Managers who keep their minds open to using the right tools will have the greatest success in sustainability improvements.
-Peter T. Hock, Senior Director, Continuous Improvement, ConAgra Foods
Picture Kermit the Frog singing “It’s Not Easy Being Green.” Head down and moping, he laments a life that fades in comparison to lively, bright and colorful creatures. But soon he perks up when he sings about the admirable and majestic things that are green. It’s only a sweet children’s song, but it strikes a chord in many people working to improve their company’s sustainability. We know sustainable business is a laudable goal, but it’s not easy to bring about the changes needed to make it happen. Once the slam-dunk sustainability projects are tackled, growth and productivity projects often win the competition for investment funds. The good news is, we can take a hint from Kermit: With a little shift in mind set, the green outlook gets a lot brighter.
In the ‘70s, many companies viewed sustainability topics mainly as issues concerning business reputation and community relations. In the ‘80s, energy price shocks had a widespread impact throughout manufacturing and service value chains, raising broad awareness and concern for sustainability. In recent decades, greenhouse gas debates and man-made disasters added to the pressure as the internet increased the level of companies’ exposure.
As a result, business-to-business relationships and non-government organizations place increasing pressure on companies to adopt sustainable business practices. Today, sustainability is often embedded in corporate values and strategies, and is seen as a critical factor in top- and bottom-line business performance. Companies are using sustainability initiatives to drive efficiency, and are developing innovative green product offerings to gain a differential advantage in competitive markets. Walmart is a very good example of how sustainability has emerged within a business and upward through the value chain.
It wasn’t so long ago that Walmart expanded its supplier profiles to include commentary on suppliers’ sustainability. In the ensuing years, Walmart established metrics to track its sustainability performance in stores and through its distribution network. Now, Walmart has a carefully structured, multi-faceted sustainability strategy that is an integral element of its business model. Internal operations and supplier relationships are managed to deliver measurable sustainability performance to satisfy its customers, its shareholders, and the communities and countries where it does business.
Walmart is not alone. In the packaged food industry, big players like ConAgra Foods, Kraft and General Mills have moved very thoughtfully to develop sustainability objectives, strategies and metrics, and have incorporated them as key elements of corporate citizenship. They are driving significant improvements through their sustainability strategies.
In contrast, other food companies have taken a very pragmatic approach in solving the growing pressure for sustainability. These companies attempt to deliver sustainability results through a series of focused projects. It’s an attractive path to take, since most companies have a wealth of opportunities to reduce energy and water usage, minimize waste generation and improve the sustainability attributes of their product and service offerings.
Sustainability improvements can be obtained a number of ways: by changing the way employees behave, by changing the technology the employees operate or through a mixture of both. For example, companies can encourage employees to reduce energy usage by turning out the lights when they leave the room, they can install motion-sensitive lighting controls, or they can do a combination of both.
Reactive, pragmatic managers often prefer technical solutions. Implementing a capital project follows a known, reliable process. Costs and results are reasonably predictable, and the project can be scoped to ensure the impact is substantial. On the other hand, behavioral solutions are by no means plug-and-play. With many grey areas that must be managed, they are often perceived as difficult to implement. Business advisors offer a wide variety of approaches to change management, to the extent many managers are uncertain how to get started. Results for behavioral projects aren’t based on engineering calculations; they are based on target setting. Results are seen as uncertain because improvements may be lost if behaviors revert to prior habits. The pragmatic manager will tend to stay in the comfort zone—capital processes that deliver proven results.
Figure 1 describes the typical process flow for pragmatic sustainability project deployment. In a nutshell, pick an area for sustainability improvement, find a promising technology solution, develop a project plan, determine the project return, gain investment approval and then make it happen. Repeat when necessary. This project-based approach has several shortcomings: It provides no path for long-term improvement, it misses the boat on behavioral solutions, and it may result in wasted effort and lost opportunity.
Most companies quickly find sustainable technology opportunities that provide lucrative returns, the proverbial low-hanging fruit. However, after the early wins, managers may find it increasingly difficult to identify technology options that promise the return on investment their company needs. Ultimately, lack of suitable technology options will force managers to consider behavioral solutions.
In large companies with multiple locations, a non-strategic, project-based approach to sustainability improvement will most likely rely on local managers to find and propose technology projects. These isolated initiatives may result in redundant effort and failure to take advantage of opportunities for scale or reapplication.
Lack of a central strategy may also be accompanied by a lack of rigor in project development. Unless leaders set expectations that local sustainability technology project proposals include thorough problem analysis and evaluation of alternatives, these steps are likely to be skipped. With a technical solution already in hand, and no push to drill further, busy managers will follow the path of least resistance and forego the extra work. In these circumstances, the company is at risk for opportunity loss, in that the project proposal may not present the optimum solution. This would also represent a loss of opportunity to advance the manager’s and company’s technical knowledge.
Some of these pitfalls can be resolved if the company begins its sustainability journey with a clear vision, specific priorities and measurable objectives. Figure 2 identifies this important front-end leadership effort. It starts with a review or update of the company’s mission, business model and strategy. In this step, leaders refresh their knowledge of the reason why the company exists, and what it needs to accomplish to succeed. No strategy review is complete without considering stakeholder expectations, including customers, investors, employees, communities and many other interested parties. While most businesses engage in a periodic review of its mission and strategies, the difference here is that sustainability risks and opportunities are woven into the discussion. This enables leaders to formulate sustainability objectives and goals in alignment with the company mission, in support of business success and in harmony with other strategic initiatives.
After gaining a firm grasp of the company values and needs, the next step is to measure and assess the company’s current sustainability performance. The objective here is to identify the points of maximum leverage and highest-value opportunities to align the company’s sustainability performance to stakeholders’ needs.
Sustainability can be measured in many ways. Each company must select the measures that are most meaningful for its processes and its stakeholders. It also is helpful to determine which metrics should be used occasionally for benchmarking and study, and which metrics will be used for regular and frequent business reporting and analysis. For the latter, most companies find it practical to select a small handful. Once these sustainability metrics are chosen, leaders must educate employees on the principles, standards and definitions for the metrics. For instance, a metric like kilowatt hours per pound would seem to be easily understood, but if managers do not communicate clear definitions for which pounds are to be counted, a variety of approaches are possible (e.g., raw material pounds consumed, finished product net weight or total shipment weight). EPA Energy Star and other programs are good sources for metric definitions and standards.
After the sustainability metrics are scoped and defined, companies often have much of the data they need to understand baseline performance in energy and water usage, waste generation and disposal. A vast majority of S&P 500 companies report their carbon strategy to the Carbon Disclosure Project. However, companies that have not been active in carbon footprint and lifecycle sustainability analysis will need to devote significant effort to set up definitions and standards, and to establish data collection and reporting processes.
In addition to internal measures, many companies seek insight through external benchmarking. Data from public utilities, environmental non-government organizations and industry consortia may shed light on sustainability opportunities and strategies.
A well-executed sustainability performance baseline should highlight a small handful of prime opportunities for founding a sustainability strategy. Borrowing a tool from the continuous improvement canon, companies may use “opportunity radar” to evaluate options. Figure 3 provides an example, where sustainability options are evaluated based on their potential impact, compared to project complexity and cost. Once leaders identify the best-value options, the effort then turns to setting priorities and measurable improvement targets.
As a final step to enable the organization to address all the shortcomings of the pragmatic project-by-project approach, we need to expand the process to allow for behavioral solutions and organizational learning. Readers who look closely at the opportunity radar in Figure 3 will note the options include both capital and behavioral initiatives. Contrary to the anxieties of the technology-minded manager, behavioral options offer low-cost, high-impact means to achieve sustainability improvements. In addition, whether we deploy behavioral or technical solutions, a great deal of gain can be made through the promotion of organizational learning. By building knowledge of alternatives and methods, as well as learning through project deployment and reapplication, companies strengthen their ability to plan and deliver successful sustainability initiatives. The idea is to turn a stop-and-go series of one-off projects into a strategic, programmatic approach that exploits the best value options among all viable alternatives. Figure 4 outlines the program approach to sustainability strategy development and deployment. In the balance of this article, we’ll cover sustainability behavioral options in more detail, and then discuss some nuances of capital project evaluation and decision criteria.
Managers who keep their minds open to using the right tool for the job will have the greatest success in sustainability improvements. Some solutions cannot be accomplished without significant capital investment—for example, thermal recovery or waste-to-energy projects. But since water usually has a very low unit cost, capital projects aimed at water usage reduction may have very poor returns, and so non-capital and behavioral solutions are preferable. Table 1 (see page 56) provides a quick look at typical capital and behavioral alternatives to sustainability improvement.
Sustainability behavior solutions are not hard to implement; they just take a different set of skills and processes than those required to deploy a capital solution. According to Jeff Erwin, operations manager at ConAgra Food’s Marion, OH plant, “Any company that has a successful safety improvement program has the skills and the employee engagement needed to achieve sustainability success.” ConAgra Food’s Marion plant now saves over 3.6 million kWh of electricity per year through behavior-based activities alone. These include line shutdown and power-up procedures, ambient temperature moderation and an employee-led process to find and fix compressed air leaks. This process has enabled the Marion plant to reduce air compressor horsepower requirements by 40 percent. As a note of caution, organizations that do not have safety improvement and workplace housekeeping (5S) processes in place may not have fertile grounds for planting the seeds of lasting sustainability behavior changes. Safety improvement and 5S processes establish a foundation of trust, empowerment and pride of ownership that is critical to the success of all other behavior-based improvement activities. ConAgra Foods facilities have adapted and reapplied safety and continuous improvement processes to deliver sustainability results. The key steps in the process are:
- Establish associate teams
- Provide time and space for regular team meetings and activities
- Encourage associates to think independently; empower them to make decisions
Nurture, teach and trust
- Support teams with training on leadership, time management, meeting facilitation problem solving, etc.
- Show teams how to use a project charter to ensure alignment on objectives, measures, deliverables, timing and resources
- Be transparent about funding limitations and resourcing decision processes
- Celebrate efforts and achievements
- Share best practices and seek opportunities to reapply.
ConAgra Foods uses Galbraith’s star model and Hiatt’s ADKAR model as valuable thought guides to help plan for lasting organizational change. Communication, recognition and rewards are especially critical to ensure behavioral changes become natural habits engrained into associates’ daily activities.
In addition to locally led team sponsorship and nurturing, ConAgra Foods showcases the most impactful and innovative ideas in its annual Sustainable Development Awards. Each year, these events provide recognition for the teams who had the greatest success in delivering sustainability improvement through technical and behavioral projects. The 2012 awards recognized projects that reduced carbon emissions by 43,600 metric tons, eliminated 61,000 tons of landfill waste, conserved 295 million gallons of water and saved over $28 million.
These events also serve as a springboard for reapplication. ConAgra Foods’ Chef Boyardee canning plant in Milton, PA won a sustainability award in 2010 for applying a ceramic coating to the exteriors of its can cookers. This low-tech, low-cost project reduced steam requirements, while also improving employee safety and comfort. In the past two years, these savings have multiplied by instituting similar projects in four additional facilities.
Determining project payback
The right-hand branch in Figure 4 shows effective methods for determining project payback and common frameworks for investment decisions. Managers must build a project justification by forecasting cash outlay and net savings, calculating the cash return on investment using a financial model.
Project outlays are usually easy to predict and quantify. They include capital purchases and project expenses, less any rebates, credits and incentives offered by vendors, taxing authorities or public utilities. Incentives, rebates and credits often make a significant difference in the attractiveness of sustainability projects.
Forecasting savings requires careful attention. Most projects have both primary and secondary impacts. Primary impacts include savings for energy and water usage and scrap disposal, less any projected expense increases. These are usually easy to quantify; however, there are some fine points worth noting:
- Energy savings: Predicting future energy prices is no easy task. There is no simple index on which to rely. NYMEX energy futures contracts would seem to be an obvious answer, but it’s not that simple. NYMEX futures reflect the current consensus on price trends, but consensus changes with each new development in the geopolitical arena. What looks like a good bet on one day may look bad the next, as new information surfaces about global supply, political events, armed conflicts and economic forecasts. Companies that engage in energy hedging create sophisticated probability calculations based on futures contracts at multiple maturity points. These companies may use their hedge analysis for calculating savings for gas and oil projects. Companies that do not have a hedging program often choose to calculate all future savings based on current prices, and provide sensitivity analysis of the possible impact of energy price changes.
- Water usage and effluent reductions: Water sustainability technology is often difficult to justify, since water has very low unit cost. Unless effluent discharge fees are prohibitive, fines are imminent, or production is threatened with curtailment, existing facilities usually rely on minor piping modifications and behavioral solutions. Facilities that need to address effluent volume and quality must do so in close communication with the local sewage district. Very often, a few high-volume discharge (HVD) sources make up a significant portion of a district’s revenue. A significant reduction in discharge from an HVD source may undermine the district’s revenue base, and the district may have no other recourse but to raise the HVD’s rates to make up for the loss of volume.
- Secondary Impacts: An LED lighting upgrade project has a primary objective of reducing electricity usage. As a secondary benefit, the LED units have significantly longer lives and, therefore, lower maintenance costs. As another example, boiler upgrades to save energy may also have a secondary benefit of more consistent and reliable hot water availability. Higher water temperature and pressure may enable improved sanitation cycles, reduced downtime and increased productivity. However, when it comes to project justification, managers may be reluctant to commit to anything more than savings they are comfortable they can measure and deliver. Some managers may cite soft benefits such as improved corporate image and consumer perceptions, but this won’t be reflected in the financial justification for a project.
Financial modeling and investment decision criteria
Most companies have a standard method for calculating project cash flows and return on investment. These models often look at financial return in several ways, for example, net present value, internal rate of return, payback (in years), etc. Whatever the measure, once a company has already deployed projects against its most lucrative sustainability opportunities, it will reach a point where further sustainability initiatives fare poorly when compared to revenue growth and productivity improvement projects. To address this, some companies that have developed a sustainability strategy have also adapted their investment decision criteria to support deployment of their strategy.
- Risk vs. return: Most companies assign a hurdle rate as a means to eliminate unattractive projects and then allocate limited funds to those with the highest return. This approach often favors bold revenue growth and productivity improvement projects. It also ignores risk. Some companies now employ a portfolio approach to capital investment decisions, evaluating projects in terms of return and risk. The portfolio approach may open the door for investment in sustainability projects whose high up-front costs bring a steady, reliable stream of long-term savings. This is akin to diversifying an investment portfolio to include CDs and money market funds.
- Strategic earmarks: Companies that have made a public commitment to sustainability improvement will demonstrate leadership resolve by committing a portion of the annual capital budget to sustainability projects. In this environment, sustainability projects still must compete for scarce funds, but in effect, they play in a separate league.
- Showcase projects and add-ons: From time to time, companies commit to bold strategic investments, such as launching a new product line, expanding to a new region or adding a significant new production system. These are prime opportunities to capture favorable media exposure. Leadership may choose to incorporate sustainability elements to these projects, capitalizing on a unique opportunity to influence stakeholder perceptions. Showcase project scope may be expanded to include state-of-the-art energy and water systems, and perhaps LEED certification. By the same token, leadership may choose to take incremental steps by inserting sustainability improvements to revenue or productivity projects, if the projects are strong enough to carry the additional investment. This is, in effect, a stealthy approach to earmarking.
It’s not easy being green. Pure effort won’t assure results. But as ConAgra Foods has demonstrated, success can be attained through strategic thinking, organizational commitment and careful selection and deployment of solutions.