Sustainability Practices in Global Outsourcing
Buyers and providers of global IT and business process outsourcing increasingly strive for sustainability. Lessons from global leaders can give strategic and responsive direction to the outsourcing industry and to buyers of out- sourcing services.
Global information technology and business process outsourcing (ITO and BPO) providers must increasingly consider issues of sustainability in their service offerings. Buyers, governments, employees, and even non- government organizations are expecting ITO and BPO suppliers to behave in ways that are socially and environmentally responsible. Buyers want a provider who can bring sustainability improvements and leading global practices to the relationship. Governments require measurable improvements in carbon efficiency, often driven by IT services. Employees want to work in organizations that demonstrate leadership in social and environmental issues. Non-government agencies such as Greenpeace or CERES expect outsourcing technology leaders to develop solutions to global sustainability problems and to demonstrate sustainability leadership in their operations.1 How do outsourcing providers respond to these pressures? That was the leading question of our research.
According to MIT’s report on the Business of Sustainability,2 “Sustainability is garnering ever-greater public attention and debate”. The authors pose key strategic questions: “Will sustainability change the competitive landscape and reshape opportunities and threats that companies face? … What, if anything, are companies doing now to capitalize on sustainability-driven changes? And what strategies are they pursuing to position themselves competitively for the future?” This article begins to answer these questions from the perspective of global outsource providers who support many of the larger organizations around the world. The majority of the Fortune 500 companies are already buyers of ITO and/or BPO and the market is expanding. The global ITO market is estimated at between $220 to $250 billion per annum and will grow by 6-9% while mainstream BPO is about $230 billion and is likely to grow worldwide by 10% to 15% a year.3
“The global ITO market is estimated at be- tween $220 to $250 billion per annum and will grow by 6-9% while mainstream BPO is about $230 billion and is likely to grow worldwide by 10% to 15% a year.”
The Rise of Sustainability in Outsourcing. Sustainability has become an unavoidable issue in global outsourcing and represents a strategic opportunity for the leaders.
In our interviews and surveys of leading buyers and providers, buyers revealed distinct criteria for evaluating providers’ sustainability capability. A recent industry survey from the International Association of Outsourcing Professionals (IAOP)4 on social responsibility in outsourcing found that “[Sustainability] is an important and growing issue for outsourcing customers and providers – 71 percent say that [sustainability] will become more important or much more important in future outsourcing contracts.”
“Many of the sustainability initiatives in global outsourcing are compliant but only a few are strategic. The leading firms demonstrate how strategic advantage through sustainability in outsourcing relationships can lead to significant benefits.”
Outsourcing buyers and providers rated the importance of sustainability in their business strategy; the response was 3.9 on a 5-point scale (1 is somewhat important, 5 is crucial).
Our research* examines the reasons for why outsourcing providers, especially leading global firms such as Accenture, HP, IBM, Infosys, Tata Consulting Services, Wipro and many others, have begun to invest heavily in sustainability. While other researchers have high-lighted the importance of sustainability in the physical goods supply chain,5 this article examines sustainability in the information supply chain.
The findings point to multiple roles and rationale for sustainability divided into categories of Compliant and Strategic.6 The Compliant category has two elements; i) acting as a good corporate citizen, attuned to the evolving social expectations and needs of stake- holders, and ii) mitigating existing or adverse effects from business activities. The Strategic perspective involves initiatives where social and business benefits are distinctive and provide long term competitive advantage.
Many of the sustainability initiatives in global outsourcing are compliant but only a few are strategic. The leading firms demonstrate how strategic advantage through sustainability in outsourcing relationships can lead to significant benefits. Figure 1 below depicts the hierarchy of sustainable actions by out- sourcing strategizers and compliers.
Global mining and resources company, Rio Tinto, provides a typical sustainability compliance example with an RFP that requires providers to comply with evidence of “appropriate health and environmental objectives and management systems in place to deliver on those requirements.” Outsource providers unable to comply need not respond.
In contrast, a strategic sustainability example was found at outsource provider Accenture, working with a global insurance firm Royal Sun Alliance (RSA), to coordinate a shared “charity day.” The India based Accenture team and the UK based RSA client team joined forces to raise funds for charity and in doing so further developed a strategic client relationship and understanding. The event helped translate a “faceless” relationship, allowing “teams to work seamlessly in a global company,” which “strengthens trust … working cross culture and cross geography.”
In the sections below we describe six examples of Compliant and three examples of Strategic sustainability practices that we found in outsourcing providers. In the Compliant category, outsourcing providers react to expectations of three stakeholder groups: customers, governments and employees. Employees have specific social and personal needs such as education and health that sustainability can address. Buyers and providers seek to protect their corporate brand through sustainability. Finally, cost reduction through Green outsourcing (Green- sourcing) is a Compliant action. On the Strategic side, building relationship trust, brand enhancement and new value- added services are three strategic practices adopted by the leading providers.
Compliant Sustainability in Global IT Outsourcing
Many sustainability actions in outsourcing appear to be reactionary and tactical, such as complying with a client sustainability requirement in a request for proposal (RFP) or complying with a government regulation. We classify these actions as Compliant, where outsourcing providers act as good corporate citizens, attuned to the evolving social concerns of their stakeholders.
We can identify three sets of outsourcing stakeholders of concern to providers: buyers, regulators and employees. Below we explore the sustainability expectations of these stakeholder groups and the provider practices.
1. Outsource providers must exceed buyer sustainability expectations. We expected that buyer requirements would drive outsourcing provider sustainability practices. This was confirmed with evidence from buyers such as an RFP requirement for a global mining company, Rio Tinto, with a stated importance of cultural fit and shared sustain- ability values when evaluating an outsourcing provider.
“30% of buyers always or often consider the sustainability capability of the provider when making an outsourcing decision. An additional 34% of buyers consider it sometimes. 71% expect sustainability to be more important or much more important in future outsourcing contracts.”
Buyers expect outsourcing providers to bring a sustainability capability that will not diminish the buyer’s reputation. As one buyer explained “Our own environmental responsibility builds our brand and trust. This reputation brings and retains our customers. When we look at the outsourcer’s [sustainability profile] we must balance cost [benefits] with the impact to our brand.” In other words, the buyer seeks lower operating costs through outsourcing, but not if out- sourcing reduces their reputation for sustainability.
The International Association of Outsourcing Professionals (IAOP) survey found that 30 percent of buyers always or often consider the sustainability capability of the provider when making an outsourcing decision. An additional 34 percent of buyers sometimes consider sustainability in an outsourcing decision. 71 percent of the respondents expect sustainability to be more important or much more important in future outsourcing contracts. The IAOP clearly sees this as an important issue for the outsourcing industry, largely driven by buyer expectations.
2. Outsource providers must adapt to sustainability regulations. Domestic policy makers and world leaders are concerned about the emission of Green House Gasses (GHGs) that contribute to global warming. It’s only a matter of time before environmentally unaware companies will face steep fines. The production of electricity often requires the burning of fossil fuels, such as natural gas or coal, which produces GHGs. In the last decade, the general public has become aware and very concerned about global warming and the resultant climate changes. Governments in many countries are now adopting laws and regulations to curb or diminish the consumption of electrical power and the burning of fossil fuels. For example, in 2009 the UK government implement- ed the Carbon Reduction Commitment requiring an estimated 5,000 UK organizations to reduce electrical power consumption through a set of incentives and penalties. In October 2008 the European Union published a code of Conduct for Data Centres Efficiency, which establishes best practices to “ensure the carbon emissions and other impacts … associated with in- creases in energy consumption are mitigated.”7
In response to these regulations, the UK National Outsourcing Association (NOA) established a Green Committee and published an initial white paper with the intent “to advise relevant officials and regulatory bodies on how best to approach the issue of carbon reduction and the green agenda, with specific focus on the outsourcing space.”8 Similarly, in the US the IAOP has begun discussions with leading providers on how to embed sustainability requirements in certification of outsourcing practitioners.
While governments implement regulations to curb GHG production, a set of global sustainability standards has grown to become an accepted business requirement for leading providers of IT outsourcing. We examined the public sustainability profile of the top 19 global outsourcing firms and found that the leading six firms had all adopted and con- formed to a ‘de facto’ set of sustainability standards. The set of standards include the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), ISO 14000 and the UN Global Compact.
3. Outsource providers must meet employee sustainability expectations. In North America, where the baby-boom retirement will create hundreds of thousands of job vacancies in the next ten years, the outsource providers will compete in a shrinking pool of qualified resources. A recent Sustainability Initiative survey demonstrates that sustainability has an impact on employee recruitment and retention. The survey found that “of private companies 57% say they expect employee interest in sustainability to impact their organizations” and “37% [had] already highlighted sustainability initiatives in recruiting.”9 Sustainability policies and practices support the attraction and retention of young employees, the talent for the future.
4. Outsource providers should support employee sustainability needs. In the developing nations such as India, sustainability initiatives address societal needs for education and health. According to many studies, India is the most favored location for ITO/BPO but there is much poverty.
India has a young and growing population, in contrast to the aging populations in Europe and North America. The vice-chair of India’s software and services trade association NASSCOM commented, “we are intending to develop programs that leverage ICT to accelerate vocational skilling.” For example, one program will “target young teenage women from poor backgrounds… we will focus on teaching them computer arts and animation skills.” In discussing sustainability in India, the focus is on “addressing the people [issues] first.” Developing the skills of the general population increases the pool of potential employees. By focusing on groups of less-fortunate individuals (such as lower castes in India), some out- sourcing providers are helping to build a better society.
At global mining firm Rio Tinto in Montreal, the director of sustainable development described the importance of employee and family health. In areas where malaria is prevalent, worker absenteeism can be problematic, for example when workers care for a sick family member or are themselves ill. Efforts to prevent malaria are a reasonable sustainability investment to improve worker attendance.
The following two responsive sustain- ability issues are related to mitigating existing or anticipated adverse effects from business activities.
5. Providers will use sustainability to defend the corporate brand. How important is the brand to buyers and providers of global IT outsourcing? Interbrand’s Best Global Brands 2009 places IBM as the second most valuable brand, with a brand value of $60 billion. Approximately 40% of IBM business is in outsourcing. HP, with an outsourcing business at 30% of total revenue, is ranked 11th with a brand value of over $24 billion. Accenture, with an out- sourcing business at 42% of revenue is ranked at 45th with a brand value of over $7 billion. These North American providers invest heavily in branding.
Sustainability initiatives can be seen as brand insurance for buyers. For example, one UK financial institution, Cooperative Financial Services (CFS), has gone so far as to seek providers with strong sustainability reputations to reinforce the value of its own corporate brand. The buyer sees sustainability as the “missing link” in global outsourcing and the opportunity for “leveraging [sustainability] towards brand equity” for both the buyer and the provider, according to a CFS Head of Strategic Partnerships. This UK firm has turned away millions of loan applications from potential clients and dismissed outsourcing providers who did not measure up to the firm’s own sustainability levels.
“Outsourcing provides a path for buyers to reduce escalating technology costs and the associated GHG emissions from increased power consumption.”
Another example is the North American energy company Enbridge. We were told that sustainability and its impact on corporate brand would soon be included as a significant metric in their corporate and personal balanced scorecard. Not surprisingly, an outsource provider to Enbridge, Tata Consulting Services, is committed to “co-embrace environmental issues.” The providers will develop sustainability initiatives with the client that “can be measured in a meaningful way” so that they can be included in the balanced scorecard.
6. Outsource providers will reduce costs with Green outsourcing. Environmental responsibility in out-sourcing, driven by increasing power costs, the threat of negative publicity and regulation on reduced carbon emissions suggests that Green Outsourcing will grow in importance. Most outsource providers are major consumers of electrical power. The increasing power consumption by IT, doubling from 2000 to 2005 according to the U.S. Environmental Protection Agency, gives rise to two sustainability concerns related to global outsourcing. First, the rising cost of electrical power has an economic impact on outsourced operations. Second, global outsourcing providers, who rely on IT, consume in- creasing amounts of electrical power as their operations grow.
Several commentators predict a long-term trend of rising energy demands and costs.10 Dramatic increases mean the cost of energy is now a major concern for most organizations. The 2009 Green Outsourcing Survey reported that 85% of the senior executives surveyed believed that “the adoption of green technology is more likely the result of escalating energy costs than ecological altruism.”
Alongside rising energy costs, there is an unrelenting appetite for energy in data centers. Aggregate electricity for servers doubled over the period 2000 to 2005 both in the U.S. and worldwide and almost all of this growth was the result of the increasing number of servers, with only a small part being attributable to increased power use per unit.11 Forecasts predict that total electricity used by servers will grow by an additional 76% over the next five years. Other researchers have concluded that all computer- related equipment and internet usage is responsible for close to 6 percent of the U.S. electrical consumption.12
Sustainability initiatives in globally outsourced operations have the potential to reduce power consumption costs through more energy efficient data centers, better cooling technology and through technology virtualization and consolidation. One global outsourcer, Cognizant, quotes a 35% reduction in servers procured in 2008, through technology virtualization, while continuing to grow business volumes by 32%.
Outsourcing provides a path for buyers to reduce escalating technology costs and the associated GHG emissions from increased power consumption. Saving money through Green outsourcing is a strong compliance sustainability opportunity for many organizations.
Strategic Sustainability in Outsourcing
According to Porter and Kramer, strategic sustainability “is about choosing a unique position—doing things differently from competitors in a way that lowers costs or better serves a particular set of customer needs.”6 Strategic sustainability “unlocks shared value by investing in social aspects of context that strengthen company competitiveness.”
In our research we identified three strategic practices where sustainability strengthens outsourcing competitiveness. First, sustainability enhances the outsourcing relationship by building client trust. Second, intermeshing sustainability of the provider and the buyer strengthens brand value. Third, new and growing revenue opportunities are available to providers who deliver sustainability leadership and services to buyers.
“Sustainability provides a strategic reinforcement of trust. Alignment in social and environmental commitments between outsourcing buyer and provider creates foundation of mutual trust that enhances the relationship between the two partners.”
1. Providers will enhance relation- ship trust through shared sustainability activities. Sustainability provides a strategic reinforcement of trust. Alignment in social and environmental commitments between outsourcing buyer and provider creates foundation of mutual trust that enhances the relationship between the two partners.13 This trust extends well beyond the contractual commitments and RFP evaluations. Referring to a recent outsourcing RFP, a buyer at Rio Tinto in Montreal told us, “cultural fit, i.e. the values that we share, is becoming very important, especially when price difference [between providers] is marginal.” The need for trust and strong relationships is magnified in global outsourcing when differences in time zones, legal systems, language and culture make the establishment of a trusting professional relationship difficult to achieve. Development of sustainability does not preclude the parties from building trust in other ways, such as reliable delivery of services, shared risk and reward, clear communication channels, etc., but it does provide a convenient and tangible mechanism for bringing the two parties closer together, through shared values and shared sustainability activities.
Among our cases, global outsourcing provider Tata Consulting Services (TCS) spoke of sustainability as a strategic competitive advantage. Working with a North American energy company, the provider described a carbon reduction goal and a joint client sustainability project. TCS described how measurable sustainability will become a mark of “maturity in the client relationship.”
North American outsourcing buyer Enbridge described their relationship with an outsource provider in Southeast Asia. When the 2004 tsunami hit that region, the buyer staff were alerted by the provider and responded with a fund- raising initiative to help their colleagues in the provider firm and for other people in the affected region. The previously distant “faceless” relationship between buyer and provider staff was transformed as close personal relationships developed between the groups. The co-operative effort to help strengthened the relationships and goodwill trust between the individuals in the two organizations. This has continued to smooth the work process by reducing suspicion of opportunism and by establishing informal communication linkages that help with ad hoc problem solving.
2. Providers will enhance brand value through intermeshed sustainability. Another example of sustainability developing trust comes from a UK financial institution, Cooperative Financial Services. A significant outsourced application development project was awarded to the Indian outsource provider Infosys. A qualification criterion for the shortlisted providers was the ability to demonstrate commitment to sustainability, aligned with the values of the buyer. The buyer embraces sustainability as a major facet of its brand and market position in the competitive financial services marketplace. The buyer requires and expects their outsource provider to strengthen that brand with their own strategic commitment to sustainability. As one senior client executive stated, “it may be possible to enhance brand equity through partnership focused sustainability strategies with suppliers.” The outsourcing buyer has a well-established protocol for validating provider sustainability and ethical qualifications. The buyer takes a pro-active stance and continuously monitors outsource provider sustainability commitments.
3. Providers will deliver new sustainability value added services. Many outsource providers are building a growing line of business in providing sustainability consulting services to outsource buyers. The new offerings may come from providers who have developed expertise from their internal sustainability projects or may be delivered by newly acquired sustainability experts.
Two large outsource providers told us how they offer sustainability consulting services to buyers. One outsourcing executive told us of their sustainability consulting practice that had grown to employ 1000 people in under two years.
The large outsourcing providers, such as IBM, publish numerous sustainability white papers, articles and describe clients’ success stories. One large provider told us of a series of client case studies being prepared for publication. Another provider’s 2009 sustainability report cites numerous examples of businesses “optimizing their operations to minimize environ- mental impact … in a manner that maximizes performance.”
Figure 2 summarizes the different practices of compliant and strategic sustainability in global outsourcing.
Implications for outsourcing buyers and providers
For outsourcing buyers. Opportunities to work cooperatively with providers on sustainability initiatives will grow. There will be continued uptake by providers of sustainability practices. Buyers will need to determine their individual appetite for working collaboratively on sustainability projects. For example, outsourcing providers will seek to match a buyer’s sustainability profile in order to build a trusted outsourcing relationship. In addition to shared views on sustainability, buyers should expect sustainability leadership from their outsourcing providers. For example, a provider should be able to demonstrate reduced carbon emissions through power management that is more efficient than the buyer could achieve.
In our review of public profiles we found that the large global providers had mature and well-developed sustainability capabilities, while the mid-tier or smaller outsourcer providers were still building their sustainability capability. We also found that buyers infrequently validate the provider sustainability profile. So a caution to outsource buyers: beware of unsubstantiated sustainability claims. Buyers will increasingly demand evidence of global sustainability standards such as the Global Reporting Initiative, Carbon Disclosure Project, ISO standards and the UN Global Compact. Several independent consultancies are able to assist buyers with sustainability audits of potential outsourcing providers.
For outsourcing providers. Providers can expect to work with buyers to collaborate on sustainability initiatives. Data center providers must be able to demonstrate energy efficiency that exceeds the levels buyers and governments expect. Buyers will ask for both capability and knowledge in sustainability, so providers must continue to hire and develop expertise in this area. Increasing sustainability will require compliance with government and industry standards, and the constant evolution and upgrading of skills. For example, providers must be aware and should participate in the Global Reporting Initiative, Carbon Disclosure Project and the UN Global Compact. Providers must understand and provide leadership to their buyers in areas of government sustainability regulations.
The global outsourcing market continues to grow at double-digit rates. The need for sustainable business operations is becoming apparent at an even faster pace. Outsource providers have a significant opportunity to help their customers, and the world, to build a more sustainable economy. The combination of these two trends will provide opportunities and challenges for buyers and providers.
About the Authors
Ron Babin is an assistant professor in the Ted Rogers School of IT Management at Ryerson University in Toronto and a graduate of the Manchester Business School DBA program.
Brian Nicholson is a Senior Lecturer at Manchester Business School and has been involved in teaching, research and consultancy projects in the broad area of global outsourcing of software and other business processes since 1995.
Sustainable Global Outsourcing, by Babin and Nicholson, is published by Palgrave Macmillan.
*See Babin and Nicholson (2011), How Green is My Outsourcer?, Strategic Outsourcing International Journal, 4(1), pp. 47-66
Babin and Nicholson (2009), Corporate Social and Environmental Responsibility in Global IT Outsourcing, MIS Quarterly Executive, 8(4), pp. 123-132
1. For example, Greenpeace monitors sustainability performance with its Cool IT Leader-board, at http://www.greenpeace.org/international/campaigns/ climate-change/cool-it-challenge/
2.The Business of Sustainability, MIT Sloan Management Review Special Report, 2009, retrieved February 21 2011 at http://www.mitsmr-ezine.com/ busofsustainability/2009?#pg1
3. Willcocks, L.P., M. Lacity. 2009. The Practice of Outsourcing: From ITO to BPO and Offshoring. Palgrave, London.
4. “Summary of Findings from the IAOP 2009 CSR Survey”, February 25, 2011, http://www.iaop.org/Download/Default.aspx?ID=1418
5. S. Golicic, C. Boerstler and L. Ellram, “Greening Transportation in the Supply Chain”, MIT Sloan Management Review, 51(2) (Winter 2010): 47-55.
6. Our model builds on the findings of M. Porter and M. Kramer, “Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review 84 (Dec 2006): 78-92.
7. European Commission, Renewable Energies Unit, “Code of Conduct for Data Centres Energy Efficiency”, March 4, 2010, http://re.jrc.ec.europa. eu/energyefficiency/pdf/CoC%20data%20centres%20nov2008/CoC%20 DC%20v%201.0%20FINAL.pdf
8. National Outsourcing Association (NOA) Whitepaper: “Greensourcing: The Challenges Facing the Business World” February 25, 2011, http://www. noa.co.uk/UserFiles/additions/GREEN_WHITEPAPER.pdf
9. L. Brokaw, “Does Sustainability Change the Talent Equation?”, MIT Sloan Management Review (Fall 2009): 33-34.
10. N. Lewis, “Powering the Planet”, Material Research Society (MRS) Bulletin, 32, (October 2007): 808-820.
11. J. G. Koomey, “Worldwide electricity uses in data centers” Environmental Research Letters, IOP Publishing, (September 2008).
12. J. Laitner and K. Ehrhardt-Martinez, “Information and Communications Technologies: The Power of Productivity – How ICT Sectors are Driving Gains in Energy Productivity”, Report No. E081, American Council for an Energy Efficient Economy (February 2008).
13. For example, see D. Feeny, M. Lacity and L. Willcocks, “Taking the Measure of Outsourcing Providers”, MIT Sloan Management Review 46 (Spring 2005): 42-48.