Energy Management Strategy: Energizing profits and insulating risks

Over the past year, Deloitte has seen a noticeable change in business and government thinking about energy and water resources.  Executives have more than an awareness of the opportunities to positively impact cost and risk to their organizations by addressing supply and consumption of these business critical inputs.  And, I think decision makers have recognized that aligning energy and resource management initiatives to strategic goals or government mission has an impact on; reputation, top and bottom line, employee motivation, and risk reduction.  When you think about it, very compelling outcomes can result from clarity on this issue.

One of the persistent challenges executives face is determining how much information is required to meaningfully impact energy management strategy and operations.  Is there a diminishing return on data collection and analysis and how does an organization determine what is the ‘right’ approach or appropriate management program to address energy and water management?   Another challenge and opportunity for executives is understanding how new supply technologies could be harnessed to deliver operational and strategic advantages.  We are having a lot of conversations with executives about new technology and innovation; from water treatment and re-use opportunities to distributed power and the potential benefit and application of abundant natural gas supply in the United States.

In the first two decades of the 20^th century we experienced a transformation of the global economy as the availability of power energized industry and machinery replaced manual labor.   Today, we are RETHINKING business fundamentals around; people, power and technology again.  As the private sector struggles with growth and the public sector aims to seriously reduce costs, I am convinced that the days of assuming there is little an organization can do about energy costs are gone, and that innovative leaders are focused on energy as a key input to operations and therefore an area worthy of scrutiny and new solutions.  Those same leaders define energy in a broader context, too, extending beyond electricity and traditional petroleum products to include components such as water and natural gas.  The most successful of their efforts likely go far beyond resource conservation initiatives alone; the big differences will be made by viewing and managing energy more strategically.  As such, key resources becomes the foundation of an enterprise-wide strategy that treats energy as a manageable asset capable of yielding significant efficiency, improved profits, enhanced competitive advantage, and designed to help insulate the organization from market uncertainty and risks.  In short, it is a strategy designed to both protect existing assets and create new economic and brand value.

This is an opportunity to stop looking at business as usual and create a new paradigm, a new way of thinking about the future.  Rather than being threatened by the need to change, these challenges should be embraced and used as a lever for innovation.  At Deloitte, we encourage our clients to rethink their energy approach on three specific levels: processes, technologies, and people.  Breakthroughs in data management systems, for example, can pave the way of better collection and analysis of information about energy use.  This will likely be followed and supported by changes in human behavior that take full advantage of the combined improvements in data capture and consumption processes and reporting.

The coming decade is expected to present difficult energy challenges for businesses and the public sector: will your organization be ready?  As with any dynamic situation, there is no need to wait for a silver bullet—you can start now; define your priorities to target for improvement, begin to identify viable solutions, introduce cost saving steps, and measure results associated with efficiency and better risk management.  By involving employees in the process, you also help them understand how their behavior impacts the big picture.  You’re on your way to establishing that new paradigm!

Rebecca Ranich
Director, Federal Energy & Resources Management
Deloitte Consulting LLP

 

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Planting Down Roofs

  
In the course of your day how often do you look up at the skyline? Food, water, and shelter are the three elements of basic survival, and yet we do not spend much time thinking about shelter. Unless we are without it, it’s broken, or we are on an architecture tour, we tend to ignore the rooftops that populate our lives. With a few notable exceptions, like the movement from thatch to tiles to prevent fire hazards in 1212, based on an edict by King John of England, the evolution of roof technology isn’t that exciting. Things are changing however, and it’s time to start looking up, and thinking green.

A green roof (i.e., vegetated roof or roof garden) is a roof with vegetation planted over a waterproofing membrane. In Europe, green roofs are already abundant, yet their popularity is just beginning to grow  in the United States — particularly in crowded urban settings and cities. In Washington D.C., universities, advocacy groups, Federal Agencies, and condominiums are installing green roofs. Chicago has built one for its city hall, Philadelphia has installed them on schools, and Los Angeles on restaurants. They offer many substantial environmental and economic benefits, including:

• Reduction in a building’s energy, heating and cooling costs
• Minimization of storm water runoff,  city sewer fees, and the urban heat island effect
• Filtration of pollutants and heavy metals from rain water and from ambient air, including CO₂
• Extension of the life of a building’s roof
• LEED credits

What do green roofs mean in relationship to Deloitte?  Recommending that our clients consider installing green roofs on buildings is one example of the many ways we can help our clients achieve their sustainability objectives.  Helping our clients reach their greening goals is one objective I keep in mind while developing and defining the Energy & Natural Resource Management service offerings, as part of the Sustainability & Climate Change IMO. I’m not suggesting that we literally get our hands dirty and plant gardens on top of our client’s roofs, but we should be talking to our clients about how to take advantage of the benefits. And while it may seem backwards, starting at the top, by greening their roof, may be a great foundation for the rest of their sustainability efforts.

 
Greg Aliff
U.S. Energy & Resources Leader
Deloitte LLP

A profitable shade of green

 
Ready, set, go! More businesses are joining the race to redefine the corporate bottom line, including the U.S. SEC, global stock indexes and many businesses from around the world. It’s becoming increasingly apparent that linking the interests of businesses, governments and consumers around the world is merely one degree of separation away. The challenges of carbon emissions management and coping with a resource-constrained, highly competitive future are two of the key components that fuel the trajectory of corporate sustainability activities.

Changes that address the financial impacts of resources, growth, carbon, ecosystems and climate change are fully underway. Many large businesses are maintaining (or increasing) investments in sustainability despite the economic downturn. Aligning strategies, business practices, systems and public image has emerged as a business and strategic necessity. Businesses, lenders and investors are now focusing on the long-term social, environmental and business implications of their strategies and capital allocations.   

An accurate assessment of business risks, costs and opportunities is the cornerstone of any successful enterprise. But how do you accurately account for such items? The 21^st century has seen the advent of the triple bottom line which encompasses the environmental, social and fiscal value of corporate activities. Or, in the words of Amory Lovins, “We aren’t harnessing the full power of capitalism unless we start playing with a ‘full deck of capital' encompassing the material, financial, human and environmental varieties.” [1]

Whatever the motivation, be it the possibility of significant cost-cutting through efficiency gains, a desire to improve public relations, or the specter of government regulation, many companies are harvesting new and unexpected profits from their sustainability programs. For some, the waste products they had dismissed as a cost of business yielded a new product or revenue stream upon closer inspection. For others, public and investor scrutiny created a pressing business case to improve governance, controls and disclosure, reducing long-term risk exposure and potentially preempting regulation. For yet others, a commitment to reduce carbon intensity in-house led to lucrative innovations they could sell up and down their value chain.

There are inherent obstacles to any kind of systemic change as well as challenges in implementing new ideas even after the business case has been made. In addition, trends point to more government regulation, increasing stakeholder scrutiny, greater competition for resources, and skyrocketing global demand for energy. The issue of how to grow amidst myriad constraints is not going away. Perhaps more importantly, with a majority of executives polled by The Economist identifying senior management as having a key role in driving their companies’ sustainability efforts[2], confident and informed C-suite leadership appears essential to meeting these challenges.

Eric Hespenheide

Partner, Deloitte & Touche LLP

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[1] Michael S. Hopkins, What Executives Don’t Get About Sustainability (and Further Notes on the Profit Motive). MIT Sloan Management Review, Fall 2009 (October 1, 2009).

[2] Economist Intelligence Unit (2010), Managing for Sustainability; 54% of Sustainability, CSR and Financial executives identify leadership by senior management as key to their companies’ efforts.

Why IT really matters in executing sustainability programs

I wonder if any company has a really good handle on the wide range of policies, procedures, and processes, along with the many individual projects and programs, which relate to sustainability strategies, goals, and metrics. I’ve been asked if I could identify such a company. I’m still looking.

Do companies have good information regarding the results of their sustainability initiatives? Can they report with confidence measures of tangible and intangible benefits? Do they know if they have taken full advantage of tax incentives and rebates available to offset the costs of our sustainability initiatives? What’s been the actual ROI of abatement and mitigation investments? Do buildings with more natural light really improve productivity and morale, and lead to fewer employee sick days? Are there real impacts on productivity, recruiting or employee retention from sustainability programs?

In my experience, it is difficult to pull all the pieces of the sustainability puzzle together. Ask your executives. Ask your board members. Getting consistent, reliable information about sustainability investments, costs, and results is hard. I think it’s hard, in part, because sustainability initiatives are approached separately, sometimes being tacked on top of the business rather than embedding them into the business. The result is well-intentioned but disjointed efforts performed inside functional or geographic silos with hundreds – or even thousands – of isolated activities. This reality is why I am devoting my time, talent, and energy to “IT for Sustainability.” My focus is on frameworks and enabling technologies to help manage sustainability data and to improve the quality of information used to plan, manage, and report on sustainability programs. I believe there are significant impacts for information technology priorities, projects, and plans at least over the next several years.

Every company has to invest resources in sustainability related initiatives – whether or not they actually use the term “sustainability” or fully embrace the concepts of sustainability. This is just a fact of life in the current environment. So, why not do it in a way that creates more value and better manages risk? Decisions about what investments to make, and judgments about whether projects and programs are delivering the desired results, require reliable information. Monitoring of performance and enforcement of policies will require timely and accurate information. An information-driven approach to sustainability can give even the most complex organizations the power of discipline and the benefits of efficiency.

Making sustainability a central tenet in strategy and operations, rather than something bolted on top of existing business processes, will require new capabilities. No one seems to argue with this point. But when it comes to the question about the role of IT in managing sustainability, there is still much confusion and a lack of clarity. Some are rushing to buy new software tools. But few yet have well-thought out strategies and plans for managing sustainability data, or a roadmap for information technology changes to support sustainability. Even companies where sustainability is a strategic priority can fall into this trap. Some companies have invested in new carbon management software, for example, without first creating a holistic sustainability strategy for the enterprise.

I believe that when IT and business leaders take a moment to think things through, address the underlying needs, and together develop strategies and plans, they will seek integrated technology platforms for planning, monitoring, reporting, controls, risk monitoring, and performance management related to sustainability. Why? For starters, they won’t want a variety of new software tools deployed in different parts of the business. And who wouldn’t want a consistent measurement framework throughout the organization?

So how do we get the right conversations started about information technology and sustainability? IT departments have been involved in sustainability for years through “Green IT” initiatives that reduce energy consumption through data center and infrastructure optimization. This has been important and valuable work, producing tangible benefits. I believe it is time to focus on the broader role of IT in helping to execute sustainability strategies and achieve sustainability goals. To help expand the scope of the discussion, we need a new term that goes beyond IT’s energy saving efforts and encompasses IT’s support of sustainability programs, processes and performance throughout the enterprise. I suggest we use the phrase “IT for Sustainability” or ITFS to refer to this broader role. The use of “ITFS” here at Deloitte is inclusive, running the spectrum from our work on green IT to our assistance in automating sustainability reporting, from development of sustainability performance intelligence to more advanced enterprise sustainability analytics.

Without the right approach to information technology, companies will not be able access the relevant, accurate, and timely information they need to make informed decisions about their sustainability strategies. And as rising energy costs, evolving regulations, and increasing stakeholder expectations make sustainability measures even more important, organizations will need new and better information management capabilities to execute and monitor their sustainability strategies, programs, and projects. IT for Sustainability should organizations to measure, monitor, and report on their sustainability performance, allowing them to truly understand the impacts on financial and operational performance.

Lee Dittmar
Principal, Deloitte consulting LLP

Three Myths About Green Sourcing of Indirect Materials

As business leaders try to understand how to “green” their supply chain, sourcing professionals are being asked to show how they’re contributing to the company’s overall sustainability goals. Much of the focus in “green sourcing” has been related to direct materials, those items used in the products or services being sold to a company’s customers. What’s often overlooked is the large potential in indirect spend categories that are consumed internally in the operations of the business.

Since most indirect spend categories are invisible to customers, and typically smaller than direct spend categories, executives tend not to pay as much attention to them. As a result, opportunities in indirect spend are not as clearly understood. To capitalize on the potential of “greening” your company’s indirect spend categories, let’s explode a few myths.

Myth No. 1: Greening indirect spend categories means buying more expensive items.

Actually, greening indirect spend categories can save you money.

Since many indirect spend categories are overhead or SG&A (selling, general, and administrative) costs, the benefits of greening these categories seem dubious because unlike direct materials, the potential increased cost of “greener” inputs can’t be translated into a premium price for the final product, with the associated marketing and PR benefits. However, in many indirect spend categories, large savings potential exists once the sourcing team is able to quantify all costs associated with a particular category, beyond just initial purchase price.

For example, equipment categories like HVAC, refrigeration, and food preparation equipment all consume a lot of power. In some cases, the total electricity costs over the average life of the equipment exceed the purchase price of the equipment itself! In addition to electricity, durability and end-of-life retirement, costs can vary substantially among manufacturers. 

So don’t assume “greener” products cost more than their traditional equivalents just because their purchase prices are higher. With a little analysis, the higher cost of energy-efficient equipment can be justified. In a recent project where I looked at a company’s spend on refrigeration equipment, I found that for every extra dollar they spent on the most energy efficient equipment, they actually saved three dollars over the life of the equipment. 

Myth No. 2:  Product specifications offer the most greening benefits.

On the contrary, performance specs offer the greatest benefits for uncovering sourcing opportunities.

In many indirect spend categories, category specifications often are tied into a particular manufacturer or brand offering. They’re designed to help the product’s users understand the particular nuances of that manufacturer’s product and exploit its efficiencies.

While this might be helpful to the user, it’s important that the sourcing organization develop performance-based specs for all categories with green potential. This is perhaps the only way that the sourcing organization can consistently cut costs and improve sustainability in categories that are sourced repeatedly. Many technologies that reduce energy or water consumption, such as LED lighting or metering, have performance differences from manufacturer to manufacturer, just like any other product.

If the spec for a particular category is tied to a manufacturer’s offering, you won’t be able to capitalize on improvements from competing offerings if those products aren’t “in-scope” in the category spec. It can often be as simple as specifying that LED lighting is required, rather than Brand X LED lighting, in an RFP or other sourcing document. This allows participants to propose all market offerings, including those that are better than the industry standard. 

Myth No. 3:  Greening indirect spend categories follows the same process as traditional strategic indirect sourcing.

Not exactly. It’s actually more work to green indirect spend categories. But the payoff can also be bigger.

Green sourcing has some qualities that distinguish it from traditional sourcing. The main differences are in quantifying the opportunity and current spend, vendor development, and final analysis and implementation. 

In order to characterize and quantify the sourcing opportunity for a given category in a green sourcing process, you’ll need to assess all costs and engage a broader group of stakeholders than you ordinarily would. The sourcing team will need to talk to such groups as engineering, design, sales, finance, and perhaps others to build a broad view of what “greening” opportunities exist in a given category, in addition to the team’s own independent market research.

Likewise, vendor development will take a broader approach. In addition to the traditional industry leaders, you’ll need to look at (as appropriate) global and local vendors who have focused on building efficient and “green” products.

Finally, analysis procedures and payback periods in green sourcing are typically longer than in traditional sourcing. In many cases, you might need analytical models and spreadsheet or data base organizational tools, and other software programs in order to capture the full benefit of the sourcing process. Also, you’ll need to understand the potential benefits in terms of total cost of ownership, which might have a longer payback period than normal. This is especially true with equipment categories, as noted above. 

I believe that when sourcing teams focus on the realities of green indirect sourcing and the large benefits it can deliver, they can achieve breakthrough results for themselves and for their businesses.

Jayanth Iyengar is a Business Analyst in Deloitte Consulting LLP’s Strategy & Operations practice.