Key points
Recently, a mid-west water agency spent $5 million completely replacing a set of finished water high-service pumps. While the pumps had been in service for more than 20 years, there were no performance issues of note; they were well within the efficiency range, with only a few typical impending failures detected – nothing out of the ordinary for even a one-year-old set of pumps. Importantly, these pumps had a history of reliable service, and exceeded needed capacity.
Why were they replaced? Because the calendar said so.
A Primer on Risk Type
Every year, organisations are making very expensive capital decisions to replace assets based on risk calculations. Sometimes these assets don’t really need to be replaced. Why do they get it wrong?
We can look at risk in two ways: short -term and endemic. Short-term risk is determined by the probability of failure; endemic risk is determined by the historic frequency of failure. The difference is subtle, yet significant: short-term risk drives the maintenance approach while endemic risk drives capital investment decisions.
The Impact of Short-Term Risk
During a typical criticality analysis, a key objective is to understand how essential systems and assets are to supporting an organisation’s mission and values. In the real world, those missions and values are at risk when critical systems or assets approach failure. To determine this risk, the likelihood of failure is measured against associated criticality.
The result should either motivate immediate action for highly critical assets which pose high risk or allow for ‘run-to-failure’ for less critical assets, while accounting for everything in between. In this approach, using condition-based likelihood of failure, the risk is a key driver for determining the response to a failing asset. It is an immediate term, or short-term, window on risk.
Understanding Endemic Risk
But there is second way of estimating and assessing risk, which introduces another kind of risk: endemic risk. Assessing ‘historic frequency of failure,’ or the number of times an asset or system has failed over a period of time, the last 10 years for example, will estimate a different kind of risk. We refer to this as endemic risk.
Endemic risk indicates the risk posed by systems or assets based on their design, operating context, maintenance history, relationship to the rest of the portfolio, level of service requirements, and even staff culture and skill set employed over time. It’s far more than identifying an impending failure from a failing bearing.
This kind of risk determines if the system or asset is suitable in design for its intended purpose, which is referred to as “fit for purpose.” It considers its whole reliability and cost history, and whether it is maintainable in its current state. This kind of risk perspective is best suited to drive capital investment decision points.
Just because a pump is rusty doesn’t mean it needs to be replaced. That is most likely a maintenance item. But if the level of service requirement exceeds its inherent capacity, then a capital decision is required.
Where Rubber Meets the Road
To illustrate with a simple example, consider the purchase of a new car used for a work commute. There is no historic failure data available, but it is assumed that the risk is low with both short-term and endemic risk because it’s brand new.
If, however, the car develops a compromised tire within the first few weeks, the likelihood of failure increases along with short-term risk, and action must be taken to prevent the failure. Since this car is a critical asset, immediate engagement is necessary. However, the endemic risk remains relatively unchanged because there have been no past failures.
Fast forward 10 years. Assume the same vehicle has proven its reliability and has been proactively maintained. In fact, over the course of 10 years, the car has only required repairs for two unpreventable malfunctions: a brake recall and a sunroof failure. In this case, the endemic risk posed by this highly reliable vehicle would remain relatively low, but perhaps a little higher than a new car.
Short-term risk is still estimated based on tire condition, oil changes, and other performance-related indicators. If nothing seems to be going wrong, then short-term risk would seem to remain relatively low, and there is no need to initiate any impending repairs. Importantly, since endemic risk is also low, this car can be trusted and safely driven for another 10 years.
On the other hand, assume the vehicle purchased 10 years ago was a lemon, signs of failure are ignored, the vehicle is misused, and suffers from an incompetent maintenance garage. It has needed major repairs multiple times over the last 10 years, perhaps at an increasing rate over the last two.
With this historic rate of failure, the endemic risk is much higher. Even if the car is currently performing reasonably, a replacement might be worth considering, which will require a capital investment.
Why Does Risk Matter?
It’s quite possible that older systems can pose very low endemic risk and do not require replacement, avoiding a big capital investment. It’s also possible that relatively new systems can have a high degree of failure, and as such may require an earlier-than-expected capital investment to manage, design, or engineer out the risk.
Calendars alone are poor predictors of capital requirements. These questions are more important:
- Have there been changes in Level of Service requirements?
- Is the corporate culture/employee skill set/maintenance regime suitable for managing this portfolio?
- Is this asset “fit-for-purpose?”
- Is it too expensive to repair “as-is?”
It would be unnecessary to replace a car because it has had several flat tires over a 10-year span. Similarly, it is a very costly mistake to base capital investment decisions on short-term risk results rather than endemic risk.
They are not the same, are not interchangeable, and each has its intended use. Short-term risk is driven by the impending failure of an asset and drives maintenance action (or lack of), regardless of its endemic risk. Endemic risk drives capital decisions, regardless of short-term risk.
There are times when the two risks converge, and that system or asset is then at its expiration date. To better plan and protect critical assets or systems, organisations should consider an enterprise asset management system that facilitates decision support for both endemic and short-term risk calculations. A better understanding of risk leads to better decisions, which lead to better outcomes.
