Sustainable outsourcing

Usually sustainability is thought of as cutting down CO2 emissions and planting more trees. But sustainability is more than just acquiring a green image. It is another way to look at your own company, the external environment and thus also your sourcing strategy. Organizations can actually profit from better financial results by a smart application of the modern aspects of this theme.

A large oil and gas company outsourced a part of its BPO activities to Asian supplier. This supplier had contracted another co-supplier for data-entry activities who used illegal under aged employees. A non-governmental organization found this out by accident which resulted in a lot of negative press for the oil and gas company. In order to outperform the competition they outsourced several activities, but this backfired due to severe image damage.

Several clients which outsourced part of their IT activities to a Tier 3 vendor indicated that they needed more insight in their carbon footprint as part of their corporate governance policies . The IT firm was taken by surprise by this request, as their sole focus was on the realization of a new data center concept based on Platform-as-a-Service (PaaS).

In the first example the oil and gas company miscalculated the risks related to sustainability, which caused damage to their image as well as to their financial advantages of the outsourcing deal. The IT vendor in the second example were managed by two directors whose main focus was on internal affairs and the latest technologies. They were taken by surprise by the effects of environmental developments on their business process. In both cases there was too much internal focus and too little understanding of the external developments.

A better approach

Wal-mart is an example of an organization that is able to combine sustainability and high performance. They defined thirteen networks related to a number of sustainability related themes.  The Wall-Mart networks are built upon different external and internal stakeholders and have a primary target on reducing the ecological pressure.

For the supply chain network this means not only a reduction of package material but also an estimated reduction of $3.4 billion in the period from 2008 to 2013.

More and more senior businesses managers will demand similar action from parts of the organization that are not under their direct control (like IT, facility management, F&A). A senior manager will for example be able to explain to his clients that also the IT organization defines and meets sustainability targets for its IT Services. So also staff functions will have to make an effort on topics like social responsibility, human rights, ethics and environment.

Sustainability is thus typically a theme where Business and staff functions like IT, facility management, F&A and others have to work closely together. The main difference between “normal” and sustainable value chain optimalization is that value is not only measured by a higher profit. However, the process is quite similar.

Applying the approach

In the first example, the oil and gas company encountered problems because there was not sufficient control on the outsourcing contract. The happiness of the managers who made the deal in the first place, backfired on them, when newspapers reported the violation of human rights by the suppliers.

More and more organization are implied by governmental and consumer organizations on their social responsibilities. The fear of reputation damage is often the starting point for sustainability projects. Therefore more than often regarded as a risk and cost factor.

The illustration uses portfolio techniques to show in which way for example IT initiatives contribute to sustainability, business value and/or lower costs. The green line draws a borderline between attractive and less attractive investments.

In the second example, the IT firm was caught by surprise by the request of its clients to provide more insight in the power usage of the IT systems. Insight in the total power usage is however only a minor aspect of the Total Cost of Sustainability (TCS). For many organizations insight in and allocation of power costs are already a challenge.

Expect that in the near future more and more senior business managers will require that also departments which are not part of the primary business value chain have to contribute to the desire of companies to get a more social and green image. Incorporating this into the sourcing strategy and selection criteria is still a relatively immature practice. Most IT contracts for example do not include much more than some clauses referring to reducing CO2 production.