How do you transform sustainable procurement strategy into standard business processes?

  • Author: Heinz-Gerd Peters
Posted on 28-01-2011

Sustainability at Deutsche TelekomA large number of companies have good ideas and have developed strategies on sustainable procurement; this is clear from benchmarking and workshops held within our own industry and across other industries. The problem for companies is quite often that these well formulated strategies are not, in fact, implemented in the real processes of procurement.

Much of the time procurement is still reduced to contracting based on price; this is the specific driver for success and procurement is monitored and also paid on this basis. Even quality aspects and the consequences of quality for the product life cycle are not usually considered by procurement but by the requesting department within the organisation. Often the requesting department is much more powerful than the procurement department; in some cases only the requesting department is the decisive factor in the purchasing process. Indeed, procurement is sometimes only involved in writing the purchase order, although this is sometimes in practice against existing company policies.

Under those circumstances a CSR department must cooperate with both procurement and the different requesting departments to implement sustainability needs in concrete purchasing processes and in the criteria for bid evaluation. This creates some challenges to be mastered.

First, the definition of the bid evaluation criteria. The same criteria will not apply to all the commodities considered. For example, there is a big difference between IT hardware and marketing; for IT hardware energy efficiency should be considered, and this is not really relevant for marketing.

Second, the weighting of sustainability within the bid process. In some cases it may make sense to weight sustainability more than in other cases; because some products or services may be more risky or important than others from a sustainability perspective.

Third, keeping in mind that procurement is normally monitored on the basis of costs, we can ask: what is the financial impact of weighting sustainability? Take the case of one supplier that offers a better price than a second supplier, but has a poor performance on sustainability; you may choose the second supplier because of the overall evaluation result. This will result in higher costs for the purchasing company. However, how do you measure the reduced risks by considering sustainability criteria; for example, the costs of researching alternative suppliers as a result of a crisis, and the communication and reputational risks of such a crisis?

Deutsche Telekom is embarking on a project to consider sustainability criteria within bid processes based on ten pilots across different commodities, in order to establish more detailed knowledge about the impacts of these criteria. This will be a complex and challenging project. However, there is no alternative if you really want to be a sustainable company, with more than just good ideas and standards such as supplier codes of conduct and social audits.

The next challenge for the near future will be the measurement of sustainability criteria. In addition we will have to think about different incentive systems for procurement people; and this may be an even harder challenge.

Dr Heinz-Gerd Peters is Head of Sustainable Development and Environment, Deutsche Telekom AG

What are the implications for public procurement of the Spending Review and sustainability requirements?

  • Author: Laurence Cranmer
Posted on 22-12-2010

SustainabilityProcurement across the UK Government and public sector is a significant part of the economy as a whole. Last year the Office of Government Commerce reported that, ‘The Public Sector spends around £220bn each year on procurement in over 44,000 organisations right across the UK in every sector that government operates. Public sector spend often constitutes a large percentage of a given supply market – often between 10% and 15% ’.

This scale of public procurement suggests that it can play a major role in at least two areas of government policy: to help find the £81 billion savings required by 2014-15; and, to support becoming what David Cameron described as ‘the greenest government ever’.

The recent Spending Review mentions procurement several times. It discusses, ‘a tough new efficiency regime, monitored and supported by the new Efficiency and Reform Group’. This will include as part of its work addressing the key findings of the recent Efficiency Review by Sir Philip Green to ensure that, ‘the Government is using its scale as effectively as possible in common areas of spending such as procurement, property and major contracts’.

The Spending Review also includes as one of its ‘Spending Challenges’, ‘a programme to centralise the procurement of commonly used goods and services, bringing efficiency gains of over £400 million a year’.

One example of the Government approach to sustainable procurement is the publication of the self-assessment ‘Flexible Framework’ that, ‘allows organisations to measure and monitor their progress on sustainable procurement over time’. The Framework is voluntary, although it includes some mandatory requirements.

The website for the Department for Environment, Farming and Rural Affairs (Defra) says that, ‘During these tough financial times, now more than ever, we need to be thinking about balancing environmental, social and economic needs’. In general it seems that Government considers spending reductions and sustainable procurement as complementary areas of policy.

There is much more to say on each of these issues. I will make a few comments.

Public procurement will be aiming to provide value for money as always, but will be looking to make substantial savings to contribute to Departmental spending reductions.

Departments will be seeking to establish collaborative procurement arrangements across Government in order to increase market leverage.

The move to greater centralisation of public procurement for some goods and services may need to be balanced against ‘big society’ ideas of greater local provision, including perhaps contracts with SMEs.

Suppliers will find they will need to meet both current and possibly increasing sustainability requirements, both directly and across their supply chains.

Departments, possibly acting collaboratively, may seek greater engagement and negotiation with suppliers, across all areas of procurement but in particular on costs and sustainability.

I am very interested to know what readers think about this brief sketch of these complex issues.

What are the implications of far reaching company wide sustainability plans?

  • Author: Laurence Cranmer
Posted on 06-12-2010

SustainabilityUnilever has just announced its ‘Sustainable Living Plan’. Their website states that, ‘Unilever unveils plan to decouple business growth from environmental impact’, which I think involves a very interesting and bold claim. The website also makes the more familiar but still significant claim that, ‘Our plan isn’t just the right thing to do for people and the environment. It’s also right for Unilever: the business case for integrating sustainability into our brands is clear’.

Reflecting on this announcement, it seems to suggest an approach to sustainability that seeks to cover the entire range of company activities in a single plan. Other similar plans include Proctor and Gamble’s ‘Sustainability Vision’ and Marks & Spencer’s ‘Plan A’. These whole company plans link multiple strands of sustainability together, and directly tackle all operational and supply chain activities. These plans also seem to aim, implicitly or explicitly, to ‘decouple business growth’ from ‘environmental impact’, as Unilever states. Developing and implementing plans on this scale suggests a number of features of the companies involved. I think some of these features are as follows:

  • The company is a significant agent in global society, including and beyond its commercial activities
  • This agency generates both substantial positive benefits for customers and for economic prosperity more widely, but also substantial negative environmental and social externalities
  • The company is able to act as a single agent, albeit in collaboration with stakeholders, to reduce these negative externalities very substantially, and in some cases to zero
  • To achieve this, the company is able to reduce impacts across it operations but also throughout the entire supply chain from raw materials, through to consumer use of products, and finally to disposal
  • There remains a sound business case for the plan that combines for example revenue opportunities, cost reduction, risk mitigation and brand reputation
  • At the same time, companies may have a global responsibility to act on these issues of sustainability beyond legal requirements and financial return

When considered together, these features of global companies raise both conceptual and practical questions. From a practical point of view we can ask, for example, whether new or improved processes and measures are required to manage supply chains to minimise or remove negative impacts on this scale. We can also ask how companies will translate whole company sustainability plans into positive brand reputation.

From a conceptual point of view we can ask some far reaching questions. For example, do companies in fact have a global responsibility to achieve minimal or zero negative externalities, even if this responsibility exceeds legal requirements and/or reduces financial return. Perhaps this becomes a responsibility for companies beyond a certain size or scale of negative impacts. Alternatively, is this responsibility fully discharged within a more traditional view of the company through responding to customer, investor or citizen preferences; this seems to be consistent with Unilever’s statement that, ‘the business case for integrating sustainability into our brands is clear’.

As company wide sustainability plans are implemented over time, it will be very interesting to see how these and other questions work out.

Can damage to your reputation be avoided when disaster taints your industry?

  • Author: Michael L. Barnett
Posted on 16-11-2010

CSR issues“Could it happen here? The environmental disaster that followed the blow-out of the Deepwater Horizon rig in the Gulf of Mexico has shown that deep-water drilling is indeed a hazardous activity. . . Like the big banks, big oil needs to be restrained.” – The Independent, 10 June 2010.

As BP is an oil company, its massive Gulf of Mexico oil spill has significant consequences for Shell, Exxon, and other oil firms. The tar ball that spread across the Gulf is also spreading across the oil industry, gumming up oil firms’ reputations and darkening their collective futures.

These types of situations, where events at one firm can damage the success and survival of entire industries, can be conceptualized as reputation commons problems, where the commons is a resource that is collectively owned and jointly used. Examples abound across a broad swath of industries, with the BP disaster as just the most recent. These sorts of problems arise because stakeholders of all kinds are unable or unwilling to separate the baby from the bathwater. We cannot pay attention to everything so we develop shortcuts to help us cope with a complex world. For example, in the case of banks we may say: I’ve heard bad things about banks; this is a bank; therefore, it is likely to be bad.

The implication of a reputation commons is that you cannot manage your firm’s reputation in isolation from your industry. Even though the eventual destruction of the commons will make all worse off, the dominant economic incentive for individuals to overexploit the commons is difficult to keep in check. The solution for many natural resource commons problems has been to privatize the commons. In an analogous fashion, the solution for an industry faced with a reputation commons problem is to erect what we have termed mental fences that parcel reputation into individual plots.

Consider the risk a firm faces by being in an industry with a few dozen firms, each with a five per cent chance of suffering a major crisis in the next year. If the actions of other firms reflect on all firms in the industry, then it becomes virtually certain that at some point the focal firm will suffer collateral damage. But if the firm can untangle itself from the reputation commons and stake out its own distinct reputation plot it can ameliorate this vulnerability to the acts of others.

Mental fences are built through information disclosure. Transparency, outreach and community involvement help to distinguish firms, making them more than generic players in an industry. This stands in contrast to the common tendency to hunker down. Don’t be a closed box. Most stakeholders, given other demands on their attention, will not take the trouble to look inside a closed box. But once their attention is drawn toward it as a result of an inevitable disaster, they will presume the worst about the unknown contents. It is better to establish transparent relationships in advance, when stakeholders are amenable to listening, and then to keep that relationship alive.

Interestingly, a mental fence built in isolation seems to be ineffective. If a firm does manage to distinguish itself from similar other firms in the eyes of stakeholders it still remains vulnerable to harm from the misdeeds of rivals if these rivals have not also built mental fences. The chemical industry recognized this after the Bhopal disaster and created the Responsible Care industry self-regulatory program, the primary code of which required all member firms to open their doors and closely interact with the community.

Given the massive damage inflicted on the Gulf region, it presently feels rather petty to focus on the welfare of industry in response to crisis. But perhaps an industry’s recognition and better management of their shared fate may decrease the likelihood of future disasters.

CSR Risk: Asking the Right Questions

  • Author: Fiona Donaldson
Posted on 29-10-2010

Corporate Social ResponsibilityMany individuals in the field of procurement and corporate responsibility will no doubt be aware that the last five years have seen a marked increase in the pressure on companies to take responsibility for the activities and actions of their suppliers. Most corporate sustainability reports will include brief sections on suppliers, however most companies are barely scratching the surface when it comes to the supply chain.

It is easy enough for a first-tier supplier to sign up to a “code of conduct” (an activity of debatable worth), complete self assessments and even audits to assure their customers of their dedication to managing corporate responsibility risk, but what about their suppliers and the suppliers of their suppliers, and so on to the nth degree.

The challenges for an organisation within this area of sub-tier management need to be addressed in a formal and methodical way to ensure understanding of product tracing and the overall supply-chain. What companies need to ask themselves is “where is the risk imported from?” and “How will these risks affect my brand identity and business continuity?”

Many organisations are unable to answer the fundamental question as to why they are trying to manage corporate responsibility risk in the supply chain. Ultimately the decision should be made based on the company’s understanding of (and commitment to) the required actions to ensure a responsible and sustainable method of conducting business inclusive of their suppliers’ actions rather than treating this as a tick-in-the-box activity.

Does it pay to be moderately socially responsible?

  • Author: Michael L. Barnett
Posted on 15-10-2010

CSR issuesIt is interesting to discover that “sort of nice guys” who engage in some socially responsible practices but do not fully commit to social responsibility finish last.

Rob Salomon (Stern School of Business, New York University) and I studied how variation in the level of social responsibility of firms and mutual funds related to their financial performance and found that those that were the least and most socially responsible did the best financially, while those that were moderately socially responsible did the worst financially.

The sort-of-nice guys suffered some of the costs of being socially responsible but did not do enough to earn the trust of stakeholders, which is the key driver of financial returns to social responsibility.  A half-hearted effort left them stuck in the middle, bogged down with the trappings of nicety but falling short of earning the rewards associated with sincerity.

We first looked at mutual funds that engage in socially responsible investing (SRI funds).  SRI funds “screen” the stocks for their portfolios according to certain social and environmental criteria.  Early studies that compared the financial performance of standard unscreened funds to SRI funds found mixed results, but more recent studies showed that SRI funds were financially outperforming unscreened funds.

However, critics pointed out that SRI funds had begun to perform well financially only because they had also begun to sacrifice social responsibility; that is, they had significantly loosened their screens and become indistinguishable from standard funds.

To address this we took into account variation in the screening practices of SRI funds. We posited that as SRI funds tighten their screening practices, they lose their ability to diversify, often excluding entire sectors.  This imposes a straightforward cost. However, though SRI funds select from a restricted pot, as they screen more intensely it becomes an ever richer pot, ever more likely to be full of stocks of firms that are stable and profitable because they have earned stakeholder trust, and less likely to contain the stocks of those firms that are socially irresponsible and so more prone to future crises.

We tested this hypothesis on all the SRI funds listed in the US from their inception through the year 2000 and found that a curvilinear relationship between screening intensity and financial performance – a sort of smile, graphically – emerged. We found that those who used only one of the twelve social screens did well financially, and as funds used more and more, they did worse financially, until they hit the lowest point of financial performance at just over six screens.  Thereafter, financial performance turned back up, increasing with additional social screening.

More recently, we studied this relationship at the firm level.  Again, we found a U-shaped relationship, with those firms rated as the least socially responsible and the most socially responsible having the highest financial performance, while those firms deemed moderately socially responsible had the lowest financial performance. But in this firm-level study, we found a significant upturn, such that those firms that were the most socially responsible did the best financially.  It appears to take sustained involvement in social responsibility to be believable, and so trusted, by stakeholders.   Don’t stop at the half-way point on your journey.

Michael L. Barnett is a Professor of Strategy, Saïd Business School, University of Oxford

Are corporate objectives on sustainability and cost improvement complementary or mutually exclusive?

  • Author: Laurence Cranmer
Posted on 28-09-2010

SustainabilityCompanies engaged in implementing sustainability requirements of every kind are confronted by an interesting convergence of ‘practical’ and ‘ethical’ issues. Implementing sustainability necessitates overcoming practical issues, but at the same time, the idea of sustainability raises questions about the principles that establish the boundaries of what the business is responsible for, clearly an ‘ethical’ issue.

I think that ‘practical’ issues raise ‘ethical’ issues – the two are inextricably linked, and the distinction between the two is not as sharp as it first appears. However, for companies, I think this suggests an important distinction: practical issues can be addressed within the broadly accepted current responsibilities of the business; whereas ethical issues may raise questions about these responsibilities, potentially for the business itself and as part of the wider public policy debate.

The idea that applying sustainability requirements may produce cost savings suggests an interesting overlap between practical and ethical issues as they confront the business. If companies both reduce costs and become more sustainable, they can combine an improvement that falls within current responsibilities for improving efficiency to increase overall financial return, and meet a requirement that may fall outside of these responsibilities as defined by current legal and regulatory requirements.

This overlap may become apparent as organisations analyse the procurement environment that confronts them. For example, supply chain analysis involves the systematic mapping of the supply network and the identification of cost drivers, value adding activities and non-value adding activities. The same map can be used to identify the environmental and social impacts of activities across the supply chain and analyse the links between, for example, waste as a cost driver and as an environmental impact.

Empirical research on labour standards in two of Nike’s garment suppliers in Mexico may also suggest this overlap. Research conducted by Richard Locke and Monica Romis from the MIT Sloan School of Management provides a ‘structured comparison of two plants, both located in the same country, producing the same products, and subject to the same code of conduct and monitoring practices’. The authors argue that, ‘through reorganizing the production system and adopting a variety of employment practices, [one plant] could improve labour standards and business outcomes at the same time’.

These examples suggest that cost savings and sustainability requirements may be complementary rather than in conflict at a practical level for the business. Working through these practical issues may of course raise more complex ethical questions about where the responsibilities of companies lie across all operations, including procurement, either at a business level or at the level of public policy. These responsibilities may include sustainability requirements that increase costs at least in the short term.

Laurence Cranmer is a member of the Oxford-Achilles Working Group on Corporate Social Responsibility and Associate Fellow, Saïd Business School, University of Oxford

Why measuring Social Responsibility Performance counts

  • Author: Paul McNeillis
Posted on 11-05-2010

Just when does a Social Responsibility initiative become material? In my view, it’s when it can be measured. If real performance on social issues is to become the norm for all mainstream corporations, then we need to fill out our success stories with clear measures of success.

Companies have some great stories about advancing human rights. I was at a sustainability conference in Chicago recently and I heard impressive stories from two companies (making chocolate and home products respectively) who had each engaged strongly with their suppliers in Africa. In both cases their teams had gone to the territory and over a sustained period started a real dialogue with the communities around their supply chains to understand the challenges they faced. They heard from the next generation farmers with no incentive to follow their parents, they heard about unscrupulous middle-men cutting out their profits, and they saw uncontrolled mining activities encroaching on prime farming land. By tackling these issues together with their suppliers they strengthened the capacity of their suppliers to sustain their communities, to advance their rights, and to be more productive.

The companies gained a host of benefits including maintaining long term security of supply, developing their people, and building their corporate reputation. Success stories like these are compelling, at least to a conference audience, because people can relate strongly to a simple human story with challenges and victories. But is it enough to influence mainstream senior management teams in less progressive companies?

I was struck by the contrast between these narrative accounts and the many presentations from those focussing on the environmental side. These speakers had more numbers than a maths class flowing from their presentations. This many millions of tonnes of carbon were saved by moving from air-freight to shipping, that many percent more items were shipped by redesigning packaging and that many tonnes of waste were saved by reduction initiatives. The conference audience certainly appreciated the insights, the innovations and the achievements. Moreover you got the sense that within these companies the senior teams had quickly appreciated the financial benefits of these projects as carbon or waste savings translated straight into cash savings albeit often with some capital investment. These environmental initiatives were ‘no brainer’ best practices available and applicable to all, whereas the social initiatives, without the compelling numbers behind them, started to look like the more risky, ‘pioneering’ moves of the few.

Also the environmental performance improvements could quickly be reckoned as percentages of overall business activity and therefore the materiality of the improvements demonstrated to any sceptics. In contrast the unmeasured social initiatives, although in these particular cases large in scale, had no way of differentiating from token initiatives or occasional philanthropy. So, just when does a social initiative become material?

The triple bottom line says that the three pillars of economic, environmental and social performance are all vital to a sustainable business. Environmental managers are mastering the measurement tools to submit the business cases, mobilise resources and deliver measured benefits. But what about those who are trying to champion social benefits? Where they are part of a receptive culture they get support from the leaders of their companies who often act because ‘it’s the right thing to do’. But if progress on social issues is to be achieved within mainstream corporations, then success stories need to be made more tangible, and that can only happen by applying clear measures of success.

I would like to hear your views and experiences on the measurement of human rights and social responsibility performance. Please comment…

Beware procurement’s Black Swan

  • Author: Paul McNeillis
Posted on 05-01-2010

No company ever truly got hurt by a supply chain scandal, or so says conventional wisdom.  And there is evidence that may appear to support this: Mattel came under the spotlight in 2007 when their toys were subject to a series of product recalls in a toy safety story that simply refused to go away. The events escalated and reverberated around the business and political sphere culminating in the tragic suicide of the manager of a supplier company in China. A recent case study by the Oxford-Achilles Working Group on CSR goes into the public and the private stories of that complex case to give valuable lessons learned (http://www.sbs.ox.ac.uk/achilles/). However, the bottom line questions remain: Did the share price plummet? Did the brand value drop? Did sales fall long term? No.

However, things could be changing. A year ago the Norwegian national telephone company, Telenor, was caught up in a scenario that may be the shape of things to come: A factory in Bangladesh supplying the company had two deaths and audits revealed the use of child labour. That same factory was linked to them by a joint venture with Grameen phones, headed by microfinance, Nobel Prize winner Mohammed Yunnus.  The two parties split with some heated mutual criticism and sustained media pressure on Telenor ensued. The debacle came close to causing Telenor real damage.

Brands are as vulnerable as they are valuable, as high street jeweller Ratner famously found to his cost in the classic incident in 1991 when he made a single supposedly light hearted speech denigrating his ‘affordable’ stock as “total crap”. The comment virtually destroyed the brand overnight and wiped £500million off the company’s value.

If such damage is possible to national brands, could a global giant be next? Why do they seem immune when there are so many risk factors and so many stakeholders watching? The answer may lie in the metaphor of the Black Swan created by Nassim Nicholas Taleb in his 2007 book The Black Swan. Taleb argues that almost all major scientific discoveries, historical events, and artistic accomplishments were as rare as “black swans”—undirected and unpredicted phenomenon which then came to pass. He drew an analogy in finance by arguing that banks and trading firms are highly vulnerable to hazardous Black Swan events because they fail to contemplate scenarios which could in fact be predicted. Similarly, within supply chains we start every day with a business as usual mentality that fails to spot the dangerous scenarios. There seems a reluctance to plan for that Black Swan – an unexpected, but in hindsight entirely predictable event.

In procurement the foundations for a major brand destroying scandal are already laid: NGO’s active for many years produce sophisticated and sustained critiques that cannot be brushed aside by clever PR. Consumers de-sensitised for years are starting to be presented with real choice in the market as leaders pull away from laggards and make corporate responsibility a strategic advantage. Above all else, the bottom line in global supply chains is that too little is actually really happening to prevent a Black Swan event. CSR initiatives led by small teams are not getting traction yet in procurement departments.

The scale of benefit realised by moving to low cost countries is enormous, however, scratch the surface and the investment in responsible supply chain initiatives is tiny. Only a few industry wide initiatives are really starting to pull together a global effort of sufficient scale to address the issues in a serious manner.

Put together these ingredients and the ‘unlikely’ event of a real supply chain scandal – one with devastating results – seems as plausible as the now widespread analogy of the Black Swan. It’s time procurement professionals woke up to these predictable dangers and started working with each other in cross-industry initiatives, with their colleagues in CSR and on producing change on a meaningful scale that makes an impact in the real world. Only then can they say ‘we’ve seen the black swan coming and we’re ready for it’.

Paul McNeillis is CSR Director at Achilles