Sustainable Procurement: a crucial lever to end the crisis?

Whitepaper based on the HEC 2009 Sustainable Procurement Benchmark and 21 interviews with Procurement Directors

O l i v i e r B r u e l H E C P a r i s O l i v i e r M e n u e t S N C F P i e r r e - F r a n ç o i s T h a l e r E c o V a d i s

1

Table of Contents

Executive Summary ............................................................................................................................. 2 1. Historical reminder .......................................................................................................................... 3

2000-2004: “Just a fad?” .............................................................................................................. 3 2004-2006: “Why?” ..................................................................................................................... 4 2006-2008: “From Why to How?”............................................................................................... 5 What about tomorrow?................................................................................................................. 6

2. Benchmark 2009 .............................................................................................................................. 7 2.1 Procurement Directors’ vision ................................................................................................... 7

What benefits?.............................................................................................................................. 9 What results? ................................................................................................................................ 9 What obstacles?.......................................................................................................................... 10

2.2 Company practices ................................................................................................................... 12 What impact on the organisation? .............................................................................................. 12 What tools? ................................................................................................................................ 13 Measurement indicators ............................................................................................................. 14

2.3 “Responsible” suppliers and “sustainable” products ............................................................... 15 How to involve the suppliers? .................................................................................................... 15 What impact on the choice of products? .................................................................................... 17

3. Keys for the future ......................................................................................................................... 18 3.1 Six action principles ................................................................................................................. 18

1. Measure… and measure again ............................................................................................... 18 2. Integrate environmental, social… and economic aspects ...................................................... 19 3. Act on products and involve the suppliers ............................................................................. 19 4. Integrate into existing procurement processes ....................................................................... 20 5. Set up a dedicated organisation .............................................................................................. 21 6. Allocate appropriate resources ............................................................................................... 21

3.2 Manage change by maturity stages .......................................................................................... 23 Stage 1 ........................................................................................................................................ 24 Stage 2 ........................................................................................................................................ 24 Stage 3 ........................................................................................................................................ 24 Stages 4 and 5 ............................................................................................................................ 28

Conclusions: a lever to end the crisis? ............................................................................................... 29 Appendix 1 – Study characteristics .................................................................................................... 30

2

Executive Summary Since the first HEC study carried out in 2003, Sustainable Development, an emerging subject at the time, has become a key concern for Procurement Departments. How are Sustainable Procurement initiatives weathering the current economic and industrial crisis? How have Procurement Directors managed to solve the implementation difficulties which they were facing in 2007? These are only a few questions which the HEC-EcoVadis 2009 Barometer is attempting to answer. You will find hereafter the principal lessons of the 2009 study:

• Sustainable Procurement is still the number 3 priority of Procurement Directors, an objective deemed “critical” or “important” by 90% of them.

• Image protection and cost management remain two key motivation factors but compliance with environmental regulations now completes the trilogy.

• The big news in 2009 is that the objectives are considered “achieved” or “in the process of being achieved” by 80% of the respondents. The transition to operational implementation is effective.

• The obstacles already mentioned in 2008 (contradiction between short and medium-term objectives and lack of pertinent indicators) remain predominant, with an additional focus this year on budgetary constraints (certainly due to the economic climate).

• Only 11% of companies intend to reduce the Sustainable Procurement budget, while 35% will increase it despite the budget cuts affecting most companies.

• The effects on organisation are now palpable: 37% of the companies interviewed have put in place a Sustainable Procurement department or at least a dedicated entity. Half of the companies have raised their buyers’ awareness, or fully trained them, on Sustainable Development concerns.

• The tools specific to Sustainable Procurement have significantly evolved, with a special focus on supplier evaluation and risk analysis tools for each procurement category or each country (+15% deployment over one year). Supplier evaluation methods have become more prominent (+5%) to the detriment of the buyers’ empirical judgment (-11%). These CSR evaluations do not yet cover the entire supplier portfolio, with only 11% of the companies applying them to all suppliers.

• 75% of the companies are now integrating CSR into the bidding process and 30% of them allocate significant weight to these criteria in the grading and selection system (with an average weight of 10%).

• Finally, 75% of the companies use Sustainable Procurement performance measurement indicators although these indicators are still largely focused on processes and resources. In addition, progress has been made with regard to the emergence of individual performance objectives required of the buyers for approximately 16% of the respondents.

At the end of this study, it appears that Sustainable Procurement policies will not suffer from the current economic crisis but will be reinforced by this crisis. By encouraging environmental innovation, transparency of the companies’ CSR performance, and instructing parties’ responsibility with regard to SMEs, they can even act as a crucial lever to end the crisis.

3

1. Historical reminder A brief recap of the emergence and deployment of Sustainable Development in the Procurement function, before becoming what we will now refer to as “Sustainable Procurement”. Based on four surveys on “Procurement and Sustainable Development” in 2003, 2005, 2007 and 2009, we can outline its historical evolution.

2000-2004: “Just a fad?” At the time, it was very à la mode: many were talking about Sustainable Development in general terms and there was a lot of enthusiasm but few companies carried out genuine actions other than a few marketing-motivated and “green” actions. Only a handful of pioneers were beginning to truly commit. This was all the more apparent within the Procurement Departments who failed to grasp the full phenomenon as well as the associated risks and opportunities. A pioneer had already promoted change before 2004 by integrating Sustainable Development criteria: Nature & Découvertes, whose product range clearly showed an actual and in-depth concern about environmental protection. The current success of this company, little known at the time, demonstrates how this vision fulfilled the consumers’ expectations. Another example is EDF, who in 2002 launched a vast Sustainable Development training programme in partnership with the consultancy firm Des Enjeux et des Hommes, aimed at training 1,000 instructors within the company, who were then to implement the awareness programme amongst the 117,000 company employees. The first major corporations started appointing their Sustainable Development Directors around 2002-2004; these directors were often rather isolated and lacking in major resources but were convinced of the legitimacy of their commitment. In France, these appointments coincided with the NRE law of 2001, which obliged listed companies to publish their commitments and achievements in terms of CSR (Corporate Social Responsibility). In this context, it came as no surprise that the consideration of Sustainable Development in the procurement policies and the management of relationships with suppliers was almost non-existent, with very few exceptions. For example, SONY upgraded its supplier certification audit programme in March 2003 by launching “The Green Partner Environmental Quality Approval Program”, in which environmental criteria were assessed simultaneously with more traditional ones (Quality, Costs, Delivery, Services). The HEC 2003 survey was organised during this first major historical phase. One of the initial findings, rather surprisingly for the time, was that 40% of the Procurement Directors, when interviewed on their strategies and practices, mentioned Sustainable Development as one of their priorities (albeit far less crucial than cost cutting, cash flow improvement, supplier risk reduction etc.). Furthermore, at this time the deployment level in terms of Sustainable Procurement was nearly non-existent. Intentions were beginning to emerge but nothing was really changing in terms of procurement habits.

4

2004-2006: “Why?” Under pressure from their Top Management, Procurement Directors were forced to integrate CSR criteria into their procurement strategies and policies. In 2004, the Senior Executive Leaders discovered that the SD and CSR risk was significant for their company, revenue and image, which is why they asked all their support functions to put in place processes to manage and anticipate these new risks. For example, in mid-2006, the PALM Company lost $120 million in market capitalisation because of the withdrawal of its new TREO 650 model from the European market, having discovered too late that the suppliers had failed to comply with their RoHs obligations. Another example is PEPSICO who, in 2006, had to withdraw its bottles purchased in Mexico because their lead content was too high, which also resulted in a $1 million fine payable to the State of California. With regard to Procurement, this resulted in a much higher awareness of the need to integrate these new aspects, beyond the traditional QCD criteria (Quality / Costs / Delivery). As highlighted by our 2005 survey, more than 60% of the Procurement Directors interviewed felt that the consideration of Sustainable Development in their policies and practices was becoming a strategic issue; however, significant gaps remained between this new vision and actual practices observed in the field. Compliance procedures in relation to certain regulatory constraints linked to environmental issues begin to appear, but social constraints are not yet fully taken into account beyond the traditional “Fight against child labour in developing countries”. The companies tackling the “Environmental / Social / Economic” aspects remain exceptional, disparate and small-scale. To be perfectly fair, however, certain notable advances can be observed in cases of simple procurement processes likely to create visibility, such as eco-responsible office paper (recycled or generated by certified and sustainably managed forests) or ink cartridges (for photocopiers or personal printers) recovered and recycled sometimes by personnel involved in a vocational integration programme. Some advanced Sustainable Procurement practices examples are also worth mentioning: that of IKEA who committed to an in-depth approach integrating the Environment and Social rules into relationships with its suppliers. These suppliers are encouraged to adopt a virtuous approach designed to improve their environmental impact and social practices, called the IKEA Way, with IKEA’s buyers and auditors helping them implement their permanent progress processes. There are two other significant examples during this period. In 2005, GENERAL ELECTRIC conducted the social and environmental audits of 4,475 suppliers, resulting in 272 contract terminations with companies who failed to comply with basic Sustainable Development criteria. In July 2005, the British Government launched its new strategic programme called “Sustainable Procuring for the Future”.

5

2006-2008: “From Why to How?” The transition seems truly effective: Procurement Departments are well aware that they (finally) must switch to a more standardised operational deployment phase, and fast, despite the lack of tools, resources and result indicators. As demonstrated by the third survey in 2007, we are entering a phase during which more than 80% of the Procurement Directors claim that Sustainable Development is one of their top 3 priorities, second only to direct and indirect cost cutting. A considerable gap remains however between declarations of intent and actual achievements – visible in the field – as less than 10% of them claim to have fully achieved their Sustainable Procurement objectives and 50% confess that they have initiated nothing or very little. The principal shortfall lies in the lack of expertise in establishing and above all deploying a genuine Sustainable Procurement policy: lack of appropriate processes, lack of dedicated tools, lack of skills, lack of indicators (KPIs) and a relative inability to determine a target (objectives) and implement guidelines to steer the operational implementation. Despite these difficulties, certain very symbolic actions demonstrate however that it is possible to advance, even in a fairly pragmatic way, by acquiring targeted external skills and more importantly with a genuine desire to move the traditional frontlines. Four examples illustrate and epitomise the 2006-2008 period. In 2007, WALMART launched a packaging-related initiative aimed at reducing CO2 emissions, effectively resulting in a significant 600,000 ton reduction in CO2… but also in $3.4 billion cost cuts! That same year, LA POSTE chose the train rather than plane to transport its products from Paris to Bordeaux, which significantly reduced greenhouse gas emissions on this route while generating savings of approximately €1 million! Also in 2007, VODAFONE launched a new programme called “Supplier Sustainability Awards” to encourage and reward its most virtuous suppliers in terms of Sustainable Development. Finally, in early 2008, SNCF launched its new Procurement programme, SynergiA, which makes Sustainable Procurement the focal point of its strategic value-added system over the long term: thus, Sustainable Development criteria are assessed on a par with other, more traditional procurement criteria (economic performance, supplier quality, customer services).

6

What about tomorrow? This is why, at the end of 2008, we thought it necessary to assess the reality of corporate deployment. After many years of reflection, raising awareness and feeble deployment, it was important to observe whether Sustainable Procurement was finally having a greater impact on procurement strategies and plans of action. Contrary to the previous publications of this European “field” survey, thus far limited to the fact-based reporting of observations, this “2009 Sustainable Procurement Barometer” also offers in-depth and prospective elements: in the following pages, we present action principles based on the analysis of best practices and we provide a reference system based on the concept of Procurement maturity levels, designed to shed light on the change management issue. We strongly believe that “21st century procurement can only be sustainable”.

7

2. Benchmark 2009 Since the first study carried out by HEC in 2003, Sustainable Development, an emerging topic at the time, has become a significant concern for Procurement Departments, so much so that the 2007 Barometer was entitled “2007 – Sustainable Procurement is growing up””. How has the Sustainable Procurement process weathered the economic and industrial crisis with which most companies are confronted? How, since 2007, have Procurement Directors managed to solve the effective policy implementation difficulties they faced at the time? These are only a few questions which the 2009 edition of the HEC-EcoVadis Barometer is attempting to answer.

2.1 Procurement Directors’ vision This survey was carried out in the autumn of 2008: the concerns associated with the financial crisis were expected to badly affect the Procurement Departments’ focus on Sustainable Development. After 4 years of very rapid development, the priority level of Sustainable Procurement seems to plateau, albeit at a high level: more than 80% of the Procurement Directors consider this theme an important or critical priority.

While Sustainable Development is deemed slightly less “critical” by certain Procurement Directors than in 2007, it remains solidly anchored in second place, just behind cost cutting (direct and indirect costs) and far ahead of other traditional objectives such as contract compliance improvement or the contribution to the development of innovative products.

“Our responsibility as Procurement managers

is to integrate Sustainable

Development into all our Procurement

processes”

Procurement Director, Telecom Equipment

8

The economic crisis is of course an issue for most and the number of Procurement Directors who consider cash management a critical subject has dramatically increased (+12%). In 2009, we also observe a generalization of Sustainable Procurement approaches which extend to nearly all industries: in 2005, certain industries such as the Retail industry due to food safety constraints) and the Public Sector (“exemplary nature” of the State) were the most advanced; in 2009 companies from all sectors are committing to the approach (albeit for very different reasons). A sign of the Procurement Departments’ growing interest in Sustainable Development is that only 11% of the companies intend to reduce the budget allocated to these subjects in 2009, while 35% will increase it despite the cost cutting programmes affecting most of the sectors.

“For Procurement Departments, SD is a new challenge and a real opportunity: SD

has value and is a genuine internal and

external communication tool”

Procurement

Director, Logistics Company

9

“Beyond the search for compliance, we believe

that Sustainable Procurement helps us

identify the substances that will be banned in the near future as well as alternative supply

sources”

Procurement Director (€5 billion), Medical

What benefits?

The 2009 survey and the interview carried out with 21 Procurement Directors have made it possible to identify three types of motivation behind Sustainable Procurement initiatives. The first one is a defensive approach: it concerns two thirds of the companies and aims at “protecting the company’s image” (67%) and “guaranteeing supplier compliance with environmental regulations” (63%). The second type of motivation is economic: nearly half of the companies (41%) claim that Sustainable Development is a way to reduce the total cost of ownership (TCO) of certain products, notably by acting on the reduction in energy consumption, preventing excessive packaging or simply by reducing certain overheads. Finally, a third category, much more limited, seems to adopt an offensive approach and claims that Sustainable Procurement can unite and improve the motivation of Procurement teams (21%) and also encourage the company to create new “green” products (25%) by making better use of the environmental innovations proposed by the suppliers.

What results? Although the attention paid to the subject seems to level out in 2009, the results obtained have considerably improved. Only 19% of the Procurement Directors currently state that they have not yet achieved their results in terms of Sustainable Procurement (compared with 80% four years ago). This means that, in over one quarter of the companies, a Sustainable Procurement approach has been initiated in the past 18 months and the first results have been achieved, which represent a major achievement.

10

“One of our greatest difficulties is the lack of

simple and pertinent tools, standards and

performance indicators”

Procurement Director, Energy Sector in

England

A lot however remains to be achieved. Despite the 2008 inflationary pressure and the heavy pressure on cost cutting associated with the economic crisis, nearly 20% of the Procurement Directors claim they have achieved their objectives in terms of savings on direct or indirect procurement. Conversely, only 7% of them have fully achieved their Sustainable Development objectives. This is also due to the absence of “quantitative” measurement indicators (this will be developed further), without which it is of course difficult to assess the achievement of objectives.

What obstacles? Multiple technical, organisational or strategic obstacles in the implementation of Sustainable Procurement initiatives remain.

“We are confronted with conflicts of interest when Sustainable

Development involves cost increases or implementation

constraints”

CPO, Media Sector

Contrary to 2007, when budgetary constraints only affected 28% of the companies, nearly one in two companies now recognise this constraint. The economic crisis has of course a lot to do with this but it seems more so that, with the rapid emergence of the subject, the associated resources

11

(internal teams, external support) have now become sufficiently significant to be taken into account as a specific budget.

“The absence of simple TCO models

integrating the cost of

environmental externality costs is the main obstacle”

Procurement

Quality Director, Chemical Industry

France

The absence of pertinent and simple indicators to measure the Sustainable Procurement performance remains an obstacle for most companies. However, the “Absence of tools” only affects 27% of them, compared with 42% in 2007. The emergence, in the last two years, of companies developing specific Sustainable Procurement tools probably explains this significant decrease. Similarly, technical expertise on “new environmental regulations” seems to have improved.

A major problem, of a more strategic nature, remains: the buyers’ difficulty in reconciling the contradictory demands of short-term saving objectives and longer-term Sustainable Development challenges (44%).

12

2.2 Company practices

What impact on the organisation? The scope of the study was extended to analyse the impact on the Procurement organisation.

The Sustainable Procurement project often begins with the appointment of a dedicated manager and 37% of the companies claim they have identified an “internal champion”. This figure is probably under-estimated for major corporations: in the interviews we have conducted, primarily with companies boasting a turnover of more than €5 billion, there is not only an “internal champion” but also, in two thirds of the cases, a Sustainable Procurement Manager or Director, sometimes devoting his/her full time to this duty. In certain large corporations, the “Sustainable Procurement” teams involve many people. In most of the companies we have met, the “Sustainable Procurement” function remains very centralised; a small team reporting to the Procurement Director or Procurement Quality Director is in charge of deploying this initiative. This is probably due to two factors: - The newness of the subject and the need for “technical” expertise

on certain very specific points (social rights, environmental regulations etc.).

- The desire for independence, as many companies want to manage the conflicts of interest between “local cost optimisation” and “long-term impact of the suppliers’ poor environmental and social practices on the company’s image”.

The training of Procurement teams is also important and half of the respondents claim that they have trained most of their buyers. These training courses can however take many forms, from a simple awareness meeting to a genuine in-depth training course, including

“Procurement stakeholders must think outside the box, rethink the supplier markets and requirements: SD is the

opportunity for Procurement stakeholders to become a

force to be reckoned with and assume a leading position

within the company” Service Procurement

Director, Transport/Logistics

“Buyers feel more valued because they have the

opportunity to investigate new areas of action thanks to

the consideration of Sustainable Development in their relationships with their

internal clients”

Procurement Director, Pharmaceutical Industry

13

the use of much more innovative techniques such as e-Learning. The situation is far more contrasted regarding the integration of Sustainable Development criteria into the buyers’ objectives, as only 16% of the companies claim that they have implemented this individual buyer performance assessment system. Most of the companies that have put in place these objectives are still using a “qualitative” objective individually allocated to each buyer. In the most advanced companies however, actual quantitative objectives are appearing (e.g.: KPI to measure the suppliers’ Sustainable Development performance) in the objectives.

What tools? The implementation levels of tools supporting Sustainable Procurement has also significantly increased since 2007.

The first tool implemented and most commonly used is the Sustainable Procurement Charter already deployed in 2 out of 3 companies. This Sustainable Procurement Charter can take very different forms from one company to the next: from the simple one-page Charter only outlining the major principles and values to highly sophisticated Codes of Conduct clearly detailing the environmental, social and ethical standards embraced by the company, as well as the “Sustainable Development clause” integrated into the Procurement Terms and Conditions. The Sustainable Procurement Charter is often the foundation, which costs little to implement, on which the company can build its Sustainable Procurement programme and procedures. Far behind the Sustainable Procurement Charter is a second category of tools, more operational, for the deployment of the policy: “Supplier self-assessment questionnaire” and “Risk analysis for each category or country”, “Specific supplier audit programme”. The significant progress (an extra 15% of companies) in the deployment of these tools since 2007 should be pointed out. If the companies achieve their declared objectives regarding the “deployment in the next 12 months”, these tools should be deployed by 2010 on the same scale as the Sustainable Procurement Charter is today, i.e. in almost two thirds of the companies.

14

Again this year, a majority of companies (56%) seems to use specialised service providers for the development of these tools or related services (e.g.: audits, supplier evaluations). The decreasing (-7%) number of companies choosing to develop these tools internally should also be noted, a probable sign of the maturity of solutions available on the market. Finally, 22% of companies choose to use solutions offered by professional associations: this is certainly related to the vertical initiatives existing in certain industrial sectors (e.g. EICC for electronics, GSCP for the retail industry etc.) which provide shared standards and solutions.

Measurement indicators Nearly 75% of the companies use measurement indicators relating to Sustainable Procurement. However, most of these indicators are process measurement indicators (e.g.: “number of suppliers evaluated”) rather than result indicators (e.g.: “percentage of expenditure with responsible suppliers”). “Quantitative” indicators (such as the CO2 emissions associated with procurement or suppliers) remain very marginal.

“We believe that Sustainable

Procurement must be ‘SEVE’: simple,

ecological, visible and economical”

Procurement

Director, Media Company, France

15

2.3 “Responsible” suppliers and “sustainable” products

How to involve the suppliers? One of the most sensitive aspects of Sustainable Procurement is the need to involve suppliers. For the first time, the notion of Corporate Social Responsibility means the company is responsible for the environmental and social practices of its suppliers. Therefore it comes as no surprise, notably in the private sector, that most of the Sustainable Procurement effort is concentrated on supplier evaluation and development. The maturity of companies continues to increase and, this year, 83% (+8%) claim that they evaluate their suppliers on environmental and social issues. Beyond this declaration of intent, the decisive criterion is currently more apparent in the methods used to measure this performance objectively and rigorously. Again, there is increasing maturity and the number of companies leaving this evaluation to the “buyers’ discretion” has dropped sharply since 2007 (-11%). Nearly half of the companies are now adopting a more objective approach, by using internal tools and methods or by resorting to a third party “in charge of the evaluation”.

One of the consequences of the use of more sophisticated tools to evaluate the suppliers’ environmental and social performance is the increasing role played by Sustainable Development and CSR in the calls for tender and supplier evaluations.

“One of the specific characteristics of

Sustainable Procurement is that it

involves far better knowledge of the

suppliers, beyond the services/products purchased. This

requires a specific approach”

CPO, €5 billion,

Chemical Industry

16

Three in four companies now use this criterion and 29% of them even allocate a “minimum weight” to the Sustainable Development criterion to ensure that this theme will be taken into account in the same capacity as the evaluation of economic competitiveness, quality or delivery deadlines. In the companies with a minimum weight, we have observed a rather broad range of 3% to 25%, the average being approximately 10%. These figures may appear low for some and very high for others, but the mere fact that this criterion is formally integrated is already a good sign. For these companies’ suppliers, it is now possible to make the most of the investments made in terms of Sustainable Development, thereby creating an important virtuous circle.

As tools emerge, significant progress remains to be achieved regarding the implementation of these processes over a broader panel of suppliers. Two thirds of the companies, i.e. the same proportion as in 2007, deem that these evaluations should apply to most if not, for some, all suppliers. While several companies deploy these audit processes over thousands of suppliers, it must be pointed out (in particular after reading the Sustainable Development reports where data on suppliers audits quantity and results) that, in most companies, these audits only cover several dozen suppliers and a small fraction of the total spend volume. As Procurement Directors have worked tirelessly for ten years to increase the percentage of “Managed Spend”, significant progress is required in 2010 and beyond so that the Sustainable Procurement process can be deployed on an even larger scale over the entire panel of suppliers.

“It is really not easy to deploy a large-scale

Sustainable Procurement policy as

we have many suppliers… and a chain

of suppliers behind our suppliers!”

Procurement

Director, Pharmaceutical

Industry

17

What impact on the choice of products? Simultaneously with the supplier approach, Sustainable Development criteria must be taken into account for the products and services purchased. To achieve a tangible result in this domain, a similar approach to that involving the search for savings can be adopted, i.e. the integration of two types of consideration: initially an upstream approach is adopted, notably when the requirements and the specifications are defined, and then downstream to fully integrate the costs generated by this product or service during its usage and subsequently its disposal or partial end-of-life reuse.

In light of the responses, it should be noted that there is still considerable room for improvement regarding the integration of Sustainable Development into the purchase of products or services: only 16% of Procurement Directors initiate Lifecycle Analysis (LCA) approaches, and this on a very limited number of Procurement segments (35% of the respondents). At this stage, it seems that the safest investment lies in the reference to eco-labels, as proclaimed by one third of the Procurement Directors. However, given that eco-labels are still uncommon in market products and services, there is still considerable progress to be made to achieve improved performance in this domain.

18

3. Keys for the future

3.1 Six action principles Our analysis, in particular the study of the Sustainable Procurement programmes of the most advanced companies, made it possible to identify six principles which should help structure everyone’s Sustainable Procurement approaches.

1. Measure… and measure again The motivations behind Sustainable Procurement initiatives vary from one company to the next but can be classified into three categories:

- Risk management: risks in terms of image, regulatory non-compliance, potential resource depletion or disruption of supply.

- Cost cutting: optimise the total cost of ownership by using the environmental leverage to reduce energy consumption, recycling costs, or excessive packaging.

- Value creation: by developing, for example, new products and leveraging suppliers’ environmental innovations.

We have observed that many companies identify only one theme and only the most advanced have structured their Sustainable Procurement approach so as to simultaneously work progressively on all three themes. The correct identification of all the possible benefits of each of these three aspects is a key stage in the Sustainable Procurement approach. The difficulty in assessing the benefits, in particular estimating the financial impact of risk reduction, is a major problem for most. Numerous companies admit that this lack of measurement indicators makes it all the more difficult to obtain internal budgets and resources for the large-scale deployment of this initiative. Everyone seems to agree that “Sustainable products/services do not cost more” but it is difficult to quantify the benefits of implementing a Sustainable Procurement policy. The implementation of these measurement indicators, whether they relate to supplier risk reduction, TCO reduction, or value creation, is one of the key success factors. All companies that have implemented these indicators have observed a significant improvement in the dynamics. The implementation of a measurement indicator (KPI) is also a way to counteract internal opposition from buyers or “internal clients” who deem the Sustainable Development issue overly “subjective”. In the last year, we have also observed innovative practices in terms of motivation: for example, one of the world leaders in the Banking and Insurance sector is about to associate part of its buyers’ variable remuneration with an improvement in the suppliers’ Sustainable Development performance indicator. The implementation of a Sustainable Procurement performance indicator remains difficult but measurement tools are beginning to emerge and Sustainable Procurement KPIs are improving. This indicator will accelerate the deployment of the initiatives while reassuring the top management with regard to the “return on investment” of the plans of action.

19

2. Integrate environmental, social… and economic aspects Since the expression “triple bottom line” was coined by John Elkington in 1994, Sustainable Development has often been associated with the three “Environment”, “Social” and “Economic” fundamentals. The “Economic” aspect of Sustainable Procurement is often neglected but this issue is back in play in 2009, as many companies are realising that their suppliers’ vulnerability jeopardises their own activities. The automotive industry, often cited as a role model due to its innovative procurement practices, is now facing tremendous difficulties, notably due to the problems of its tier 2, 3 or x suppliers. Many companies are now realising that the fair treatment of their suppliers is much more than a mere ethical issue: the financial and operational impact of the disruptions in supply caused by supplier failures (or those of tier-n suppliers) is significant and is unfortunately becoming a frequent reality in many sectors. One of the objectives of Sustainable Procurement, in addition to environmental and social optimisation, must therefore be to create sustainable relationships to ensure supplier viability and durability. Numerous initiatives have been launched in the last year. The example of the European aeronautical industry, notably Airbus and Safran, is worth mentioning, as they collaborate in the restructuring of certain industrial sectors, based on a dedicated investment fund, Aerofund II (€75 million). Similarly, in April 2009, Franck Riboud, Danone’s CEO, announced the creation of a support fund of €100 million to benefit the suppliers of the agri-food group. Other approaches are possible, like Toyota for example, who make available to some of their suppliers experiencing significant difficulties, their own engineering teams. Certain clients are also working on initiatives consisting of “purchasing on behalf” of the supplier to help this supplier overcome its cash problems. Sustainable Development is by definition an integration lever and requires the reconciliation of the company’s environmental, social and economic objectives. As pointed out by Franck Riboud: “It is in the best interest of a company to take care of its economic and social environment, which can be referred to as its ecosystem. No organism can develop in a depleted environment or in a desert.”

3. Act on products and involve the suppliers Sustainable Procurement actions must be simultaneously undertaken in two directions, “Products / Services” and “Suppliers”, as these two complementary and parallel dimensions are fundamental and eventually link up. This is why the Sustainable Procurement policy must really focus on these two approaches: “what I buy” and “whom I buy it from”. The “product” aspect is as crucial as the “supplier” aspect as it raises all the right questions in terms of Sustainable Development, notably in the upstream phase but also during the product’s lifespan and its end-of-life.

20

Most companies tend to focus on one theme only: they should progress in a homogenous manner in both directions to guarantee the sustainability of their Sustainable Procurement programme. This dual approach is also economically justified. A CSR approach focused on suppliers runs the risk of generating additional costs (notably qualification audits or audits on the correct implementation of progress plans, and costs incurred when securing the supply chain). However, co-development approaches often constitute an efficient way to capture the suppliers’ innovation with probable economic effects. Conversely, the actual savings of a Sustainable Procurement plan of action must be a priority in the specifications and requirements (product and packaging simplification; end-of-life analysis of the products, focusing notably on the recycling and reuse of products and materials, which itself generates future procurement savings).

4. Integrate into existing procurement processes For a long time, many have considered the number of new tools and additional processes to be implemented as part of the approach an obstacle to the deployment of Sustainable Procurement. In addition, certain suppliers were justifiably complaining of the extra burden associated with new audits specifically dedicated to Sustainable Development, as well as the specific corrective action plans expected from them. Based on experience, a common sense rule must prevail: Sustainable Procurement cannot and must not involve specific operational systems (Procurement processes and tools). On the contrary, the idea is to complete the existing processes without any additional stage or phase but by adding new criteria or dimensions. RFIs, RFPs or RFQs must be completed by information or requirements linked to the suppliers’ CSR performance. Supplier sourcing approach and approval processes must include new criteria with a significant weight but with no fundamental change in the evaluation approach. The CSR audits of suppliers must be integrated into existing audit procedures without adding an extra burden. The tenders evaluation procedure will remain unchanged. At the same time, supplier databases will integrate new data without altering the structure of the information system. And so on. Thus, for the companies with a “normal” Procurement maturity level, this approach is a continuation without any real added complexity. The scope analysed and monitored is broadening but the existing processes, workflows and information and decision-making support systems remain unchanged. With only one difference: it may be pertinent – for cost and efficiency reasons – to outsource certain processes with specialised service providers (notably supplier database audits and management, especially for companies with international Procurement activities) to benefit from the sharing of costs and experience.

21

5. Set up a dedicated organisation An action-based project designed to fundamentally upgrade procurement practices and ultimately the culture and vision, must become a genuine corporate project because all stakeholders will be involved. In all cases, this will be a lengthy process, often costly in the short term, which will require investments in the same capacity as a large-scale industrial or commercial project. When a project aims at innovating and imposing common rules, it creates certain limitations to the autonomy of the departments and can result in relative rejection. As long as a Sustainable Procurement project remains limited to the Procurement Department as part of a lengthy professionalisation process, the obstacles are above all “technical” and can be overcome by internal solutions. However, as soon as the other company stakeholders (“internal customers”) are involved, the actual conditions for progress are no longer technical but “psychological” to combat the resistance to change and cultural reticence. Nothing can be achieved without the support and direct involvement of top management, which is why it must be the primary target of the internal communication plan supporting the project. The project scope and result obligation must be defined very clearly by the top management and communicated to all other managers. Furthermore, visibility must always be guaranteed: regular reports will be essential but there must also be discussions within the company and all stakeholders must rapidly be made aware that they will be involved, not simply spectators. This will also be an opportunity to decompartmentalise. The concept of group project is therefore ideally applicable in these circumstances. When the company is big enough, the essential condition for efficient deployment is the implementation of a dedicated Sustainable Procurement team. This entity must not replace the authority of the Procurement Director or that of the buyers; it will be a special competence unit in charge of the methodology, training, project deployment coordination and reporting system. The choice of the manager and his/her team for this unit is essential, as it requires someone with recognised skills in Sustainable Procurement (legitimacy), entrepreneurial qualities, clear leadership skills and a capacity to operate within a non-hierarchical cross-sectional management context. In addition, during the project development phase, it may be advisable to provide a Governance structure integrating representatives of the major company functions, opinion leaders if possible.

6. Allocate appropriate resources

Give or take a few exceptions, the resources (budgets/funds) allocated remain very limited when compared with what is at stake. Certain companies very often allocate resources to the subject on the strength of the CEO’s “personal” vision (or that of the Procurement Director). And this is probably a mistake. Resources committed to a Sustainable Procurement initiative need to be considered as an investment and companies should seek a positive return on investment. We must do away with

22

the cost logic: Procurement must be perceived as a (future) profit and value creation centre. Why invest? Because a Sustainable Procurement policy eventually yields more than it costs: most of the abovementioned examples clearly attest to this. It is the role of the Procurement Directors to convince their top management. Remember Quality and how this “new concept” which appeared in the 1980s is now considered essential in industrial and service companies, in administrations and local or territorial authorities, so much so that it has often been demonstrated that it is cheaper to produce quality from the start. Finally, some food for thought: are the Procurement organisations which are unable to devote 1% of their budget to the development of a genuine Sustainable Procurement policy credible? Especially given that nearly 90% of the Procurement Directors claim that Sustainable Development is their number 2 priority! To conclude on this point, we should quote the Stern report which claims that all it would take is for humanity to devote 1% of the planet’s GDP (i.e. €275 billion over 10 years) to drastically resolve the increasingly alarming greenhouse gas problem. To support this assertion, we confirm that 1% of the Procurement budget of any structure, regardless of the economic crisis, is nothing when compared with the stakes involved and the need to make a significant and profound change both in terms of supplier markets and the range of products and services. As stated previously, we will reiterate in conclusion to this chapter that “21st century procurement can only be sustainable!”

23

3.2 Manage change by maturity stages Managing the deployment of a plan of action in the Sustainable Procurement domain raises several fundamental issues similar to those relating to any structured Procurement project:

- Is it possible to have a pertinent reference system to manage change, in a steered and controlled manner and in coherence with the other guidelines of the Procurement policy?

- Is it conceivable, pertinent and/or preferable to proceed in successive stages representing maturity levels, in order to sustainably and consistently set up the practices and processes?

Maturity matrix reference system The Maturity Matrix reference system was successfully created, disseminated and used in response to this procurement management issue. Its basic principles are outlined hereafter. The Procurement function can be described by defining a few basic “macro domains” (some of them relate to political choices and internal and external procurement practices; others to the management of human resources, information systems, internal and external communication actions and performance measurement systems). In addition, it is possible to define a few maturity levels – generally five – used to define as many function evolution stages (from a basic stage limiting this function to simple supply to a “target” stage where all major company functions are “Procurement-oriented” with regard to their choices and specific strategic and operational decisions). Furthermore, assessments can determine the “actual” maturity of the company’s Procurement function and therefore the progress required in the short and medium terms is “naturally” defined by aiming for a “vertical” and homogenous advance in all domains to be covered without exception or concession. Evidently, the maturity levels cannot be achieved in a short period of time, with a qualification of all processes at each stage (in the ISO sense of the term): several years are required (at least 5 to 10 depending on the initial stage). Maturity matrices therefore provide a reference system enabling a projection into the future, thereby becoming a genuine change management tool which can also be communicated to all the company’s internal and external stakeholders1

.

A vision of Sustainable Procurement by progressive maturity stages How can Sustainable Procurement be effectively integrated into this type of approach? In light of the feedback from leading companies, it appears that several Sustainable Procurement approaches can be legitimately identified, representing in fact the “evolving maturity” of the practices. We will detail this observation by considering Sustainable Development as a new dimension, an integral part of a Procurement strategy, which is equivalent to defining a new stratum of this matrix which will have an impact on the different domains. The table hereafter puts them back in the context of the generic maturity matrix. 1 We assume that you are already familiar with this subject, having notably been developed in the following article, published in l’Art du Management, a supplement to French newspaper Les Echos : Fonction Achats : un modèle pour conduire le changement (Procurement function: a model for change management), Olivier Bruel, Thursday 7 October 2004.

24

Stage 1 In stage 1 of the matrix, experience demonstrates that the company’s Procurement maturity is insufficient: it does not have the time, resources or skills to also tackle Sustainable Development issues in a coordinated and proactive manner.

Stage 2 In stage 2, however, the companies must initiate a managed process and begin by striving to minimise the risks as part of a compliance approach. Whether the reference systems are mandatory (laws and regulations) or based on a commitment approach, this logic will take the following forms:

- list the principal risks according to legal obligations (unavoidable) or recognised social and environmental standards at domestic and international level;

- assess these risks in terms of occurrence and according to the seriousness of the economic and image-related consequences via the systematic analysis of procurement and supplier portfolios;

- create plans of action covering two aspects: define the requirements and specifications in accordance with the regulations (e.g. ROHS, REACH, other European directives etc.) or external standards and norms (ISO 14001, EMAS etc.); for suppliers, select reference standards (OIT, Global Compact, SD 21000 etc.), establish a Sustainable Development charter and make them commit via a Commitment Declaration and the signing of explicit contractual clauses.

At maturity stage 2, the knowledge of suppliers is primarily based on self-declaration principles (RFI including questions specific to CSR). Regarding the Procurement portfolio and supplier policy, the approach covers an intentionally limited target: focus on the “major risk” categories of the portfolio (generally 15% to 20% of the expenditure) and on “core panel” tier-1 suppliers or those identified as a major risk. In addition, supplier information systems must be completed accordingly. There is generally no internal dedicated Sustainable Development structure within the Procurement Department. Most frequently, the Corporate structure is involved, notably in the training of buyers and informing of the principal internal clients or Business Divisions. SD performance objectives are introduced in the annual appraisal interviews with the buyers. The indicators used (KPI) relate to measures primarily focusing on the actions undertaken and the levers used.

Stage 3 This stage is the standardisation of the previous stage, notably by broadening the scope (approximately 50% of the expenditure and suppliers as a result). The essential evolution lies in supplier actions, as a collaborative approach is developed, aimed at improving the performance.

27

Table – Sustainable Procurement according to Procurement Maturity (© Professor Olivier Bruel – HEC Paris – March 2009)

28

This notably involves the implementation of a specific supplier audit system as well as the adaptation of the offer rating and supplier selection process via the introduction of SD criteria with a significant weight (approximately 10% to 15%). In addition, performance improvement plans can be requested (with fixed objectives) or discussed and jointly steered, and suppliers can be monitored (via supplier scorecards). This stage requires a genuinely global approach to the supplier panel. More generally, all Procurement processes are adapted accordingly. The idea is not to implement new processes but additions as per a “seamless continuum” logic. Internally, all buyers are trained and resource-oriented qualitative performance criteria specific to SD are systematically integrated into their individual plans of action and performance measurement (annual appraisal interviews). The performance indicators are extended to make up a Procurement function dashboard communicated internally and externally.

Stages 4 and 5 This level involves a different type of approach: without relinquishing the notion of risk control, these stages focus on minimising total costs of acquisition or ownership, with an anticipation and innovation approach. At this stage this cannot be achieved internally within the strict confines of Procurement but as part of a collective “cross-functional” approach. With this prominent objective, the value creation approaches via innovation for requirements, products or services purchased will be favoured, with the active support of the suppliers in accordance with a co-innovation and co-development logic, aiming for the coherence of the business models. New projects emerge:

- integrate the supply chain into the scope covered by the analysis (e.g. international procurement generates a supply chain with risks and costs as important as those strictly specific to the suppliers);

- establish a map of country / area risks at global level with formal rating with an impact on the decisions regarding international procurement deployment or relocation;

- integrate and estimate all risk prevention actions by measuring the savings achieved as part of an “insurance-based” logic (this type of risk management must be integrated into a global corporate approach);

- for suppliers, in particular in the current economic climate, the notion of sustainable economic development can (must) be developed in accordance with a range of appropriate resources and measures;

- search for savings on Procurement via eco-design and value analysis actions on products, packaging and transport methods. Search for joint innovations, notably as part of the collaborative relationship with the suppliers, to create value beneficial to both partners.

- these eco-design approaches logically generate the implementation of reverse logistics for end-of-life products with a view to re-use and therefore the minimising of future consumption, in particular for non-renewable energy sources or raw

29

materials the worldwide stock of which is limited. The impact of product re-design and innovation seems evident.

Internally, this standardised approach requires the creation, within the Procurement Department, of a specific, SD-dedicated department with the objective of coordinating this corporate project internally and cross-functionally. It does not replace the buyers but fulfils a project management task, directly reporting to the Procurement Director. To do this, a global SD dashboard must be defined, including result indicators, notably quantitative (and not only action-oriented). Communication must be multi-targeted: top management, business units, internal clients and suppliers. This communication is “positive”, not based on intentions but on actual and binding achievements. Stage 5 standardises this approach, a phase during which global governance must be implemented as part of a dual process approach. Thus, the buyers must have an overall vision of upstream industrial processes while managing all supplier networks in a coordinated and collaborative manner. However, this has often yet to be developed…

Conclusions: a lever to end the crisis? Upon completion of this study, it appears that the Sustainable Procurement policies will not suffer from the current economic crisis but actually will be reinforced by it. We see four reasons why Sustainable Procurement can be a crucial lever to end the crisis: - By creating more transparency in the supply chains. As indicated by the recent “Amsterdam Declaration” of the global Reporting Initiative2

- By encouraging the emergence of environmental innovations, which generate new “green growth” opportunities. As supported by President Obama with the “New Green Deal”, these new green technologies are a unique opportunity to resume economic growth.

, the current economic crisis could have been alleviated with more transparency and responsibility in the Governance, Environmental and Social practices of certain organisations.

- By promoting the notion of responsibility of the client toward its suppliers, they help develop more durable relationships. The numerous initiatives launched in the past six months to reinforce supply chain in specific sectors (see 3.1.2) are Sustainable Procurement examples which can contribute to alleviate the impact of the crisis on SMEs. - By focusing on the TCO, they encourage companies to invest now in order to generate savings tomorrow. The freeze on investments, typical of the current crisis is choking companies. By inciting companies to invest today, for example in energy efficiency projects, Sustainable Procurement can help reverse this trend.

Finally and most importantly, by contributing to a more harmonious balance between economic, social and environmental imperatives, Sustainable Procurement helps prevent the next crisis, that of climate change and resource depletion, the consequence of which we already know will be more serious than those of the current crisis and above all… irreversible.

2 www.globalreporting.org/CurrentPriorities/AmsterdamDeclaration

30

Appendix 1 – Study characteristics This study was carried out from September to December 2008.

• Number: the Procurement Departments of 200 large European corporations were contacted and 96 of them agreed to participate in this benchmark. 75 companies responded to a questionnaire relating to their visions, practices and results. For 21 of them, a one-on-one interview with the Procurement manager(s) made it possible to develop the analysis further by collecting more quality-oriented information.

• Function: 87% of the participants are in charge of Procurement: 16% are Chief Procurement Officers, 40% Directors or VP Procurement/Supply Chain and 37% Procurement Managers.

• Country: a panel of European companies based in France, England, Germany, Benelux, Italy, Sweden and Switzerland were interviewed.

• Company size: 73% of the companies have a turnover of more than €1 billion. • Sectors: the companies interviewed represent all areas of activity as illustrated in the

diagram below:

For further information on this study, please contact: benchmark@ecovadis.com or bruel@hec.fr

31

Sustainable Procurement: yesterday, today and tomorrow A white paper on Sustainable Procurement in line with the studies carried out within HEC for the past 6 years on “Sustainable Procurement & Development”: following the 2003, 2005 and 2007 surveys, a large number of European Procurement Directors respond to the same strategic and operational questions to assess the progress of intentions as well as achievements. Beyond a mere survey, the Authors’ intention was to illuminate, based on their expertise and by interviewing 21 Procurement Directors. These Directors gave their vision of Sustainable Procurement and provided pragmatic elements regarding successful implementations but also failures. This personalised focus, combined with the updated quantitative data shed light on the new developments of Sustainable Procurement, thereby explaining how to switch from a “Why?” to a “How?” approach. The authors, by integrating the fact that Sustainable Development is an extension of the concept of Total Quality into the innovative notion of Global Quality, can therefore declare that “21st century procurement can only be sustainable!” About HEC Paris: a European leader, specialising in management education and research, HEC Paris offers a comprehensive and unique range of courses for tomorrow’s decision-makers: Grande Ecole, Specialised Masters, MBA, Executive MBA, TRIUM Executive MBA and Doctorate. Founded in 1881, HEC currently boasts 104 permanent teachers, 3,400 students of whom 32% are foreign and over 8,700 executives and managers trained each year. About EcoVadis: EcoVadis operates Europe’s leading collaborative platform, allowing companies to assess the environmental and social performance of their suppliers on a global basis. EcoVadis combines technology and Corporate Social Responsibility (CSR) expertise to deliver simple and reliable supplier scorecards, covering 150 purchasing categories and 21 CSR criteria. EcoVadis supplier CSR ratings help businesses reduce risks, drive performance and support innovation in their supply chain. HEC EcoVadis

1 rue de la Libération 54 rue de Varenne 78351 Jouy-en-Josas 75007 Paris +33 (0)1 39 67 70 00 +33 (0)1 53 63 11 86 www.hec.fr www.ecovadis.com