Holistic Management for Increased Profitability
SAP is both a sustainability practitioner and a solution provider. Peter Graf is the company’s Chief Sustainability Officer (CSO) and driving force behind SAP sustainability solutions. Graf assumed this dual role in March of 2009. Nine months later, SAP had:
- Elevated sustainability to be a strategic priority with long-term targets, and focused over 500 employees across all lines of business on this objective, including 160 “sustainability champions” to drive cultural change across SAP
- Achieved a 16% reduction of greenhouse gas emissions and saved close to $130 million through more sustainable internal operations in 2009
- Piloted new ways of leveraging SAP’s strengths to drive social improvements around the globe
- Brought new sustainability solutions, such as SAP BusinessObjects Sustainability Performance Management, to market; acquired and enhanced Clear Standards (now SAP Carbon Impact); built best practices for sustainability analytics to enhance SAP Environment, Health, and Safety Management; and actively enhanced the SAP Business Suite to enable more sustainable business processes
- Cultivated an extensive partner ecosystem around sustainability, including more than 100 partner solutions and services, which serve thousands of customers
It seems only fitting at the outset of a “Sustainability 101” article to provide a working definition of sustainability. Here’s the definition I use:
The holistic management of economic, social, and environmental risks and opportunities to drive short- and long-term profitability
For companies that are just getting started with sustainability, the reference to profitability may seem an aberration. How does profitability factor into the discussion?
Sustainability requires you to examine the economic, environmental, and social implications of every business decision and, through this holistic approach, improve operating margins and top-line growth.
Readers of this magazine know SAP for our business applications. You’re accustomed to leveraging our solutions to optimize processes and tie these efficiencies back to your financials.
Tried and true metrics for process efficiency include time-to-market, inventory turnover, perfect order percentages, and so forth. Process efficiency, however, is only half the story. It doesn’t account for resource efficiency and its substantial impact on profitability.
PepsiCo provides a great example. This company assessed the carbon footprint of its Tropicana orange juice, from grove to glass, and surprisingly found that it wasn’t the product’s creation, distribution, or cooling that was the biggest carbon contributor; it was the fertilizer. Today, the company works with farmers to use less fertilizer, which, in turn, significantly reduces costs and greenhouse gas emissions for both the farmers and PepsiCo’s products. The sustainability lens provided PepsiCo with an opportunity to look into its suppliers’ processes and identify “waste” that you just can’t see by merely looking at the price of oranges.
This is the essence of sustainability thinking: Carbon footprint, water footprint, material consumption, unwanted attrition, employee sick days, and other sustainability indicators can help identify resource efficiency shortcomings that, when improved, can dramatically drive profitability and competitiveness.
It stands to reason that:
- More efficient resource productivity and less waste translate into savings. Eco-efficiency measures at DuPont, for example, saved the company $3 billion since 1990. Valero, having gained visibility into its real-time energy use, reduced costs by $140 million per year.
- Environmental and social issues now have to be accounted for. It’s not just regulators that are calling upon companies to disclose their sustainability performance; nongovernmental organizations (NGOs) also are requesting transparency. And increasingly, large companies like Wal-Mart use their buying power to force their value chains into more sustainable operations.
- Catering to the growing legions of consumers and investors that favor sustainable offerings fuels top-line growth. Procter & Gamble is a great example. The company generated $13.1 billion in recent sales from what it deems “sustainable innovation products.” These are products with double-digit percentage improvements in the areas of energy, water, transportation, packaging, or renewable energy.
- Sustainable practices help to ensure the longevity of your business. The very idea of sustainability stems from the fact that unbridled resource consumption threatens the business model of a company, specifically if this consumption outpaces the earth’s ability to replenish those resources.
Company after company has shown that sustainability bolsters the bottom and top lines. It can save you money. It can make you money. It ensures the longevity of your business. It just makes great business sense.
Enacting Sustainability Measures
For sustainability to be managed successfully, it needs to be inextricably linked with a company’s business strategy and operating frameworks. In contrast, companies that treat sustainability only as a compliance, PR, or philanthropic exercise can’t create lasting value from these endeavors.
Sustainability leaders like Nestlé, The Coca-Cola Company, and Deutsche Telekom, for example, manage sustainability holistically and actively engage with their suppliers, partners, and customers. Doing so, they’ve improved operating margins, enhanced brand reputation, inspired employees, and appealed to the growing legions of socially and environmentally aware investors and consumers.
We’ve found that sustainability leaders continuously optimize their sustainability, following a common pattern. We’ve distilled this pattern into a “sustainability roadmap,” shown below.
||The sustainability roadmap – a continuous optimization effort
Profiting from Sustainability: The Roadmap
The key to profiting from sustainability is to go about it using the holistic approach shown in the roadmap. It starts with engaging stakeholders and determining what enduring environmental and social measures are most important and how these measures and your business priorities align. Engagement with stakeholders comes full circle with comprehensive reporting on the changes you have set out to effect. This entire cycle is supported through SAP BusinessObjects Sustainability Performance Management.
Step 1: Feedback and materiality.
Talk to customers and employees. Talk to suppliers and investors. Meet with community representatives, regulatory bodies, and NGOs (specifically if an NGO has lodged a protest or demonstrated outside your plant). Detractors aren’t necessarily adversaries. If we’re talking about a reputable NGO — like the World Wildlife Fund or Global Reporting Initiative (GRI) — the group can hold a lot of sway with consumers and investors and have valuable knowledge to share in your target sustainability areas. I, and many of my CSO counterparts, welcome this input when shaping sustainability strategy. In fact, the sustainability roadmap labels “Feedback and materiality” as its first step. The idea, in short, is to engage with stakeholders, solicit their input, and figure out what sustainability issues are material to them and what the impact is on the business. The role of IT here is to provide the social computing capabilities that allow for a structured and inclusive conversation.
Step 2: Analyze and benchmark.
In the areas that are material to your sustainability agenda, benchmark how you are performing today. It’s important to get a baseline established before you start any optimization initiative. If the change you want to effect is to reduce carbon output, capture your current rate of emissions. If the goal is to optimize energy or water management, then measure the energy intensity of your operations or your water consumption and treatment levels. And if the goal is gender diversity or delivering more sustainable products, measure diversity in top management or sustainability across your supply chain. SAP has tools to help you do this (see the table below). It’s with these benchmarks that business value reveals itself. This is where companies discover process inefficiencies and opportunities to improve and innovate.
For example, Wal-Mart, found that 92% of its carbon footprint is in its supply chain. SAP found that its employees commute more than 50 kilometers to work per day, contributing more than 20% to the company’s overall carbon footprint. Once you know these facts, you can start optimizing. For example, SAP uses SAP Carbon Impact to baseline and benchmark its carbon footprint.
Step 3: Adjust strategy.
Take a new look at your business strategy and operations and determine how you will embed sustainability activities therein. This is where the connection between software for strategy and risk management and sustainability performance management is important. The goal is to achieve dual benefits — positive societal and environmental contributions and significant business gains. One of the rationales I often hear among companies that compartmentalize their approach to sustainability is that now’s not the time for them to take on such a cost. Benchmarks and measures typically change this perspective, demonstrating that nearly all lines of business stand to gain from more sustainable practices.
Step 4: Set targets.
Companies that take a compartmentalized approach to sustainability often peg targets to regulatory mandates. Business advantage doesn’t stem from compliance. In manufacturing, the big gains usually come from sustainable design, procurement, production, packaging, and logistics practices. In fact, sustainability measures are now being leveraged to optimize nearly all major business areas, as shown in the diagram below.
To make those targets affordable to track, we worked on both ends: the instrumentalization of the SAP Business Suite and partner solutions to capture sustainability indicators, and the connectivity with SAP BusinessObjects Sustainability Performance Management, so that they can be tracked correctly, cost effectively, and thus repetitively (for optimization).
||Sustainability measures are now being leveraged to optimize nearly all major business areas
Step 5: Implement your initiatives.
Moving sustainable plans into operations has familiar elements: Cascade plans and budgets, monitor performance, and adjust activities for targeted results. Business applications can help you conduct these activities in a repeatable and consistent manner.
Here, SAP customers have a key advantage. SAP Business Suite and sustainability solutions work together. This means you can extract environmental measures, just like you do with financials and logistics information, from your SAP systems.
Your SAP applications can help you collect data, gain a 360-degree view of your sustainability efforts, and thus simplify assurance of your sustainability performance.
Step 6: Operate across business networks.
A sustainable supply network is the cornerstone of any corporate sustainability strategy. Take the issue of carbon labeling. It requires you to pull information from suppliers and aggregate it at the point of sale. Software can help you both model and optimize your supply chain, capturing data from sensors, performing quality systems checks, monitoring calculated parameters against permit limits, triggering events and inspections, and accounting for sustainability measurements and currency, such as emissions and credits.
Step 7: Measure performance.
Sustainability measures are no different from those you apply to your financial, sales, or other business forecasts. Shorter measurement cycles provide better visibility and control. When you close your financial books, close your carbon books. (At SAP, we close our carbon books every three months.)
How do you actually measure sustainability performance? The measures come from meters and calculations. SAP customers, for example, can also leverage data (e.g., travel or purchasing data) that is already in their systems to determine their carbon footprint. Your SAP applications can help you collect the data, gain a 360-degree view of your sustainability efforts, and thus simplify assurance of your sustainability performance. This is hugely advantageous, since sustainability data collection and rationalization can otherwise be very costly.
Step 8: Assure.
How do you verify your sustainability claims? In addition to conducting internal audits, many companies now work with independent authorities such as KPMG and Ernst & Young. Here, sustainability systems are invaluable. Verification becomes faster, easier, and less expensive.
Step 9: Report.
The final step is to publish a sustainability report. GRI is the gold standard for sustainability reporting. It provides a reporting framework for sustainability that outlines the main elements of a report and the indicators that should be addressed. Of course, the ultimate goals of reporting are to provide transparency, meaningful data, and engagement. SAP BusinessObjects Sustainability Performance Management contains a library of 400 KPIs that have been validated by GRI, so you’re sure to report correctly and efficiently.
And then the process begins anew. This roadmap doesn’t have an endpoint. It’s a continuous process, an ongoing journey.
In the long run, sustainability will affect most business processes. Therefore, the integration of the IT systems that run those processes and track their financial impact is important to allow companies to holistically, repetitively, and affordably optimize their sustainability. At SAP, we’re designing all of our sustainability systems to work easily with each other — so our customers won’t need to spend as much money on integration.
Take the First Step
Look at sustainability as an opportunity and optimize around it. Ask yourself what sustainability measures reflect your stakeholders’ priorities and your company’s abilities.
Then look at your business processes and see how you can align environmental, social, and business imperatives in a way that renders your company more profitable and competitive. Corporate success and meaningful societal contributions are not mutually exclusive. View them holistically, and everyone will be the better for it.
April 01, 2010