Companies that control costs better than their competitors are well positioned to succeed in the  marketplace. The professional management of surplus assets–referred to as investment recovery, or IR for short—can provide massive and surprisingly profitable returns, both in cost avoidance and in substantially higher revenue from the well-reasoned disposition of a company’s surplus assets. The primary goal of investment recovery practice is to ensure that the company receives the highest possible return for surplus assets at the lowest possible cost.
 
One surprising fact is that studies on improving supply chain performance—including Michael Porter’s landmark value chain analysis—seem to completely ignore the potential impact of recovering the intrinsic value from non-performing or surplus assets. No school that we are aware of teaches even a single course on surplus asset management. The lack of focus on this critically important practice is essentially the ‘missing link’ of proper and productive supply chain management.

Fortunately, the Investment Recovery Association, a more-than 25-year-old organization  headquartered in Kansas City, has taken steps to fill this information vacuum. This article reviews
the proper steps involved in developing a well-functioning investment recovery process in your organization and how this adds dollars to a company’s bottom line.

Investment Recovery Highlights:
  • At any point in time, up to 10% of a large organization’s total assets are either non-performing or surplus.
  • The average holding cost for surplus assets and stored inventories is 20% of the book/fair market value.
  • Organizations with a formal investment recovery process show up to a 30-fold return on the disposition of that surplus.
  • The additional dollars generated from investment recovery translate almost immediately to bottom-line profit improvement.
  • The investment recovery process is a primary means of supporting the sustainability initiatives of a corporation and can help employee morale.
  • Value chain analysis should include a 360 review of the total cost of ownership of an asset, most notably a thorough review of the proper processes that should be in place to continually identify non-performing assets owned by the organization, and recover the highestpossible
    value from those surplus assets.
  • Substantially improved compliance with Sarbanes-Oxley requirements becomes an added (and virtually no-cost) benefit of a well-designed investment recovery program.
  • Investment recovery research, professional certification (Certified Manager of Investment Recovery) and formal education in the principles and day-to-day application of investment recovery practices are available only through the Investment Recovery Association.
Identifying Your Surplus Assets.
While perhaps not readily apparent, the drain of non-performing assets on a company’s financial picture can nonetheless be severe. Members of the Investment Recovery Association—a virtual Who’s Who of the Fortune 1,000—report that, on average, 10% of their organization’s entire assets are considered surplus, no longer supporting current operations. Consider the financial impact of a multimillion-dollar piece of process equipment that is functional, yet no longer needed in the place it was put into service, coupled with the avoidable cost of placing a similar piece of equipment into service in another facility. There are costs involved with maintaining an idle piece of equipment, more costs associated with the purchase of functionally equivalent equipment in another location and opportunity costs expended on both sides of essentially the same coin. Yet these are rarely  recognized within organizations as a detriments to profitability.
Compare that all-too-frequent occurrence with a well-functioning investment recovery program where non-performing assets throughout a corporation are regularly identified and redeployed within the company or disposed of in a cost-effective manner. Needless purchases are avoided because
procurement personnel have real-time visibility to corporate-wide surplus equipment. This cost  avoidance measure directly impacts the bottom line in a very meaningful way.
 
Investment Recovery Best Practice: Early Involvement with Other Corporate Activities.
One of the best practices recommended by the Investment Recovery Association is the early involvement by investment recovery staff in corporate activities that may generate surplus. These eight include: capital projects, equipment replacement or upgrades, dismantling and demolition,  divestitures, real estate sales, plant shutdowns, acquisitions or warehouse inventory reductions.

 
 
 

One surprising fact is that studies on improving supply chain
performance—including Michael  Porter’s landmark value chain
analysis—seem to completely ignore the potential impact of recovering
the intrinsic value from non-performing or surplus assets. No school
that we are aware of teaches even a single course on surplus asset
management. The lack of focus on this critically important practice is
essentially the ‘missing link’ of proper and productive supply chain
management.

Fortunately, the Investment Recovery Association,
a more-than 25-year-old organization  headquartered in Kansas City, has
taken steps to fill this information vacuum. This article reviews
the
proper steps involved in developing a well-functioning investment
recovery process in your organization and how this adds dollars to a
company’s bottom line.

Investment Recovery Highlights:
  • At any point in time, up to 10% of a large organization’s total assets are either non-performing or surplus.
  • The average holding cost for surplus assets and stored inventories is 20% of the book/fair market value.
  • Organizations with a formal investment recovery process show up to a 30-fold return on the disposition of that surplus.
  • The additional dollars generated from investment recovery translate almost immediately to bottom-line profit improvement.
  • The
    investment recovery process is a primary means of supporting the
    sustainability initiatives of a corporation and can help employee
    morale.
  • Value chain analysis should include a 360 review of the
    total cost of ownership of an asset, most notably a thorough review of
    the proper processes that should be in place to continually identify
    non-performing assets owned by the organization, and recover the
    highest possible value from those surplus assets.
  • Substantially
    improved compliance with Sarbanes-Oxley requirements becomes an added
    (and virtually no-cost) benefit of a well-designed investment recovery
    program.
  • Investment recovery research, professional
    certification (Certified Manager of Investment Recovery) and formal
    education in the principles and day-to-day application of investment
    recovery practices are available only through the Investment Recovery
    Association.
Identifying Your Surplus Assets. While perhaps not readily
apparent, the drain of non-performing assets on a company’s financial
picture can nonetheless be severe. Members of the Investment Recovery
Association—a virtual Who’s Who of the Fortune 1,000—report that, on
average, 10% of their organization’s entire assets are considered
surplus, no longer supporting current operations.
Consider the financial impact of a multimillion-dollar piece
of process equipment that is functional, yet no longer needed in the
place it was put into service, coupled with the avoidable cost of
placing a similar piece of equipment into service in another facility.
There are costs involved with maintaining an idle piece of equipment,
more costs associated with the purchase of functionally equivalent
equipment in another location and opportunity costs expended on both
sides of essentially the
same coin. Yet these are rarely recognized within organizations as a detriments to profitability.
Compare that all-too-frequent occurrence with a
well-functioning investment recovery program where non-performing
assets throughout a corporation are regularly identified and redeployed
within the company or disposed of in a costeffective manner. Needless
purchases are avoided because
procurement personnel have real-time
visibility to corporatewide surplus equipment. This cost avoidance
measure directly impacts the bottom line in a very meaningful way.
Investment Recovery Best Practice: Early Involvement with
Other Corporate Activities. One of the best practices recommended by
the Investment Recovery Association is the early involvement by
investment recovery staff in corporate activities that may generate
surplus. These might include:
capital projects, equipment
replacement or upgrades, dismantling and demolition, divestitures, real
estate sales, plant shutdowns, acquisitions or warehouse inventory
reductions.
 
The Investment Recovery Association has developed a set of
recommended procedures for properly identifying and cataloguing the
surplus assets of an organization. These procedures are part of
a best-practices approach that is taught at seminars held throughout the U.S. and Canada.
The Cost of Holding Surplus Assets. The cost of holding
surplus assets can be surprisingly high. Surplus assets (idle,
non-performing assets in excess of the company’s needs) can come from
all
departments within an organization. This surplus can consist of
a wide variety of items from spare parts and supplies, IT and office
equipment/furniture, manufacturing machinery and process equipment,
mobile equipment, raw materials and finished goods to entire
manufacturing plants and production lines as well as real estate.
Holding costs, also called carrying costs, are expressed as
the cost of holding one item of inventory in stock for one year. This
may be expressed as either a percentage of the total book value or fair
market value (FMV), or as a dollar amount. For example, if the holding
cost of an item is 20% per year and the value of that item is pegged at
$1,000,000, the potential holding cost of that item would be $200,000
per year. That may seem high, but many factors influence the cost of
holding inventory.
The potential value of various disposition options for any
particular asset varies both with the disposition method and the time
involved. The most obvious holding costs include:
  • Warehouse space (rent for the required space)
  • Equipment, materials and labor to maintain and operate the warehouse
  • Required maintenance or operating costs for the surplus, such as utilities for a surplus building
  • Insurance, security, taxes and interest on money invested in the inventory and space
  • Some
    stored items become obsolete before they are used, reducing their
    contribution to revenue while having no effect on their holding cost
  • Some
    are damaged by handling, weather or other mechanisms. Some items are
    lost through mishandling, poor recordkeeping or theft, a category
    euphemistically called shrinkage
  • Costs for recordkeeping and physical stocktaking of inventory
  • Environmental concerns
  • Holding costs also include the lost capital opportunity costs
 
Typically, holding costs are estimated at approximately 15-45% of
the asset’s actual value per year. Studies completed a few years ago
that concluded the average holding cost for surplus assets and stored
inventories was 20% of the book value/FMV. Determine if there are any
other costs you can think of that are incurred simply by being in
possession of an item. If you can think of any, treat them as holding
costs, (e.g., government rules, regulations and laws that preclude the
use of an asset without modification).
Value of a Formal Investment Recovery Program.
Clearly,
holding on to unused inventory or idle equipment is detrimental to the
finances of an organization. But the difference between a formalized
program of surplus asset management and
an ad hoc approach to
dealing with surplus is significant. In a series of six well-documented
benchmark studies of more than 100 large corporations by the Center for
Advanced Purchasing Studies (CAPS) of Arizona State University,
application of the proven principles of investment recovery has been
shown to provide an average 20.5% return to the total purchasing or
procurement process.
Significantly, this number has increased with
every benchmarking study, with the most recent average showing a more
than $30 return for every $1 spent on IR activities. In other words,
for every $1 invested in the investment recovery process (including
salaries), over $30 was returned to the company’s bottom line!
In terms of overall employee productivity, this arguably makes
investment recovery practitioners the most profitable employees within
the organization. The benchmark studies, previously fielded by CAPS
Research every three years, are now done every other year to provide
more timely and up-to-date data.  The studies show roughly $1.9 million
of cost-benefit per investment
recovery employee. As recommended by the Investment Recovery Association, a welldocumented
process
of investment recovery provides a hierarchy of value for surplus assets
within an organization (see graph  below). The potential value of
various disposition options for any particular asset varies both with
the disposition method and the time involved.
The decision options that companies face in managing these assets fall, in general, into three broad categories:
  1. redeployment/ reuse,
  2. selling or 
  3. disposal/discarding.

Each one of these has its own set of critical issues that must be
considered, planned for and managed carefully. Investment recovery
professionals are charged with the challenging responsibility of
managing the rocky landscape of surplus assets to maximize value and
reduce risk and liability for the company in final disposition. In
addition to requiring an incredibly diverse range of knowledge, to be
successful, IR managers need qualified service providers and resources
in a wide variety of business channels to assist them in their efforts.

 
 
 
As important as it is for IR managers to know and have resources,
it is equally important that service providers and other resources have
insight into how and why corporate surplus asset disposition decisions
are made. Enter the Investment Recovery Association. Twenty-eight years
ago, companies
were addressing investment recovery as a very ad hoc,
informal discipline. A few enlightened professionals recognized the
need for a formal approach to investment recovery as a contributor to
company
bottom lines and formed an organization to foster knowledge and
identify and promulgate best practices in the field. In most cases,
these were people who were in the corporate management ranks in
engineering, plant operations, procurement, purchasing, distribution
and transportation—given the task of handling investment recovery as a
part of their other job responsibilities.
One of the first priorities this group recognized was the need
to define and codify the decision considerations and processes
essential to being effective in this area. With the leadership of the
Investment Recovery Association, these principles have matured into the concepts represented in the chart below.
Decision Sequence to Maximize Recovery Potential and the Value Chain.
In investment recovery, as in primary useful life asset
management, the value equation is a sequence of analyses and decision
elements that defines issues of operating value, risk, opportunity and
return
for identified assets. Each of the elements in the process chart on
page 7 has its own set of detailed considerations for success or best
practices. Each of the potential disposition methods
has potential
benefits and costs associated with its implementation, and each
individual situation can have very different results, even for the same
basic surplus disposition method. For example,
the transportation,
logistical and environmental concerns of removing surplus oil pipeline
from the North Slope of Alaska would have dramatically higher costs
than the same amount of similar pipe from Louisiana.
Proper Analysis Helps to Eliminate Costs from the Value Chain.
A value chain analysis enables leaders to systematically assess
where, how and why their organizations create value for customers and
determine how to increase that value in primary and support activities.
Adding value creates competitive advantage, but it’s not the only
factor in business success. This process also helps identify costs as a
means to better eliminate them. The value chain approach to surplus
asset disposition includes:
  • Disposition decisions guided by a prioritized list of options consistent with financial drivers of the company
  • Asset values and carrying costs
  • Time vs. value understood and considered
  • Having supporting tools in place and deployed to the organization
 
Investment recovery already plays a recognized role in maintaining
discipline over cost drivers. For example, member data collected by the
Investment Recovery Association indicates that investment recovery
departments save their companies an average of $8 million annually.
Furthermore, member data shows that 70 to 90 percent of every sales
dollar generated by investment recovery goes straight to the bottom
line as profit.
Once your organization or department defines its value chain,
a cost analysis helps identify strategies to develop a cost advantage
by reducing primary and support activity costs, reorganizing the value
chain or both. In his value chain model, Harvard Business School
Professor, Michael Porter identifies cost drivers that investment
recovery professionals can utilize to improve their organizations’ cost
advantages by specifically addressing many of these variables.
 
  1. Economies of scale. In larger and more diverse companies, IR
    professionals can identify more opportunities to reuse or repurpose
    assets. Also, large companies generate more surplus, allowing IR
    departments to consolidate lots for sale.
  2. Learning. Education
    and information about the function and potential of investment recovery
    will improve the value chain from beginning to end by identifying
    revenue and cost elimination  opportunities of surplus assets.
  3. Capacity
    utilization. Investment recovery professionals specialize in optimizing
    every asset to maximize capacity and expand opportunities,
    accomplishing more in the same cost structure.
  4. Linkages among
    activities and interrelationships among business units. IR groups play
    a unique role because of their interaction with virtually every other
    group in an organization. The investment recovery department may be the
    only group with complete visibility into all the opportunities to move
    assets among departments or facilities, consolidate similar assets from
    different groups or package diverse assets from multiple groups into a
    single package in which the sum is greater than the parts.
  5. Organization’s
    policies of cost or differentiation. Organizational policies that
    recognize investment recovery as a worthy alternative, or mandate
    surplus assets as the first consideration in procurement, contribute to
    its use and credibility. Such policies also can improve the likelihood
    of pursuing and completing projects at lower costs while contributing
    to the sustainability goals of the company.
  6. Geographic
    location. Transportation costs can be minimalized by locating or
    deploying assets as close to operations as possible. As companies
    become increasingly global, IR groups also can play an important role
    in reducing taxes and import/export duties.
  7. Institutional
    factors (regulation, union activity, taxes, etc.). Investment recovery
    frequently can accomplish surplus exchanges without creating a taxable
    event. Reuse of existing assets is  important in minimizing exposure to
    environmental regulations governing disposal of various kinds of waste,
    especially computers.
 
The Missing Link.
Harvard Business School Professor Michael
Porter developed the value chain model to analyze specific activities
through which firms create value for customers and better position
themselves in competitive markets. Porter defines two
activities—primary and support activities—that are generally present in
organizations.
According to Porter’s value chain model, primary value chain activities include, in sequence:
  1. Inbound logistics: accepting delivery of, and then storing, the
    materials necessary to produce your company’s products or services, and
    the efficient distribution of those materials to manufacturing.
  2. Operations:
    the production or manufacturing processes necessary to transform raw
    materials into the finished products and services your customers demand.
  3. Outbound logistics: the maintenance, storage and distribution of finished products and services.
  4. Marketing
    and sales: the processes of identifying customers and their needs, and
    generating demand for goods or services in the target markets.
  5. Service: customer support after closing the sale of products and services.
What is missing from Porter’s analysis is the process of
reverse logistics (the return of goods from the distribution channel
back through the supply chain) and investment recovery or surplus asset
management.
The costs associated with holding surplus assets (15%-45% per year) and
the lost revenue associated with an ad hoc approach to dealing with
this surplus make it untenable to simply
hope that this function
operates on its own in any meaningful way. The discipline of the value
chain analysis approach should be brought to bear on the full impact of
the supply chain, including surplus asset management. Investment
recovery provides this discipline.
Building the Value Chain Link by Link.
In the value chain
analysis, first assess each activity your company or your team
undertakes as a part of regular business practices. The analysis leader
should work with a diverse group of colleagues to brainstorm all
activities that contribute to internal and external customer
experiences. Remember to include routine managerial and outsourced
activities such as team building and motivation, reporting, training
and development, and internal and external feedback loops, both formal
and informal.
Maintaining the Links in the Value Chain.
As you increase
your experience with Michael Porter’s value chain model, the investment
recovery function should become a constant, almost invisible part of
identifying opportunities that add value, drive out costs and better
respond to customer needs in your organization’s primary and support
activities. When the IR team has achieved such proficiency that its
value chain contribution is both expected and routine, it’s time to
start identifying new ways for investment recovery to add value – to
creatively extend the value chain experience and to competitively
differentiate the IR function within the entire organization.
Differentiation can occur along any link in the value chain.
As a function of uniqueness, companies can differentiate themselves by
altering a particular primary or support activity to transform a
product or service into something entirely unique in the marketplace.
Because many opportunities to  differentiate also add costs, IR’s role
in generating revenue or cutting costs—or both—may become increasingly
important. For example, if your company requires new equipment to
achieve product differentiation, the investment recovery group may need
to identify a use for the machine it replaces to offset the new cost.
Enhanced Sarbanes-Oxley Compliance.
One significant benefit
of a well-organized investment recovery program for publicly held
corporations in the United States is improved and less-costly
compliance with the requirements of Sarbanes-Oxley legislation for
better reporting of financial implications for the company. The
Sarbanes-Oxley (SOX) legislation brought the need to have transparency
in financial statements to the forefront of corporate
issues. And
though many companies continue to look at SOX as a ‘financial
department issue,’ related regulatory action and interpretations by the
Financial Accounting Standards Board (FASB), connected to ‘retired
assets’ accounting, have complicated the lives of investment recovery 
managers. The main issue is that companies must now report asset value
data related to possible future facility retirement in current
statements.
To be very simplistic about it, including such information in
current financial statements sets up huge questions related to
projecting future market conditions and future company operating
situations. There are two FASB rulings involved here:
  • FAS (Financial Accounting Standard) 143, “Accounting for Asset
    Retirement Obligations,” issued in June 2001, established the rules for
    how a company must value and report recently retired assets (just
    before or just after the event, when costs and liabilities are
    essentially certain).
  • FIN 47. In December 2005 came FASB’s “FIN
    47” (Financial Interpretation No. 47) “Accounting for Conditional Asset
    Retirement Obligations—an interpretation of FASB Statement No.
    143.”This interpretation established that companies must book future
    retirement liabilities now, according to certain standards, and keep
    the books updated through event actuality. According to the
    introductory summary in the ruling document: “Diverse accounting
    practices have developed with respect to the timing of liability
    recognition for legal obligations associated with the retirement of a
    tangible long-lived asset when the timing and (or) method of settlement
    of the obligation are conditional on a future event.”
In other words, the creative bookkeeping flexibility
associated with retired assets was being  eliminated in the spirit of
SOX. The FASB rulings created challenges for investment recovery 
managers by requiring immediate quantification of potential future
asset retirement before there is an actual project on their schedule.
Adding to that difficulty are interdepartmental communications that
must be managed and tracked—possibly over several yearsagainst an
uncertain event target date. Clearly, SOX is not just an accounting
issue!
“Companies affected by FIN 47 will likely hail from the
industrial sector, and include utility, refinery, mining, and chemical
companies,” says Doug Reynolds, a national office partner with auditor
Grant Thornton. He adds that those are the companies with enough
capital to build a facility large enough to affect the environment and
therefore require a cleanup contract before receiving permits.
Conclusion.
As companies around the world look for
strategies that will keep them one step ahead of the  competition,
investment recovery professionals are strongly positioned to add value;
cut costs;
mitigate legal, regulatory and environmental risks;
improve productivity; and generate newfound revenue from assets already
on the company’s books.

Allowing surplus assets to simply sit idle instead of
contributing to the full potential value of the organization is not a
viable option for an organization that wants to remain competitive.
Sustainable
business practices call for investment recovery—the
missing link in the supply chain—to be actively managed. Porter’s value
chain model provides an excellent framework for investment recovery
leaders to improve the functioning of their surplus asset management.
Courses in the practical application of surplus asset management and
professional certification as managers of investment recovery (CMIR)
are available from the Investment Recovery Association.