Leadership and the Business Case for Sustainability in the Federal Sector

Both Executive Order 13514 and Energy Independence and Security Act (EISA) Section 432 require federal agencies to strategize, implement and report on their energy-efficiency and greenhouse gas (GHG) emission-reduction initiatives. Across the federal government, sustainability initiatives are emerging with increasing prevalence. Some examples include the multiple-agency program, E3 (Economy, Energy and Environment), which helps manufacturers become both lean and green; the General Services Administration's (GSA) promotion of green procurement and high-efficiency green buildings; and the U.S. Navy's recent test flight of the Green Hornet, an F-18 powered by 50 percent biofuel in anticipation of the deployment of its "Green Fleet" within a few years. With the number of sustainability projects and initiatives underway within most federal agencies, how should stakeholders in the federal government measure and analyze the benefits of promoting and investing in sustainable practices and products? Regardless of the type of sustainability initiative, the business case is the most important document to justify and report their outcomes. In order for the results to be valid and respected, stakeholders must understand three key dimensions of the business case:

1) Leadership and strategy alignment;
2) Overcoming the challenges of meeting statutory and Executive Order requirements; and
3) Choosing the best measurement model for analyzing results.

Leadership and strategy alignment

EO 13514 clearly identifies the efforts to reduce energy consumption and lower GHG emissions as a leadership initiative - that is, all participating federal agencies are required to develop strategies, implement and report on projects, and continuously improve their processes as a model for leadership to the rest of the country. Too often, the lowest level of effort is given to those initiatives that are the least understood. In addressing sustainability, because of its broad and vague definitions - including impacts on the economy, environment and equity in society - some agencies may tend to check the compliance box rather than take advantage of the full array of benefits.

In many instances, the failure to comprehensively address sustainability is due to the lack of buy-in by top managers. Among the most important aspects of justifying the costs of sustainability is the degree to which leadership aligns the mission of the organization with sustainability objectives. In my book, Smart Green, corporate leaders described the difference between "adding green projects" to their business plan and "becoming sustainable." The difference is alignment of strategies with the mission of the organization versus assigning projects to various departments in order to fulfill a requirement.

Companies began experiencing improvements in cost savings, employee performance and increased sales due to sustainability being "part of the DNA" of the organization. This is significant: there is a direct correlation between increasing sustainability activity at the highest levels and moving down within the organization and the overall performance of that organization. In addition, many organizations are discovering that unless sustainability initiatives are supported from the highest level of the organization and included in the mission and strategic plan, these initiatives fall by the wayside and are often ignored. Given the time it takes to demonstrate some of the benefits of sustainability initiatives, many projects are not measured and therefore abandoned within a year or two. This raises another point with regard to leadership: sustainability must not only be included in the mission and strategic plan, but it must also be supported and maintained by the financial leaders of the organization. In a recent survey of CFOs and accountants in both the public and private sectors (NCACPA newsletter, June 2010), over 85 percent of participants in the survey indicated a belief that their role was critical for the success of sustainability initiatives, and an equal percentage indicated they were not consulted or informed about these plans. 

Overcome the challenges of meeting statutory and executive order requirements

Another equally important dimension of building the sustainability business case is meeting the goals outlined in recent statutes and executive orders such as The Energy Policy Act, EISA, National Defense Authorization Act, EO 13434 and EO 13514 that require agencies at a minimum to increase the visibility of energy savings through metering, auditing and commissioning of federal facilities; implementing and reporting on energy conservation projects; implementing and measuring operational energy projects in the military context; and developing short- and long-term strategic plans for reducing GHG emissions and introducing renewable energy projects. Agencies will need to demonstrate how they plan to overcome some of the challenges to fulfilling these requirements.

Some of these challenges include the following:

Funding. Although there are numerous funding mechanisms for sustainability initiatives available to agencies beyond direct allocation such as Energy Savings Performance Contracts (ESPCs) and Utility Energy Service Contracts (UESCs), there still remains a gap in realizing the real costs and benefits associated with reducing energy costs while also lowering GHG emissions by introducing renewable energy sources. In some cases, energy-efficiency projects have long payback periods and minimum engagement costs exceed $1 million. Agencies will need to explore automating the creative commissioning and bundling of their projects, i.e., lower-cost/high-savings projects with high-cost/longer-term savings projects.

Standardized reporting infrastructure. Federal facilities have been developing and deploying a variety of technology solutions for managing their facilities, with little or no guidance to meet current and upcoming compliance requirements in energy-efficiency and GHG emissions. In some cases, agencies may have several systems operating throughout the agency that may or may not be compatible. The increasing number of metrics and complexity of calculations and reporting requires an assessment of facilities management technology. Standards and guidance need to be established to ensure ease and cost-efficiency in reporting, as well as optimization of the technology investment.

Energy management and IT training. The complexity of managing facilities and energy is expanding. In a recent article in the Federal Register, a bill was soon to be passed that would allocate funds to provide certification training for federal facility and energy managers on advances in technology, such as computer-assisted facilities management (CAFM) systems, and new approaches and technology for energy efficiency. To be compliant with statutes and executive orders, agencies must elect an "energy manager"; however, some agencies are assigning the role of energy manager to individuals who may not be qualified. There is an immediate need to develop and deploy a variety of core training materials both online and in the classroom to educate the facilities/energy managers who will manage the new complexities of energy-efficiency compliance, planning and measurement.

Sustainability strategic planning support. Federal agencies are required to develop and submit a sustainability strategic plan, as well as submit periodic progress reports. Many of the sustainability team members in the agency are unfamiliar with the key concepts and are not aware of all the potential benefits of an integrated sustainability strategic plan in relation to its impact on performance and the organization's mission. Comprehensive training, mentoring and support capacity for agencies is needed to improve the quality and outcomes of sustainability initiatives.

Analytics support for sustainability outcomes. Most agencies collect data and report energy-efficiency outcomes as "energy savings" and "cost savings." They may also seek to determine the Savings to Investment Ratio (SIR), and an adjusted internal rate of return (AIRR) that requires additional calculations. As the complexity of reporting and data types increases, agencies will need to utilize more sophisticated analytics models and tools, not only to meet statutory requirements but also to demonstrate improvement of their own processes and duplicate the most productive efforts throughout the organization.

Choose the best measurement model for analyzing results

A key consideration for fulfilling the statutory requirements and meeting the challenges and opportunities provided by sustainability strategies includes choosing the correct measurement approach. Among the most significant challenges in the development of a measurement approach is in the definition of the model and choosing the right analytics  approach for the desired outcomes. Having informative integration partners and feature-filled software tools becomes irrelevant if the model for analysis is not determined correctly. Two types of measurement that are equally important but serve different purposes include Savings on Investment and Return on Investment, as outlined below:

Savings on Investment (SOI). One significant misconception about measuring financial impact is that cost savings, also known as savings on investment, are considered a return on investment. The typical SOI approach impacts the organization in two basic ways: cuts to the budget and improvement of organizational processes. The highest form of SOI activities includes reliance on the discovery of mass economies of scale, hyper-efficiencies, and business processes that reduce waste and time. Although a necessary step for maximizing available resources, SOI analysis helps to solve short-term goals, but may misinterpret business needs that drive clients, and potentially fail to inspire breakthrough value for the organization.

In Figure 1: Savings on Investment Approach, the flow of information, requested data sets and final report result in comprehensive savings and compliance. The statute (Sustainability Regulation) guides the federal agency, for example, to be compliant by introducing sustainability initiatives into their facilities. In this case, sustainability is never fully integrated into the mission goals and therefore the facilities managers deploy systems and technologies with the sole benefit of the device and only indirectly for the benefit of the agency’s mission result. This analytics model can only show energy and cost savings and submit a report that the effort was compliant with the statute. Therefore, no conclusion can be drawn on the isolated impact of the sustainability initiatives because the analytics approach, metrics chosen and outcomes report are separated from the agency’s mission outcomes.

Return on Investment (ROI). The ROI of a project assumes a measurable financial return that is connected to the overall success of the organization. Measuring business impact requires statistical analysis to isolate the benefit from other possible inputs to the benefit. Measurement of ROI is much more than the typical historical look at the benefits of a current project. Using an analytics approach, through careful identification of intervention and control groups, departments can tease out additional metrics to optimize their strategies and deploy successful projects across the agency, for even greater returns. Long considered too expensive, complicated or even impossible, measuring business benefit is not only possible, it is fast becoming a business imperative - especially with the ever-increasing interest and demand for sustainability-related projects.

In Figure 2: The Return on Investment Approach, by contrast to SOI, requires agencies to integrate sustainability as an integral part of the mission goals being implemented by the facilities managers, and demonstrated in the strategic plan, implementation and outcomes of the project. As a result, this analytics model collects data on both the project outcomes, e.g., project completion, efficiency, productivity, etc., as well as sustainability metrics in comparison to previous missions or in the current mission to demonstrate isolated impact. The final report not only provides the energy and cost savings to meet one aspect of statutory compliance, but it also offers an integrated final report for performance improvement inclusive of sustainability outcomes and isolated impact. This report will help to increase the visibility of some of the unseen benefits of sustainability’s contribution to mission success.

Though these two models seem deceptively simple, many analytics firms and systems integrators will default to the SOI approach because the metrics are easier to capture, and the cost and energy savings basically meets the compliance requirements of the statute. Moreover, there is a distinct cost difference between the two models, with the ROI approach costing more but with much greater gains from the benefits, paying for itself very quickly. This subtle difference between the savings gained from sustainability and the isolated benefits of sustainability on the mission must be acknowledged and clearly defined in the expectations of outcomes and reports.

Strategy alignment, overcoming challenges to meeting statutory requirements and choosing the best measurement have become increasingly important for stakeholders in federal agencies to address the increased pressure to be compliant with recent statutory requirements. More importantly, the complexity of sustainability data-collecting/-reporting is increasing, requiring new approaches to demonstrate the business case with greater validation. Through greater leadership, aligning sustainability outcomes to the agency’s mission and goals, and choosing the right measurement models, agencies will be able to rise above the challenge of demonstrating and maximizing the benefits of sustainable initiatives.

*Footnotes