Until recently, business decision makers thought that improving the sustainability measures in their products and services drives up costs. However, this view is shifting in companies across the world as decision makers can now see that taking the steps to better their sustainability can create a source of competitive advantage. In this week’s post, we are talking about how vendors can measure their sustainability using a value management approach.
To learn more about implementing value management, please, check out our previous post.
Sustainability as a cost-driver
Typically, businesses measured the improvements they made to environmental, social and governance (ESG) areas on how much they cost. So, ESG developments were looked upon as cost drivers in the early days. But this assessment was pretty biased because it overlooked efficiency income. This caused business decision makers to make unfit judgments and choices. For instance, if you make a product more sustainable, on the one hand it could cost more to produce, because of more pricy but environmentally friendly manufacturing processes. But on the other hand, your customers might think this product is better and is worth more, so you can increase the selling price and, the product creates more income.
Can sustainability conversations focus on revenue generation?
Customers’ decisions are shaped by ESG matters, and industry leaders of today know they can find a source of competitive advantage if they make moves to become more sustainable. The difficulty, even for the leading companies comes with attaching a monetary figure to the effect of ESG improvements. It is really complex to attach a value to these actions, in dollars or any other currency. And it’s really tricky to work out how many customers have purchased a product because it’s sustainable, rather than for other reasons. It is also hard for companies to grow brand value centred on the sustainability improvements they make to their offerings. Without knowing the cash value, meeting rooms get jam-packed with futile discussions about costs, fluffy ideas to defend sustainability and messy notions to drive competitive advantage.
Here are some questions to think about before we start:
- How does your situation look?
- Can you imagine a different situation?
- Would you find market tools, that can attach a monetary value to your sustainability measures, useful?
- Could you make your product or offering even more attractive by adding sustainability values if you already use number-driven approaches, such as value management or value selling?
- And if you were able to show your customers how much value they could get, in money, from making sustainability improvements - would they be happy to pay more for your offering?
To make sure that your sustainability arguments are more positive, here is how to measure sustainability using value management.
Here are 4 steps to guide you on this journey:
STEP 1: Know the ESG benchmarks in your industry
- Do you know where your industry stands with sustainability measures?
- And then where your industry stands in comparison to the next closest industry?
The first step is all about knowing just where you are. It’s best to get in the picture and to know your top industry benchmarks, so you can keep relevant and stay focused on your specific industry. When you understand your industry’s key ESG KPIs you will get to know your businesses context inside out, and this can really improve your competitive knowledge. You see, with this information it is much easier for you to set ESG targets. And, also, with cross-industry capabilities for every material ESG KPI, you can see which practices should be changed or improved to meet ESG targets. Since the ESG KPI options are vast and wide, choosing a select number of top-quality KPIs will give you the best results.
STEP 2: Know which ESG benchmarks are the best ones for your company
The questions in this phase are:
- Where is your company within your industry?
- Do you know where you stand against your direct competitors?
In step two your job is to look at your key ESG performance indicators so you can compare them to industry peers, or the industry leaders in sustainability. When you know where you stand, you can set targets to drive more effective long-term decision making. You can look at which changes can bring benefits to you, or your customers, with this knowledge. It really helps you to see how big the gap is between your business and top industry players.
STEP 3: Assign your KPIs a monetary value
- Do you know the value of each KPI in terms of money?
Step three is about looking at your ESG KPI measures in regard to the percentages, tons, etc., and working out how much they are worth. This process can feel a bit drawn out, but it’s usually fairly easy when you get going.
You can very simply find out how many tons of recycled packaging are used by top industry performers, what their CO2 emissions are, or a percentage of the minorities in employment, as an example. But, assigning every KPI a monetary value is, often, a quagmire. It can be so time consuming to give your KPIs a value, in dollars or in any other money, and this job can also require several people in separate teams to agree with each other.
Don’t let us put you off though because these measures are always worth it. Take it from us, any cross-functional conversations and decisions will be a lot less painful when you have these values. The fact is that some decision makers may be shy to buy into your qualitative sustainability story if they are being pressured based on financial needs. But this story will change completely when you can meet your customers with real monetary values.
Many of you will feel like you are all set up to have great sustainability talks with customers without needing to take this step, but it is always very wise to give your ESG KPIs a real cash value. All businesses are at the peril of downturns and financial pressures – it happens! And in these uncertain times the risk is higher for some companies. You will be better armed and more successful in the years ahead if you can speak the language of money.
Step 4: Monitor ESG KPIs using a value tracker tool
This last step is last but it’s not least. The key questions here are:
- What will happen when you put your sustainability strategy into action?
- How can you know if you are keeping on track?
- And how will you spot variances that might make you change your action plan?
This is all about how you measure how you perform on selected ESG KPIs. You need to track these KPIs regularly, and check where you are, to get the highest value possible from ESG investments. This stage of analysis looks at the economic value that you have realised on selected KPIs, the expected value that you should have realised, and the gap between these figures. Then it gives a forecast for the coming years. This helps you to fully follow your progress and witness your sustainability transformation. These results help you to build further credibility in your sustainability storytelling too, as we touched on in the last step.
The problem for vendors who don’t outsource some support and try to measure sustainability using value management alone, is that publicly available ESG data is usually unbounded, unreliable, and unclear. And, more often than not, not, sustainability divisions don’t have the spare hours, resources, or talents to undertake this level of analyses.
You will be able to make smart, value-driven sustainability decisions if you are equipped with the right tools and processes. You can back up your decisions when you combine sustainability improvements with value management. The four key steps to measure sustainability using value management that we have discussed with you today, are based on industry and company benchmarking. Like the processes that are also applied in value selling, they will help you to find an economic value for each KPI and then you can track KPI improvements over time.
Ökol, our partner company at TVST, has developed a business intelligence software platform. This is a tool that offers data analysis and provides specific industry and company benchmarks, all focused on material ESG KPIs. The four steps we have discussed in this post, are all included in the Ökol methodology. Ökol offers all the ESG KPI tools that you’ll need, which can save you time developing your own.
Do you want to find out more about how Ökol or TVST can help you manage your value and sustainability improvements?
Can we help you? You can get in touch with us @ Ökol to speak to an expert member of our team – and please follow Ökol on LinkedIn too.
To learn more from here, here’s a link to Ökol’s promo video!
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