Many executives see the drive toward sustainability as a forced march, one in which the government plays the role of drill sergeant, yelling at companies to be more efficient and cut carbon emissions and then punishing them with regulations. From this perspective, making your business more sustainable means making it worse.
In practice, however, this perspective is shortsighted and wrong. The world faces shortages of resources of all kinds. When the cost of oil or water or electric power rises, the company that uses resources most effectively will have an advantage. When a company monitors how its partners do business it can avoid costly damage to its brand from exposure of embarrassing or unlawful business practices.
It is true that government regulation is punishing inefficiency and rewarding higher performance in specific use of resources through cap and trade measures for carbon and other regulations. It is also true that it costs real money to comply with regulations. But now imagine all regulations were rescinded. Which companies are going to be the winners? The ones with the least efficient operations that emit the most carbon, use the most water, and consume the most electric power? The ones who value short term monetary gains over brand reputation?
Making operations sustainable is just another lens for creating a better company. The motivation should not only come from regulators but should also from the desire to make your company as efficient, productive, profitable, ethical, and admirable as it can be.
Jack Welch, former CEO of General Electric, is famous for pointing out that making your business sustainable is a requirement for a modern company. "If I'm running a business, I want to be sure I'm green as can be," Welch said in an interview with Fresh Dialogues. "Design products with a smaller carbon footprint; engage your employees in green activities…make everybody feel you're in. There's no percentage in being against it."
At the recent Data Center Dynamics Conference two weeks ago, Mark Monroe, who is the executive director of TheGreenGrid.org, an IT industry and end-user consortium focused on resource efficient data centers and business computing environments, said "Companies who are more efficient on a carbon basis are also more efficient on an economic basis as well."
The question is how? What does the transformation to higher levels of sustainability look like? To get a view of how this transformation works in the real world, I turned to Peter Graf, Chief Sustainability Officer of SAP. Graf runs the Sustainability business at SAP that creates products to help companies become more sustainable. He also leads SAP's efforts to become more sustainable itself.
In a recent interview, Graf laid out four stages that most companies move through as they use sustainability principles as a lens to better understand operations and improve efficiency and productivity.
- First, companies become more aware of how they are using resources like carbon, water, electricity in order to run their businesses in compliance with regulations.
- Second, companies use the increased awareness to optimize their processes, reaping financial benefits through cost savings and increased productivity.
- Third, companies leverage sustainability to differentiate their offerings to the market.
- Fourth, companies weave sustainability into their overall corporate strategy, as opposed to simply trumpeting a separate "sustainability strategy."
Here's how these stages work in practice.
Graf said that in the first stage, companies start paying attention to sustainability in a comprehensive way that includes use of resources and business practices. In a variety of ways, firms turn the lights on, they start to look at all aspects of the business that fall under the umbrella of sustainability.
The challenge in stage one is to turn the lights on and make tracking and reporting about information related to sustainability as efficient as possible. Graf said SAP's first generation of sustainability products such as Carbon Impact On-Demand helps measure a company's consumption of energy and non-carbonous resources such as water. The software collects and makes sense of the data required to understand and manage sustainable consumption and determine the environmental impact of manufactured products.
"We see sustainability as the transformation of this century, similar to the longevity and fundamental character of globalization in the last century," said Graf "If we don't put this into our software, we put the company at risk. As leaders in the software market, we must deal with this. It must become part of our strategy." SAP expects the total amount spent on sustainability software to exceed 7 billion euro between 2009 and 2014
The need for this type of software is driven by the growth in sustainability regulations across the board. "Worldwide, in the last 2 years alone, some 2,000 regulations relating to environmental health and safety were newly instituted," Graf said. "As a company, you have three choices in dealing with this ongoing stream of new regulations: You can throw more people at the problem, which increases your cost. You can continue with the same headcount, which increases your risk. Or, you can use software to help manage the problem, which helps you potentially to reduce both cost and risk."
Sustainability software can provide alerts if plans are made to purchase prohibited raw material, help report on safety related or environmental incidents, as well as plan optimal responses to those incidents. Such reporting can be a heavy load if it is not automated. Each year, a single chemical plant may have report to environmental authorities as many as 50,000 measurements. Graf said that SAP's compliance solutions helped Nova Chemicals save $2 million in just one year, simply by enabling the company to report its data on a monthly basis. Ink producer INX reduced volume tracking time by 75%, significantly accelerating the company and dramatically increasing capacity.
Reporting compliance requirements also show up in the supply chain in ways that are not related to regulations but are driven by consumer preferences for green and sustainable products. A company like Wal-Mart has the power to require its suppliers to report not only their economic performance but how well they stack up with respect to environmental and social issues.
"When Wal-Mart says, 'We only sell TVs with an EnergyStar rating,' that shapes the TV industry more quickly than government regulation," said Graf. "If you don't comply you risk economic consequences that may be very negative."
Stage two is about optimizing use of resources and has potential for a much larger payoff than achieving efficient compliance with regulations.
As more of the earth's population strives to adopt the Western lifestyle, prices for scarce commodities such as oil, copper, rare earths, and wood are becoming increasingly volatile and, therefore, less predictable. McKinsey & Co. reports that over the past 5 years, this volatility was up 40% compared to the like period a decade earlier. Add the effect of speculation by commodities traders and price volatility is even greater.
Reducing consumption of these commodities has proven to be one of the best ways for a company to lower its vulnerability to price volatility. Oil Refiner Valero used SAP's software to compare operations across 15 refineries and then share best practices, and was able to save $120 million in its purchases of energy in just 1 year. Similarly, Lexmark managed to reduce the weight of its packaging for computer printers by 26%, leading to a dramatic reduction in the energy used in its product manufacturing.
"The role of software in this stage is about using transactional systems and analytical tools to understand, 'Where do I consume energy today, and how can I be creative in using less?'", said Graf. "It's about tapping into the operational data you already have in your business and then, enhancing it with analytics so that you understand where the potential for improvement is. And then, of course, implementing, tracking and reporting on those improvements."
Other stage two success stories include PepsiCo. The company did a lifecycle analysis of its Tropicana brand orange juice, which revealed that more than 50% of the lifecycle carbon emissions related to a single quart of orange juice is in excess use of fertilizer.
Pepsico then worked with farmers on how to use less fertilizer while creating the same yield, or at least the same profitability. The company is also helping find and promote use of fertilizer that is less carbon-intensive. "The program reduced the use of fertilizer and the cost of oranges," Graf said. "In effect, they used carbon as a proxy for process inefficiency. Resource productivity and sustainable consumption are so closely tied." Graf said the next step for sustainability software is to provide more capabilities to do this kind of comprehensive analysis.
Stage three is about enhancing your product offerings through sustainability.
One simple way to do this is just to let the market know about the gains you made in step two. PepsiCo, for example, has made sure consumers know about its progress in becoming more sustainable. (See How green is my orange?.)
But the larger opportunity in stage three is to enhance the value of existing products through sustainability or to find new products and/or markets. In this stage, companies must ask themselves how can we use sustainability to enhance our product and service portfolio? "That's where it gets really interesting because now you're not only talking bottom line, you're talking top line," said Graf.
Toyota changed the entire automotive industry with hybrid cars. "Now every major car maker has hybrids or plans for hybrids to more effectively compete with them. I even heard of a hybrid Ferrari to be launched in 2012/13," Graf said. Another example is Deutsche Telekom's recycling efforts for mobile phones.
The fourth stage is building sustainability into the company strategy so that it becomes a part of the way you do business.
"Incorporating sustainability is not a software challenge, it's a business leadership challenge," said Graf. "By making a corporate strategy sustainable, you ensure that your business model works in the future."
"Imagine you're in the footwear and apparel industry, and publicly, you ignore the fact that your suppliers are employing children to make the products you sell," said Graf. "With everyone on the internet today, your brand may get hit very hard when news of this fact gets out. Companies need to make every effort to ensure human rights across the supply chain."
Nike learned the hard way and was criticized for some of the labor practices in its supply chain. Now, Nike is seen as a leader in sustainability because it addressed these issues that in essence put its entire business at risk. Eventually Nike moved on to stage four and sustainability became essential to the corporate strategy.
Coca-Cola's concern for conserving water is another good example. It takes a lot of water to create one can of Coke, mostly because Coke contains sugar, and growing sugar cane requires a great deal of water. No water, no sugar, no Coke, which makes water conservation is a major topic of conversation in the Coca-Cola boardroom. Failing to tackle this issue puts the business at risk.
A sterling representation for sustainability can also help in recruiting. "SAP was able to hire a new managing director in India –because of the strength of our track record in sustainability," said Graf "Last year, 57,000 people looked at our sustainability report online. We estimate that about 10% of those were potential future employees for SAP."
Consumers are extremely aware of and well-informed about sustainability. They want companies to walk the walk. Brand value is affected by how well firms act in sustainable ways. In addition, employees choose their companies based on this knowledge. Investors are mightily interested how well companies manage risks related to environmental and social challenges.
"Personally, I used to be interviewed only by investors managing sustainable funds, but now these questions come up with mainstream investors, too," said Graf. "The concern is with the long-term success and risks of the business."
This fourth stage is a long-term transformation crucial to lasting success. "The environment is changing, the people around you are changing, the electronic interconnectivity is changing. Everything's changing. The number of people living on the planet and their behavior are forcing companies to revisit their strategies and ensure that their business models are fit for the future," said Graf"Now, it's about balancing the short- and the long-term profitability in the right way so that you're not only hitting your numbers for the next quarter but also making sure to be the market leader in 10 or 20 years. If the economic crisis has taught us anything, it's that if we look only at short-term profits, something's wrong."
Dan Woods is chief technology officer and editor of CITO Research, a firm focused on the needs of CTOs and CIOs. He consults for many of the companies he writes about. For more stories about how CIOs and CTOs can grow visit CITOResearch.com.
Thanks to Dan Woods / Blogs Forbes / CIO Central / CIO Network
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