It is good to be green

Environmentally friendly credentials are influencing business outsourcing decisions

The Authors

Douglas Brown, Brown-Wilson Group, Oldsmar, Florida, USA

Abstract

Purpose – This paper aims to discuss how the influence of consumer and investor opinions for green corporate accountability and the creation of new government regulations in favor of protecting the environment have pushed green issues onto the boardroom agenda and onto outsourcing vendors' growing plate of priorities.

Design/methodology/approach – The data presented and the opinions discussed in this paper are based on the on-going research behind The Black Book of Outsourcing, by Douglas Brown and Scott Wilson.

Findings – The paper presents a wealth of data that clearly highlight how environmental issues and the ability to display an environmental-friendly culture are becoming vital to all outsourcing stakeholders. Also, using the data analysis, it delivers a 13 steps process to develop a green outsourcing initiative.

Originality/value – This paper discusses one of the latest trends in outsourcing, and it does so by providing numerous relevant data. As such, it contributes to setting a relevant research agenda. At the same time, it provides an in-depth analysis of various industry first-movers, and based on that it delivers a process that can be used by practitioners to develop green outsourcing offerings.

Article Type:

General review

Keyword(s):

Outsourcing; Sustainable development.

Journal:

Strategic Outsourcing: An International Journal

Volume:

1

Number:

1

Year:

2008

pp:

87-95

Copyright ©

Emerald Group Publishing Limited

ISSN:

1753-8297

Introduction

Rising energy prices and changes in the global climate have put ecology issues on the strategic planning of corporate executives worldwide. The influence of consumer and investor opinions for green corporate accountability and the creation of new government regulations in favor of protecting the environment have pushed green issues onto the boardroom agenda and onto outsourcing vendors' growing plate of priorities.

Green factors are forcing a new stage of expectations on global outsourcing suppliers. Environmental concerns have clearly entered into the formal selection process of outsourcing vendors, as well as the renegotiation processes of renewed engagements.

Research methodology

This paper uses data currently being gathered for The Black Book of Outsourcing (Brown and Wilson, 2007).

Black Book utilizes a three-step process to collect candid performance data. First, Black Book collects a series of direct evaluations covering 26 performance areas on leadership and senior management, which comprise the scored ranking of the Black Book 50 Best Managed Vendors.

Second, Black Book collects ballot results on 18 performance areas of operational excellence to rank vendors by outsourced service lines. Third, the gathered data is subjected immediately to an internal and external audit to verify completeness and accuracy, and to make sure the respondent is valid while ensuring the anonymity of the client company is maintained. During the audit, each data set is reviewed by a Brown–Wilson executive and at least two other people. In this way, our clients are able to clearly see how a vendor is truly performing. The 18 criteria on operational excellence are subdivided by the client's industry, market size, geography, and function outsourced and reported accordingly.

Third, situational studies are conducted on areas of high interest such as green outsourcers, educational providers in outsourcing, outsourcing advisors, and outsourcing legal firms. These specific survey areas range from four to 20 questions or criteria each.

Understanding the statistical confidence of Black Book data

Statistical confidence for each performance rating is based upon the number of organizations scoring the outsourcing service. Black Book identifies data confidence by one of several means:

  1. Top ten ranked vendors must have a minimum of five unique clients represented. Broad categories require a minimum of ten unique client ballots. Data that is asterisked (*) represents a sample size below required limits and are intended to be used for tracking purposes only, not ranking purposes. Performance data for an asterisked vendor services can vary widely until a larger sample size is achieved. The margin of error can be very large and the reader is responsible for considering the possible current and future variation (margin of error) in the Black Book performance score reported.
  2. Vendors with over ten unique client votes are eligible for top ten rankings and are assured to have highest confidence and lowest variation. Confidence increases as more organizations report on their outsourcing vendor. Data reported in this form is shown with a 95 per cent confidence level (±0.25, 0.20, or 0.15, respectively).
  3. Raw numbers include the quantity of completed surveys and the number of unique organizations contributing the data for the survey pool of interest.

Who participates in the Black Book ranking process?

Over 120,000 individuals are invited to participate annually (including C officers of the Fortune 2000, Inc 500, institutional members and officers of various professional organizations, subscribers of our media partners and previously validated survey participants). Non-invitation receiving participants must complete a verifiable profile, utilize valid corporate email address and are then included as well. Over 22,000 users were validated in the 2007 ranking process. The Black Book survey web instrument is open to respondents and new participants each year from March 1 to May 31 at http://TheBlackBookOfOutsourcing.com

Global stage takes notice of outsourcers' role

Scott Wilson, partner in Brown–Wilson Group (BWG) and co-author of The Black Book of Outsourcing was among the keynote speakers at the recent UN Global Compact to address BWG's 2007 study on green outsourcing and the influence of sustainable procurement melded into a possible international solution by suppliers.

In 2008, Wilson predicts the shift of environmental and social responsibility to outsourcers will create both opportunities for those who rise to the occasion and potential contract terminations for those who cannot or would not comply.

Founded in 2000, the UN Global Compact brings businesses together with UN agencies, labor, civil society, and government to advance universal principles in the areas of human rights, labor, and environment. The mission of the UN environmental program is to provide leadership and encourage partnership in caring for the environment by inspiring, and enabling nations and peoples to improve the quality of life, without compromising that of future generations. The forum aims to help decision-makers develop and adopt policies that are cleaner and safer, make efficient use of natural resources; incorporate environmental costs; and reduce pollution; and risks for humans; and the environment.

United Nations global compact environmental principles

Green outsourcers promote the UN Global Compact's commitment to environmental protection. “While voluntary efforts can never be substituted for government action, they can accelerate the process of solution finding and inspire customers, peers, and policy makers to have the courage to face the climate challenge as early as possible”, states Georg Kell, Executive Director, UN Global Compact

Principle: businesses are asked to support a precautionary approach to the environment

Principle: businesses should undertake initiatives to promote greater environmental responsibility

Principle: businesses should encourage the development and diffusion of environmentally friendly technologies

“While many outsourcing vendors, particularly European and US-based vendors have already established proactive green corporate policies, there will be a flurry of activity among offshore firms from India and China to retain competitive appeal. The offshore perspectives of these suppliers, traditionally focused on cheaper and faster, did fortify the strategic importance of the environment on the decision-makers within North American and European clientele, hence the frantic catch-up mode to set green agendas,” said Wilson to the UN forum.

Since the UN Global Compact session, the outsourcing industry has begun to react. Silicon.com's CIO Jury, a pool of US chief information officers and other corporate IT professionals, revealed that environmental factors will definitely play a key role in the selection of technology suppliers and partners in 2008 and beyond.

A recent BWG study concluded over 21 per cent of US and UK publicly traded companies that outsource functions have added “green policies and performance” demands to their vendor contractual arrangements in 2007, and over 94 per cent plan on adding clauses or including “green” in their renegotiations processes.

Thirty-six per cent of private companies executives are currently considering greener outsourcing service agreements in 2008.

Among first time outsourcing clients in 2007, 43 per cent included green factors in their selection processes and 18 per cent added contractual goals for outsourcers.

How does the shift to environmental responsibility impact outsourcers?

The pressure is on for outsourcing suppliers to produce green credentials and adopt green initiatives to meet client demand, yet suppliers must strategize ways in which they can extend such value-adds without significantly increasing costs to stay competitive.

BWG reports over 88 per cent of outsourcing decision-makers indicated that the environmental dedication will influence their selection processes as contracts come up for bid in the next 12 months, but only a mere 7 per cent anticipate any increase in passed-along costs from their outsourcing vendors to meet specified green concerns

“Beyond labor savings and operational re-engineering, outsourcing clients now seek top-line and bottom-line contributions from their suppliers. There's still a very short list of outsourcing firms who are making the grade as good stewards of the planet with significant implemented ecological commitments and dedication to environmental responsibility”, said Wilson.

Boards and CEOs are also turning to corporate outsourcing governance and procurement advisors to implement green corporate policies via their sourcing vendors.

Some Wall Street analysts and portfolio strategists are not as enamored with green policy implementations, regardless of who is responsible, because of the cost factor to climate issues that are still debated. Individual investors seek green companies while institutional investors are cautious about the bottom line impact. Analysts warn that costly environmental efforts may eventually hurt margins which propels the outsourcer into damned-if-you-do/damned-if-you-don't predicament, indicated Wilson.

According to the Black Book survey, the impact on outsourcing vendors is forcing executives to incorporate issues like hardware energy consumption, alternative energies, waste disposal, use of recycled content products and environmentally preferable products and services, use of bio-based products, energy- and water-efficient products, alternate fuel vehicles, products using renewable energy, and alternatives to hazardous or toxic chemicals as well as asset disposal into their sourcing strategies.

Wilson also noted that the economic development of emerging outsourcing countries is alarming earth scientists concerned about the surge in greenhouse gas emissions in countries like China and India.

Opportunities abound for IT outsourcers with green credentials

Black Book predicts that the next few years will be critical for outsourcing firms to establish their roadmap to green leadership, not only for their clients, but as global businesses impacting the entire earth. The impression of an outsourcer on the environment is becoming an increasingly critical issue for companies (Table I).

Technology analyst firm IDC produced a study paper, “Creating Cost and Efficiency through Outsourcing Hosted Solutions”, in late 2007 which found few companies have yet turned too managed hosting to mitigate the growing costs of maintaining energy efficient IT infrastructures.

Outsourcing IT and data center functions to third party providers can deliver energy savings of up to 40 per cent and help reduce firms' exposure to green legislation, according to IDC.

IDC also argues that specialist IT outsourcing providers can exploit economies of scale by sharing the same data center infrastructure across large numbers of customers, allowing them to reduce overall energy use.

James Eibisch, research director at IDC's European telecoms and networking group said that outsourcing IT work to third parties also reduces the risk of increased compliance pressures for IT directors.

“Although today the EU would like the IT industry to regulate itself, this would not be the case forever”, Eibisch predicted. “Today, legislation is concentrated on areas such as materials and recycling, but discussions are going on within the EU and NGOs to extend environmental regulation to IT and communications, and companies must consider the future implications of this for their business”.

Firms could sidestep many of these imminent regulations by handing IT functions to specialist outsourcing providers prepared for the legislative controls.

IT outsourcing firms also have greater freedom to invest in the newest energy-efficient technologies and renewable energy sources.

The increasing pressures felt by IT departments in the areas of rising energy costs and consumption should encourage companies of all sizes to overcome the perceived barriers to managed service adoption.

Green drives outsourcers

Technology outsourcing is set to rise if business is landed with the financial burden of compliance with environmental regulations.

“Efficiency regulations are only a matter of time”, predicts Black Book's Wilson. “Technology outsourcing is set to rise if business is landed with the financial burden of compliance with environmental regulations. Business technology consumes so much energy it is highly probable there will be regulation that targets IT soon”.

IDC agrees, reporting that shifting the responsibility for energy costs to the IT department can already consume the entire annual IT budget. And the burden is shifting further on to the outsourcing vendors.

Bob Stephens, senior director of data center operations at NaviSite – “I believe that outsourced model can provide companies with a potentially greener way to do business, in part thanks to the magic of economies of scale. We are adding value for our customers, both in terms of being environmentally friendly as well as from a business standpoint. We are talking about picking up 15 and 20 per cent efficiency in the amount of power it takes to cool the data center”.

One of NaviSite's tricks is a proprietary monitoring system that, according to Stephens, works on a very granular level. Temperature probes monitor and manage the air that goes into and flows of out of server. Through sophisticated algorithms, the system adjusts the varying speed of the fans to optimal levels.

Like other companies, NaviSite is also increasing energy efficiency through the usage of DC power, which he says results in another 15 per cent reduction in power usage.

While there are benefits to be had through the hosted data-center model, any sort of outsourcing relationship needs to be approached with care. In a recent report titled “Data Center Power and Cooling Scenario: Options for the Road Ahead”, IT research and analysis firm Gartner stresses that simply going with an outsourcer to address power and cooling concerns is not a prudent move. Rather, an “organization must go through the process of benchmarking its delivery quality and cost of service provision and make the necessary optimization changes before handing over to a third party”.

That includes doing your due diligence in researching your would-be partners; exercising great restraint in putting your most business-critical IT services and data in the hands of a third party; ensuring the provider meets all your security, bandwidth, and support needs; and devising an air-tight SLA.

Fifty per cent of businesses now employ technology outsourcing. IDC sees two potential benefits for firms facing rising bills and changing rules.

It cuts costs because suppliers have access to more efficient datacenter technology and can make the most of economies of scale not available to individual organizations. And it reduces risk, by speeding up compliance with incoming regulations.

Outsourcers rising to the opportunity

Major suppliers are already lining up to display their green credentials. IBM, US Technologies and HP have all recently launched initiatives for energy efficient systems.

Customers and prospective clients are definitely seeing environmental stewardship as a competitive differentiator”, observes Wilson, “Green concerns are underscored with cost and compliance issues as well”.

“Suppliers who get in early will benefit most when regulation forces the issue up the agenda”, said National Outsourcing Association director Mark Kobayashi-Hillary. “Some suppliers have been spending millions on making their IT systems more green, and when legislation is on the horizon user organizations will start demanding that expertise (Table II).

Suppliers recommended by current clients for dedication to greener outsourcing services include:

Investors take notice in green outsourcing

Investment analysts are now embracing strategies that correlate environmental performance with a firm's financial performance. Investors are making their dollars speak for them: investment dollars are flowing to companies that will gain an edge through efficiency-related cost reductions, and that will face less risk from environmental liability.

Financially, investors that purchase stock in green outsourcing companies and their clients believe these companies will be successful in the long term, which will cause the stock price to go up, so they can sell the stock at a higher price and make money.

Eco-responsible companies can gain a competitive advantage over their peers through cost reductions, quality improvements, increased profitability and access to new and growing markets. Earth-friendly companies also have less risk of environmental liability, which could have a major impact on future stock prices.

Advocates of green investing also believe that a company's environmental performance is a reflection of how the company is managed. Management style is an intangible factor that is difficult to measure, yet it can have a dramatic impact on a stock's performance.

Work green practices into outsourcing contracts

The green business model hits outsourcing head-on. Not only is the sustainability of raw materials important, but how the operation is run with energy efficiency, green chemistry and healthful work environments.

One way for companies to green up operations is to work green practices into their outsourcing contracts. US and UK businesses have been at a disadvantage on the global business stage in labor costs – but they have compensated by developing expertise and procedures that are environmentally and socially responsible.

Compliance regulations are now turning a favorable advantage to companies who took an early lead in engineering processes with a minimal to negative carbon footprint.

Suppliers tend to accomplish only what they are asked to achieve. If your products would be greener if your supplier tracked how many miles their parts traveled… ask for that transparency.

Finally, watch out for contractual loopholes that allow your outsourcing vendors around compliance to your preferred green requirements. Some outsourcing firms have placed caveats into their agreements to stop potential losses from expenses incurred on the way to green.

Microsoft Corporation outsources their facilities management services to various firms around the world. According to Pamela Passman, Microsoft negotiated to contractually add stipulations for their housekeeping and janitorial service providers to use green products in their delivery model. However, should the cost of such products exceed the cost of comparable non-green friendly cleaners and equipment, Microsoft must pay the difference or accept the ecologically hazardous waste.

The powerful green partnerships between client and outsourcer are becoming among the most respected links in the green supply chain.

“The champions are truly the next generations to whom we leave this earth. However, we'll undoubtedly witness the competitive successes of both outsourcing buyers and providers who implemented green practices when it was the right thing to do, not when it was the legislated thing to do”, predicts Wilson.

Thirteen steps to develop a green outsourcing initiative

According to BWG, developing a green outsourcing program can be simplified, especially with the right tools and the assistance of an advisor who has green expertise. Businesses can use the simple steps outlined below in starting (and maintaining) a successful green sourcing program

  1. COMMIT – make a commitment to contracting with green outsourcing services where available;
  2. DESIGNATE – dedicate sourcing personnel to the goal of seeking green-focused suppliers;
  3. COMMUNICATE – communicate your commitment to your employees, clients, current vendors, prospects, consumers/customers, and the public;
  4. ASSESS – review and evaluate your current sourcing contracts, partners, habits, policies, and procedures;
  5. SET GOALS – set green sourcing goals specific to your organization;
  6. LEARN – learn about green policies and initiatives from current and prospective vendors;
  7. ASK FOR TRANSPERANCY – vendors are going to respond if you ask for results;
  8. REVIEW – work with outsourcing suppliers and review the vendor's purchasing, product services specifications as your organization impacts the suppliers utilization levels;
  9. PUT IT IN MOTION – procure outsourcing services using a phase-in approach or test them through a pilot program;
  10. PHASE IN – demand that all current vendors meet an achievable implementation date for submitting, approving and executing their green plan;
  11. EVALUATE – evaluate your green sourcing program and that of your vendors;
  12. MARKET AND GET THE WORD OUT – market your achievements –- it will encourage all your vendors to get involved more quickly, and force competitive vendors to also raise the bar;
  13. MONITOR – monitor your green sourcing program with the assistance of external benchmarkers or internal auditors.

ImageTable IIT clients overwhelmingly prefere environmentally-responsible suppliers
Table IIT clients overwhelmingly prefere environmentally-responsible suppliers

ImageTable IIThe leaders in green outsourcing
Table IIThe leaders in green outsourcing

ImageTable III“Green” outsourcing survey criteria included
Table III“Green” outsourcing survey criteria included

Reference

Brown, D., Wilson, S. (2007), "The Black Book ‘Green Fifty’: The Top Environmentally Responsible Outsourcing Vendors of 2007, July", .

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Corresponding author

Douglas Brown can be contacted at: doug.brown@brown-wilson.com