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New Bottom Line Volume 5.8 – Minding Your Own Business? Watch Its Metabolism

April 9, 1996

Ed Koch, the colorful former mayor of New York, was known to travel around the city calling out to passersby “How’m I doin’?” In addition to useful image building, that gave him a reality check that he probably couldn’t get in the mayor’s office at city hall.

How do you know how well your company is doing? The familiar measure of financial reports is fine as far as it goes, but of course only goes as far as monetized value; anything that doesn’t have a dollar/mark/yen/rupee value attached to it just doesn’t count. Many environmental factors never make it onto the profit and loss statement or the balance sheet.

Increasingly, many firms are developing environmental management systems (EMS), often supported by either internal or external audits. Unfortunately, some of these — for example the ISO 14000 standards — focus on the systems themselves, not the results they generate. Similarly, many auditing schemes are also limited by their focus. Environmental auditing has typically focused on regulatory compliance. The ISO 14000 auditing element focuses on auditing management systems themselves, to ensure that companies have structures in place that will enable them to meet their environmental goals, whatever those are. Some audit schemes compare actual practices with “best practices” for a particular technology or industry.

Ultimately, though, what counts is results. But if performance is key (as recognized by Europe’s EcoManagement and Audit Scheme), the question becomes, performance of what? One fundamental answer may be right under your nose–the physical “metabolism” of your company.

In the metaphor of industrial ecology, companies, and collections of companies, are like ecosystems. Like ecosystems, and the webs of living things than compose them, companies may be said to have metabolism–the ability to “capture and transform matter and energy from the environment…for survival, growth and reproduction,” to quote G. Tyler Miller. Just as the metrics of a living system’s metabolism (such as pulse rate, dietary fat intake, blood chemistry) disclose its health, “industrial metabolism”–the physical flows of energy and cycles of materials through a facility, a company, an industry or a region–offers a framework that can be used to identify and select relevant metrics for eco-efficiency and environmental management. These can in turn be used to assess both financial and resource productivity, including environmental improvement, productivity gains, product quality improvement, enhancement of corporate image with customers, etc.

“Raw” data–quantities of individual resource flows–is of limited usefulness, since it provides little guidance for effective action. “Data” requires context to become “information.” Any management metric (environmental or otherwise) is most meaningful when presented in relationship to something else: another metric or production factor, a change over time, a rate of change, comparable factors within the industry (benchmarking), etc. This can be done through trends, ratios, and benchmarks.

Ratios put data in context–in relation to other flows and processes. Trends put data in context–in relation to time. Benchmarks put data in context–in relation, internally, to customer’s historic performance, and externally, in relation to competitors’ performance.

Key ratio elements could include, for example, inputs–energy, water, materials, labor–and outputs–product, ancillary product (such as packaging and secondary materials), and non-product output (or “wastes”). Other factors such as product quality (or defect rates), employee health and absenteeism, and environmental liabilities may also be relevant. Ratio denominators could be set as inputs or outputs, time periods, plant size or labor factors; which denominators are most meaningful will vary by industry, by management level, or by personal preference. For that reason, any software used to compile and analyze operating metrics should make it convenient to exchange denominators in a “what-if” exercise, ideally in collaboration with a variety of stakeholders.

Examples could include raw material or energy purchased in relation to product produced, crafted as “physical unit of input per financial unit of output” or “per physical unit of output.” Conversion efficiency is a particularly compelling metric for tracking resource productivity, and communicating it throughout your organization. (Since more than 90% of the material “throughput” in the US economy, according to the National Academy of Engineering, represents “waste,” a 10% improvement in conversion efficiencies would nearly double economic yield of product from a given physical resource base.)

The power of this approach is that it is based in physical realities, not economic abstractions, that it adds value at any scale, and that it provides employees and executives alike with clear feedback on “how are we doing?” Conversion efficiency trendlines and benchmarks–if made available throughout your organization–then become a powerful guide to support a process of continuous improvement. There’s nothing quite like confronting the ratio of Product to Non-Product Outputs, or benchmarking your firm’s resource efficiency against your competitors’, to focus everyone in your organization on the job at hand.

(c) 1996 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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Please inquire at “reprint_rights at natlogic dot com” before reproduction in any commercial forum.