The Asset Lifecycle Management Process from Start to Finish
If your business relies on a particular piece of equipment that is instrumental in generating revenue, managing and maintaining it is pretty important. If you’re in the freight transportation business and your fleet of trucks is suddenly out of service, you’re losing money every day they sit idle. The same goes for construction equipment, printing presses, or any number of business assets. You depend on this equipment to keep your business running smoothly and your cash flow healthy. Asset lifecycle management helps you get the most value out of your assets and make better business decisions about buying, using, and disposing of assets.
Before we dive too deeply into asset management and its importance, let’s start by first defining a few terms, such as asset, asset life cycle, and asset lifecycle management.
Have you heard someone referred to as “an asset to their organization” — meaning they provide a valuable resource? The same can be applied to physical assets.
What is an Asset?
In accounting, an asset is a resource that is owned or controlled by an organization that provides positive economic value. In business, it can be anything from a copy machine to a vehicle, to a building to a piece of equipment. These are tangible assets.
There are also intangible (or non-physical) assets that play an important role in business operations, such as intellectual property, trademarks, or brand equity. While these assets can provide significant value, they don’t have a natural lifecycle like physical assets. A patent, for example, may have value in perpetuity, while a physical asset like a car has a defined lifecycle where its value diminishes over time until it’s no longer useful.
- The asset management lifecycle stages consist of; planning, acquisition, operation and maintenance, and disposal.
- There are intangible assets (intellectual property, trademarks, or brand equity) and tangible assets (anything from a copy machine to a vehicle).
- Tracking the lifecycle of an asset gives you the information you need to make informed business decisions about how your assets are performing, when maintenance and replacement are optimal, and when it’s time to decommission an asset.
What is Asset Life Cycle and Asset Lifecycle Management (ALM)?
An asset’s lifecycle includes everything from planning and acquisition until it’s disposed of after it comes to the end of its useful life. Asset lifecycle management, short ALM, pertains to how businesses manage these assets.
Asset Lifecycle Management Definition
ALM is a process to maximize the cost-effectiveness of assets throughout their lifecycle. As assets move through the various stages of their lifecycle, ALM helps you track and manage your assets efficiently.
Asset lifecycle management meaning can vary slightly depending on industry and application. For example, in software development circles, engineers often refer to ALM as assert or application lifecycle management, which follows a similar path from creation to deployment to end of life and is an important process in agile development practices.
However, in most businesses, ALM is focused on physical assets.
Why is Asset Management Necessary and Important?
Asset management is a crucial part of managing businesses efficiently. Most companies have made significant investments in their assets, and they want to maximize their value for as long as possible. Tracking an asset’s lifecycle provides the information you need to make informed decisions about how your assets are operating, when maintenance and replacement are optimal, and when it’s time to retire an asset.
One of the other key reasons asset management is essential is because of the sheer volume of assets most businesses have. In many companies, assets may account for as much as 50% or more of a company’s total value. They may have thousands or tens of thousands of assets that they need to keep track of and manage.
To make it even more complex, different assets have different lifecycles. A computer may need to be replaced every three to five years. Servers may last five years or more, or be upgraded to extend their life. Vehicles might last ten years or more. Furthermore, the lifespan of construction equipment can vary wildly depending on usage and is typically tracked in hours.
This makes keeping track of an entire portfolio of assets challenging unless you have a formal process and the right asset lifecycle management software to ensure things don’t fall through the cracks.
The Benefits of Asset Life Cycle Management
Companies using asset life cycle management practices see several important benefits. Besides getting maximum value for their investments, organizations also realize:
- Longer lifespans for equipment due to proactive and preventative maintenance
- Decreased downtime due to asset failures
- Better planning and forecast for budget cycle for asset acquisition and replacement
- More efficient operations
The Goals of Asset Life Cycle Management
These benefits produce tangible goals that benefit businesses. For example, when you can extend the useful life of an asset, you can delay having to spend cash for replacements. With proper asset lifecycle management, businesses can extend an asset’s life. This helps maximize ROI and minimize the total cost of ownership.
At the same time, by monitoring performance, businesses have a better idea of when an asset is getting close to end-of-life, so they can better plan future capital expenditures.
In addition to these benefits, lifecycle asset management may also play a crucial role in maintaining industry and company compliance measures.
The Different Asset Management Lifecycle Stages
Assets naturally flow through five stages in their lifecycle in any organization:
You may have encountered the asset management lifecycle diagram at some point. It looks like a circle with each stage connecting to the next. As assets move through the lifecycle, they advance from one stage to the next until they are disposed of. Then, the cycle may begin anew with a replacement asset.
In the procurement stage, organizations evaluate assets and make purchase decisions. Companies typically have guidelines for the acquisition and may include buying committees. Large companies often have departments dedicated to procurement to ensure there is consistency in asset acquisition across divisions or departments, along with specialists in things like managing the IT asset management lifecycle.
Procurement teams evaluate products with an eye towards TCO, preferred vendors, and support.
Once assets are purchased, the next step is putting them into service. Products are tested and any defects or design problems are identified.
Assets aren’t added to a company’s balance sheet typically until they are put into service. As deployment begins, physical assets are tagged, typically with a bar code for future identification, and logged into asset management software for tracking. Items classed as capital expenditures (CapEx) in companies may be eligible for depreciation.
Organizations can expense the cost of eligible fixed assets over their usual life. Depreciation estimates an asset’s value at the end of its lifespan and subtracts it from its initial cost. The difference is depreciated over the years and the amount can be expensed as a tax deduction. It’s important to track every asset to maximize your financial benefits.
This stage is often called useful life. As long as an asset is functioning and performing the intended job, it is within its useful lifespan. This varies, of course, based on the quality of the asset, the job at hand, and evolving technology. It’s not uncommon in many industries to find assets that perform just fine, but newer tech can create efficiencies that outweigh any sunk costs.
Basic maintenance will continue during the utilization stage to keep assets in service and performing as needed. Modifications and upgrades will be done along the way. The performance will be monitored to look for warning signs of wear, aging, or deteriorating performance.
As assets lose their effectiveness, become obsolete, or no longer function as needed, it’s time for the final stage.
At the end of an asset’s useful life, the last step is disposal. In many cases, it’s not as simple as throwing something into a dumpster. Steps must be taken to ensure compliance with company requirements and regulations. Sarbanes-Oxley, PCI DSS, HIPAA, GDPR, CCPA, CPRA, and a host of other acronyms require specific handling for the handling and disposal of data, for example.
In other cases, physical assets may contain harmful chemicals that must be remediated before disposal.
Disposal may mean physically destroying or disposing of the equipment, breaking down equipment into parts that can be used for other reasons, or selling them off.
Once disposed of, the asset must be written off a company’s balance sheet to reduce the fixed asset account and the accumulated or remaining depreciation. Any residual value must be accounted for which would show as a loss.
Why Is Asset Management Software Important for Asset Life Cycle Management?
Asset management software is essential for large enterprises, but businesses of all sizes need a consistent, accurate way to track and manage assets.
Moreover, this software can help simplify the job at every stage of the asset’s life, from procurement to disposal. Here are some of the things the best software asset management lifecycle programs can do at each stage:
- Create purchase orders
- Manage purchase order workflow and tracking
- Create an auditable approval chain
- Entering assets into inventory
- Helps analyze prior purchases to justify new acquisitions
- Moving assets from inventory to in-service
- Assets tagging and tracking
- Asset depreciation calculations
- Assigning necessary licenses
- License management
- Compliance management
- Schedule alerts for maintenance
- Schedule alerts for compliance checks
- Records of maintenance
- Cost/Benefit analysis to ensure efficient TCO
- Justifications for disposal
- Movement of assets to inactive
- Track asset disposal
- Store historical data
- Create an audit trail
- Evaluate asset lifecycle to aid in the procurement of replacements
When you look at all of the things asset life cycle management software can do, you can see how important it is to run an efficient organization.
Tracking fixed assets also plays a big role in a company’s market value. If a business is looking to sell, the value of the company’s equipment and inventory plays a significant role in the sale price. If companies are looking to get financing or take on additional investors, assets may be pledged as collateral or give assurances that if a company defaults, there are assets available to pay off any outstanding debt. With asset lifecycle management software, companies have this information at hand.
The Asset Lifecycle Management Process
The term Design, Operate, Maintain (DOM) was coined by ARC Advisory Group, as a way to characterize the key concepts involved in asset management.
While the five stages detail how assets flow through companies, the DOM process focuses on how companies evaluate assets during their lifecycles. For example:
- In the Design and Build phase, asset management is focused on optimal project performance (PPM).
- During the longer phases, Operation and Optimize, asset managers are more focused on asset performance management (APM).
- During the Maintain and Improve phase, asset management is focused more on cost-effectiveness and efficiency versus replacement assets.
Organizations also monitor asset and project portfolio management (APPM) to ensure a company’s big picture approach to asset investments is aligned with company strategic goals.
How Can Asset Life Cycle Management Help?
Asset life cycle management helps you optimize an asset’s performance throughout its useful life and make better decisions about purchasing, maintaining, and disposing of assets.
The right software for the asset management lifecycle can help see a better return on your investments, improve your productivity and operational efficiency, keep you in compliance, and help mitigate risk. At each stage, you can create reports quickly and easily and analyse assets for ROI, leading to cost savings.
With engineering asset lifecycle management, for example, you can know the total cost of ownership of every asset in your organization at any time. However, by evaluating the cost of maintenance and operation versus an asset’s useful life, you can make better decisions about whether assets need to be replaced.
Conclusion: Provide Greater Value and Returns
Proactive asset lifecycle management can help you mitigate the risk of capital projects, extend the life of your assets, and help you better plan for future needs. Assets impact every part of a business. When properly managed and maintained, assets can provide even greater value and returns.
Assets can be tangible or intangible. In accounting, a tangible asset is a resource owned or controlled by an organization that represents positive economic value. In business, this can be anything from a copy machine to a vehicle to a building or equipment. Intangible (or non-physical) assets play an important role in business operations, such as intellectual property, trademarks, or brand equity.
The lifecycle of an asset includes everything from planning and acquisition to disposal at the end of its useful life. Asset lifecycle management, or ALM, refers to how companies manage these assets.
Asset management software is essential for large enterprises, but companies of all sizes need a consistent, accurate way to track and manage assets.In addition, this software can help simplify work at every stage of an asset’s life, from procurement to disposal.
Sectors that benefit most from Asset Management Software are for example; IT and Telecommunications Industry, Entertainment Industry, Healthcare Industry and Manufacturing Industry.