Chapter 8
Scaling a Green Organization
Operational transformations are becoming a significant differentiator and value generator for businesses. And customers are taking note.
In the “good old days,” supply chains and sourcing departments were primarily focused on cost; when less plastic is used in packing and the overall mass of the end product is reduced, the cost of the good is reduced. Sourcing models were refined to understand all the inputs—including the fossil fuel inputs that were used to create the plastic—to ultimately arrive at an optimal manufacturing price of the good. Consumer packaged goods (CPG) firms tracked fuel prices. Fabric firms tracked fuel prices. Every product firm tracked oil, and every service-oriented firm that relied on the products generated tracked oil prices. The oil prices would in turn affect upstream sourcing professionals who would price the product, and package engineers would redesign the bottles, design closures, remove dyes, and simplify labels to ultimately arrive at the predetermined price of the good. Today, supply-chain management is more strategic, albeit involving significant financial due diligence. But customer perception and market sentiment also play important roles in supply-chain due diligence:
From which firms are we sourcing our materials, and from where? What are their labor practices and their market reputation?
What chemical formulations inform the ingredient list? Should we request that our suppliers use a more sustainable alternative even if the formulation is considered safe with minimal toxicity effects?”
Customer demand has placed significant pressure on firms to look beyond cost-based pricing, by demanding better, more sustainable products at a lower price. It is no longer enough to fulfill price points; the target audience of each product in the market demands affordability, effectiveness, efficiency, and sustainability. In collaboration with the IBM Institute for Business Value, the National Retail Federation reports that nearly 70 percent of consumers surveyed would pay a premium of 35 percent for a sustainable or eco-friendly product, and nearly six in ten consumers are willing to change their purchasing habits in order to support the planet.1 The report goes further to establish two groups of consumers: the value-driven ones (who want good value for their money) and the purpose-driven ones, who purchase products from firms that demonstrate their values.
Customers truly have the ear of large corporations today, so much so that manufacturers are known to have hotlines to address customer feedback and questions related to safer alternatives. Sustainable practices have made a business case for themselves in the consumer and corporate worlds, and appear as line items in financial due diligence reports. However, large corporations and small to midsize businesses have a bigger challenge in embedding and sustaining sustainable practices. And the challenge doesn’t lie in the “why” but in the “how.”
Farm-to-Table Supply Chains Are Here to Stay
There is no greater opportunity and challenge facing established, matrixed, and globally interconnected firms today than sustainability. At the Yale School of Management, Jeffery Sonnenfeld and Daniel Esty state that the curtain has finally come down on regulation-driven compliance behavior related to sustainability.2 We need incentive-driven programs that promote sustainability, a forward-facing approach for integrating sustainability into corporate strategy, and a way to embed “green” and “value and values” into product specs. We need to meet our customers where they are—and the customers have spoken. The consequences of not doing this are well known, and for every giant that has gotten outmaneuvered in the marketplace, there is an innovative and nimbler firm that will match its audience’s desires and deliver.
However, as every business executive understands, creating a fundamental shift or managing change of this scale is daunting, and there are some real challenges in the way.
To answer the “how” of embedding and sustaining sustainable practices, we recommend a three-pronged approach:
1. Engage your stakeholders and lead with values
2. Run a pilot . . . one service line’s supply chain at a time
3. Scale the success story
Engage Your Stakeholders and Lead with Values
During a visit to the NASA space center in 1962, President John F. Kennedy noticed a janitor carrying a broom. He interrupted his tour, walked over to the man and said, “Hi, I’m
Jack Kennedy. What are you doing?”
“Well, Mr. President,” the janitor responded, “I’m helping put a man on the moon.”
—cited by Mark Zuckerberg at the 2017 Harvard University Commencement
In 2008, TIME magazine named thin-film solar panels the best invention of the year,3 and even though solar was still considered a niche player in the energy market, Dr. Jeff Thompson, CEO of Gundersen Health Systems, a large academic hospital in Lacrosse, Wisconsin, installed them in his home to reduce his personal energy footprint. At the time, solar power cost over $4 per watt, significantly higher than traditional energy costs, but it was important to Jeff that his home derive energy from a renewable source. His friends, who had clearly not yet bought into the use of solar panels, jokingly asked, “So, Jeff, what’s your return on investment on that thing?” Thompson simply replied, “It will provide an ROI one day, however on the first day I felt better about reducing pollution and improving health.” Jeff was an early adopter, and while he hadn’t experienced the financial benefit of the technology at the time, it was important to him that he demonstrate his values and personal commitment to human and environmental wellness through this individual action. Sure enough, solar took off, and, as any technology scales, it drives down the price. In the first quarter of 2017, the cost of solar power had dropped to $2.80 Wdc (watts direct current) for the residential sector and $1.85 Wdc for the commercial sector.
Thompson was committed to doing his part to further renewable energy initiatives, gladly taking on the role of early adopter. And his investment in solar paid off—just as it did when he once again led with his values to create sustainable change in the world of healthcare, motivating his stakeholders to do the same.
Thompson served as the executive vice president of Gundersen Health Systems, a nonprofit group of hospitals in Wisconsin, from 1996 to 2001, before moving up as its CEO for an additional fourteen years. During his tenure, Gundersen was awarded Healthgrades’ America’s 50 Best Hospitals Award from 2012 to 2016 and was named the White House Champion for Change in 2013, among several other accolades. In 2014, Gundersen Health Systems became the first hospital in the United States to become energy independent—that is, the system produced more energy than it required to operate. Gundersen’s trajectory from a mission-driven regional hospital to a national champion for sustainability and population health was not an accident, and the hospital’s leadership under the guidance of Thompson took significant strategic steps to establish that pioneering trajectory.
Prior to the launch of the energy efficiency program, Thompson reviewed the financial statements of the hospital with his leadership team, and noticed the rising operating costs of running the nonprofit academic hospital system over the previous decade. In 2007, the energy costs of operating the hospital system alone hovered at approximately $5 million, and were set to increase at the alarming rate of $300,000 per year. As his leadership team considered various areas where costs could be managed while maintaining patient outcomes, Thompson took a more holistic approach to hospital management. He began to consider which initiatives in the next year would not only benefit the financial health of the organization but also improve the environmental and therefore physical health of the community. The community that the Gundersen Hospital serves is diverse and faces significant challenges in community and population health related to high-risk diseases such as hypertension, diabetes, and obesity, and other significant complicating health issues.
In February 2008, Gundersen Health Systems rolled out their first ambitious initiative to achieve net-zero-energy performance on a district-wide scale. Energy efficiency was a strategic priority in their road map to greater sustainability. With cost savings well documented for organizations around the world, the business case was clear, and the team was excited about the potential free cash flow to leverage in other initiatives.
First, they aimed to gain energy efficiency within existing buildings through retrofits and adoption of energy-efficient strategies for new construction. In the retrofitting strategy, the hospital evaluated the efficiency of HVAC systems, lighting, plumbing, and other systems that Thompson and his team had identified as “energy-sucking monsters.”
Next in its strategy to improve efficiency, Gundersen invested in renewable energy from a variety of sources—such as biomass and biogas plants and later on, in photovoltaic cells. And on October 14, 2014, Gundersen became the first hospital in the US to offset all its fossil fuel use with locally generated renewable energy. Eric Bradshaw, Gundersen’s director of environmental compliance leveraged efficiencies in renewables to create wins in other areas: the biomass boiler that powered the geothermal system also sterilized infectious waste to markedly reduce the cost of disposal. Gundersen’s $2 million one-time expenditure on this project translated to a $1.2 million annual reduction in costs for the hospital system, and compounded year-over-year savings that far surpassed the installation costs. Old buildings such as the Gundersen Prairie du Chien Clinic in Wisconsin, a clinic constructed in 1958, broke even on their energy-project expenses in 1.5 years; the clinic now saves 35 percent of its pre-retrofit energy bill. When Gundersen builds a new clinic now the solar panels and the geothermal battery to help decrease peak usage are not discussed as separate items at the board. Rather they are just part of the “business as usual” processes.
Considering that Gundersen is the largest employer in the area, the public health benefit of the energy expense reduction was visible in air-quality improvements in the local hospital service, including a 93 percent reduction in CO2 ppm, an 80 percent drop in nitrous gases, and a 91 percent decline in particulate matter between 2008 and 2015. The health system went further to utilize savings from this first initiative to invest in sustainability programs that address biomedical and food waste. It has even utilized the by-products of the biogas digester plant to create its own line of organic potting mix in Middleton, Wisconsin, generating an additional revenue stream that further improves the environmental footprint of the hospital.
Gundersen’s pilot was so successful because it engaged stakeholders at every level to become embedded in the mission of the hospital and to approach future engagements with a triple-bottom-line approach: profits, people, planet. Dr. Thompson mentions that people were engaged for reasons other than their paycheck: the success is attributed to engagement in improving their community and patients’ health and wellness.
At the employee level. When Gundersen’s in-house pharmaceutical waste program was created in 2009, the organization was spending $151,000 per year disposing of pharmaceutical waste. Through comprehensive measures and teamwork, Gundersen spent less than $10,000 on hazardous waste disposal in 2015. In addition, 345 pounds of controlled pharmaceutical waste was diverted from the sewer system in the first six months. These metrics were motivating to employees, who could see the effects of the program in their organization and also in their local community. “Doing good” as a part of their work and seeing the wins their hospital made in terms of community health and improved air quality made the employees feel good about the work they were doing. The janitors began arriving early, and the engineers would check in on their bioreactor plants at 3 a.m. because they were excited to see these innovations work. People gained a lot more momentum behind the business development and creation of partnerships with the city and other public entities.
At the leadership level. “I am constantly asked how we did it,” Thompson told us. “For all the projects, the most important aspect was to get buy-in from key stakeholders, whether that is the investors, donors, clinicians, or local and national government officials. The organization was asked many, many times why they were moving in a more environmentally sound direction.” At times like this, Jeff first and foremost indicated that the mission of the health system was to improve the health and well-being of the community. “I showed them the 60 percent return on energy conservation investment and improved patient outcomes. There was no counterargument of any better investment.”
At the community level. Gundersen Systems produces so much energy, they on occasion supply it back to the grid to power homes and businesses in the county. The feedstock for this energy is derived from landfills of degrading waste that release about three hundred cubic feet of methane per minute. Another renewable input utilized by the health system is cow dung to power the biogas plant. Both of these projects engaged local farmers and landfill site owners to strategically turn supply-chain waste into energy. Through relationships with the city council and local community, the hospital reinvigorated health programs and launched drives to clean up neighborhoods and restore buildings. Partnerships with the local school districts and private universities not only expanded their public health programs but also provided nutrition counseling. At every level, the community was engaged in the sustainability program of the hospital.
Beyond ROI, the key to creating a sustainable enterprise is to develop a closed-loop cultural system, and this happens only when everyone the business ecosystem touches is inspired by the mission. It is, as Thompson reflects, “the only way people look beyond metrics and key performance measures. The only way to ensure regenerative ideas and process improvements occur continually is to engage the ecosystem—your community, your employees, and your leadership. It is absolutely the only reason someone wakes at a 3 a.m. to check on the mechanics of a new system when no one is watching.”
Run a Pilot
In 2009, Staples bought Coastwide Laboratories, a national leader in safe cleaning products. Coastwide, a midsize firm located in the northwestern US, had developed a strong market reputation for its sustainable, green chemistry-based cleaning solutions. Interestingly, these cleaning products, known as the Sustainable Earth® line, had originated as an experimental, pilot service line, which due to its rapid growth and success, had led to a firm-wide transformation to green cleaning products and a later acquisition by Staples.
Founded in the 1980s, Coastwide had become a large manufacturer of commercial cleaning chemicals and a distributor of sanitary maintenance supplies. In 2006, more than three decades later, the firm was poised to do what no other commercial cleaning supply company had ever attempted: convert its entire line of chemical cleaners to “green chemistry” formulations designed to reduce or eliminate the use and generation of hazardous chemical substances. Executive vice president of Coastwide Laboratories, John Martilla, with the support of Grant Watkinson, president; Roger McFadden, vice president of product development and technical services; Jim Evans, vice president of sales and marketing; and Rick Woodward, director of corporate sustainability, all held themselves accountable for the challenge of making the Sustainable Earth line a success. And it worked out for them. Sustainable Earth catapulted Coastwide Laboratories to sustainability fame as the first green product manufacturer in the US, with all its products being certified through the EPA’s Design for the Environment (DfE) and Safer Choice Certifications. Here’s how they did it.
Coastwide reported revenues of approximately $13.6 million in 2004, with the majority of its revenue coming from the distribution and manufacture of cleaning products. Of this $13.6 million, approximately $6 million was attributed to the firm’s private-label chemical sales. At the time, the average sanitary/janitorial product firm was valued at approximately $4 million.
Roger McFadden, VP of product development and technical services at Coastwide, was approached by a healthcare system after its hospitals failed a system-wide audit related to its cleaning products. This request was an indicator of other national trends pointing toward increased consumer demand for safer cleaning products. The janitorial industry was experiencing a high workforce turnover of approximately 150 to 200 percent, and the Department of Labor was reporting rising claims related to chemical related injuries. It estimated that the direct cost of hazardous cleaning materials to the industry was approximately $615 million in 2004. For a low-margin consumer product industry, these costs were significant; they drove the business case for a move to environmentally benign and nontoxic cleaning products. Applying the green chemistry principles developed by Paul and John Warner, Roger’s team developed the Sustainable Earth® portfolio of green, highper-formance cleaning products line as a pilot.
Scale the Success Story
Although the products Coastwide created were pathbreaking, the firm faced challenges from customers and suppliers in scaling the adoption of its new line. Consumers were challenged to pay more for the same product, and suppliers were inconsistent in their commitment to supplying the firm with green chemicals. They didn’t see the upside, as the traditional chemicals they supplied were pervasive and penetrated well into the marketplace, despite their well-known toxic side effects.
Here are the levers Coastwide pulled to scale its sustainable service lines:
Innovate in other areas to keep costs down. Coastwide had made a commitment to customers to stay competitive as a “lowest-total-cost provider.” The increased production cost of the new products resulted in a challenge, as this higher cost could not be passed on to the customer. In this case, Roger heavily formulated highly concentrated cleaning solutions. Higher-concentrated cleaning products provided end users with a lower in-use dilution cost. Ultimately, the Sustainable Earth® products were high performance, safer for human and environmental health, and the lowest in-use cost option, in fact, lowest in-use cost.
Here the Sustainability Scorecard was helpful in identifying methodologies to optimize the solution and even the operations. The Coastwide product team led by Roger took bold steps to completely eliminate all toxic chemicals from their products. This product innovation required drop-in replacements with sustainable chemical alternatives that improved the efficiency and overall performance of the line. Further, to address waste prevention from a transportation standpoint, the team even redesigned product containers to an S shape and optimized the bottle thickness to ensure durability of the container and to reduce the breakage of bottles during transport. Once the number of bottles in each container had been optimized, the team went even further to create circularity in transportation materials. Wooden pallets are typically used during lifting and moving activities. However, once the products have been transported on top of pallets, these material components end up as waste, and typically find their way into a landfill as a graveyard. Roger McFadden’s team created an additional revenue stream out of resale of pallets once their use was completed.
Set your suppliers up for success. Coastwide worked with its suppliers in marketing the suppliers own formulations to other customers. This built a coalition of firms with green procurement strategies, enabling greater sales in the “green” space for suppliers.
Get everyone on board. With Coastwide radically reassessing and redesigning its processes, the process of training every stakeholder in sales and among external suppliers began. The company created three levels of education to convey its value proposition to its different audiences: employees, suppliers, and customers.
Employees. As Roger McFadden told us, when you educate your own organization well first, everything works better externally. Ineffective chemical management can affect product performance and environment quality, the negative effects of which affect business reputation and brand integrity. The company made sure the sales professionals knew why each chemical reformulation had occurred and empowered them to educate their peers and customers.
Suppliers. Coastwide collaborated with well-informed and engaged leaders at suppliers to potentially source even more effective ingredients for the organization. Coastwide used this opportunity to educate its suppliers on green chemistry and the company’s goals related to continuous improvement. The company informed them of the economic factors that determined inputs, and once suppliers began recognizing that Coast-wide’s advances in green chemistry formulation would be marketable to their other customers, they were on board.
Coastwide met with supplier Rohm & Haas in 2002 to discuss concerns over zinc and other metals used to bind with acrylics in floor polishes. Following the meeting, Rohm & Haas designed and introduced the first zinc-free polymer emulsion in the industry, which Coastwide then used in its Sustainable Earth floor polish. Coastwide pursued similar positive changes with suppliers Akzo Nobel and Novozyme. When one supplier failed to commit to Coastwide’s new objectives, Coastwide switched to a new partner who was able to provide a superior, safer chemical ingredient to meet the Coastwide criteria
Customers. Coastwide utilized an extensive customer feedback and education policy. Its sales department invested in educating customers about the benefits of using the new formulations and the ancillary costs that were negated in the process—for example, costs related to the need for personal protective equipment such as gloves and masks, and to corrosion on hard material surfaces. Also, Roger explains, they were encouraged to go as far as breaking down the costs for the customer. These clear benefits of the sustainable product lines informed the firm’s “lowest-total-cost provider” status for its clients. And to the firm’s surprise, customers not only loved the sustainable products, but they were willing to pay 10 percent more than the traditional products.
The success of the Sustainable Earth line led to an enterprise-wide focus on green cleaning products for Coastwide. And once Corporate Express/Staples sniffed out the firm’s alignment with its own corporate mission to offer its customers safer products, the company eventually acquired Coastwide.
Coastwide’s success (and attractiveness to Staples) can be attributed to the circular nature of its processes. The company closed the loop on everything, including its supply chain.
At the time, Coastwide had amassed more than ten thousand industrial and commercial customers, with an suprisingly low customer turnover of less than 2 percent a year. By converting to sustainability in its service lines, the firm risked long-term relationships with customers who were accustomed to the effectiveness and efficiency of existing products at existing price points. In addition, the firm faced stiff competition in the cleaning goods marketplace.
So Coastwide brought one distribution function and two manufacturing units under its own label. This improved its negotiating power with suppliers so that its price points could remain competitive. Now, not only did it manufacture a full line of commercial cleaning chemicals such as cleaners, disinfectants, floor finishes, and degreasers but it was also a full-line distributor of sanitary maintenance supplies to companies such as 3M, Advance, Georgia-Pacific, Heritage, Johnson Wax, Rubbermaid, and Windsor. Of the $13.6 million in chemical sales during 2004, Coastwide’s private-label chemical sales accounted for nearly half, $6 million, a $600,000 increase over the previous year.
Sustainable Earth’s® Sustainability Score
The Sustainable Earth line was a pioneer among cleaning products and was the first to be recognized by the EPA for its green chemistry formulations. These benign-by-design products were the result of innovation and targeted redefinition, reengineering, and optimization. For fun, we decided to score the Sustainable Earth line in order to provide a more in-depth view of how the Sustainability Scorecard works. Please note: The scoring here was performed by the authors in a retrospective manner after reviewing publicly available literature on the Sustainable Earth line. Although we have provided a more comprehensive scorecard later in this book, here we will highlight some of the key metrics on which Sustainable Earth moved the needle:
1. Waste prevention
a. Process mass intensity (PMI): Conservation of water and energy and other key chemicals in the new formulations. More than 50% less water needed.
b. Environmental quotient index (EQI): The elimination of environmentally and human-health-related toxic chemicals such as phthalates (endocrine-disrupting chemicals) and other known carcinogens resulted in a favorable “environmental friendliness” quotient for this service line.
2. Maximizing efficiency and performance: the Sustainable Earth line was highly favorable in performance due to the following:
a. Cost efficiency: Lower total cost to its customers (enabled through the concentrated cleaning product innovation) and positive impacts on the firm’s gross margins up to 40% higher than traditional cleaning products.
b. Effectiveness: The products were 63% more effective in stain removal.
3. Renewable inputs that remove fossil fuels entirely from the formulation development process
4. Safe degradation
a. Time/exposure: The green chemistry used to develop these products resulted in benign chemicals on degradation, resulting in low bioaccumulation, no persistence, and low exposure.
Every business leader understands the need to seize opportunities and capture value. Gundersen Health Systems’ $2 million investment into energy efficiency has paid off with a $1.2 million annual reduction in energy costs for the hospital system. Coastwide’s (now Staples’) Sustainable Earth service-line transformation has successfully created significant value propositions for its janitorial client base in terms of regulatory and market-leading differentiation. As both Gundersen and Staples show, designing a future that is healthful, replenishing, circular, and effective in leveraging climate economics can be your greatest unexpected business opportunity.