RCM & the Sub-Prime Mortgage Meltdown

Turning A Blind Eye
RCM & the Sub-Prime Mortgage Meltdown

by Neil Bloom

You might be curious and wonder what in the world RCM has to do with the current financial crises, so let’s explore what it is that they have in common. As we will see, RCM has a distinct similarity to the current global sub-prime financial fiasco. Many of you have heard about Reliability Centered Maintenance, or RCM as it is called. But how much do you really know about it?

RCM is a logical way of identifying what equipment in your facility is required to be maintained on a preventive maintenance basis rather than a let-it-fail-then-fix-it basis. Many have heard the phrases "don’t fix it until it breaks" or "don’t break it by trying to fix it." There is a grain of truth to these axioms, but they depict a very shallow approach if you are striving to achieve reliability and safety levels for your facility that are the best they can be.

Many plants have tried the "hit-and-miss" approach, or the old "how-we-used-to-do-it" approach, or the "runon-luck" approach to maintenance. These methods will get you only so far until your luck runs out, and the potential for a disaster looms right around the corner.

In the absence of a structured RCM approach, reliability will rest solely on the basis of seat-of-the-pants experience, with a strategy consisting of a best-guess decision process. That approach falls far short of modern-day expectations.

However, in real life everything is not perfect. For example, there is no universally perfect climate or environment. Likewise there is no universally perfect reliability environment. For example, there are those who are responsible for plant reliability that may still be in a relatively early stage of getting their program going. They are really doing the best they can with the resources they are allocated. In meeting and talking with many of the people in this stage of their reliability program development, I am deeply encouraged by their devotion and passion. They are continually striving to do better. They implement predictive maintenance (PdM) in all the ways they can and use the best judgment available to them.

Then there are those reliability professionals that find themselves in a more experienced and progressive reliability environment. These folks have the benefit of being in a more highly developed situation with a greater flexibility to implement more advanced preventive maintenance methods and tools such as RCM.

Even with those employing a methodology such as RCM, there are those just beginning in their journey, there are those who have been through the challenges of attempting to begin an RCM program and then there are those who have successfully completed the RCM process.

RCM originated in commercial aviation and, unfortunately, since it left that industry, it has become a very difficult and costly process. It was never intended to be that way. In fact, RCM today hardly resembles what it was intended to be by its founders Stanley Nowlan and Howard Heap.

It has been conservatively estimated that less than 10% of all RCM programs attempted will succeed. Looking at it another way, over 90% of all RCM programs attempted are destined for failure! For those of you with first-hand experience, who have attempted to implement an RCM program, you understand why RCM has been so difficult.

Remember, there is a major difference between a program such as RCM, which is designed to truly enhance safety and reliability and its cost avoidance benefits, such as avoiding potential disasters….. and a more generic PdM or betterment program which is strictly an economic exercise implemented solely to reduce known costs. There is nothing wrong with PM betterment efforts or using standardized PM task templates.

However, with almost the same amount of effort, one can successfully achieve a true comprehensive RCM program instead of settling for something with far less value and effectiveness.

RCM and Reality

From many decades of first hand experience with RCM and associated preventive maintenance program initiatives, approximately 80% of those people who are contemplating implementing an RCM process to improve their plant reliability, do not have a grasp of what it really is. The majority of these folks have good intentions, however, what they are settling for is a means to convert time-directed overhauls into condition monitoring PdM tasks. Or they want to use cookie-cutter PM templates, or find better ways to schedule their PM’s, or review the 20% of their known problem components that they believe cause 80% of all of their plant problems. I wholeheartedly endorse all of these measures but let me be very clear; these betterment techniques are not RCM.

It’s The Unexpected

It has been proven over and over and over that the vast majority of major disasters that occur… that were not due to either acts of nature, human error, or sheer negligence…were caused either by equipment failures whose consequence of failure was unexpected and never analyzed, or from components which were incorrectly analyzed to be run to-failure. The disasters caused by these two reasons are "surprises" because they were totally unknown, unexpected, and unanalyzed.

In this light, think about the following statement……."Plant reliability and safety is directly related to the existing vulnerabilities that have NOT yet been identified because the failure consequences surrounding those vulnerabilities have not yet occurred. Shortcuts in the RCM process will most likely result in those plant vulnerabilities remaining unidentified until an unwanted event does occur. Real-world RCM is all about finding those vulnerabilities before they can occur and result in an unwanted consequence of failure."1

RCM And The Sub-Prime Mortgage Fiasco

Now that we have a better understanding of what RCM is and what it is not, what does all of this have to do with the sub-prime mortgage fiasco? Can you see how the above quotation can be directly compared to the vulnerabilities that existed in the sub-prime mortgage market? Can you see how shortcuts in the mortgage application process, such as verifiable income statements and job validation not being required, contributed to the debacle? How about the wishful thinking that, through some uninterrupted string of luck, home prices would continue to escalate indefinitely? Can you see how the absence of ascertaining the real vulnerabilities, such as overstating the inherent value assessment and understating the inherent risk of the mortgages that lenders wrote, resulted in a catastrophic failure of the investment banking industry?

The vulnerabilities that existed on Wall Street, prior to the mortgage meltdown, are eerily, yet specifically similar to the vulnerabilities that existed prior to the countless number of plant catastrophes that have occurred previously, and, in fact, vulnerabilities which currently exist in many plants and facilities today!

What can we in the reliability community learn from the mistakes that were made in the financial community?

It is very easy to fall into the mind-set of cruising right along on a wave of "Reliability Nirvana".

What do I mean by this? What I mean is that the plant or facility is humming along just fine without any significant problems. There have been no calamities recently; there have been no explosions, no fires, no fatalities, and no negative front page headlines or litigation concerns. So how does this Nirvana continue?

It usually continues on a prolonged streak of luck. But, at some point in time that luck will run out.

Quite often, plant managers know that all is not right. However, the inertia of the status quo becomes too great to overcome and they continue to depend on that streak of luck. Unconsciously, they may even turn a blind eye to "reliability reality", thinking that since everything is running well today, everything is just fine with their plant or facility. There may even be a reverse incentive to continue to do nothing, since the option of doing nothing saves money in the short term.

Can you see where this faulty logic is taking us?

A Faulty Logic

That same "cruising right along" logic prevailed at our most prestigious investment banks on Wall Street. Let’s look at the makings of that global financial misfortune in detail. Not unlike the plant management with visions of "Reliability Nirvana", the Investment Bank CEO’s and Managers had that same kind of misappropriated confidence without being realistic about the risks involved. They were in what I call a "Financial Nirvana." Many of those in risk management at the leading Wall Street institutions inadvertently set up "blinders" so they could not really peek at the true risks involved in the undertakings they were dealing with.

How about the profits? They were enormous. Sounds a little like some of those folks in a state of "Reliability Nirvana", making more money by doing nothing and cutting costs capriciously.

Did any of those financial leaders really want to challenge the status quo that was bringing in all the money they could possibly hope for? Could they not see, even for a moment, that they were running on luck? Did it take that much insight to figure out that when they loaned money to people who had very little chance of repaying that debt, they were playing all their cards on the hope that home prices would continue going up by the day. And if that upward trend suddenly stopped, they would pay dearly. Surely it didn’t take a genius to see that their formula for success also put them on the brink of disaster?

Those subprime mortgages were further packaged into Collateralized Debt Obligations (CDO’s), then even further re-packaged by the CDO’s into Structured Investment Vehicles (SIV’s). Each financial instrument in the process brought in more money and more bonuses for the Wall Street crowd. At each step of the way the financial leaders turned a blind eye to risks and to reality.

The Similarities Of A Disaster

In summary let’s look at the similarities of the mortgage disaster and the impending equipment disaster just waiting to happen at a plant or facility.

A FALSE STATE OF "NIRVANA":

In the Financial World: Senior management believed their current sub-prime mortgage process could continue indefinitely and their "house of cards" could not fail.

In the Reliability World: Senior management believes their facilities will continue cruising right along and their facility could not incur a disaster.

TOTALLY OBLIVIOUS TO THE REAL RISKS:

In the Financial World: Senior Investment Banking management, without an in-depth understanding of their mortgage underwriting vulnerabilities, were totally oblivious to the real risks involved.

In the Reliability World: Senior Plant and Facilities management, without an in-depth understanding of their real plant vulnerabilities, are also oblivious to the real risks they are taking.

THE PROFIT MOTIVE TRUMPED EVERYTHING ELSE:

In the Financial World: The investment banks on Wall Street were too busy making money to perform a "self-assessment" of their true vulnerabilities.

In the Reliability World: Plant management is often so focused on reducing costs and saving money that they become unmindful of the true vulnerabilities in their plant.

THE ADDITION OF COMPLEXITY AND CONFUSION CAMOUFLAGED THE RISKS:

In the Financial World: The mortgage documents were so complicated that the people in China, Japan, Europe and even here in the USA had no idea of the "exposure to danger" that they were investing in.

In the Reliability World: The PM program becomes so convoluted that it camouflages the real "exposure to catastrophe" in ones plant.

COVERED THEIR EYES TO REALITY:

In the Financial World: They inadvertently put on a set of blinders to prevent seeing the deficiencies that existed in their mortgage lending program.

In the Reliability World: They may inadvertently put on a set of blinders to prevent seeing the deficiencies existing in their preventive maintenance program.

If your plant management team’s primary goal is to "keep things humming along" and only pay lip-service to preventive maintenance, then disaster is right around the corner. While it may not happen on their watch, especially if they are close to retirement, it could quite possibly happen on your watch.

Was there ever a doubt that a "day of reckoning" was going to happen in the financial world with so many billions of dollars being lent to people, many of which had no job and offered bogus applications to substantiate their income? Was there any doubt that home prices could not continue to skyrocket 15% to 20%, year over year over year?

Likewise, was there ever a doubt that a "day of reckoning" was going to happen and cause the hundreds of plant shutdowns, fires, explosions, and fatalities that have occurred due to equipment problems whereby a less than robust preventive maintenance program was in place? Is there any doubt that unanalyzed or incorrectly analyzed failure modes or hidden failures in standby, backup, and redundant systems are just waiting to wreak havoc on our plants or facilities?

Is there any doubt that this situation exists, and just might happen at your plant or facility?

If so, it doesn’t have to be that way.

Different reliability professionals and different corporate organizations will no doubt be at different levels of understanding and different levels of implementation in their quest for achieving reliability. A large number of you are just beginning to realize and understand that the unknown and unanalyzed consequences of failure pose the most serious threat to the safety and reliability of your plant, and to the well-being of your plant personnel.

There is a new wave that is bringing classical RCM back to its simple original roots like it was always intended to be. Many astute Maintenance and Reliability professionals have already begun to realize the benefits of riding this new wave, and let’s hope that many more will ride the wave to reliability success.

Neil Bloom is the author of "Reliability Centered Maintenance – Implementation Made Simple" published by McGraw-Hill. He is a mechanical engineer with over 35 years of both hands-on and senior level engineering and maintenance management experience in RCM and Preventive Maintenance Programs in the commercial aviation and commercial nuclear power industries. He is an international guest speaker on RCM and an Instructor of RCM in the Continuing Education Division at the University of California-Irvine (UCI). Neil provides 3-day RCM Training Seminars/Workshops and can be reached at neilbloom@RCMAuthor.com or (949) 218-1286. His website is

www.rcmtrainingseminars.com

.

References

1. RCM

–

Implementation Made Simple, Bloom, Neil B., McGraw-Hill Professional, (2006)

Download OctNov_Reliability.pdf

Comments

[G. Strunk]

RCM is… – fixing long term problems with long-term solutions. The way it ought to be!

The RCM fails because … - trying to fix long term problems with short term (quick gain) solutions. Why? - We in industry have to satisfy the investment community – Wall Street.

WE, the INVESTOR, make “long-term investments” to reach our long-term goal – retirement. Our tool is “the Wall Street Banker”, who lives on short term solutions (quick) gains to give us – the INVESTOR – our nest-egg.

Does anybody sees a problem here?

[Bill Hughes]

The publication of RCM in 1978,provided an answer to the "Hard Time Paradox" and also provided the engineer with the tools to determine "What should be maintained," Why it should be maintained and "How it should be maintained".
But as Nowlan pointed out in his first full discussion of RCM, its true value lies in its application "prior to service" as he indicated in his Design Maintenance Partnership explanation.

If we compare the differences between Airline and General Industries some noticeable differences apply,namely:
Our design practices lag behind,functional replication is rare, time and resources are at a premium, support documentation is deficient, multiple failure causes are the order of the day and competencies are weak when compared to Airlines.

In this environment, whilst I do not advocate a return to MSG 1, the decision logic process can be adjusted to take cognizance of these factors as we have found in the application of RCM both on military aircraft and a wide range of industries over the past twenty five years.

To conclude I have been involved in the application and training of RCM over many years and its integration with other tools and would like to converse with the Author as I found the article quite interesting, but obviously influenced by his backround experience.

[Erik Kapp]

you would not perhaps do the seminars in south africa ?

[Dibyendu De]

I agree with you that RCM should be done in the proper spirit to get the best results. And RCM is invaluable to avoid, prevent or reduce the consequences of failures.

But I find that there are only a few who can really think of failure modes and their consequences and accordingly choose the appropriate task to avoid the consequences of failures. It is a difficult job for most human beings. This I think is the most important reason for 80% of the programs falling flat on its face.

Added to this is the management apathy for methodical work. Most want very quick results and their their commitment to RCM waver to say the least.

My experience tells me that RCM can be very successfully applied to plants that are very well designed and built. Most industries are not very well designed and built. With system faults around, application of RCM becomes very difficult indeed. Without overcoming these inherent imperfections it is extremely difficult to survive on RCM results.

There are other generic faults within most industries but that might be discussed at a later date

Hence to be successful application of the RCM concepts need to be modified as per the situation.

regards,
dibyendu