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March/April 2000· Vol. 63· No. 5

Why Asset Management Is More Critically Important Than Ever Before

by Anthony R. Kane

The following article was adapted from Tony Kane's speech to the Asset Management Peer Exchange, sponsored by the American Association of State Highway and Transportation Officials and the Federal Highway Administration, in Scottsdale, Ariz., Dec. 1 through 3, 1999.

Why is asset management important? Why is it more important than it has ever been before? What's new about it? What is different? Why do we need to focus on it?

My premise is that we are in a rapid period of change. Change is all around us -- in our political system, in our economic system, in our institutional relationships, in technology, in public attitudes, in our customers' expectations. We not only need to be a part of change; we better be leading the change. Otherwise, we will be following; we will be falling behind; and we will not have the support that we need for highway programs in the future.

We must establish a sense of urgency. In his book Leading Change, John Kotter from Harvard talks about a series of steps that are important in focusing on change, dealing with it, and managing it. The first step is coming to grips with the importance of change and realizing that there is a need for urgency. I say that now is the time because we have a real need and a real a sense of urgency about asset management.

Maintaining and operating the existing highway system with its more than 6.4 million kilometers of roads and about 500,000 bridges is the focus of asset management.

We in federal and state highway agencies must now think about ourselves a little differently. In this workshop, we heard a presentation about a program (six-sigma) that has never been used in the public sector, but it is used in the private sector because they worry about the bottom line, they worry about margins, they worry about how much money they have to run their business, and they worry about how much profit they are going to make.

Well, we have businesses too. We have invested a trillion dollars in the highway system. Think of yourselves with a multibillion-dollar balance sheet. Even the smallest state has that. The largest state probably has a balance sheet that is at least $100 billion.

Well, do you think we ought to be responsible for that? Do you think we ought to be checking how well we are doing? What kind of rate of return are we getting? Should we report to our stockholders -- the drivers in our states and those who pay for some of our services as they pass through.

Well, it's time! It is time for all of us to look at the assets we have in a different way. We should look at ourselves as a business, responsible for billions of dollars of assets. What is your corporate report each year in terms of how well you are serving your customers with those billions of dollars of assets?

Asset Management Is Quality Management
Truly, to me asset management and quality are two sides of the same coin. For example, quality awards, such as the Malcolm Baldrige National Quality Award, are based on quality in leadership, strategic planning, information systems, process improvements, management and development of your human resources, focus on customers, and bottom-line business results. These same "qualities" are required for effective asset management.

To have effective asset management, the top leaders are going to have to be focused on it. You are going to have to be committed to it. You are clearly going to have to have good information systems. You are going to have to understand all the processes that you have. It requires a thorough examination of what you are doing, what you are managing, what you want to get out of all your assets, and how well are you serving your customers. This is clearly the quality framework.

A very fascinating and intriguing aspect of asset management is its multidisciplinary approach. We are finally blending our economic skills and our engineering skills to work effectively across multiple disciplinary boundaries within our own organizations. It is having our finance people and our budget people and our planning people talking to our pavement management and bridge management staffs so that what evolves into multiyear programs emanates from sound asset management considerations and trade-offs. Information that comes from a variety of management systems is integrated across the disciplines, and the finance and budget people and the planners are working in sync with the asset managers.

Fortunately, the tools of our information age help us to coordinate and cooperate more easily than we could in the past, and that makes it easier for us to adopt and embrace the concepts of asset management.

The Dynamics of Our Highway System
If we look at the highway program itself, there are two general areas that influence our discussions on asset management. The first area is our evolution from building the system to maintaining and operating what we have, and we have a very large system -- more than 6.4 million kilometers of roads with about 500,000 bridges as part of an investment of more than $1 trillion. Second, we also have had changes in our institutional governance. Let me focus on both of those dimensions.

Clearly, as we take a look at changing from expansion to preservation and operation, it is a new ball game. Asset management clearly covers the full gamut of preservation and operation of the system -- the whole range from preventative maintenance to reconstructing the system while placing a strengthened emphasis on operations, including traffic control operations, freight operations, and customer service.

Asset management truly embraces myriad considerations. For example, think about how long and frequently your highway system is "open for use" so you can focus on whether your incident management system is working well, whether your snow removal is working well, whether your construction processes avoid tying up the traffic lanes as much as possible, and whether your traditional congestion-relief measures are really working well. What processes are involved in the operation of your system, and how well is it operating?

Obviously, these and similar issues are very important, and we can see that national expenditures are moving toward more efficient operation and preservation of the existing system rather than simply expanding capacity.

Another major influence is the change in transportation roles for the state and federal governments and for the private sector. A recent report from the American Association of State Highway and Transportation Officials (AASHTO) explains how state departments of transportation (DOTs) are altering the size of their operations and the way they are structured. They are decentralizing programs and project management. They are coalescing some support service functions. They are streamlining operations and moving more toward performance-based operations -- not only in specifications, but in the way they do business and manage their own resources. And there are a whole range of public/private ventures, including a general trend toward increased privatization. Outsourcing is becoming much more common; many states contract for more than 90 percent of their design work. Several states have performance-based maintenance contracts and management contracts; as an example, the District of Columbia has a contract to have the private sector manage their entire portion of the National Highway System. So, the evolving roles of the public and private sectors are influencing our view of asset management by redefining the way the assets are going to be managed and who is going to be managing them.

This evolution of roles is going to continue, and asset management is clearly not a stagnant endeavor. We must embrace it, understand it, and commit to using asset management.

A Historical Perspective
As we ponder the changes occurring now and in the future, it is worthwhile to remember that these kinds of changes in highway management and operations are not a recent phenomenon.

At the end of the 19th century, the Good Roads Movement was started by the American Wheelmen, and they were not men who drove cars. They were bicyclists. They were the ones who got to their state legislators and asked for better roads. So, remember them and what they accomplished as you think "back to the future."

The 1920s were a golden age. The rallying cry at that time was "move the farmers out of the mud." You have all seen a picture in which the road was nothing more than a muddy path with a car or truck stuck in mud up to its axles.

In the 1950s, with the initiation of the interstate system and the federal highway trust fund, there was a focus on construction and new ways of doing business.

The 1960s and 1970s saw everything from the environmental movements to a change in focus on resources. Governments around the world began switching from Keynesian economics with its emphasis on employment and government spending to influence aggregate demand to being more worried about balanced budgets and deficits. They became more focused on paying for what you get, on managing systems better, and being more responsive.

As we jumped into the '90s with new emphases on intermodalism and comprehensive planning, we also evolved into the preservation era.

As we look out to 2050, what might we see? I do not know, but think about our history of evolving public/private partnerships and changes in the way we manage our systems. We may or may not endorse the evolving, possible New Zealand model with a couple of private, competing road companies owning and managing our roads, but who knows? It is going to be a very different game, and we need to be ready for it. We need to be nimble. We need to adjust. We need to adapt.

Conclusion
I contend that a good asset management framework is understanding what you have, its value, what you need to do to make improvements, the marginal gains from different investments and from different things you do to that system, and the whole host of players who are involved in managing the system. You need to have an integrated focus. You need to have a database system. You need to have the engineering and economic analytical tools. You need to have the methodology to understand that system.

Changes in highway management are not a recent phenomenon. For example, at the end of the 19th century, the Good Roads Movement was started by the American Wheelmen, who were bicyclists.

As we move into the 21st century, think of your organization as a multibillion-dollar corporation. Your stockholders are going to ask: What have you done with those assets? What is your rate of return? What have you gotten? What kind of marginal gains have you made with those assets? What will they be worth next year versus this year? How much have they depreciated? What is their value now? What have you done to enhance the value of your assets? What is the economic value of that system?

Now is the right time to think about it, to focus on it, to work on it.

We are working hand-in-hand with AASHTO. They have asked us to be partners. As we looked at our own organization and reorganized in January 1999, we created an infrastructure core business unit (CBU). Vince Schimmoller heads that CBU, and within that CBU, we created the Office of Asset Management, headed by Madeleine Bloom. We pulled together our economists, our engineers, and our pavement and bridge management system folks into a unit that can hopefully help the state DOTs to develop new concepts and provide technical assistance in the areas of system management and preservation.

AASHTO and FHWA are not establishing any mandates. We will work on technical products. Your shareholders and customers are the ones who are going to demand that you focus on asset management.

The shift in emphasis from "building" to "operating" systems is entirely in sync with the concept of asset management. FHWA was originally organized in the era when we were building the highway system, but now we need a stronger focus on operations. So, we pulled together our traffic management folks and our intelligent transportation systems (ITS) staff to form a new Operations Core Business Unit, headed by Christine Johnson. Within that core business unit, we created a new Office of Freight Management and Operations.

Today, a good asset management system is more important than ever before because there are more players involved in that management and we have to have the right tools. We must understand everything about our assets. We must communicate effectively because government is no longer alone in the management of public assets; we have a lot of private partners as well.

"The times, they are a-changing." It is time for asset management to be a significant part of the changing nature of state DOTs. The bottom line is that you can either be part of the change -- lead and shape it -- or follow it and perhaps be forced to live with something that will not meet your needs. The choice is yours!

Anthony R. Kane was the executive director of the Federal Highway Administration. He is a long-time advocate of integrating economic and engineering disciplines for effective asset management. He has a bachelor's degree from Rensselaer Polytechnic Institute in civil engineering, a master's degree from Northwestern University in transportation, and a doctorate of business administration from George Washington University.

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