What the CFO Needs to Know: Energy & Sustainability
▲ Investing in energy conservation makes business sense: According to ASHRAE, energy is the second highest retailer operating expense. A new white paper by the Retail Leaders Industry Association (RILA) and Schneider Electric notes that recent weather extremes have increased energy costs for retailers, and the trend is expected to continue. Factor in potential electricity price increases in the near future, and increases in energy costs could be significant. Making stores more energy efficient mitigates the risk of energy-related cost increases, while also helping the environment.
▲ Energy is a strategic asset and should be managed that way: Deploy energy management systems that track and measure energy consumption and develop processes for continuous improvement.
“It’s also important to communicate the value of energy management and reduction across the organization — from senior-most executives to the front-line associates,” said Adam Siegel, VP sustainability and retail operations, RILA.
▲ Effective energy management hedges against uncertainty in costs: Energy prices have a direct impact on a com-pany’s profitability. They frequently fluctuate based on service territory demand and can spike during unanticipated weather events, making energy budgeting requirements highly variable, according to Siegel.
“Minimizing energy use reduces the susceptibility to these price fluctuations,” he said.
▲ The cost of energy is complex: Using an expert to procure energy can help control, or even lower, a company’s energy bills with no other investment. And once an investment in energy efficiency is implemented, the initiative needs to be periodically checked to ensure a continued ROI.
▲ Sustainability is good for the bottom line: According to RILA, 50% to 80% of retail sustainability activities provide reduced costs, brand enhancement and risk management, as well as numerous fringe benefits.
▲ Finance’s sustainability role is on the rise: In a Deloitte Touche study, 26% of CFOs from large companies indicated they had sustainability authority, up from 17%. Nearly two-thirds of these finance chiefs expect their involvement to increase by the end of 2014.
▲ Operational benchmarking is key to unlocking higher performance: Benchmarking for sustainability involves analyzing your operations site-to-site and measuring your performance against peers, and it is increasingly required by law, noted Patrick Leonard, manager, portfolio services practices, PMP, LEED AP, Paladino and Company.
Two states (California and Washington) and eight major cities (New York City; Philadelphia; Washington, D.C.; Minneapolis; Boston; Austin; Seattle; and San Francisco) require commercial property owners to disclose and benchmark utility energy consumption (and sometimes water also), with the goal of highlighting the opportunity to improve efficiency.
“Even if not required by law, benchmarking is a useful first step in analyzing where to invest the time-improving performance in your organization,” Leonard said.
Investors Care About Sustainability
Professional investors are increasingly factoring sustainability into governance policies, portfolio decision-making processes and investment allocations, according to a new study from PwC’s Investor Resource Institute.
PwC’s research reveals a number of reasons for the upswing. At bottom, the study finds, investors have apparently made a judgment that the problems and challenges associated with sustainability issues — ranging from extreme weather events to resource scarcity to social responsibility and good corporate citizenship — expose the companies they invest in to greater risks and potential loss than conventional economic/financial accounting and reporting lets on.
Risk mitigation was the primary driver for investors factoring sustainability issues into their decision-making processes, followed by enhancing performance returns.
What the CFO Needs to Know: Facilities Management
▲ Customer experience: Poorly maintained stores cost sales and dilute the brand and customer experience. Not giving facilities the funding required to keep stores clean and in good condition will impact the bottom line in that customers will shop elsewhere. Today, more than ever, shoppers have high expectations regarding the look and feel of a store, and they also have many more options from which to choose. Dirty restrooms, stained flooring, burned-out lights, poor air conditioning and the like are proven customer turn-offs.
▲ Preventive maintenance is good for the bottom line: Even though it requires an investment, the payoff is significant: A preventive maintenance program helps protect assets and prolongs the useful life of equipment, improves system reliability, provides a more consistent store environment, reduces equipment downtime and decreases the frequency of reactive repairs, which are often quite costly and can be disruptive to store operations.
▲ Always consider total cost of ownership: The four-wall environment needs to be designed with the lifecycle costs included in the performa, advised Rick Migliorelli AIA, senior VP, PDS, Jones Lang LaSalle, Parsippany, New Jersey.
“The design/construction budget of the store prototype should include material, maintenance and replacement costs,” he said.
▲ Known versus unknown: Certain areas of the facilities budget are known, namely preventive maintenance costs, planned capital improvements, contract monthly costs and other fixed costs that may be regulatory charges or inspections.
Other areas, including emergency repairs, are unknown. Facilities managers forecast off known costs, fixed costs and historical trending, minus one-time hits, planning a budget to cover a “best guess” scenario. But you should expect changes.
▲ Early approval: The earlier in the year planned capital is approved and purchase orders are issued, the quicker a facility manager can clean up the budget.
▲ Expanding scope: The expanding scope of facilities management means that companies should no longer view the function as strictly a cost of doing business. Even small improvements in facilities, particularly with regard to energy consumption, have been shown to have dramatic effects on the bottom line.
▲ Technology is shaping the future of facility management: More and more companies are investing in IT-based facility-management solutions and services designed to optimize assets and resources and reduce operating costs. Integrated facilities management is a term used to describe the total integration of facilities resources at the network level, thereby optimizing the ability to effectively address energy price volatility and other cost-of-operations issues.
▲ In facilities management, data is king: An asset management system is an essential tool for today’s facility manager. It provides line-item detailed information regarding the condition, maintenance record and costs of a retailer’s facilities and equipment across its entire portfolio, resulting in improved capital asset management and budgeting and capital equipment replacement programs. An asset management system also increases reliability and helps ensure regulatory compliance.
▲ Resources: The implementation of an asset management system results in the type of big data that helps a company better manage its business and expenses. But it’s important to make sure resources are allocated to analyze the data.
▲ Aging buildings: For many retail chains, facility management is challenged by problems stemming from an aging building stock. As facilities and mechanical systems reach and exceed their expected operating lives, major issues of “repair or replace” must be addressed.
▲ The more things change, the more … Vendor management remains a top challenge for facility managers. If anything, it has become more time consuming, as the complexity of building system increases and suppliers continue to expand their range of service offerings.
“Set up RFPs with key performance indicators and have the vendors vested in performance and results,” Migliorelli said
What the CFO Needs to Know: Cloud Computing
▲ Cloud computing, the remote hosting of applications on virtual platforms for on-demand, Web-based delivery, is on the fast track. Analysts estimate that during the next six years, 90% of new spending on Internet and communications technologies will be on cloud-based technologies.
Cloud computing (which at its simplest means storing and accessing data and programs on the Internet — the cloud — instead of a personal computer) is profoundly impacting how IT professionals implement, deploy and manage technology solutions. It’s also having a dramatic effect on the cost, payment structure and business strategies associated with IT rollouts.
▲ The cloud increases cost visibility: Cloud computing substantially increases the cost visibility of IT deployments.
“The cloud is here to stay,” said Chicago-based Christian Hagen, a partner in the strategic IT management practice of global management consulting firm A.T. Kearney. “It gives improved visibility of your true IT consumption and costs. Traditional implementations give you a ‘peanut butter’ spread of costs where you don’t get to understand the true drivers.”
Hagen added that in terms of capitalization, cloud-based services differ from traditional IT implementations in that they are mostly accounted for on the expense side.
▲ Implementation is easier, which can also cause problems: Cloud systems are easier to implement than traditional IT systems since no internal hardware is usually required. As a result, the IT department is often much less involved or even bypassed entirely in systems selection and implementation, with individual end users able to pilot and roll out turnkey cloud-based solutions on their own. This easier implementation process also decreases upfront IT costs. However, Hagen cautioned CIOs that cloud rollouts need to be carefully monitored.
“Software as a service (SaaS) providers will often go right to the end users,” Hagen said. “It sounds good and you save time, but you can wind up with shadow systems that haven’t gone through appropriate IT procedures and end up with a fragmented application architecture. Introduction of new applications should be managed by both the CIO and CFO.”
The flexible and quickly deployable nature of cloud computing also makes the cloud an ideal environment for testing and development of IT systems, even if companies plan to later deploy those systems in-house.
▲ Different models have different cost structures: Not all cloud deployments are created alike. There are three basic models of cloud systems implementations: public, private and hybrid. Public deployments take place on shared clouds where multiple clients use a single platform, while private deployments take place on a dedicated platform used by a single client, and hybrid deployments use both public and private clouds for different solutions.
Hagen estimated that roughly 25% to 50% of traditional infrastructure costs are eliminated through a cloud deployment. In general, public cloud hosting is cheaper upfront than private cloud hosting, with hybrid rollouts costing somewhere in between. Hagen explained the benefits of each model.
“Public clouds have very targeted uses, such as development and testing environments where protecting the data is not as important,” Hagen said. “Private clouds have a more secure, sophisticated architecture. Hybrid clouds use both the public and private models, with companies selecting each model for various processes.”
Amazon Web Services, Microsoft’s Azure and Google’s Compute Engine rank among the largest public clouds.
▲ You pay for what you use: Generally speaking, cloud deployments use a flexible “pay as you go” model. Users pay for the amount of virtual services that are delivered and/or the amount of virtual server space they require.
The flexible nature of cloud infrastructure means that cloud-based IT deployments can be scaled up and down according to changes in the user’s needs, with corresponding cost adjustments. Private clouds generally offer the most usage and cost flexibility.
“The private cloud infrastructure offers a better match between supply and demand,” Hagen said. “You only get charged for the IT you use.”