Outsourcing And Offshoring - Carbon Dumping?

[Derek_Parkinson]

The long-term trend that sees companies outsource business processes and services is set to continue for the foreseeable future, as of course is the low carbon agenda. But how well does the need for companies to reduce their emissions fit with an outsourcing strategy? And what will be the impact on the service providers?

“The trend towards the 'virtual organisation' is visible everywhere. If you go to many companies around the world you find that head offices have almost no-one in them!” says Mark Kobayashi Hillary, Director of the National Outsourcing Assocciation (NOA). “It's not unusual to have a company with its head office in High Wycombe, for example, customer services in Colombo, human resources in California, and IT in Bangalore.”

The NOA, the UK trade association and centre of excellence for the industry, has set up a Green Steering Committee, chaired by Kobayashi Hillary to work on the challenges of the low carbon agenda. The committee started work this year, motivated by what it sees as changing demands from customers. “We have to be sensitive to this – because outsourcing is a kind of partnership, a deeper relationship than just purchasing,” he says.

“We had noticed people talking more and more about carbon emissions, particularly with respect to data centres, which obviously consume quite large amounts of energy. But the Carbon Reduction Commitment [CRC] has really been driving it home, with companies going out to outsourcing partners to talk about how they are going to achieve these formal, mandated commitments.”

Regulation aside, the public commitments made by high profile companies caught the attention of the outsourcing industry, he says. “The consumer organisations are the obvious ones. When you see a company like Marks & Spencer make such as big commitment to carbon reduction you know this is going to ripple down the supply chains.”

Who bears the burden?

The industry has concerns though. Precisely because its members enable companies to focus on core business activities while support functions are carried out by external service providers – often overseas, as with our hypothetical business in High Wycombe – it tends to be wary of simplistic claims made for emissions reduction. The NOA has been vocal in urging a more realistic approach to assessing overall UK emissions, for example

And as with suppliers generally, the industry is concerned about how the costs and benefits of carbon reduction are distributed along the supply chain. Put simply, the industry is aware that it could face the cost of cleaning up its own operations while customers outsource carbon intensive operations – so-called “carbon dumping” – and take all the credit for reducing emissions. This is a particular concern for the data centre operators when service buyers “do not expect to pay more for green IT until the global economy is in recovery,” according to recent research. See http://theblackbookofoutsourcing.com for more.

Furthermore, service providers may not receive any credit for the improvements they make. “Currently, an outsourcing supplier is penalised when taking on a client’s data centre. Regardless of whether the client’s data centre has become more efficient and greener, the supplier will have to log an increase in carbon emissions and therefore face possible criticism from government organisations and NGOs, or even face penalties and sanctions,” says the NOA.

“One of the things our steering group is most concerned with is the need for agreed standards, clarity about when one organisation hands off responsibility for emissions to another, and tools for measuring this,” says Kobayashi Hillary.

We have yet to see carbon emissions become a “front-burner” issue for many outsourcing providers. According to the '2009 Green Outsourcing Survey' some six out of seven providers claimed that greener technology was adopted to cut energy costs, rather than because of emissions reduction. But this could easily change as the new regulations begin to bite. “We are now beginning to see more interest from customers in the UK, with service providers being quizzed about their low carbon strategy at the tender stage,” says Kobayashi Hillary.. This is especially true for public sector contracts, where carbon emissions are now part of the standard criteria.

Looking beyond the recession

Despite the difficulties, the industry leaders are betting on a low carbon future. IBM for example is investing $1 billion in Project Big Green, aiming to increase the efficiency of IBM products and services across its range of offerings, including a five step approach to energy efficiency that could give energy savings of approximately 42% for an average data centre.

According to the 2009 Green Outsourcing Survey, Indian IT outsourcing suppliers are typically ahead of the curve, moving beyond thinking about sustainability demands as necessary costs of doing business, and introducing innovations that any company in the world could learn from.

An example is Patni, a global outsourcing company with roots in India, which has invested $40 million in a low environmental impact delivery centre. Seating around 3,500 staff, the Patni Knowledge Centre uses state of the art design to reduce the energy consumed and the waste it emits, including use of natural light wherever possible, smart air conditioning, and LEED certified construction techniques.

Such developments pose a challenge for the UK-based industry. Rough estimates suggest that data centres of around 5,000 square feet or more in size are likely to qualify for CRC participation. “Increased energy use and emissions – resulting from...'carbon dumping' – may affect their league table ranking and lead to reputational damage and increased costs because they will not benefit from recycled payments. Should providers and data centres be forced to increase their fees – as a result of higher energy costs – they may lose custom to non-UK cheaper operations,” warns law firm Norton Rose.

But doing nothing is clearly not an option, either because providers will be caught by the CRC, or because they risk losing out to more dynamic competition from overseas. According to the Green Outsourcing Survey some 92% of respondents believe the vendors who have initiated green options for clients in the economic downturn will develop mature products and services that will be the highest in demand in 2010 – 2011.

At the very least, the industry needs to wake up to the realities of the CRC regime, says Kobayashi Hillary. “I'm still meeting people who seem to know little about it. I was in the boardroom of a supplier to a major airline recently, and asked them when they thought they would be asked about their carbon emissions. They reacted with horror, because they genuinely hadn't thought about it,” he says.

Key questions:

* How can we work with our outsourcing partner(s) to reduce emissions?
* How is carbon reduction integrated into our tendering processes?
* Are we cutting carbon, or just dumping it?