Durban makes adaptation a priority for business

The Durban Platform agreement on climate change has been welcomed, if only because expectations were so low.  Of course, it is just an agreement to agree something by 2015, and to do whatever is agreed by 2020.  But is this just a bit of political positioning, or does it hold important messages for businesses in the UK?

Floods in Thailand wreaked havoc on supply chains

Durban is an important “heads up” for businesses all over the world.  Some countries not previously committed to emissions reductions under Kyoto have now said they will definitely agree something in the next few years – including China, the world’sbiggest emitter.  For energy-intensive businesses competing head on with companies in developing countries, this may be good news.   For those firms in countries that will now have to commit, it may sound worrying.  However reducing energy intensity is good business – and because the change is some way off, those companies have an excellent opportunity to invest thoughtfully now, save money, and be ready for 2020.

In Europe, emissions are already regulated, and governments are using grants, taxes, and other powers to encourage industries to become more efficient.  Does this mean that there will be no particular change for firms in the UK and on the continent?

The biggest news for companies here (and big-ish news for firms everywhere) is that global emissions are likely to keep rising for some time.  A view from a growing number of experts suggests that this means we might face a narrower set of options by 2020: either to cut emissions much more dramatically than if we started now, and at enormous cost, or to risk temperature increases of greater than 2C.

On the assumption that the world will not opt for dramatic, extremely expensive emissions cuts, firms face an imperative to work now on adaptation, even though the exact impacts of 2C+ warming, and their timings, are still uncertain.  There are a number of tactics companies will be pursuing to mitigate the risk of more frequent extreme weather events and their impacts.  For example, some will relocate facilities away from areas at risk of floods and hurricanes.  Others may invest further in back-up solutions to deal with everything from power failures, to transport shut-downs, to extensive supply chain disruptions.

If your firm has an emergency planning process, now is the time to make sure it covers all the predicted impacts of climate change for your region, with an understanding of the potential severity and likely timescales involved.  If you have no such process, it is more urgent than ever that you get started.  Adaptation to an environment of growing risks is now a clear priority for business.

Which retailers are most efficient?

Retailers are under considerable margin pressure, so you would expect them to take any measures possible to reduce cost.  Much work has focussed on labour productivity, or getting more sales per staff person, for example by introducing self-checkout.  However there is still much to be done on resource productivity.

A recent data set on leading retailers’ greenhouse gas emissions, sales, and employee numbers shows a wide variation in labour productivity and sustainability.  Interestingly, the most labour efficient retailers are also the most emissions efficient – no company is just “green” or solely focussed on automation or scale.

CVS (a pharmacy retailer) and Costco (a warehouse club) exceed their peers on both measures, but amongst the others there are some interesting differences.  Walmart and Tesco do not achieve the labour productivity of Kroger (a leading US supermarket), but both are significantly more efficient on greenhouse gas emissions.  This is probably no accident – both Walmart and Tesco have made bigger commitments to reducing emissions.  

Tesco aimed to reduce energy use by 50% from 2000 to 2010, versus Kroger’s target of a 30% reduction over the same period.  Walmart gave themselves just 4 years to achieve a 30% reduction (from 2005-2009), and they aspire to supply their stores with 100% renewable energy.

There are big savings for retailers who make efficiency their priority.  Improved lighting systems, daylighting, energy controls, heat recovery, behavioural change, and many other approaches can reduce costs significantly, often with a 2-3 year payback period.  For any firm in the retail sector, sustainability in terms of a reduced carbon footprint should have a leading role in their effort to thrive in these challenging times.

Why your waste costs 20 times more than you think

Waste disposal costs are rising.  Heightened attention is being turned to dealing with it cost-effectively, diverting it from landfill and getting the best possible income stream from recycling or re-using it.  This attention to waste is a good thing.  We want to reduce the cost of it, to make our businesses more competitive.  However the truth is that most managers are missing 95% of the cost of their waste.  If your facility’s waste costs were 20 times higher than you thought, what action would you take?

The answer is obvious – you would stop trying to maximise the recycling and re-use value of your waste stream.  Instead, you’d try to stop producing it in the first place.

Let’s look at a hypothetical manufacturing company[i].  Imagine a firm that produces high quality ready meals.  Our firm has operating costs of £50 million a year, and runs two shifts a day.  They produce 500 tonnes of waste per year, and it costs them £100 per tonne to dispose of it (fees and handling costs).  So this firm believes that its cost of waste is £50,000 per year.  This is significant enough to get attention, but at just 0.1% of total cost, it is not the highest priority.

Now, imagine that each day, an average of 10 minutes of each 8-hour shift produces waste.  This takes two main forms: 

• Occasional quality failures (e.g. too little product in one tub, or a run with wrong dates)
• Planned waste, while a new run is started, and the machines are adjusted to get the machines aligned perfectly

So for an average of 20 minutes per day (10 minutes for each of two shifts), the facility is producing waste.  That’s roughly 2% of a 16 hour day.  In other words, 2% of the operational time, and therefore 2% of the operational cost (electricity, people, facilities costs, materials, etc) is waste.  In a facility that costs £50 million per year to run, that’s a cost of £1 million, spent on producing product that will never be sold.

This is just a hypothetical example.  Is it typical?  In fact, this is close to the average for the UK economy as a whole.  As I’ve reported elsewhere, DEFRA estimates there are £23 billion of resource efficiency savings with a year payback or less, just waiting for firms to take advantage of them – about 1.6% of GDP.

A million pounds of a £50 million budget is a substantial sum – it could be better spent holding off the next round of unwanted redundancies, investing in new capital equipment, or developing new products.  If this were your firm, wouldn’t you do whatever you could to stop the waste?

So... just how much of your operational time each day is spent producing waste?

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[i] This could apply just as well to a service company.  For example, in a call centre, it might include outbound calls to wrong numbers, and times when the computers or phone lines are down.

Do more with less – and save £23 billion

That, at least, is the conclusion of a DEFRA study published in March.  It found that for very little cost, UK businesses could produce just as much as they do today, while saving £23 billion in costs.

Given our current economic troubles, it is surprising that this hasn’t been headline news.  The topic is called “resource efficiency.”  The UK government has been trying to encourage firms to improve their resource efficiency by providing advice and grants, and even the European Commission has urged firms on, claiming that “Increasing resource efficiency will be key to securing growth and jobs”.

These claims are entirely realistic.  There are multitudes of case studies available through government agencies and in business school texts, and of course many cases have never been documented.  Just tackling the production of waste products alone – without considering any other efficiency savings – could produce big savings to the bottom line.

The fact is that the funding interventions from the government have so far been very small – less than £100 million per year of the Business Resource Efficiency and Waste scheme.  However, they indicate big potential – every £1 spent by the government achieved an average £1.64 in additional sales and £3.20 in cost savings – and those are the benefits in just one year.  Unfortunately, the budgets for this work are now being cut.

As the ENDS Report has observed, “government will have to depend on businesses stepping up their own efforts independently, without relying on public funds for advice and support.”  Increasing landfill taxes are meant to encourage firms to address their inefficiencies, but waste handling costs represent only a tiny fraction of the true cost of waste.  Moreover, there are many more inefficiencies that have nothing to do with the waste stream.

When so many companies have tackled their waste stream, why have so few put the same energy into efficiencies – that is, into not producing the waste in the first place?  It’s often no one’s job – we assume our employees will identify and eliminate waste if they can, but no one is tasked or measured on this.  And why not?  Well – since the cost of producing waste, or working inefficiently, is almost never measured, those in charge don’t realise it deserves an explicit place in their management structure.

For those companies that grasp the opportunities in resource efficiency, the prize will be higher profits, greater security, and growth.  The government will no longer take the lead, though it is a wonder that it was ever necessary.  Given the size of the prize, it is time more firms put resource efficiency on the CEO’s agenda.

Why your business customers want you to cut carbon

Recent research from The Carbon Trust reveals a potentially unsettling truth for the B2B market: multinationals are not just addressing their own greenhouse gas emissions.  They are also increasingly including carbon in their selection criteria for suppliers.  Within three years, the vast majority will do so – only 10% say otherwise.

Why this move – is it part of these multinationals’ attempts to look green?  The report ascribes the trend to “shareholder pressure”.  Are these shareholders investing in an increasingly ethical way, or are they looking for financial value?  I would suggest the latter - in other words, this isn't a fad.  It's part of a trend towards shareholders actively looking after the value of their investments.  Suppliers should take note.

It is not only shareholders who know that low carbon can translate into good value.  Sourcing professionals look for signs of quality and efficiency to ensure that they are getting the best goods at the best price.  Low carbon emissions signal efficiency – that a supplier is using less inputs for the same output.  That will translate into a sustainably lower cost structure, from which the buyer hopes to benefit.  Multinationals are sourcing low carbon because it’s often cheaper, and is likely to get even more competitive if fossil fuel costs rise further.  Shareholders and management want to know that their companies are managing for value.

A quote from Chris Harrop of Marshalls plc is particularly revealing: “By choosing suppliers of responsibly sourced goods not only do we cut carbon emissions but invariably there are cost and efficiency gains to be had, which all adds up to a strong competitive advantage.”  Perhaps it’s nice to be green, but it’s good business to be cost competitive, and paying attention to carbon in the value chain helps firms solidify this advantage.

So, suppliers now have another reason to address emissions, if cost competitiveness itself were not enough.  Multinationals will be expecting suppliers to report on, and compete on, greenhouse gas emissions.   Their suppliers will be asking the same questions right down the supply chain.  If your business customers are not already asking you to reveal to your carbon footprint, they soon will.

Carbon offsets vs carbon reduction – which is the better investment?

Carbon prices are at an all time low.  What does this mean – and should a business thinking of buying carbon offsets be worried about investing in them?

Carbon offsets are purchased by individuals or firms to offset the emissions they produce in their activities.  The emissions aren’t being taken away of course; the idea here is that somewhere in the world, a project to reduce emissions by the equivalent amount will go forward because this money has been granted to it.  That is supposed to put the project into the black – the UN will only approve offsets if the project would not be financially viable without the money the offset brings in.

Offsets can include landfill methane power generation. Photo: D'Arcy Norman /
Creative commons

The problem right now is that offsets are in low demand, at least partly as a result of the recession.  At the same time, supply of offsets is rising, as more and more projects are approved by the UN.  There is no shortage of companies willing to propose projects, but at current prices, most of these will barely cover their costs.   High supply and low demand have made this one of the worst performing commodities this year.

However, this is not a problem for the buyers of offsets.  In fact, if you are buying in order to become carbon neutral, it has never been cheaper to do so.  So should every firm that aims for carbon neutrality start focussing on offsets to accomplish this?

This is not necessarily wise.  Carbon offsets cost money, and provide no direct return – you have to buy them again next year.  Carbon reductions – for instance reducing waste, energy consumption, and so on – does provide a return, as the cost reductions come year after year.  Like offsets, they may cost money, though many are free or have a payback period of months.  However, even the costly investments do at least have a return, which carbon offsets do not.

On the other hand, some environmental investments will never be profitable.  To take an extreme example, solar panels on a north-facing roof in the UK are unlikely to turn a profit.  How can a firm decide which investments to make, and whether to pursue offsets as well?

A popular tool for selecting green investments is the marginal abatement cost curve.  The vertical axis shows the net present value or cost of the project per Kg of emissions reduced, while the horzontal axis has the total amount of abatement per year.  Investments are ordered by value, with those that create the greatest financial benefit per unit of carbon reduction on the left.

Those projects with a positive net present value are the obvious priority. As for the projects with negative net value, some will be attractive to firms that will gain sufficient indirect value from carbon reductions (morale, reputation, etc).  Those opportunities with a net cost lower than carbon offsets should clearly be favoured next. For projects with a greater net cost than offsets, the strategy should switch to purchasing these instruments instead.  The chart on the right summarises the decision process.

Offsetting is most valuable to firms that have already have a powerful programme of continuing carbon reductions, and who will benefit from the reputation effects of achieving full carbon neutral status.  However, if a firm’s emissions per unit of sales or output are not falling, then there are almost certainly direct carbon reduction options waiting to be uncovered.  In addition to being environmentally sound, these projects are financially more sustainable than offsets.

Reporting and green tourism – what happens when consumers know?

Emissions from tourism matter – they account for around 5-14% of total global emissions.  Developed countries produce considerably more GHG emissions per capita than developing nations, and one reason among many is the availability of time and money for leisure. 

Carbon emissions from leisure pursuits is a sensitive issue.  On the one hand, denying people air travel or even the experience of a heated swimming pool would be politically unrealistic.  On the other hand, consumers themselves are becoming increasingly interested in their personal impacts, and consumer goods companies from Puma to Unilever have been quick to respond, by reporting their impacts and showing annual improvements and innovations.

The same cannot be said of the leisure industry.   Few report on their emissions at the corporate level – but the rare leaders who do suggest some interesting conclusions.  Figure 1 shows emissions from a selection of firms in transport, holidays, casinos and hotels.   Two dimensions are relevant: emissions per customer, and per unit of spend.

For an individual trying to reduce their discretionary carbon footprint, the emissions-per-customer metric is highly relevant.  For example, a luxury hotel stay (measured on a room-night basis – HKS and Intercontinental) is clearly less green than a stay at a holiday park (Centre Parcs and Holidaybreak).

For a company looking to produce a more efficient product and deliver more value to their customers, the dimension of emissions per unit of revenue is most relevant.  For example, compare the two hotel groups, Intercontinental and HKS (Hong Kong and Shanghai), both targeting the high end of the market.  HKS is likely to keep costs low by reducing energy consumption relative to revenue, presumably without changing the quality of the experience.  This will help them boost their financial surplus, which can be invested in services their guests actually value.

At the moment, consumer tools like GoodGuide.com focus on goods rather than services.  Given the importance of leisure to global emissions, change cannot be far off.  When these tools are available for holidays, travel, and other leisure experiences, those companies that have already invested in their own sustainability – and reported transparently – will be the first to benefit. 

The truth about imports and emissions

Back in April and May there were a lot of headlines about how the UK isn’t really reducing emissions at all – we’re just transferring emissions to the developing world by importing energy-intensive manufactured goods.  A report by a respected institution, the National Academy of Sciences of the USA, has been cited as solid evidence.  It is solid – but people are drawing the wrong conclusions.

The data does indeed show that when we look at consumption rather than production, emissions in the developed world have indeed grown rather than fallen – by 0.3% per year on average.  Moreover, the fact that global emissions continue to increase is undeniable.  However, we are not simply transferring our emissions to the developing world.  The authors state this – the emissions intensity of trade is actually falling, even as trade grows.   Since 1990, international trade has grown at more than twice the rate of the emissions embodied in that trade. The problem is that we continue to consume more, and we have failed to reduce the emissions of our consumption enough to compensate for our increased appetites.

The real question is this – what should we do about it?  There is a danger that, based on the headlines, policy-makers will conclude that reducing energy-intensive imports is the way forward.  In short, protectionism will become fashionable again.

Of course, as most mainstream economists will tell you, protectionism tends to lead to slower growth – good for emissions, but bad for jobs and wealth.  Fortunately, The Economist, a respected international news and opinion journal, throws cold water on the idea that tariffs could help.  It argues instead that green investment in the developing world is the way forward.

However, all commentators appear to neglect the point that stares at us out of the data – the big emissions opportunities that we in the developed world can tackle are from production destined for domestic consumption.  While it is very difficult to regulate emissions in other countries (tariffs are a very blunt and potentially divisive instrument), it is perfectly possible for countries to regulate the emissions from their own production, most of which is destined for internal markets.  Since this is the largest figure, and the one most conducive to management, it makes sense to focus attention here.

Of course, there is still a strong argument for measuring national emissions based on consumption, not production.  This gives us a more realistic picture of the environmental impacts of our national lifestyles.  Nevertheless, when it comes to making reductions, we should be looking at the big wins that come from production to meet our own needs – this is where we will have the biggest positive impact.

Is micro-generation a good business investment?

The UK government yesterday announced its strategy for microgeneration of renewable energy.  It is aimed at businesses and individuals who want to produce energy on their own property, rather than energy companies or investors.  In my 16^th May article I pointed out that small businesses may be able to invest in renewables profitably if they have an idle resource that can be turned into energy cost effectively.  Does the UK government’s strategy make this any easier?

It will.  The government has already put financial incentives in place to promote small scale renewables, most notably the Feed-In Tariffs (FiTs).   These incentives work, yet not every suitable business is installing solar panels on the roof or a wind turbine on vacant land.  Why not?  One major obstacle is the lack of knowledge, and uncertainty about whom to trust.  The government’s strategy will address this by taking a stronger lead in establishing standards, quality marks and the like, to give decision-makers more confidence in choosing systems and services.

Will this strategy overcome all the major obstacles to the development of microgeneration?  No – the missing piece of the puzzle remains planning permission.  Although the government’s strategy mentions the issue in relation to community energy projects, they describe it as essentially a work in progress.  However, approval rates do vary widely, as the National Audit Office has reported, with Scotland taking the strongest lead in application approval rates.

A longer term consequence of regional variations in micro-generation approvals will be that business decisions about new site location may be influenced in part by planning attitudes to renewable energy.   This will be particularly attractive to those firms in energy-intensive industries, or where carbon footprint is important to the buying decisions of their customers.

Of course, the difficulties in obtaining planning permission do not make renewable micro-generation less attractive in terms of financial returns.  Instead, these obstacles increase the business risk associated with considering renewables, as it becomes more likely that the management time and pre-planning investments will come to nothing.  Businesses are no strangers to this problem – tenders, pitches, and investments in unproven markets all suffer from this sort of risk.  The secret to managing them is to make these efforts many and small, so the firm can afford to fail with most of them.

 

Translating this to micro-generation, the approach should be similar.  Look at all resources that could be converted to energy.  Plan to put in applications for any renewable installations that have a positive financial value.  Do this over a period of time that does not put excessive burden on management.  Expect to lose most of them, unless your business is located within an authority that is friendly to renewables, so keep the up-front investments low unless there is good reason to think your application will succeed.  Use independent, specialist consultants to evaluate the business case and advise on planning.   Micro-generation can be profitable, and approaching it with the same attitude taken to any business investment will bring good financial returns, as well as environmental benefit.

Finally, keep an open mind about micro-generation opportunities, because government policies, carbon pricing, and fuel costs will continue to alter the landscape in which businesses have to make their choices.

The Anthropocene

We had got used to being insignificant.  Copernicus showed that we were not at the centre of the universe.  Darwin found an explanation for the variety of species that did not involve them being created for our benefit.  But just as we had got used to being unimportant, it turns out that things are changing.  The Economist is amongst the latest to note the view that we are living in the Anthropocene age – a geological time in which the development of life on earth is dominated by mankind.

This change of perspective reflects our increasing recognition of the impact we have on our planet.  As individuals, our impact is normally insignificant, but as the number of our species has grown and our individual impacts have increased, these multipliers have added up to an unimaginable impact on the planet’s ecosystems.

As we wait for legislation, the markets, or scientific innovators to solve the problem for us, the costs are beginning to mount.  Insurance costs are on the rise.  Speculators, investors and consumers drive up commodity prices in ways that are proving hard to predict.  It is difficult to know what to do in the face of such uncertainty and change.  However, standing still looks like a poor strategy.  Businesses need to be flexible, to learn and to adapt continually.

The traditional approach to learning is to rely on experts.  Unfortunately, in times of rapid change, experts have only a part of the picture.  What is most needed are experimenters – people who can combine thinking about what is known with speculation, turning it into testable hypotheses.  They will then run fast, inexpensive experiments to inform business decisions.  How do you know whether these experiments lead to success or failure?  As Columbia professor Rita Gunther McGrath observes, you don’t – so you need your experimenters to be expert in learning from all outcomes – including failures.

The current crop of entrepreneurs is doing exactly this.  As sustainability author Andrew Winston has blogged for HBR, both new business leaders and venture capitalists are making bets on businesses that solve sustainability problems.  These aren’t first-time-right ventures, but resilient enterprises that have kept going until they found a solution.  For example, third place winner PK Clean has based its business on technologies that are the fallout from many inventions and innovations tested and redesigned over decades.

But how do we decide what sorts of experiment to run?  The answer comes from a good understanding of the organisation’s impacts and vulnerabilities.  Your experiments will aim to reduce these.  From this point of view, the experts are not the external change consultants, but your internal experts who know full well what your firm does to the environment (even if they don’t know how much), and who have a pretty good idea of your firm’s critical needs – those things you cannot do business without.

The key factor for success is straightforward: manage your changes as experiments, not just “pilot projects”.  In other words, the aim should be not to “prove” that they are a success, but to evaluate them critically and learn from the results.

We humans are coming to dominate our planet in a way we did not anticipate.  The coming decades will favour those firms that acknowledge this, and deal with the changing environment with ingenuity and open-mindedness.  The winners will accept that the answers may not yet be “out there” – they’ll use sound methodologies to find the answers that really work... if only until the next change.

How much is this waste costing us?

Nowadays, waste disposal costs usually have a place in the accounts.  Standard landfill tax costs £56 per tonne (set to rise to £80 per tonne by 2014), and waste disposal services have their fixed and variable fees on top.  Recycling may provide some relief, but still typically involves some cost.  However, waste has hidden costs as well, and these can be considerably more than the disposal or recycling cost.

There are two big hidden costs in waste: the materials, and the production cost.  The first is easier to spot – if you purchase a tonne of steel, and sell products containing 990g of steel, you know you have wasted 1% of the material.  Production managers are usually aware of this, but the finance department may not be.

The second cost is less obvious – the cost of the facility.  Let’s say that a manufacturing firm has operating costs of £100m per year, and is working fairly near its current capacity, so waste products displace products that could be sold.  If the reject rate is 0.1% of products, then the operating cost of producing that waste is £100K per year (0.1% of £100m).  Alternatively, consider this from a time perspective.  If a typical production line in our hypothetical facility spends just 10 minutes of a 16 hour day producing product that can’t be sold, that would be 1% of the time – or £1m cost per year.  Move to another perspective: the opportunity cost of the goods not produced because the line is at capacity.  If gross margins are just 10%, then waste at 1% of production is equivalent to £100K of foregone profit, displaced by waste.

These hidden costs of waste are rarely part of any management accounting system, and may be difficult to pin down.  However it’s worth the effort – keeping track, even at the “guestimate” level, can help companies work out the value of investing in waste elimination initiatives.  Putting a price on waste helps to focus attention on a big win for both the environment and the bottom line.  Recycling may deal with the waste that can’t be eliminated, but the biggest win comes from avoiding waste entirely.

What to do about high energy prices

As oil prices reach a new sterling high, and experts cast doubt on a significant price fall in this decade, there are few words of comfort for British businesses. The low oil prices in the 1990s now look like a temporary reprieve.  Electricity prices are likely to rise as coal plants close and the UK invests in new capacity.  What does this mean for UK business? 

The UK faces the combined threats of inflation and a return to economic recession.  This is “stagflation”, and can occur when inflation due to commodity price rises (like energy) result in lower productivity in the economy.  There is no certainty about what energy costs and productivity will do, and this uncertainty is far from reassuring.

Small businesses can be particularly hard hit because they lack buying power, often cannot risk buying fuel on long term forward contracts, and face having their increasingly price-sensitive customers consolidate their purchases with the “big box” stores (for B2C) or with large suppliers who can reduce their transaction costs (B2B).  However, this is also a time of opportunity for agile SMEs who can negotiate the uncertainty of these economic conditions.

The solution to the energy squeeze is clear: reduce dependency on energy and increase productivity.  Britain is already doing this, though the 5% drop from 2000 to 2008 hides wide variation between firms, even in the same industry.  As a second option – become an energy producer.

Office space can consume energy when not in use.

The first solution, reducing dependency on energy, essentially means eliminating waste.  If a firm reduces its use of unneeded resources – anything from heating empty office space  to producing goods and services too poor to sell – then it reduces its consumption of energy.  Firms often have unnoticed waste, from the unused space mentioned above to the waste of material that is considered “just part of the way this industry does business”.  Successful waste reduction efforts start by identifying all the resource consumption that does not create value for customers, and then working with employees, suppliers, customers, and other organisations to find ways to eliminate this waste.

The second solution – becoming an energy producer – works best when a firm identifies a resource it already has in excess which can be turned into energy.  As a simple example, some firms in suitably windy locations install wind turbines.  Others turn their waste into energy, either directly (for example wood waste becomes biomass), or indirectly, by selling their waste to a firm that can produce energy from it.  It is often surprising how many waste streams contain energy that can be released cost effectively as a fuel.

The critical message for SMEs is not to stand still.  Although no one can predict future energy prices, recent history does not encourage complacency.  To avoid being trapped between rising energy costs and downward pressure on margins, firms should act to cut waste in all its forms – this is a tried and tested route to reducing energy consumption.  With whatever excess resources are left, look for smart ways to turn these into energy.

How deeply should you cut your energy consumption?

This week’s Economist argues that decarbonising developing economies matters much more than reducing emissions in the developed world.  Although emissions from production in developing countries is now greater than in the industrialised nations, there is in fact no excuse for complacency about energy use in the wealthier economies.  Just over a month ago, DECC released their provisional estimate for UK greenhouse gas emissions for 2010.  They showed the first year-on-year increase in two decades.  As major consumers of energy, businesses need to play their part in turning this around, both because it’s right and also because it makes business sense.

The ideal energy consumption for any company is zero – in a perfect world we would have no energy costs at all.  But putting aside idealism, how do we set an emissions target for our business that is both desirable and realistic?

One way for a firm to set a target is to look at the governments' targets in the countries in which it operates.  For example, the UK has an emissions target for 2020 of 34% below 1990 levels.  In 1990, emissions were much higher than today – as of 2010, emissions were down by about 25%.  That leaves another 9% to go – or to put it another way, about 11% of 2010 emissions need to go by 2020.  This has to happen even as the economy grows – in other words, emissions per unit of output need to fall even faster.  A company that can cut its emissions by 11% over the current decade while growing at the same pace as the economy can feel that it has done its bit to help meet these targets.

But is this a good target for your company?  It’s a fair share in UK terms, but what about global terms?  If we are trying to be equitable, and just use our fair share of global emissions, we need to aim higher.  A UN Environment Programme report estimates that the world needs to peak at 44GT of greenhouse gas emissions in 2020 to avoid exceeding 2 degrees C of global warming.  If we take into account the estimated populations of the UK and the world now and in 2020, we’d need to reduce our emissions by 34% from 2010 levels in order to be making only our share of emissions.  In other words, we need to cut emissions by about a third over the coming decade in order to be equitable.

Is it realistic to cut a firm’s emissions by 11-34% by 2020?  In a word... yes.  Others have managed it.  For example, Interface Inc, a maker of commercial carpeting, reduced absolute GHGs by 71% from 1996 to 2008, while increasing sales by two thirds.  They didn’t do this by moving into a less energy intensive line of business.  They accomplished this remarkable reduction principally by reducing waste.

This is not to say that massive reductions in emissions are easy.  They need belief and determination.  However, the payoff is substantial – in good profits, good morale, and good reputation.  In the words of Ray Anderson, CEO of Interface Inc, “sustainability... has proven to be the most powerful marketplace differentiator I have known in my long career”.

How cash can kill your business

“Cash is bad” said my MBA professor many years ago. This obviously depends on your perspective. But as many business leaders have found to their regret, cash really can be a killer.

The main problem with cash is that it’s fickle – here today, gone tomorrow. Many businesses have run into difficulty when they couldn’t get a loan to cover the difference between cash and profits. That is, they’ve got paper profits, but the expenses need to be paid, and the cash hasn’t come in yet. Businesses like this use cash flow forecasting for two main reasons: 1) to make sure they grow their sales only as fast as that their working capital can match, and 2) to ensure they’ve actually lined up enough working capital, often in the form of a long term line of credit, to be able to pay all their expenses without embarrassment.

A less well known problem faces the business that has a positive cash cycle – the kind of firm that receives the money before they have to pay the expenses. Companies in this desirable position may think they don’t need cash flow forecasting – as long as they keep trading profitably, the cash will always be there. This type of cash flow can also be a killer, and can take business leaders completely by surprise.

The main pitfall for positive cash cycles occurs when a business uses its cash to finance its operations. Why?  Even a business with very thin profits, but growing rapidly, could find itself apparently swimming in cash. Surely it makes sense to use the cash productively, to invest in business improvements and growth? But what if the cash inflows subside, even just for a few months?

Imagine a (highly simplified) business turning over £1m per month. It has a positive cash cycle of 1 month, and razor thin margins. So although profits are essentially non-existent, it sits on £1m of cash at any one time, which has been paid into the bank, but won’t need to be paid out until next month. By that month, another £1m will have come in, so the company will look appreciatively on that money, which always seems to be there, and may think of investing it in something more productive than savings.

Now, imagine that after a couple of months they’ve invested £1m in new equipment, with the intention of growing the business. This is shown as “Month3” in the table to the right – you can see that after a couple of months of sitting on £1m in the bank, they wanted to do something with it, even though their profits are actually zero. Unfortunately bad weather plays havoc on their market (or some other unexpected event occurs) and sales vanish to nothing the next month – “Month4”. Imagine, too, that they feel safe, because they can reduce their expenses by £1m – they have the ultimate in flexible operations, so their margins will stay the same (zero, but at least they’re not losing money).

Unfortunately their cash position is terrible. The £1m buffer that they used to have is now invested in equipment. The expenses from last month - £1m – were going to be paid for with the £1m in cash coming in this month. Regrettably it’s not there, and they need an emergency loan of £1m from the bank in order to pay their debts. The equipment probably cannot be liquidated for £1m, and this is not a profitable firm, so the bank may ask some very difficult questions about this loan request.  Promise of positive cash flow returning next month may sound to the bank like "jam tomorrow", no matter how justified.  They will want to know why you didn't see this coming.

The best way to head off this sort of problem is to incorporate cash flow reporting into the monthly accounts, and to use scenarios to test cash flow forecasts on a regular basis. This will highlight any risks to future cash flows, and should prevent all but the most extreme of unexpected events from taking business leaders by surprise.

Don’t wait for the markets to save the planet

A current theme in management writing is that companies’ green behaviour leads to greater success.  Green business guru Andrew Winston has recently blogged about the way Dow and The Nature Conservancy are trying to show the “business logic” of protecting the environment.  And some of that logic is right – reductions in materials use, lower energy consumption, and a green reputation can sometimes bring long term, economic benefits that greatly outweigh their costs.  Yet companies still overexploit the seas, pollute the air, and dump waste.  Why?

Companies are not fooled.  Green behaviours that have value to society – public goods like clean air, stable climate, and healthy ecosystems – do not always benefit the company enough to offset the investment made.  Some companies will do it anyway, because of ethical beliefs, or a strategic view that they’ll benefit later.  But many green practices are not worth what they cost the company – at least not to that company.

One proposed solution is to solve this through markets, for example through carbon taxes, or the pricing of “ecosystem services”.  This is a very good idea.  However it involves a lot of negotiation and international agreement to be effective.  Even then, we know that some firms will make the “wrong” decision, particularly in failing to pursue the long term gains from efficiency that current investments could make.  Long term gains are uncertain, and often require a lot of effort to assess them.

It should be no surprise, then, that recent studies in areas such as behavioural economics have shown that purely rational decisions are not the whole story.  Decision-makers use many criteria that lead to apparently irrational outcomes.  And these apparently irrational rules of thumb are actually used far more consistently than the mathematically pure economic models that MBAs are taught.

Why focus solely on a fragile case - that saving the commons is in businesses' self-interest - when the argument doesn’t match people’s decision-making processes anyway?  The evidence base suggests that an important additional approach would be to harness the things that really drive many decisions – and the most promising in my view is the “social contract”.

A social contract is simply a commitment made to others, which has the effect of making the planned outcome more likely to happen, and often encouraging others to make similar commitments.  Weight Watchers uses this very tool, helping people lose and keep off weight by making their goals and progress public.  Companies are led by people who are just as susceptible to this as the rest of us.  If a CEO meets her counterpart at a conference, and hears them say they’re going to reduce their firm’s carbon footprint by 10%, she may well feel that she ought to say something similar – not because it’s economically advisable, but because her peer is doing it.  Once she has made the commitment – particularly if it is done through the media – it will be hard for the company to back down, even with a change of management, and certainly with her in place.

Such commitments are rare and typically small.  At the same time as Sir Terry Leahy told Davos that he would build zero carbon stores in the Czech Republic and Thailand, he also urged governments to put market mechanisms in place.  The belief that markets will solve the problem is still dominant – but there is still a chance that social contracts will catch on.

We all need to cut food waste

This is the conclusion of a new report, The Future of Food and Farming: Challenges and choices for global sustainability, which has just been published by the UK Government Office for Science.  The study concludes that we all need to cut food waste across the supply chain, from producer to consumer, by 50% by 2050.  This is in addition to improvements in land productivity, and changes to the mix of "resource-intensive" types of food. Only in this way, the report says, can we hope to feed the 9 billion population that the earth is expected to carry in four decades' time.

So how do we do this?  The report offers some high level solutions:

1. Narrow the gap in wastefulness between geographies, countries and organisations in terms of waste - spread best practice
2. Advance research that reduces waste further

These are good, high level observations - but now that we have the "big picture" motivation, what we need is action by individuals who can influence waste.

Some may think that in places like the USA and Europe, waste is pretty low.  We don't have the huge losses that are experienced in post-harvest storage and transport where investment in agriculture is low.  However, we do have enormous production, and even marginal waste adds up.  Moreover, recent publicity about fish discards shows an area of waste which is not normally included in official accounts of waste, because the fish are never landed.  Problems like this are due not to lack of investment, but to public policy, and this is rightly an area where the public are demanding action.

However, we cannot all get off the hook by demanding action from our elected representatives.  Much of the supply chain is under the control of businesses and individuals, and we need to accept responsibility.  Many of us can remember our elders telling us to eat up "because there are children starving in Africa".  Back in the days of overproduction, this didn't make a lot of sense.  But now, and in future, all of our waste, from field to fork, is ultimately going to put pressure on the availability of food, and we need to do something about it.

In developed countries, waste by consumers and the food service industry can be on the order of 20-30%.  The waste of food in industry is particularly interesting because in principle, companies should be motivated to reduce waste in order to reduce cost.  This could apply to consumers too, but where incomes are high in comparison to food costs, factors like "convenience" and "culture" can drive up waste.  Are these factors also influencing the food service industry?

I think so.  Most research focusses on using food waste productively (incineration for energy, or composting for fertiliser).  However, these uses generally don't save much money - they're just popular because they're fairly easy.  Much harder is to change procedures and systems so that unneeded food doesn't end up entering the supply chain in the first place.  This requires people in the organisation to accept that there's room for improvement.  That's not an easy ask.  People will ask - "if it were that easy, surely we'd have done it already?"

And that's right - this isn't the easy way to deal with waste.  However, it is the most lucrative.  Not buying what isn't needed - and using as much as possible of what you buy - is clearly going to be much better for the bottom line than disposing of waste productively - food is generally more valuable than the fuel or fertiliser it would become as waste.

How do you escape the “domino effect”?

In the second episode of Michel Roux’s Service, the owner of an Indian restaurant in Birmingham describes the traffic jam in the kitchen as a “domino effect”. Diners have been seated late, and have placed their orders late, so a bunch of orders come into the kitchen at the same time. They’re readied as quickly as possible for the servers to take to the tables. The servers struggle to get them all out as quickly as possible. But the net result is that a lot of people get their food later than intended, and the problems carry on through the rest of the evening.

The domino effect is familiar enough to all of us, but how does it work? It is in fact a potential problem in all systems. On the programme, the problem seemed to occur at “the pass” – the point where orders were coordinated between front and back of house. In fact, the problem started when a party was mis-seated. When the people who should have had their table turned up, this had a knock-on effect on another groups – a total of three groups were re-seated. This in turn affected the timing of the orders, which all came into the kitchen at once. This meant the orders were ready to serve too close together for the servers to get them out promptly. As the service backed up, more and more orders were being delivered late, affecting far more parties than those originally involved. This expanding ripple of service problems is what we call the “domino effect”, because one problem has a knock-on effect on every process step “downstream” of where the problem occurred. Often, the most visible effects of the problem are at this downstream end, and it’s not necessarily clear to those affected just how far back in the processes the dominos had started to fall.

I saw a beautiful demonstration of it at a coffee shop recently, and it will show you how this famous effect actually takes place, and what you can do to change it.

In the coffee shop in question, a branch of a major chain, I observed people being served coffee between 10-11am. They queued at a counter, where a member of staff took their order, gave them any food part of their order, and took their payment. They then moved on to the end of the counter, when they collected their coffee from the barista. The barista got her cue about what to make from the staff member at the till as the order was taken.

The barista could make a coffee in an average of just over a minute. In the course of 40 minutes, 29 orders were taken, so she had enough “capacity” in terms of time to make all those orders, with time left over.

Had the customers come in like clockwork every minute or so, and had all the coffees taken an equal time to prepare, she’d have probably done fine. However, clients don’t come in like clockwork – they come in bunches, with pauses in between. And some coffees are complicated, or get spilled. Also, there were small disruptions – from customers wanting to ask a question, from a member of staff who came through to do some cleaning, and from the staff member on the till having a complicated food order to attend to, so that she had to rush to catch up taking orders, and give a bunch of orders to the barista at once.

This is why the domino effect comes into being. When things work like clockwork, with very little variation, you don’t see it much. Where you see it is in naturally chaotic systems – for instance, those that rely on human behaviour and on chance. The natural variation in these systems puts pressure on the links in the service chain, and if capacity is tight for even a short period, it can have a knock-on effect (a domino effect) on the chain long after the initial cause is gone.

Here’s how my observations went. In the first 15 minutes, only three people came in, and all were served within three minutes of walking into the shop. Then, at 10:16, two people came in – separately, but within a minute. The first was served within a minute, and the second within two minutes, so they went away happy. Then at 10:18, just as the second was getting her coffee, three more people arrived. Unfortunately the first person’s coffee was complicated, taking a full two minutes. The second was normal, but the third one took 2 minutes as well, so this last person wasn’t served until six minutes after she walked into the shop.

Meanwhile, another three people had come in. Although their coffees were quick to prepare, the barista was already behind, so they too had to wait six minutes for their coffee. While their coffee was being made, another three people came in. And while their coffee was being made, three more people arrived. These people all had to wait 3-4 minutes for their coffee. The service times were also lengthened very slightly by the cleaning staff passing through, and a customer asking a question.

At this point things got really busy. Between 10.31 and 10:40, 13 orders were taken. This was more than the barista could deal with at the speeds she’d shown up to now. Three came in at 10:31 alone – and of course the barista had started out a few minutes behind. The first was served in 4 minutes, but all the rest took 6-7 minutes from walking in to getting their coffee.

As long as people don’t mind the wait, this would have been fine - but now the domino effect began. Some of these customers had small children who quickly got bored and started acting up. Some people were so keen to sit down that they went and put their stuff on chairs, before rejoining the queue, to reserve a place – which annoyed customers ahead of them who weren’t doing it. The seating process was becoming disrupted, and that was making clients unhappy.

The biggest problem with the domino effect is that it's most likely to cause service failures at the times when you have the most customers, so even if it happens rarely, it affects a disproportionate number of your clients.  Moreover, it affects people who had no idea what originally happened - to them, it just looks as if bad service is a normal part of your business.

If there is a domino, does this mean the service system is bad? No – but it does show that the domino problems have not been planned for. Every system with more than one process step will get domino effects when demand is high and there is a disruption to the regular working of the system. A good service team understands this, forsees what the domino effects may be, and plans what to do to stop the domino effect in its tracks.

Preventing the problem is not just about throwing capacity at it – that just eats up all your profits. Instead, the plan for preventing domino effects will be to focus on the spots where capacity is a problem, and change them to make it easy to stop the domino effect before it damages your business.

One approach is to tackle the bottleneck resource that has caused the problem. In the case of the coffee shop, the barista was the key to the speed of service. Once the coffee-making got really behind, the whole system was stuck until customers stopped coming. And no one wants customers to stop coming. So what could have happened was to expand the coffee-making capacity:

• Batch processing: The espresso machine could make three coffees at once, and in some coffee shops, you will observe the barista taking advantage of this, setting up and running three espressos at the same time if there is a queue. While they are dribbling out, she can work on the other steps of the coffee preparation.
• Multi-tasking: In other coffee shops, you will see more than one person working the espresso machine. Typically one person will be full time on it, and someone else will be full on the till, but there will be floating capacity – someone who can pitch in to whatever part of the service chain has got backed up, and relieve the pressure, while doing other things (like cleaning) when the pressure is off. Where there are several different services on offer – filter coffee as well as espresso, tea, hot chocolate and so on – this may be particularly effective.
• Personal service: Still other shops will have one individual dealing with each customer – taking their order, getting their coffee, and so on. That way, if one customer is taking a very long time, the queue will keep moving because other servers will be dealing with the next customers. This is typically not an efficient way of working, because people will get more done if they are just doing one part of the process, rather than the whole thing. However, it may well be appropriate where there is very little in common between one order and the next, and where self-service is an option, for example in fashion stores.
• Productivity: Finally, rather than dealing with the systems, many coffee shops would address the underlying problem first: the slow speed of coffee production. The barista in this shop was slow compared to some of those I’ve seen in busy urban cafes. Experience and an effort to make her motions speedier and more accurate will no doubt help this barista serve customers more quickly over time. 

Another approach is to deal with the effects rather than the cause. Here, the principle problem for customers was the combined wait in the queue and risk of not getting seated. Some shops deal with this by avoiding counter service altogether and seating customers before they are served. But even with a counter service, some coffee shops will start taking orders right through the queue, and telling customers to have a seat, and that they will be called when their order is ready.

Each approach will be better suited to some contexts than to others. The point is that the service team needs to have a well thought out plan that suits their business and their customers. They need to know in advance what to do, so that when a disruption occurs, they can take action straight away.

How could the young people in Michel Roux’s care have dealt with their own domino effect? The problem was in serving, so as with coffee shops, they had some obvious options:

1. Used the order-taking process to even out the flow of orders going to the kitchen
2. Move people temporarily from other roles to serving food to the domino tables
3. Batched the serving, for instance by getting a trolley that would hold the orders for many more people than a server’s arms can deal with

Each of these options has advantages and risks. They didn’t spot the problem early enough for option 1 to be useful, and option 3 may also not have been possible given the equipment the restaurant supplied. In the event, the young people chose option 2 – they took their receptionist off the door once the restaurant was full. However, their biggest problem was that they appeared not to have a plan. They did not know what the knock-on effects of their actions would be, and the whole of the evening was spent in crisis management. With a plan, they may have made better decisions, and could also have told customers what to expect.

The domino effect is unusually damaging because it takes a small problem, such as a complicated cup of coffee, and turns it into a service failure for many more people who should never have been involved. Because its effects last far beyond the original incident, it is often hard for staff to remember what the original cause of the problem was, and the rush of dealing with its effects makes it hard to stop and think the issue through. However, by planning in advance with a system that will lessen the effects of a domino incident, businesses can help improve their service to all customers, and deal better with the variability that is natural to customer-facing businesses.

Why Michel Roux Jr won’t help you improve your service

Michel Roux’s new TV series, Service, tells the story of his efforts to train eight young people to serve customers to the highest standard.  The first episode recounts their introduction to the basics, especially presentation and attitude.   While they are reasonably well turned out, attitude is an obstacle for many of them.  Naturally their first effort at service shows their inexperience and youth, as well as their struggles to work as a team at this early stage in their training.  This makes for entertaining reality TV.

Yet while the commentators will no doubt focus on the more shocking spectacles in the show – the young man who swears, the underconfident teens in tears, the desperate failures of their first service efforts – there is a related issue that is not front-of-show: the use of systems to deliver great service.

A system is a deliberately designed set of procedures or operations to produce a planned outcome.  There is no doubt that Roux knows all about systems – his maitre d’ says to the trainees at the end of the programme “I gave you my system, and you didn’t use it”.  Roux describes the performance of his waiting staff at la Gavroche as “like ballerinas” – in other words, working in a choreographed way, to a plan.  He also describes the outcomes – the service times and standards – but it would be intriguing to know what system he uses to achieve them.

Roux may never let us in on the real secret of his current system.  However, this is not necessarily an impediment to those who want to produce service like his, because each customer environment will need a specific system designed for their particular resources and their intended customer experience.  The ideal system will produce the standard of service intended – in terms of service times and accuracy – virtually every time.  Errors and failures against the standard should ideally be measured in terms of times per million interactions.  However, in the worst service environments it is unfortunately more meaningful to talk about errors for every dozen interactions.  A well designed system would change this.

If this ideal sounds unrealistic, consider the dabbawala, a food delivery service in India where around 5000 “dabbawalas” carry around 200,000 lunches per day from the homes where they are made to the correct recipients at their work places.  They have been found to make fewer than one mistake per six million deliveries.  Moreover this is done without the benefit of IT systems or complicated management structures.  Instead, the service relies on a very simple but effective system of codings and procedures to provide their service.  For more about this exemplary business, see http://www.mumbaidabbawala.org/index.html.

Of course, the specific procedures – how to load and unload trays in the 20 second window while a train stops at a station, for example – are not going to be relevant to most businesses.  What is very relevant is this – the dabbawallahs have discovered ways of working that allow them – within the considerable constraints of their environment – to deliver and collect lunch tiffins with the utmost accuracy and timeliness over an enormous geographical area at very low cost.

So how can you design a service process that delivers to such a high standard?  The design process itself is in fact a cycle of continual learning and improvement.  It works like this:

1. Decide on the standard you will aim to achieve – for the dabbawallahs, this is 100% accuracy of delivery during the lunch timeframe, but yours will depend on your customers’ expectations and desires
2. Map out your current process and measure the standard it delivers in practice
3. Experiment with changes to these procedures – one at a time – and repeatedly observe and measure to find those that bring you closer to your standard
4. Decide which new procedural steps you want to adopt permanently
5. Train everyone involved to the new procedures
6. Go back to step 2 and keep going through the cycle until you have achieved your standard consistently through the system you have designed.  At that point, consider whether you want a new standard.

Figure 1: The Process Improvement Cycle

This sounds simple – but it has very significant consequences for management.  What this approach requires is a change of managerial approach from the bureaucratic (making sure everyone follows procedures) to a more holistic, scientific style.  Management responsibility expands to include all those steps that lead up to the agreement of procedures, as well as ensuring they are then followed.

Will Michel Roux reveal to us how he developed his world class restaurant service to the standard he achieves today?  Of course not – it probably counts as a trade secret, and in any case the antics of the young people make for much more entertaining viewing.  But if he did, it would probably do more to change the levels of service that our businesses achieve than any number of prime time reality TV shows.