The Sustainability, Measurement and Software Solutions – Part 1 described three main reasons why a business should become more sustainable. These were:
- Sustainability can make a business more successful and more profitable, e.g. through reduced waste and increased customer goodwill
- Businesses are making the sustainability of a business partner a purchasing criterion – businesses need to become more sustainable in order to remain competitive; and
- Governments, through regulation, are mandating that businesses adopt more sustainable business practices.
If a business decides that it wants or needs to become more sustainable, then it still needs to work out where to invest the finite resources it has available.
This blog looks at an approach a business can use for making sustainability decisions. The Sustainability, Measurement and Software Solutions – Part 3 will explain how measuring the cost and impact of sustainability investments based on data derived from software solutions, such as SAP’s Business Suite 7, can help a business make those decisions easier, faster and better.
Sustainability decisions should deliver a return on investment
As the Sustainability, Measurement and Software Solutions – Part 1 explained, Interface Inc., the world’s largest commercial flooring company, generated enough savings, by reducing waste, to pay for the rest of the company’s sustainability initiatives. It also generated good will that helped increase sales.
However before this or any other significant business decision is made, a business should go through a decision process. For example, if the goal is to reduce waste in a business, then it will require the answers to many questions. Here’s a starter list:
- Where are resources (e.g. materials or energy) being used?
- How much do they cost now and in the future?
- What is the environmental and social impact of using those resources?
- What scope is there to reduce the consumption of those resources, e.g. by changing the way the business operates now?
- Can those resources be substituted for alternatives that would be more sustainable or use less resource?
- How sustainable is a resource or the company that supplies it?
- What are the sources of alternate resources?
- Do the alternate sources provide assurance of continuity of supply?
- What do alternate resources cost and what is their environmental and social impact?
- How would a transition to an alternate resource affect the way the business works now?
- How much will it cost the business to switch to using those resources?
- What financial, environmental and social benefit would the business get from making the change?
- Would a change to alternate resources or a different way of operating the business affect the product and its quality?
- Are there any adverse impacts of a sustainability investment on customers or partners?
- How will the change affect customer perception of the company as a sustainable business?
- Are there new or different sustainability regulations that will require the business to change?
- How should sustainability investments be prioritized? …
In other words as with most business decisions, whether around sustainability or not, a business case is needed that is derived from answers to questions such as those above. Moreover, to succeed, it needs to demonstrate a return on investment.
Maximize the upside and minimize the downside
A business case for making a decision needs to vary, in the detail, depending on the size of the investment, the potential impact on and benefits for a company, the risks involved and the decision making/risk culture of the company. Historically though, they are often a paper that evaluates an investment just in terms of its financial impact.
As a management consultant, I had to develop business cases, sometimes as part of a proposal, for information technology projects which then had to be “sold” to executive management. However, business cases based on financial impact often only told part of the story. There was always a need to explain the less tangible benefits as well as the risks.
Although sustainability investments can be considered from purely a financial perspective, it is often the less tangible benefits and risks that have the greatest impact. For example:
- The increased sales that arise, but can be hard to predict, because of the customer goodwill generated because a business is viewed as more sustainable – see Interface Inc. that was described in the Sustainability, Measurement and Software Solutions – Part 1
- The risk of losing contracts because a business is less sustainable than a competitor’s – see quotes from Wal-Mart and British Telecom also in the Sustainability, Measurement and Software Solutions – Part 1, or
- The risk of prosecution or a fine because a business doesn’t comply with a regulations. For example, Mattel was fined $12 million because of lead-tainted toys that did not comply with regulations.
It’s also unwise to assume risks won’t materialize, after all Mattel’s reputation as a toy supplier was “stellar” before the problems occurred. When problems arise they need proactive proper management to resolve. For example Nike, back in 2000, was roundly criticized for child labor practices yet now, they make good sustainable practices a core part of their business practices and in 2006 were named the top US company for social responsibility reporting.
So the net of this is that a decision on where to make sustainability investments requires a balance between maximizing the upside, e.g. by reducing costs, or increasing sales; while minimizing the downside, e.g. by identifying and mitigating risks; so that there is a net benefit to the business and the society in which it operates.
So if the goal is to balance maximizing the upside while minimizing the downside, there is still the problem of how does a business measure the upside (and/or downside) of potential sustainability investments so that more accurate predictions can be made of the outcome.
Much of the information that is needed to measure the cost and impact of sustainability investments can often be derived from business software that a business runs.
The Sustainability, Measurement and Software Solutions – Part 3 will examine approaches for measuring the cost and impact of sustainability investments in more detail and how software solutions such as Business Suite 7 help a business make easier, faster and better sustainability decisions.