Metrics, Las Vegas Style
Instead of betting on the numbers, develop a metrics strategy
- By Richard MacLean
- Oct 01, 2006
For the past 30 years, environmental, health, and safety (EHS) professionals
have struggled to find the definitive set of performance metrics. The reality
is that, while there is no universal set, there definitely is a group of key
performance indicators for your company to use in order to win the competition
game. And it takes a strategy, not a roll of the dice, to identify these metrics.
It amazes me how much effort is devoted to finding the "right" metric
set. In just the past year, I attended a half-dozen trade-association and professional-society
meetings that devoted a program segment to metrics. Natural Logic ran two Web-based
seminars this year entitled "Measuring what Matters." The Global Environmental
Management Initiative (GEMI) has a project underway to "help in identifying
and developing key material (i.e., relevant and substantive) sustainability
metrics." Scheduled to be released in early 2007, the GEMI Metric Navigator
is an addition to a series of publications on performance measurement and reporting
extending all the way back to 1994.1
What is going on here? First, EHS and corporate social responsibility professionals
ride herd over a complicated arena that cannot be expressed in conventional
business terms such as profit and loss. They find themselves caught between
traditional, regulatory-required reporting and new demands coming from the investment
community and non-governmental organizations (NGOs). Second, metrics change
with time. What was off everyone's radar a decade ago is now a key management
concern. (This is an important point discussed later in this article.) Third,
EHS professionals take seriously this truism: What gets measured gets managed.
And lastly, this passion for "measuring and communicating the business
value of environmental activities" (a line taken from a GEMI publication)
may be an indicator of professional insecurity. In other words, might it represent
our quest to prove to business management that we serve a vital role in the
Okay, insecurity may be a stretch, but let's assume for a moment that there
is some underlying anxiety. When people worry, they will naturally seek reassurance:
I'm okay, you're okay (or at least worse off than me). For EHS professionals,
the operative questions become: "What are other companies measuring?"
and "Where do we stand?"
Benchmarking is important, of course, and executives love to see where they
stand relative to the competition. But a benchmarking-based metrics strategy
may not give much insight into long-term competitive positioning. I recognize
that this statement may seem counterintuitive, but read on.
So what metrics are strategic and how do you identify and measure them? To
answer these questions, we must explore the basics of metrics and how EHS professionals
can add strategic value. We'll start with a phenomenally simplified overview
of business metrics.
There are two types of internal business-measurement systems: management accounting
and financial accounting. Financial accounting was developed to satisfy the
needs of the investment community. What, how, and when these numbers are tracked
and reported are controlled by the Financial Accounting Standards Board's (FASB)
and the U.S. Securities and Exchange Commission's (SEC) rules and guidelines.
They are almost always lagging indicators -- the final results.
Management accounting tracks the numbers needed to run the business. These
numbers generally are not reported externally. Indeed, most are confidential.
The plant manager may be aware of the financial numbers reported to investors,
but the numbers that really attract attention are things such as the "Widget
Rejection Rate." These numbers are often leading indicators of longer-term
financial performance (and the plant manager's bonus).
Business managers now recognize that a myopic focus on the bottom line and
lagging indicators is no way to successfully run a business. Business tools
such as the Balanced Scorecard have driven this point home for decades by underscoring
the importance of a blend of key metrics.2 While EHS professionals have embraced
the need for both lagging and leading indicators, much of their thinking is
still dominated by what other companies track and report, or by what government
agencies or NGOs request. It is as if the metric set that matters is the one
prescribed by some external accounting body akin to the SEC. With the advent
of the Global Reporting Initiative (GRI), this depiction may not be too far
Yes, a few of these numbers may matter, especially in the short term if the
company is at the bottom of the EHS performance heap. In fact, they may strategically
matter if, for example, an abysmal compliance or accident record becomes a public
relations issue. But for most companies and under most circumstances, these
metrics are not the numbers that will drive long-term competitive success any
more than a few bottom-line financial metrics will drive business success over
the long term.
In addition, these numbers, which may be of interest to internal EHS professionals
or some external stakeholders, may not be of much real interest to business
management. A more subtle point is that the gold standards of EHS metrics --
accidents, violations, fines -- offer a rather dismal and narrow view of what
EHS can bring to the table. EHS becomes only a cost of doing business, and the
payout is problem avoidance -- about as exciting and strategic as checking to
see that your fire insurance has not lapsed.
A Strategic Metric Set
EHS professionals create the most strategic business value when they are early
predictors of key emerging issues and opportunities. For that matter, anyone
inside a business can add strategic value if they can improve or create new
products and services or production, sales, or marketing approaches. In addition,
those who can help shape the company's strategic vision or help business executives
achieve their vision add real value.
EHS professionals' role in supporting strategic business objectives is becoming
more and more important. The recent cover story on Wal-Mart's green strategy
in Fortune magazine is one example; GE's focused energy strategy (Ecomagination)
is another example; Intel's permitting strategy is another; and BP's "Beyond
Petroleum" strategy is yet another. The list goes on and on.
The first mistake, however, is to assume that only major corporations have
anything to gain by strategically examining EHS and corporate social responsibility.
A hypothetical example may help illustrate these dynamics.
It is 1990 and Bigfoot, a small, athletic shoe company, decides to outsource
most of its manufacturing to sites within developing countries. The EHS manager,
who oversees social responsibility issues, does some research and is very concerned
about the use of child labor in the countries where manufacturing is being outsourced.
She explains to executive management that, while it is common practice in these
countries, this issue eventually could become a consumer "hot button."
Based on her research and recommendations, management accounting metrics are
set, along with a strategy to gain control over the issue. Eventually, it becomes
an integral part of the marketing strategy -- "The sneaker with a heart
as well as a sole."
Starting around 1996, the issue child-labor issue erupts. Nike products are
boycotted. Bigfoot is now ideally positioned to make major competitive inroads
because it saw the strategic dynamics in play early in the game. Today, all
manufacturers are sensitive to "sweatshop" issues and many track and
report their performance. The management accounting/leading indicator that Bigfoot
set in 1990 has now shifted to the equivalent of a financial accounting/lagging
indicator of performance. It is no longer strategic, but expected performance.
Attention to child labor in the supply chain is widespread today. Not as prevalent,
however, is concern over environmental issues arising from outsourcing to developing
countries. I suspect that the former was propelled to prominence by influential
U.S. labor unions and human rights organizations while the latter issue has
few powerful champions. Furthermore, some company lawyers may literally prevent
exploration of this environmental factor by their EHS professionals for fear
of being drawn into liability concerns -- plausible deniability.
But the fact remains that these supply chain issues can bubble to the surface,
as illustrated by a recent front-page article in the Wall Street Journal
over a polluting chemical plant in China.3 Again, environmental supply
chain issues are just one potential emerging dimension; there are hundreds of
other issues and opportunities for companies of any size to gain an edge.
A Metrics Strategy
A metrics strategy centers on determining what really matters to internal and
external stakeholders. This approach is exactly the strategy outlined by the
Ford Motor Company in their "Materiality Matrix," which sets key performance
indicators.4 The two dimensions in the three-by-three matrix are: (1) level
of concern to stakeholders and (2) current or potential impact to company (i.e.,
what matters to management).
Sounds obvious, but how do you get at these metrics? First, the effort required
to gain this knowledge is significant -- it has little to do with benchmarking
or the GRI; it has everything to do with understanding the business strategy
and executive management's long-term objectives. The place to start is with
the fundamentals: the EHS policy, vision, and mission. Yeah, right, you say.
The problem is that these guiding principles often are created with political
correctness in mind. Again, benchmarking also has a heavy influence on the process,
rather than frank and meaningful discussions with the executive management and
the board of directors. The usual creation process is for the EHS department
-- in near isolation -- to come up with a draft for approval and then sell this
to a detached business-management group using the fact that it is consistent
with "current practices."
EHS policy, vision, mission, and strategy should be derived from an intense
series of information exchanges with management so that both parties (EHS and
business management) can make informed decisions. This includes discussion on
R&D activities, emerging issues, and business plans and objectives. It takes
weeks of energy, potentially dozens of meetings, and possibly outside input
and facilitation. If this process is done properly, the metrics can be mapped
easily between what is truly important to the business and the leading or lagging
EHS metrics that track these issues.
The same mapping strategy applies to external stakeholders. First, research
should be done to determine what really matters to stakeholders based on internal
concerns and the potential impact of emerging issues on the company. Individual
NGOs or research organizations may dictate either the politics or the science
-- or both -- for these issues. Ideally, key stakeholders are interviewed, either
directly in the case of community concerns or possibly through a neutral third
party in the case of activist organizations. It is then possible to map the
issues and look for overlaps and patterns. When I have done this for clients,
the key issues and the metrics that track these become so obvious, they literally
jump out from the page.
No time and resources for this level of consideration, you say? It takes an
effort on the same level as that required by the all-too-common EHS crisis.
Goodness knows the resources are always available for that activity.
Aside from becoming proactive rather than reactive, the greatest benefit from
this strategy is that the metrics now have meaning and strategic significance
to business management. In other words, they become THEIR key performance indicators,
not YOUR metrics. It is not some random display on the roulette table. Each
is tracked for a reason and each has significance. Business management now knows
how to play the environmental game and what's at stake.
1 Personal communication with James Kearney, co-chairman of the GEMI Metrics
Work Group, 8/10/06. See also Environmental Reporting in a Total Quality
Management Framework: A Primer. 1994. For a catalog of publications, download
Last visited 8/4/06.
2 R. Kaplan and D. Norton, "The Balanced Scorecard: Measures That Drive
Performance," Harvard Business Review, (January-February) 1992:
3 S. Oster and M. Fong, "In Booming China, a Doctor Battles a Polluting
Factory -- Fouled Waters Lead to Flood of Protests Nationwide; Officials' Mixed
Messages," Wall Street Journal, 7/19/06, Pages A1, A10.
last visited 8/11/06.
This article originally appeared in the 10/01/2006 issue of Environmental Protection.