Managing energy for sustainability

Amit Chatterjee

Amit Chatterjee is a founder, board member, and ex-CEO of Hara Software. He is a thought leader on green economy innovation, energy independence, and entrepreneurship and was selected as one of the most influential people in business as part of Fortune magazine’s 40 Under 40 list for 2010. Prior to founding Hara, he led SAP’s governance, risk and compliance unit.

Amit Chatterjee and Michel Gelobter of Hara Software describe how energy management transforms an enterprise toward sustainability.

Interview conducted by Vinod Baya and Bo Parker

PwC: What are your clients’ challenges and how are you addressing them?

AC: When you look at the future rising costs of energy, it is probably the third most expensive unmanaged cost item for any Fortune 500 company. Likely people are number one, real estate is number two, and energy costs are number three. Organizations have a great mechanism for thinking about how to manage people, and a good mechanism for real estate, but they don’t have a very good perspective around how to manage energy. The energy sector has never really leveraged information technology in a meaningful way. At Hara, we’re looking at it, and as we engage with our customers, we find that after all these years of Internet communications, there’s still a lot of use of paper, phone, and fax. So I looked at Hara and thought about what we could build or do that would be significant and relevant to the Fortune 500: can you capture and quantify the value of energy that an organization is consuming into a single system of record, and then guide them to a reduction? The net effect is providing an enterprise-wide view of their current spend, which I call a transparency-to-results process.

—Amit Chatterjee

PwC: How does managing energy relate to sustainability?

AC: When you think of sustainability as a topic, it’s a lens through which you look at the health of a company. When I look at a company through the lens of finance, certain things pop up. Similarly, sustainability is a lens through which you see the long-term health of your company and evaluate it using metrics associated with the impact on the environment and society, but in the end it’s the same as financials.

Michel Gelobter

Michel Gelobter is chief green officer at Hara and a leading sustainability and climate strategist. Gelobter is founder and chairman of the board of Cooler, a for-profit social venture. Prior to Cooler, Gelobter was president of Redefining Progress, the think tank that helped design the world’s most aggressive climate legislation, which was signed into California law in August 2006.

In this interview, Chatterjee and Gelobter describe how managing energy is transformational and starts any organization down the sustainability road.

MG: Business ecosystems need environmental resources, and you need a functioning planet with that resource base to sustain you for the long term. Businesses also impact the environment from their operations. For the first time, businesses are realizing that their resource base is not unlimited. In fact, it’s never been unlimited. In a variety of ways, resource shortages are forcing businesses to evaluate, manage, and conserve these resources as part of their business processes.

About 80 percent of why we don’t have more efficiency and conservation is because of imperfect information— an example of that is what academics call the principal agent problem—with tenants and landlords not talking to each other about energy use, the disconnects between buildings, between IT and the IT manager, and among the facilities manager, the CFO, and the energy manager, and so on. These are classic and old problems, and they relate to information. Making the information transparent is the way to address this problem, which is what we are doing to influence the management of energy and other resources. Also, energy optimization is not an incremental business if you take it seriously. It’s a transformational business that shapes your business toward sustainability.

PwC: Most organizations operate in industry ecosystems, and a large energy footprint can exist in the supply chain. How do your solutions affect the supply chain?

AC: The supply chain story was actually something that became relevant to our customer base last year. As we worked with retailers and manufacturers, it became very obvious that they wanted to not only understand what their total impact was but also their supply chain’s impact. In October 2010, we released our Value Chain module.

Ironically, one of the first customers to use it was not the channel master but one of the suppliers. I called the customer and said, “I understand that you wanted to license this module. What’s the logic?” And they said, “Reporting, because a particular retailer is asking me to. But if I start to understand how my suppliers are working on reducing energy use, I believe I have stronger negotiating positions against my competition.” So it’s a domino effect in the supply chain.

PwC: How does this understanding influence the dynamics in the supply chain?

AC: Let’s take a phone, for example. If a semiconductor manufacturer creates a chip that goes into this phone and is efficiently produced, then the manufacturer can hold differentiated pricing. That’s probably where we’ve seen the most interesting action. The supplier can now say, “In the creation of this phone, which normally would have taken you 100 kilowatt-hours, because of our semiconductor it’s now only 40 kilowatt-hours. Our pricing should remain the same, because you’re actually saving money on operations.” That’s where you’re going to start seeing real innovation as opposed to forcing someone to tell you how much energy they’ve used.

When a supplier changes its products and practices, the benefit accrues to all customers using the supplier, although the work may have been done for a particular customer. The supplier has an economic incentive to talk to its customers about innovations it is doing and can do from a sustainability perspective. As you go farther down the supply chain, all the different components that go in a product, the supplier has an incentive to understand the flow of energy so that it can make an economic argument to hold differentiated pricing.

MG: We are in a world where supply chains are increasingly linked to the health of the companies they serve. What is changing because of sustainability is that environmental costs are increasingly being internalized, whether it’s directly or what you are buying through your supply chain. The transformation has to do with the transparency and availability of information. For instance, Levi Strauss moved from having environmentally based terms of engagement with suppliers to basing its terms of engagement on the United Nation’s millennium development goals.

80% Potential for using information

PwC: So once enterprises use a system like yours to save on energy costs, say 10 percent, where do they go next?

MG: There is no end to that 10 percent. Like any other business process, managing energy is also about ongoing and continuous improvement. Let me give you some examples. The economy of China has been improving its energy efficiency 5 percent every year for the last 30 years. California has improved 3.5 percent every year for the last 30 years. The United States, on average, has improved 2 percent a year for the last 30 years. All this was without concerted systems and sophisticated management.

PwC: What features are your customers requesting that are not in your products yet?

AC: For the most part, our customers today have really figured out their total energy and sustainability impact. They’ve experimented with a variety of reduction techniques that have led them to certain cost savings. Now they’re starting to say, “As I start to modify my operations, there are externalities I need to understand so that I can forecast and play scenarios to make better decisions about where I put my facility or how I execute a particular business process.” And that could be everything from heating degree days to cooling degree days to thinking about the occupancy flow of an office building on an average day, the price of natural gas, or the price of oil.

On the basis of all those factors, a company’s executives could then make a business decision that yes, even though solar panels are not profitable in today’s scenario within the company’s time period of cost to capital, they know that if oil moves to this number, which they have high confidence it will, this actually does make a lot more sense. That net effect allows companies to not only go after the low-hanging fruit of energy-reduction opportunities, but also shift their attention to bigger projects that are a little more technically demanding and allow them to factor in what they believe the scenario of the future will look like.

PwC: So business model scenario planning capabilities allow companies to model the relationships between inputs and outputs and the overall impact of environmental or social changes?

AC: Right. For example, should a company stop expanding in the international territories because there’s not enough fresh water in that area for the company to be able to manufacture its goods? A life sciences customer actually ran into that issue because it didn’t know about the constraint. The company wanted to double its factory, so it went through the work of planning, etc., and eventually the project got shut down. The company was surprised. The project was shut down because the amount of water that the company consumed was already 25 percent of the watershed of the region that it was in, and if it doubled its capacity, the company would have essentially consumed 50 percent of the watershed. If you don’t manage the environmental perspective and its impact on your business model, you will get blindsided by really dangerous situations. That complication set the company back, because it couldn’t produce its drug; the market for its drug was growing and it was not in a position to meet the demand.

PwC: What is the role of the CIO with respect to sustainability?

AC: Part of the reason we’ve built the company the way we have is that we believe information technology transforms energy usage into something that is manageable. So, you shift now to a situation where CIOs can actually identify energy cost-saving benefits via their technology infrastructure. And IT organizations are starting with what I would say is the “clean up your own house” approach—the greening of data centers and technology resources.

Then third and probably most important is tracking how existing business processes are consuming energy and natural resources. Creating that as a decision framework for line of business owners is something that the CIO can provide in terms of reporting metrics.

PwC: How much can they do that without needing to ask permission or to seek investment from business unit leaders?

AC: Most of the time, the first step is gathering the information, which they can do on their own. Case in point: I knew we had a business when a customer gave us a contract for about 1,400 facilities. We gathered all the information and I walked back in and said, “What do you think your energy footprint is?” And he said, “Probably $50 to $80 million.” I said, “Try a quarter of a billion.”

CIOs have that data because they own the ERP [enterprise resource planning] system and they own the payables. The utility bill data sits there. They just need to use a Hara system so they can then hand a report back to a customer or a line of business owner and say, “Here are the 17 facilities that run, here’s where they’re at, and by the way you’re the seventh worst in our organization. You can do something about it.” And they can drive that transformation pretty easily.

PwC: You are offering a SaaS [software-as-a-service] solution and therefore you aggregate data across several customers. Does that allow you to create benchmarks that benefit all?

“Energy optimization is not an incremental business if you take it seriously. It’s a transformational business that shapes your business toward sustainability.”
—Michel Gelobter

AC: One of the benefits of SaaS is that you can extract aggregate data that can lead to benchmarks. Most of our customers opt in to be able to receive that benchmark data, which means that for them to see the benchmarks, they must give their data. You can see it in two ways. One is within your own community: Within your 1,800 retail sites, who’s the best performing and who’s the least performing. The second is within the regional community: Show me all the commercial buildings in Indianapolis under 25,000 square feet. How do I look? And so on.

Over time, we will see a greater aggregated benefit. We become the Consumer Reports for actual technologies. As customers go into Hara and look at a biomass boiler, or they use tinted windows or LED lights, they can actually identify the ROI [return on investment], the payback period, and the overall framework for each one. So when company executives look at their Indianapolis facility and they’re considering a fuel cell, for example, they can look at the other places in that geography that used fuel cells, what their expected results were, and what their actual results were.