As a stakeholder involved in the design, construction and operations phase of an asset’s life, the goal is to ensure the asset is delivered and operated in line with everyone’s expectations. In other words, that the certainty desires of all stakeholders are met and the asset performs exactly as intended throughout each phase of its life.

Never has there been a time where technology is, or will be, playing such a leading role in achieving this goal of asset performance certainty. So many technologies have been, or are being, developed to improve certainty of outcome in each phase of the asset’s life – design, construction and operations. Unfortunately, in order to identify those technologies (or solutions) that offer the greatest impact on certainty, all stakeholders need to contribute funds to pilot these solutions and determine their impact, thereby creating a roadmap as to which solutions should be implemented first.

The implementation of the desired technologies requires additional funding that initially may appear as costs over and above the funding used to traditionally develop and operate the asset. As is often the case with trying new things, it requires an up-front cost that stakeholders are reluctant to absorb. As it involves uncertainty of return, they prefer to keep using what they deem to be the “tried and true,” traditional approach. The trick is to find a way for all stakeholders to fund the costs associated with adopting this future state of asset development and asset management, while providing them with the empirical evidence to reinforce that the decision to adopt this future state is the right decision and establishing that the future state is better than the current (or traditional) state.

The Hurdles

For some sectors of the economy, such as manufacturing, transitioning from traditional state to future state is easy. However, when it comes to designing, constructing and operating assets such a transition has several hurdles to overcome before that future state will be widely adopted. Some of the leading hurdles preventing this vital sector of the economy from adopting its future state include:

1. Siloed Multi-Stakeholder Framework. Those involved in constructing and operating the world’s physical assets are many and they often work in isolation from each other. With so many players involved and with a siloed, or isolated, mindset, coordinating and collaborating a future state can be a tremendous challenge.
2. Margin Is Insufficient to Encourage Innovative Approaches. Some of the stakeholders within the asset construction and operations value chain make very low levels of margin relative to the risk being borne by their companies. Thus, the additional cost and risk of implementing a future state can be too great a risk to already thin margins and thus the traditional state is maintained.
3. Fragmented Sector. Not only are there many stakeholders involved in the asset management value chain, there are many companies represented in each stakeholder group globally. The design, construction and operations stakeholder number is in the millions and thus with so many firms within all the major geographies, coordinating a future state becomes even more challenging.
4. Unique Assets and Lack of Standardized Data Measures. Every asset developed and in operations is to a large degree unique -- the area in which it is located (climate, geotechnical traits); the specific, or unique, design; the asset class (subway, commercial tower, bridge); and the players coming together to build and operate the asset. Due to this dimension of uniqueness, standardizing data for each phase of the asset’s life becomes a significant challenge as evidenced by the fact that there really is very little standardization around construction and operations phase data.
5. A Traditional Mindset. The design, construction and operations sector can be very traditional in its mindset. The way in which construction has been done, from the building of the Empire State Building to the building of current mega-high-rise towers, has not changed much. The phrase “we’ve always done things this way” is quite common in the design, build and operate sector of the economy. This is further evidenced by the fact that construction is notorious for being one of the least digitized sectors of the economy.

The above represent some of the top hurdles that need to be overcome in order to help the design, construction and operations sector of the economy transform from its current state to an improved future state. Other industries that have already made this transition have overcome these hurdles and went on to significantly improve productivity and significantly reduce risk. The construction and asset management sector of the economy can make this transition and this is the time to begin the journey.

A Simple Solution to Remove the Hurdles

All the stakeholders involved in the design, construction and operations of physical assets have capital partners that are necessary to create and operate their assets. These capital partners extend funds to allow the asset’s development to move forward and once created provide funds to keep the asset operating. The following diagram outlines who these partners are and the foundational role they play in the creation and ongoing operations of the world’s physical assets.

Capital partners assess the risk associated with the capital they are putting forward, often referred to as the underwriting. Underwriting involves an often deep review of the risks that could cause the capital to lose a portion of its investment as a result of things not going to plan.

If proposing that many of the technologies coming to the asset management market place can be shown to empirically reduce several risks that would impact certainty of delivery, then shouldn’t this story be told more coherently to these capital partners? Further, shouldn’t that reduction in risk faced by the investment of these partners be reflected in improved terms put forward by these partners?

For example, if a technology could be actuarially shown to decrease workers compensation insurance loss ratios by 35%, one would expect the insurer offering such insurance to reduce the premium they charge for such coverage by as much as 35%. Thus, it would make sense that the capital partners, in this case the insurer, offer such a discount for any insured that implements this risk reducing technology. Ultimately, if the capital partners are reducing the risk faced by their capital and this can be evidenced empirically, then it would make sense for the funding to adopt new technology to at least partially, if not fully, come from the capital partner community.

To put this into dollars, using the above example, if a new commercial high rise were being constructed in New York City at a construction value of $1 billion, the cost of workers‘ compensation and employer’s liability insurance during construction could be as much as 8% of the construction value, or $80 million. A 35% reduction in rate, due to a commensurate anticipated 35% reduction in loss ratios, would result in a savings of $28 million. That is significantly more than the cost to implement the loss ratio impacting technology.

The insurance capital partners on this project should at least consider paying for this technology out of the premium collected, and at most, consider giving the project a significant savings on premium with which the stakeholders to the asset could then use to fund their transition to a more technologically advanced future state. This would thereby create further improvement to the capital partner’s profitability as more certainty of outcome is created via the adoption of risk impacting technology.

The simple solution being proposed is that capital partners will reap significant benefit to their profitability due to the implementation of risk impacting technologies in all phases of the asset’s lifecycle. Therefore, the research and development funding problem outlined above could be partially or entirely borne by these capital partners. Given that, a better framework needs to be developed in order to inform these vital capital partners how technology in all phases of asset management could improve their profitability and thus they should consider funding the technology implementation. A strategy, or a roadmap, needs to be devised to help educate these capital partners to achieve this goal.

The Roadmap to Educating Capital Partners

Within firms are employees responsible for assessing and implementing new technology and also employees responsible for communicating to the various capital partners referenced above. The titles usually associated within these two camps are as follows:

The leadership of an organization (i.e., Board of Directors, Chairman, CEO, President, etc.) should establish a strategy to better connect these two camps so that they can develop a framework to better communicate to key capital partners and create a path towards unlocking funds that could be used to invest in the creation of a government or company’s future state. A high-level roadmap would be helpful to colleagues from both camps to develop a more detailed Capital Partners Technology Communication Plan (CPTCP).

High-Level Roadmap to a Capital Partners Technology Communication Plan (CPTCP)

1. Building the team to tell the story. Identify those inside and outside of the organization that need to be involved in creating the story that will be used to unlock maximum funds from capital partners. These team members should come from those within an organization responsible for the implementation of technology and those that communicate with capital partners (see above titles reference in Table 1). Remember to involve advisers outside of the organization that can provide insight (and sometimes data) into how technology impacts capital partner results and, ideally, also have relationships and knowledge with these capital partners.
2. Target the risks that are of most concern to capital partners. Focus on risks that have the greatest impact on capital partner underwriting. This information will come from those within the organization and outside of the organization that are responsible for capital partner communications. Depending on the organization’s size, it very likely will be advisers outside of the organization that understand best the key drivers of a capital partner’s underwriting process and the key risks that those capital partners concentrate on to arrive at their terms. These are advisers like bank intermediaries, investment banking intermediaries, insurance brokers, technical advisers to capital and even the technology companies with whom the organization partners.
3. Collecting the data to tell the story. Ensure that the chosen team bring data from within the organization and outside of the organization to provide empirical evidence that the implementation of new technologies is, in fact, impacting the very risks that are of most concern for capital partners. In an ideal world, data that unequivocally proves that the profitability of the capital partner will improve with the implementation of the various technology solutions.
4. Collecting data where none exists.Sometimes there will not be any readily available data from a technology implementation. In those cases, run a pilot program to develop statistically significant data sets that evidence the technology implementation improvements. Such pilots can be done with little cost on a few projects and the results, if enough pilots have been done, could be sufficient to provide empirical evidence that the technology implementation has positively impacted the key risks driving capital partner terms. NOTE: Some capital partners are already funding these pilots themselves in order to assess the impact of technology. Use this pilot funding strategy to obtain necessary pilot data.
5. Developing the actuarial models to tell the story. Once key areas of risk that capital partners focus on to develop their terms are identified and there is data from those key areas of focus, devise actuarial evidence that validates the story. This will involve showing the pre-technology implementation data results and the post-technology implementation data results. If the technology is impacting the risks, it should be evidenced when comparing the pre-technology implementation to the post-technology implementation. The degree of impact will determine the degree of improvement in terms.
6. Developing the technology narrative to combine with actuarial models. Work with the technology companies to develop a narrative around the technology, its developers, its history and how the companies believe the technology is impacting risk. This would be a preamble to the actuarial models in order to provide the capital partners with a background on the technology.
7. Creating the submission to capital partners. The submission is the single document that combines the technology narrative with the actuarial model. It is the document that the capital partners will initially view to determine if they will consider offering improved terms based on the implementation of the technology on an asset. This document should ideally close with proposed new terms that reflect the improved profitability to the capital partner as a result of the technology implementation.
8. Joint actuarial work with capital partners. Though actuarial science should be sufficient evidence for capital partners to offer improved terms for assets that implement impacting technologies, it is often the case that capital partners will recruit their own data and analytics teams. Patience may be required as the capital partners work though the numbers and it could be the case that the capital partner will want to conduct their own pilot programs. If this is the case, help the capital partner accelerate this process so as to accelerate their decision on whether they can improve their term.
9. Final negotiations. When the capital partner advises that they agree with the assessment that there is an impact on the key risks driving the capital partner’s terms, then the next and final stage is negotiations. Several negotiation techniques should be implemented at this stage by the organization and its advisers to obtain best terms (benchmarking, relationship leverage, knowledge of alternative capital sources, business leverage, etc.).

There is no doubt that a wave of risk impacting technologies have come (or are coming) to the design, construction and operations phase of physical assets. There are several hurdles the current asset management economy faces in order to adopt these risk impacting technologies and break away from the traditional state and move into that crucial future state. A key hurdle is identifying those that will fund the future state of the asset management economy.

One key source of potential funding could be the capital partners that support all stakeholders in an asset’s development and operations. These capital partners will reap significant reward through improved profitability if these risk impacting technologies actually can be shown to work. As a result, perhaps it should be capital partners that remove several of these hurdles and move the asset management sector away from its less profitable traditional state into its more profitable future state. By offering improved terms to those assets that adopt the best risk impacting technologies, capital partners will provide key asset stakeholders the necessary capital and confidence to start designing, constructing and operating assets with more certainty (underpinned by these risk impacting technologies). Such a strategy will require improved communications between those in the organization responsible for implementing technology and those responsible for communicating to capital partners. It will also require the use of outside advisers with access to data, relationships and leverage with capital partners in order to unlock these hurdle removing solutions.

Whatever concerns there may be with going down this path, be assured the benefits that come as a result of this journey will far outweigh the costs. Further, the benefits will extend well beyond those seen by the organization and will extend into the general economy and society as a whole.