The Outsourcing Challenge: Green or Bust?

SSON News and Analysis
Posted: 07/09/2012

We have all read the hype around green IT but what does it really mean within a business context, and in particular within the context of an outsourcing relationship?  Once you have managed to cut through all of the hype surrounding green IT, it becomes overwhelmingly clear that green IT is nothing more than driving efficiencies within an organisation and at the same time having a positive impact on the environment.  Green business is good business and certainly makes good business sense.

The Outsourcing Dichotomy

A dichotomy exists within outsourcing relationships however. Traditional models of outsourcing are not conducive to promoting green initiatives, energy or operational efficiency.  Outsourcing relationships are largely not designed for efficiency and this does not assist in driving green IT within the outsourced customers concerned.  Whilst on the face of it, outsourcing initially reduces costs and improves services through a more efficient outsourcing vendor, over a period of time, the service in many instances becomes more expensive.

Outsourcing agreements are typically structured and charged on the basis of the concept of baselines: for example supporting 100 servers will cost you X.  The dichotomy arises when you introduce new sustainable technologies such as virtualization.  Let’s assume now that through virtualization you can consolidate down to 10 servers, a massive saving in energy and certainly a saving in terms of resource cost and real estate.  In reality, this is not in the outsourcer’s interest as this reduces their revenue stream and the baseline cost reduces.

Another example is energy efficiency.  The energy used to run services in the data centre is usually covered in an outsourcing agreement and the utility bills are serviced by the outsourcer, but what about the end user environment?  The end user environment - i.e. workstations and monitors - is the big hitter in terms of energy reduction, using as much as 39% of total energy in the IT environment according to Gartner.  This is almost always paid by the end user or customer, despite the fact that the outsourcer runs the service. There is no gain for the outsourcer to reduce energy in this environment and hence the customer continues to pay for inefficiency.

There are a number of other examples, all driven by baselines.  Print output for example: the more you use, the more you pay for, and the list goes on.  It is in the outsourcer’s interest to get you to use more as this increases revenue. Outsourcers don’t want you to become efficient as it will drive down their revenue. This is the fundamental problem with outsourcing and green initiatives.

The Opportunity

Interestingly, the advent of green IT creates an opportunity for outsourcing companies that are visionaries and are willing to embrace the carbon economy. This presents itself in a number of examples. To understand the first one, we need to delve into carbon management and carbon reporting. Globally, carbon reporting at an enterprise level is conducted using one of the three GHG (Green House Gas) protocols. The protocols are a means of converting an activity of work into a carbon equivalent, e.g. 1kWh of energy equates to X kg of CO2, the same for air miles etc. 

The protocols are further divided into scopes for ease of reporting.  Scope 1 emissions are emissions created within the four walls of your business; Scope 2 emissions are emissions as a result of any energy you purchase from a utility company; and Scope 3 emissions are emissions created as a result of a product or service you procure from a third party.

If company X procures outsourcing services from company Y, the emission is classified as a Scope 3 emission for company X (the customer) and a Scope 1 emission for company Y (the provider).  Why is this important?  Although global debate continues around how carbon taxes will flow as a result of emissions, there is consensus that there should be no double accounting of emissions.  Hence the latest thinking is that the tax associated with Scope 3 emissions will be shared between the customer and the provider.  In this way, in the future, outsourcing services will be a way of offsetting a company’s (the customer’s) carbon taxes and presents a growth opportunity for outsourcing vendors willing to embrace this.

Following on from the example above, comes the next, the green outsourcing provider.  Let us assume that company A wants to outsource a call centre and it has the opportunity to do so with 3 vendors.  Future procurement will have an additional dynamic - a dynamic around carbon - and the decision to buy will be based on 3 criteria, namely cost, service provision and carbon.

Outsourcing providers who embrace green initiatives and efficiency will gain competitive advantage in the new carbon economy.  Two recent studies back this up.  A report released by Goldman Sachs showed that in six sectors covering energy, mining, steel, food, beverages, and media, companies that are considered leaders in implementing environmental, social and governance (ESG) policies to create sustained competitive advantage have outperformed the general stock market by 25 per cent since August 2005. There is nothing to suggest that outsourcing providers would be categorized any differently.  A quote from the Harvard Business Review, Competitive Advantage on a Warming Planet, 2007, further illustrates this: "….the most important distinctions to be made when considering environmental risk assessment aren’t between sectors but within sectors, where a company’s climate-related risk mitigation and product strategies can create competitive advantage."

The Opportunity Expands

Clearly outsourcing relationships, and by association outsourcing contracts, need to adapt to embrace changes in the way business will be conducted in the new carbon economy. Customers embarking upon renegotiating outsourcing agreements or signing new relationships need to take cognizance of green IT and build efficiency into the contractual vehicle. Writing clauses into the contract that promote and reward efficiency is probably the easiest way to overcome the dichotomy illustrated above.  Doing more with less, reduce, re-use and recycle as well as energy efficiency clauses should all be considered when signing any new agreements.

Although agreements need to be geared toward becoming more efficient and thus more cost effective, this is not to say that the outsourcing provider needs to have his revenue and margin completely eroded.  This is backed up by a case study conducted by Accenture in 2007 of more than 7,500 consumers in 17 countries in North America, Europe and Asia. 64 percent of respondents said they would be willing to pay a higher price, a premium of 11 percent on average for products and services that produce lower greenhouse gas emissions.  Thus opportunity exists to not only win market share as a green provider, but potentially to charge a premium for doing so.

The Future

Customers must continue to push the envelope in respect of their outsourcing providers.  Start to question your providers on their procurement policies. Establish whether the technology they are using is sustainable, not only in its use but in its disposal as well.  And don’t just take their word at face value either; ask for documentary evidence from technology providers.  Procurement of product and services must start to use carbon as a decision element; rather embrace this now than be fighting fires in the future.
Within the context of an outsourcing relationship, a good vehicle to drive green initiatives would be the establishment of an innovation committee that is specifically geared towards sustainable initiatives within an IT framework.  Although this should operate at C-level, good representatives to have on this would be environmental resources and facilities or building management people who understand the impacts of energy and resource wastage.

Finally from a contractual perspective, start gearing yourself up for carbon service level agreements (SLA’s).  Carbon reporting is a future imperative, in some countries already legislated.  Outsourcing agreements will not only be required to cater for this but conceivably have SLA’s and penalties associated with carbon emissions.

In conclusion, the new carbon economy offers opportunity for both customers and outsourcing providers.  The key challenge is to establish the win-win criteria that are always the case when embarking upon such strategic decisions.  Significant benefit and opportunity exists on both sides of the fence however and all should embrace this new climate of opportunity with open arms.

About the Author

Tim James is a legal graduate from the University of Witwatersrand, Johannesburg, South Africa.  He spent 10 years in IBM South Africa and IBM UK in various roles, including transitioning and running a number of large outsourcing engagements.  He is passionate about the environment and the impact that man has upon it.  Tim is a founding director of sustainableIT, a software and services reseller geared to assisting clients in the new carbon economy through the adoption of sustainable technologies.

sustainableIT, South Africa’s first ‘Green’ IT company, offers leading edge technology solutions and consulting services to companies embarking upon a carbon reduction strategy. This includes technology specifically geared to reducing energy consumption within a company’s IT infrastructure.  Its mission is to be a catalyst within the South African business context specifically focusing on how information technology can contribute to CO2 emission reduction.

SSON News and Analysis
Posted: 07/09/2012


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