Thursday, July 1, 2010

A Framework for Sustainable Business

"The ability to provide for the needs of the world's current population without damaging the ability of future generations to provide for themselves. When a process is sustainable, it can be carried out over and over without negative environmental effects or impossibly high costs to anyone involved."
This definition is nice but how to make it actionable?
A checklist would be nice, but that is probably too simplistic. Rather, there seems to be a few key ideas that lead from this definition that give a framework for answering the question: "Is this sustainable?" in whatever context it might arise. The first question is: sustainable for whom? Which leads to...

Triple Bottom Line (TBL)
""People" (human capital) pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the well-being of corporate, labour and other stakeholder interests are interdependent."
""Planet" (natural capital) refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and curtail environmental impact. "
""Profit" is the economic value created by the organisation after deducting the cost of all inputs, including the cost of the capital tied up."
To understand if something has unacceptable costs to anyone involved, you must first identify all of the stakeholders. The simplest embodiment of this idea is in the triple bottom line: Expanding accountability to the stakeholders rather than just the shareholders. Who are the stakeholders?
  • Your people
  • Your planet
  • Your profit (i.e. the economy in which you live and on which you depend).
Once you begin trying to account for all the stakeholders' costs and benefits you are led naturally to...

Full Cost Accounting (FCA)
  1. Accounting for costs rather than outlays
  2. Accounting for hidden costs and externalities
  3. Accounting for overhead and indirect costs
  4. Accounting for past and future outlays
  5. Accounting for costs according to lifecycle of the product

FCA requires explicit acknowledgement of costs that are typically ignored in traditional cost / benefit analyses. It requires systems thinking to understand the scope and source of these costs. The points of FCA that seem, to me, to be particularly relevant to sustainability are:
  • What does it really cost to obtain, use and replace a resource? Natural resource usage is a good example: prices reflect extraction costs rather than replacement costs (it's not sustainable if I run out with no replacement). So using resource price as the cost of resources is insufficient to account for the impact of using that resource. Oil is cheap to extract but difficult to replace.
  • Externalities are acknowledged as costs of business rather than someone else's problem. Passing the cost to someone else does not make the cost go away - it's just theft from that person. A good example is the effect of overworking employees. What is the cost of a crumbling family or of the loss of a parent from workplace induced illness or stress related disease? In traditional accounting, such concerns are not the business' concern so efforts to improve employee well-being are are difficult to justify.
  • Future outlays to deal with preventing externalities are also planned for. This encourages reuse and encourages building recycling and collection into the product design and business model. It is good business to have people buy a new cell phone every year, until you have to pay for the safe disposal of every one of those phones or the impact on health and environment loss from improperly disposed phones. Wouldn't it be more economically effective to plan on collecting and reusing the materials?

If you include in the costing the environment as the source of all resources and that a better environment results in more plentiful, higher quality, more productive resources (material and labor), then you reach...

Cradle to Cradle Design
"Cradle to Cradle design perceives the safe and productive processes of nature’s ‘biological metabolism’ as a model for developing a ‘technical metabolism’ flow of industrial materials. Product components can be designed for continuous recovery and reutilization as biological and technical nutrients within these metabolisms."

This is about making the world better with each unit produced rather than just making things "less bad."
While Cradle to Cradle emphasizes product design, to me the idea logically extends to sustainable business processes as well: How do I design a business process that makes my people and customers more fulfilled rather than just "less abused" in pursuit of the company's goals?

  • Trust marketing: respect your customers and their interests to build more business.
  • Foster and direct intrinsic motivation (Drive... see TED video below) to get the most from employees.

Put another way: sustainability seems to be about approaching business with Aikido in mind (blend and direct) rather than with Taekwondo in mind (block, strike and smash).