These days, we often read headlines about the need to reduce dependence on foreign oil and to lower greenhouse gas emissions to minimize the expected impact on climate change. We also see prices going up for gas, home heating oil, electricity and water. These higher prices dont just hit us on the home front. They also mean increases in the cost of preparing, manufacturing and shipping raw materials as well as finished goods, which influences the costs of the products companies make and consumers buy.
These issues are not localized to the U.S. Economies all over the world are dealing with them. This is due, in large part, to a sharp increase in the consumption of natural resources, such as oil, coal and water caused by the rapid rise of the middle classes in highly populated countries, such as China and India, and combined with normal growth of consumption in other industrialized countries around the world.This concept is covered a great deal in Thomas Freidmans books The World is Flat and Hot, Flat and Crowded.
The U.S. is also in the midst of an energetic presidential election season with presidential candidates John McCain and Barack Obama stating that they will support a cap-and-trade approach to reducing greenhouse gas (GHG) emissions in the U.S. Additionally, regulations (in Europe) and market forces are driving many companies to adopt extended producer responsibility and product stewardship practices, whereby they take back products they have produced for recycling.
What Does this Mean for Your Company?
The first thing to do is recognize that the costs of these inputs to a companys operations will likely continue to go up as demand continues to increase, creating more scarcity. Basic economic supply and demand principles are at work here. Additionally, it should be expected that there will be new costs on greenhouse gas emissions as cap-and-trade programs (or taxes) are implemented in the future and the caps are gradually lowered over time. These issues affect diverse industries such as transportation, manufacturing, retailing and even service companies, because all use the basic raw materials of oil, electricity and water either directly or indirectly in operations.
What to Do About This?
As individuals and employees, we probably feel there is something we should be doing in response to all of this. But in many cases, we are not sure where to start, because it seems so overwhelming.
The good news is that the problem of managing escalating costs of inputs and operations, as well as managing risks to the company is not unusual for companies to face, so businesses have well established ways to address this. The difference now is that costs are increasing for things that have been pretty negligible in the overall scheme of operations basically since the industrial revolution began.
In the book, Green to Gold, authors Daniel C. Esty and Andrew S. Winton outline many examples of well-known companies that have tackled these issues head on and been able to realize significant cost savings and risk reductions while improving customer loyalty and market share. These improvements have come from companies rethinking how they do many things, such as:
- Redesigning manufacturing processes and changing other company operations to reduce energy, greenhouse gas emissions and water consumption,
- Redesigning products and company operations to use fewer raw materials and produce less waste,
- Reusing what was formerly thought of as waste in other products or activities and
- Redesigning products so they can be recycled more easily and the parts can be reused in new or different products.
These kinds of changes can be fairly systemic to a company - affecting the activities of many functions and departments - and therefore require strategic initiatives from the top down.
What Does this Have to do with Business Intelligence and Performance Management?
Performance management describes the methodologies, metrics, processes and systems used to monitor and manage the business performance of an organization. Performance management programs will drive:
- Changes in the way company leadership definesstrategy and objectives,
- How achievement of these objectives is measured and
- Changes in the incentives for leaders and individual contributors to meet the corporate objectives.
Performance management programs leverage business intelligence (BI) solutions to provide the information needed in order to monitor performance. BI solutions provide the means to deliver the reports, analysis capabilities, dashboards and scorecards that companies use to monitor metrics and key performance indicators (KPIs), improve visibility to what is happening and enable better decisions to be made.
When companies are embarking on new green or sustainability initiatives or just plain old cost-reduction initiatives, its critical to put a measurement capability in place so that all stakeholders, internal and external, can see the trend of how they are doing as compared to the goals of the initiative.
For example, lets say you are a manufacturer who has set a corporate goal to reduce energy consumption. In order to do this effectively, you would want to monitor not just the top-level energy consumption of the company, but also things like energy consumption by: facility, number of employees at each facility and number of widgets produced.
If you work for a services company where the majority of the electricity spend is on things like offices and data centers, you might track things like: electricity consumption by the number of employees at each facility, the number of servers in the data center and the number of people that work from home (because this can help reduce office electricity consumption).
You will be better positioned to take action on the trends you see by defining and tracking metrics at the right level of detail and by tracking the things that are drivers of the top-level metrics your company is trying to affect. If your company already manages the business using regular performance management rhythms and BI solutions (like scorecards and dashboards), examine at how to add the data to support the metrics related to your sustainability and cost-reduction initiatives. If you dont already do this, you may want to consider developing a sustainability scorecard, which pulls all of these measures together and allows decision-makers to readily see how they are doing against their targets as well as enable them to take the appropriate actions to improve the numbers.
Now is the time to start these measurement actions, because changes are underway in the market and in government regulations that will force most companies to start paying attention to these things. If you are not doing this, there is a good chance your competitors are or will soon be - leaving you at a competitive disadvantage in the market.
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