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Asset Management

Hero or Goat? The Difference Is Knowing the

Difference
by JD S o l o m o n

Figure 1: Decision Making_lead image

Decision Making_lead image

Asset management is concerned with the total cost of ownership and a corresponding long view. Many decision-makers do not think
this way nor do they allocate resources in this manner. Trusted advisers must understand what is meant by a decision, the different
types of decisions, and the external influences on decision-making in the presence of complexity and uncertainty. Asset managers
must properly evaluate their problem-solving and communication approaches if they are to be successful.

The Anatomy of a Decision

Let’s take a look at a not so uncommon conversation.

“Jim changed his mind!” exclaimed an excited voice on the other end of the phone. “I had a gut feeling he would go back on his
decision! He would not sign the purchase order for the long-lead equipment! It is just too much money and he is too worried that he
has made the wrong decision!”

“So, Jim finally had the purchase order in front of him and he refused to sign it?” Paul asked calmly from 400 miles away.

“Yes, that is correct,” replied Jim. “Almost two years of work, he wanted to do this, and the board authorized him to do it. He just
backed away from his decision. Something is wrong with him!”

“No, there is nothing wrong with him," Paul replied calmly. "There is something wrong with us. You see, I knew this day was coming.
Jim had never decided to do this.”

“I think you have lost your mind, too! You call him! I am done!” responded Jim, just before the phone went silent.
      

Figure 1: Asset management requires a long view that is not intuitive for most decision-makers (Illustration: JD Solomon)

Decision Defined
Ronald A. Howard, considered the father of decision analysis, defines a decision as “an irrevocable (or irreversible) choice among
alternative ways to allocate resources.” In other words, you do not have a decision until you allocate resources. All other forms of
agreement are an “intended course of action.

There is not a decision until there is a commitment of resources. An agreement without committed resources is merely an
intended course of action.

In the prior conversation example, Jim liked the idea of replacing the old equipment with a new, dynamic version that would
fundamentally change all the major processes in his production facility. He had made some decisions about planning for it, like
dedicating specific staff time to exploring it and hiring a consultant to develop preliminary plans. However, the decision to transform
the plant would be defined when he made the irrevocable decision to sign the purchase order for the long-lead (and very expensive)
equipment.

The Anatomy of a Decision

Decision-making is closely tied to the way humans think. Behavioral psychologists describe two major thought patterns: System 1 and
System 2. System 1 is categorized as intuitive, common sense and based on prior experience. The many decisions you make each
day in your life and in conducting business are largely System 1.

System 2 is categorized as analytical, statistical and complex. System 2 is characterized as the one or two life-altering or strategic
decisions that some of you make once per week, but most make maybe once per month. In the domain of System 2, planning is
performed over the long term and involves both people and numbers. The allocation of resources associated with System 2 is
significant.

In Jim's case, allocating resources related to committed staff time and hiring a consultant for a phased assignment was consistent
with operational decisions. However, the commitment to purchase expensive long-lead equipment that would change the plant’s
core processes was a strategic one.

Asset Management Decisions

According to the Institute of Asset Management, “asset management involves balancing costs, opportunities and risks against the
desired performance of assets to achieve an organization's objective. Asset management is the art and science of making the right
decisions and optimizing the delivery of value. A common objective is to minimize the whole life cost of assets (emphasis added), but
there may be other critical factors, such as risk or business continuity, to be considered objectively in this decision-making.”

Since asset management is largely concerned with minimizing the whole life costs of assets or the total cost of ownership, most
asset management decisions require a long view. The long view requires predicting the behavior and performance of complex
systems with meaningful amounts of uncertainty over the asset’s lifecycle. Asset management requires making decisions (allocating
resources) that are strategic and require System 2 thinking.

Asset management’s focus on whole life costs creates long view decisions with meaningful levels of complexity and
uncertainty.

Asset management also requires many incremental decisions along the journey. These allocations of resources are more operational
and require System 1 thinking. One issue concerning asset management is that operational decisions need to be aligned with
strategic decisions, with their long-term focus based on System 2 thinking. Another less obvious issue is that most operational
decisions are based on the decision-maker's beliefs concerning the likelihood that uncertain future events will happen. Prior beliefs
and experiences, whether in the form of desirable expertise or undesirable biases, are unfiltered in System 1 thinking.

Back to the conversation example, Jim was caught between his past experiences and intuition (System 1 thinking) and the planning,
lifecycle analysis and reasoning (System 2 thinking) that had been performed. He did not want to harm the people or the
organization. And Jim felt he needed to pull the trigger. However, this decision was a bigger and longer-term allocation of resources
that he had seldom made.

Complexity, Uncertainty and Human Behavior

Paul Schoemaker, an expert in strategic management and decision-making, believes that individuals simply have too many
information processing biases and physical limitations to solve strategic problems by themselves. A cross-functional group is the
best way to ensure quality decision-making. There are other compelling social reasons for group cooperation, including
reinforcement through group involvement, that are also very important to most individual decision-makers when coping with
uncertainty and complexity.

One example of the power of group reinforcement is loyalty. Loyalty assures that the values and objectives of the leadership team
are preserved, and conceptually assures that the organization survives. However, loyalty among the inner circle also makes change
difficult. Loyalty is just one example of why a group’s conclusions are more important than individual preferences when evaluating
strategic decisions with complexity and uncertainty.
      

Jim’s hesitancy to make an irrevocable allocation of resources may have been driven by his own intuitions or fear of harming others,
despite what all the logic was telling him. Or, his hesitancy may have been driven by group influences and trying to please his inner
circle, although the numbers showed that the new way was better than the old way.

Implications for Asset Management Decision-Making

You will know a decision by an allocation of resources. If you are not given a specific amount of time to work on a project or a
specific commitment of funds, then a decision has not been made. Without allocating resources, there is merely an intended course
of action or someone simply likes the idea of doing something. Understand at all times where you are on the decision-making
continuum.

Most asset management approaches are based on foregoing some short-term benefits at the prospect of bigger, long-term rewards
associated with minimizing the total cost of ownership. Many decision-makers do not think this way, in part because they will not be
in the same role to benefit from the long-term rewards. Understand every issue in terms of whether the decision-maker is
predominately thinking long or short.

Group dynamics are more important in strategic decision-making than individual behaviors. It is one reason why the overworked
term culture is so important in asset management decision-making. More practically, the decision-maker’s inner circle should be
included, involved and accounted for in the asset management approaches.

Communication is equally important to problem-solving approaches when it comes to asset management decision-making. System 2
thinking, which involves analytics and accounting for a complex and uncertain future, does not come easy for most decision-makers
or their inner circle. Seek to involve the decision-maker and the inner circle in the process rather than advocating to an uninvolved
group at the end.

References
Howard, Ronald A. “Decision Analysis: Applied Decision Theory.” Hoboken: Wiley-Interscience, 1966.
http://www.sdg.com/publications/decision-analysis-applied-decision-theory/

International Organization for Standardization. “ISO 55000:2014, Asset management — Overview, principles and terminology.”
Geneva: International Organization for Standardization, 2014. https://www.iso.org/standard/55088.html

Kahneman, Daniel. “Thinking, Fast and Slow.” New York: Farrar, Straus and Giroux, 2013.

Schoemaker, Paul J.H. “Implications of Decision Psychology for Classical Notions of Rationality.” New York City: Public Affairs Press,
2009.

JD Solomon
JD Solomon, PE, CRE, CMRP, is the founder of JD Solomon, Inc, a company focused on project
development, asset management, and facilitation for facilities, infrastructure, and the environment. His
technical expertise includes probabilistic analysis, root cause analysis, risk management, and systems
engineering. JD's past senior leadership roles include Vice President at two Fortune 500 companies,
Town Manager for a unit of local government, and Chairman of a state environmental rulemaking
commission. JD is the author of the book “Communicating Reliability, Risk, and Resiliency to Decision
Makers: Getting Your Boss’s Boss to Understand.” His new book, “Communicating with FINESSE,” will be
released in the Fall of 2022. JD’s education and technical credentials include a BS In Civil Engineering, an
MBA from the University of South Carolina, and a professional certificate in Strategic Decisions and Risk Management from Stanford
University. www.jdsolomoninc.com

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