At first glance, finding a second home for surplus assets within your own  organization should be easy. Like a ride in the park, right? After all, it obviously fit into corporate standards at one point, and the fact that you are even considering redeployment indicates that there is still useful value, even if some in the organization see it as an asset that has traveled its last mile.  Four seasoned Investment Recovery professionals share some of their insights into the redeployment process.

 
Even though redeployment is the first choice of disposition options, seasoned Investment Recovery pros tell us that redeployment has a set of challenges that make it especially difficult to accomplish.

The primary-and initial-option for Investment Recovery is to find another area within the company to use an idle asset. This puts the asset to work as part of its lifespan and avoids the cost of purchasing, for example, lift trucks for the Omaha facility when three are sitting idle in a warehouse in Wichita. However, surplus asset redeployment plans are not like the “Field of Dreams”—If you build it, they will NOT necessarily come.
 

In a tough economic environment, probably the largest single factor to stimulate redeployments is lack of capital. When the coffers are low and budgets are tight, used assets become much more desirable. Environmental concerns and “Green” initiatives provide further support for asset redeployment. While it is generally held that the most valuable option for surplus assets is to reuse them within the organization, in many cases these plans have been unsuccessful despite having redeployment programs advertised through internal websites or email distribution lists. Clearly, technology and written policy alone will not suffice when dealing with intra-company surplus transfers. Successful redeployment plans must be actively managed by an involved IR program manager.


NEW vs. USED

The Biggest Challenge to Redeployment Many IR managers feel that the biggest challenge to redeploying surplus assets is the propensity of engineers, project managers and procurement people to purchase new equipment regardless of the availability of similar assets sitting idle that the company already owns. After all, why would Omaha want Wichita’s old lift trucks when new ones will be fully warranted and have all the latest features?
 
Redeployments always have an element of risk associated with them because of their physical condition or a less than perfect match for the application. This is particularly true in the case of process equipment where the new equipment vendor will do much of the engineering and you know that the asset will be designed to fit the need. In the case of some assets, the cost of removal, refurbishment and transportation may make it impractical to redeploy. Additionally, even if there is a good match idle somewhere in the system, it may not have been reported to IR or may not, for other reasons, be visible in the system.
 
One IR Manager makes the point that many of the items that may be suitable for redeployment, like heavy equipment, may actually create “opposite justifications.” In other words, the piece of equipment is being replaced because the economics of continuing to maintain or repair make it a better business decision to replace with new. For another business unit to justify its continued use at another location requires justifying that it is better to maintain and repair than buy new. Two opposite views of the same transaction!
 


REDEPLOYMENT FINANCE : 1 +/- 1 = > Value @ < $

Financial issues play a surprisingly major role in redeployment decision-making. All public companies are controlled by strict accounting guidelines, especially regulated industries such as the utilities that make up such a large part of the Investment Recovery Association membership.

What makes sense for the corporation as a whole may not make sense for a single business unit within the same corporation. The appearance of having one of the business units pay for an item only to have it transferred to another at a reduced value is not acceptable. When the fair market value (FMV) is far less than the depreciated value of an asset, the receiving unit could be charged more than the FMV of the asset being redeployed—in some cases more for the used asset than purchasing new when all associated costs are included for removal and reinstallation. In other cases, the book value is considerably lower than the potential sale value, which can complicate the transfer.
Book Transfer Value:  It’s important that the receiving business unit (IR’s internal customer) is not penalized by taking non-relevant costs onto its books, e.g., original installation cost, in-bound freight, engineering, utilities, etc. The accounting department should have a process (policy) in place to eliminate the superfluous costs. For example, an accounting policy might be that initial asset installation cost should be absorbed by the originating unit, and that removal and re-installation costs should  be absorbed by the receiving unit .
 
IR Reporting the value of the transfer transaction:  If the asset is new (unused) the value of the transaction can be reported as new replacement cost or original cost since it has not been depreciated. If the asset is used, the value should be “Fair Market Value” regardless of the current net book value. 
 
Non-capital assets:  The transfer of non-capital assets can be a valuable but tricky process. It should be understood (and supported by business leadership) that any non-capital asset should be used within one year of the transfer. It should be the responsibility of the business leadership team to monitor this process.
 
One big opportunity for redeployment is when there is a large inventory of assets available from a plant closure that matches corporate standards. It is important at this point to complete an inventory of the major assets and communicate this to all businesses with a hierarchy for redeployments. The key here is to limit redeployments to those assets that have approved projects. It does no good to transfer an asset because it might be used in the future, only to have it sit in a boneyard until it is no longer is usable.
 
It’s not uncommon for an entrepreneurial business manager to send a maintenance team to another plant (especially a closed facility) to scavenge non-capital assets regardless if they have a definite current need. There have even been times when a manager will collect assets at zero cost, then sell them-with the proceeds going directly to his bottom line.
 


Selling internally.
 

It’s important that the Investment Recovery Unit establish trust and credibility with the leadership team on how they evaluate and report internal transfers. Working closely with the involved business units to assure both are treated fairly in the redeployment is critical.  The justifications must be written as to not  conflict with each other. The accounting issues can be very difficult to overcome. 
 
If the value is inflated, the leaders will not believe the numbers, or the budget of the acquiring unit may not be able to justify the expense. If the value is underestimated, the IR personnel (and disposing business managers) will not pursue transfers as vigorously as third party sales. The value should reflect the remaining useful life. This will be close or equal to FMV. This will motivate the IR team to put as much effort into internal transfers as third party sales. A proactive advertising program including an up-to-date database available via the intranet coupled with email blasts targeted at engineering and maintenance personnel is imperative to provide the desired results. Assets not suitable for transfer should be appropriately labeled to avoid confusion by the internal customers. This will free valuable time for the IR team members.
 
According to Ron Brooks, CMIR, Weyerhaeuser Company, “Education and follow-up with the various locations and personnel is critical to the awareness of redeployment opportunities. Whenever we do a training session or participate in meetings, we see an increase in subsequent requests and activity.  One of the things that I personally do is to place a link to our website on the appropriate person’s computer desktop whenever I am at one of our plant sites.”
 


A Redeployment Success Story.

Sherry Detloff, CMIR, Manager of Investment Recovery for State Farm Insurance, mentions that, “When we first started redeploying refurbished computer equipment within our company quite a few years ago, one of the obstacles we faced was resistance from users whose departmental budgets were charged the remaining book value of the equipment. Some departments wanted newer equipment, because it cost less than the old equipment- and the monthly charges were smaller, albeit for a longer time period (three years). It took a stand by the Vice President of Data Processing who told these departments, ‘This is the way it’s going to be! It’s cheaper in the long run to use refurbished computer equipment internally than to buy new’.”
Helping the redeployment, State Farm has their own computer repair shop called  the ‘Electronics Support Unit’ (ESU). Many of the technicians at ESU are certified by HP and IBM to provide maintenance and repair services. ESU refurbishes and reissues computer equipment within the company. For example, if an agent has equipment that needs to be repaired, ESU ships a replacement overnight; the agent’s staff places the non-working item in the same carton the new  item arrived in and applies a pre-paid return shipping label. ESU repairs the non-working item and puts it in their stock to be reissued when needed.
 
One major redeployment success at State Farm occurred in 2001, when they replaced IBM Thinkpad 600 laptop computers in agents’ offices, then redeployed the Thinkpad 600’s to Claims  Reps., who used them from their cars when they traveled to provide estimates. “Now, if I could just get ESU to track the cost savings incurred by redeploying…!”, laments Detloff.
 


Unique Process.

Redeployment is generally the first consideration in the disposition process, yet it is perhaps less formalized than other forms of disposition. There are not one or two standard redeployment approaches that work for all assets. It seems that most require a unique approach to finding potential areas for redeployment. Other processes for disposition are much more formalized and follow consistent paths.
 
Process notwithstanding, it is not unusual for two plants, especially if they are part of the same business and located fairly close to each other, to bypass the process. This may be good for the corporation, but bypassing formalized accounting diminishes the visibility and perceived value of investment recovery.
 


Inspection—Key to Satisfaction.

One last recommendation to help achieve a successful redeployment track record: To avoid misunderstandings and hard feelings, the receiving unit should be obligated to physically inspect the asset before it’s removed and shipped to the new location. If it is process machinery, a representative from the receiving unit should be on site during the removal and loading process, and don’t forget to make certain that all parties to the transaction – including Finance – have a firm understanding of the values and costs attributed to the transfer ahead of time.


IN Conclusion.

Redeployment is the area where Purchasing, Finance and Investment Recovery departments need to forge the closest bond. It’s crucial for these groups to communicate closely to determine what purchases are being planned, how they might mesh with idle assets in company inventory, and critically, how to allocate value between the originator and receiver of the asset.

This article was written with the help of the following members of the Investment Recovery Association:
 

Ron Brooks, CMIR, ASA, Weyerhauser Co.

+1 253.924.7444, ronald.brooks@weyerhaeuser.com
 

Sherry Detloff, CMIR, State Farm Insurance Co.

+1 309.766.0196, sherry.detloff.afp4@statefarm.com
 
Randy Hevener, PE, PS, American Electric Power 
+1 614.883.7122, rhhevener@aep.com
 

Dennis Knutz, CMIRF, ASA, Investment Recovery Exchange
+1 360.915.6941, irexch@msn.com

 
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 2, 2008

© The Investment Recovery Association