A recent study was brought to my attention by Spend Matters Jason Busch (@spendmatters). The report reminded me of the scene in the movie Jerry McGuire, where the sports agent coaches his client, and he shouts through the phone “Show me the Money!”. Well, despite late 2010 surveys that suggested that companies may pull back sustainability efforts, I suggest that CFOs read this first before pulling the plug.
PwC, Insead and EcoVadis collaborated recently to construct a quantitative model to link Sustainable Procurement practices and positive economic impact. A link to the white paper download is here. The three companies went about asking the question: “Is Sustainable Procurement a true value creation initiative to be welcomed not only by customers but by shareholders and financial markets as well?” The quantitative model was created by the analysis of the three main drivers and their respective impacts on the company’s annual procurement spend, market cap and revenue. Their impact was then compared to the implementation cost of a Sustainable Procurement program.
Among the reports key findings:
- The payback from investing in risk reduction activities in the supply chain targeting the financial impact on “brand value from negative supplier practices (e.g., child labor, creating local pollution);economic cost of supply chain disruptions (e.g., noncompliance with environmental regulation,” etc. is eighty-five times the cost associated with the initial risk reduction investment.
- Additional revenue through innovation of eco-friendly products/services, price premium or income from recycling programs yielded a 58 percent payback.
Talk about showing the money! Geesh, where do I sign up?!
The study found sustainability- driven cost reduction from energy reduction programs for instance, could fund the entire cost of a procurement initiative. This would allow companies to benefit quickly from both risk management reduction and potential revenue growth opportunities. The study also found that there were additional ‘value creation’ opportunities that could be realized if procurement departments collaborated more closely with the marketing and R&D departments upstream on the projects. In most cases, this requires a process modification to involve procurement experts in the design of new product and/or services. Findings in three primary areas were covered in this report (cost reduction, risk reduction and revenue growth). Key ‘value drivers’ for sustainable procurement and economic indicators are shown in the table below: