is impossible to prove, and the remaining 10-20 percent are well described but cannot be found, indicating they no longer exist.
When taken as a proactive move to improve accuracy, the shock can be addressed with proactive strategies to create more robust processes and information sources. Discovering the true level of asset inaccuracy in the result of a refused insurance claim or unsuccessful DR invocation can create significant business problems.
So why is there such a disconnect between the real and perceived levels of asset accuracy? Are assets impossible to locate due to poor recording within the asset register, because they have changed location, or actually removed from the organization?
For most companies, the answer is hard to give. One of the major issues is the complete lack of coordination between the asset register recorded within finance and the inventory lists used across the rest of the organization – from fleet managers to IT and plant maintenance.
Within finance, the primary objective is to record the asset value for depreciation purposes. As a result, assets tend to be consolidated into a single figure irrespective of the number or complexity of the component parts. Indeed, it is not unusual to discover a $100,000 “computer equipment” record in the asset management system, with no asset breakdown.
While this may appear adequate for depreciation purposes, it provides no opportunity for tracking the asset across the organization throughout its lifetime. This same asset may well be recorded in far more detail within the IT department – typically on a spreadsheet. And, to be fair, given the drop in the cost of technology, many components – such as PCs and laptops – fall below the capital value threshold set by companies. Thus there is no requirement for finance to record each item in detail.
However, while IT is, typically, good at maintaining its own inventory register to determine system maintenance and support, such information rarely finds its way to the finance team. Indeed, even if IT does provide information on individual asset disposal, having consolidated these assets, finance has no way of recording the information in the asset register.
The issue is even more complex in manufacturing environments where the highly complex production line is typically under continuous refurbishment. Even if finance is informed of changes, there is not enough information on the asset register to identify which items should be removed.
And, of course, most finance teams regard the issue as self-resolving: the majority of the assets no longer actually in use have already been depreciated down to zero, so there is no impact on corporate value. But this lackadaisical approach actually increases business risk.
With poor, inconsistent asset information how can any company feel confident in its business continuity planning and investment – from insurance to disaster recovery? Any inconsistency in the asset register or inability to reconcile the asset value in finance with multiple inventory records will raise significant doubt for insurance companies, delaying payment at best. At worst an organization could lose any chance of insurance payment, even face charges of claiming for items that do not exist.
And while very, very few organizations opt to duplicate their entire operation in the event of a disaster, many have set up relationships with suppliers to re-supply previously purchased equipment to the hot site within a specific timescale. Yet with poor record keeping, how can any organization feel confident that the suppliers will provide the right equipment? They only know what they have sold; they have no idea about which of these assets are still in use, and which have been replaced.
Failing to record actual assets in use can only result in organizations paying a premium for equipment that is simply not required in the event of a disaster.
Is there really any excuse for such poor control over key business assets? There are simple processes that can be followed to ensure greater information consistency. Recording serial number and asset location as well as value meets not only the needs of the finance team but also provides the detailed information required to track asset location and status for local departments.
Critically, by creating a single source of all asset data, organizations can streamline many of the processes associated with improved accuracy and financial control. Detailed information about assets can be consolidated at the finance level, if required, while the process of asset cross-referencing is also greatly improved.
Leveraging this single data source to impose good processes, asset disposal and replacement can be input into the system locally and new depreciation values automatically calculated for the finance team, ensuring a far more truthful business value. Furthermore, with good processes for recording asset disposal as well as purchase, organizations should retain high levels of asset accuracy. Critically, the information required for both insurance and DR planning is available, consistent and trusted, significantly reducing business risk and underpinning the growing business continuity investment.
Marcus Scholes is Vice President of U.S. Operations, Real Asset Management International.