There are substantial costs from equipment failure or under performance – though with the right planning, the risk can be absorbed by a more sustainable purchasing agreement.
While purchasing equipment is crucial for ongoing organisational growth and expansion, on occasion, assets can fail before their predicted lifecycle or simply just under deliver on expectations. Considering how much businesses and government agencies spend on equipment, failure to deliver or under delivery can lead to a substantial loss from the budget that cannot be recouped.
The Australian Bureau of Statistics has estimated that there was $52.98 million in capital expenditure on plant, equipment and machinery in the 2014-2015 financial year alone. If these assets fail or under deliver in performing their function, whether through obsolescence, breaking down or simply not being appropriate for the workplace, a significant portion of this asset expenditure has been wasted.
For example, a $10,000 server may require 10 years of usage to provide return on investment, though if it breaks down after two years, it will only have delivered 20 per cent of its potential value.
Such a scenario is rather common. Findings from our latest Equipment Demand Index shows that unproductive equipment is endemic in Australian workplaces – and it’s getting worse. The September 2015 results show that the number of firms impacted by assets that are overdue for replacement has increased from 55.6 per cent to 62.9 per cent over the past 12 months.
It means more employees are unable to work to full efficiency, and businesses simply aren’t getting the most out of their physical assets. However, many organisations are finding they can minimise this risk with an effective asset management plan.
How does equipment fail?
Across all sectors, equipment can fail in a large variety of ways, impacting productivity and performance. In the resources industry it can be as simple as component failure due to a lack of oiling. In federal government departments, it could be neglecting to update software protection, or even changes to roads legislation that mean purchased vehicles are no longer suitable.
To go back to our $10,000 server example, a cyber attack could leave the hardware completely useless. It’s a pressing concern, with Gemalto research showing how global data theft increased by a huge 49 per cent between 2013 and 2014.
The detrimental impact of equipment failure or underperformance is not just financial; it can also bring about productivity impacts, which can in turn have impacts on attracting and retaining staff. For example, a hospital might try to attract the best talent but if it uses equipment sweated past its useful life, the hospital will not attract the best staff nor allow its staff to deliver exceptional patient outcomes.
While the list of reasons for equipment failure is virtually endless and depends on the asset in question, an effective management plan will mitigate the most likely threats – from breakdown to obsolescence – and give an organisation options should business assets be taken out of commission.
The costs of equipment failure
When equipment does not function as anticipated, the costs to business come in several forms. Firstly, variable financial impediments like repair and maintenance costs can spike, stretching your opex budget. On top of this, lost profit and productivity can hamper the bottom line. The longer a piece of equipment takes to be fixed or replaced, the longer staff are without a key asset, and profit generation is put on hold.
The $10,000 server that fails from a cyber attack after two years will have delivered only $2,000 return on investment. The repair costs could then remove another $1,000 from the opex budget. If that proves ineffective, purchasing an identical replacement server will leave the company with a $19,000 hole in its capex budget, should the equipment be bought outright. This figure also disregards the cost of lost productivity while the equipment is replaced.
It’s an expensive situation for any organisation to find itself in, and can apply to IT equipment, transport, construction materials, plumbing tools and more.
A plan for possible equipment failure or under performance
With a sound maintenance plan, businesses may be able to keep equipment in check, minimising the risk of failure or underperformance and instead encouraging long-term performance.
One way to lower the financial impact of equipment failure or productivity issues is to use an operating lease. Operating lease terms can be shorter compared to the useful life of a piece of equipment, but they give greater flexibility in terms of allowing the payment of a new asset to be spread over the life of the agreement, and also flexibility to return or upgrade the equipment at the end of the term.
A benefit of this is the organisation does not own the equipment, and can return it should it fail, become obsolete or if it does not meet standards.
With our research showing that 24.9 per cent of businesses intend to boost their asset base as of September 2015, many companies are looking to minimise the risk of equipment failure. By reducing their own liability and up-front equipment costs through an operating lease, businesses and government agencies can find a financially stable way for effectively managing their asset base.
Getting the most from equipment
While now may not be the time for all businesses and government agencies to purchase new equipment, it’s rarely considered too soon to plan ahead for eventual equipment investments.
A decreasing number of assets puts the focus on these organisations to maximise what they have. Older equipment will be more prone to failure, though if there’s an effective strategy in place, each piece can be maintained throughout its lifecycle, without severely impacting the budget.