Business Life: Management hot air?

27th February, 2010

First published in Business Life, June 2009

How much does it cost to cut carbon dioxide emissions? The answer, of course, depends on who you are and what you do. The management consultants, McKinsey, have a complicated graph that tries to judge how much it would cost to cut emissions in different ways – from the impersonal perspective of the world in 2030. They conclude, for instance, that it will be cheaper to generate carbon-free energy by building new nuclear power stations than by building coal-fired stations with carbon capture technology. (We might, of course, be forced to do both.) But the intriguing part of the McKinsey graph shows all the possibilities with “negative cost”, including the use of biofuel from sugar cane, and most obviously and dramatically, better insulation and more efficient cars, vans and trucks. By “negative cost”, of course, they mean that these technologies save money and should be used even if there were no concern about humans causing climate change.
The mere existence of these “negative cost” opportunities is puzzling. If these investments are so obviously profitable, why aren’t they being made already? It is possible that McKinsey have their sums wrong, but if so, they are in good company. Lord Stern, economist, author of the Stern Review, and climate-change evangelist second only to Al Gore, used the McKinsey graph at a recent gathering of the Royal Economic Society. And at a recent panel discussion I attended on the business case for sustainability, every panellist argued that money was being left on the table because businesses were not investing in simple energy-efficiency measures. “They are a no-brainer,” said one panellist. Do managers, then, have no brains?
New research from economists at Stanford, Cambridge and LSE’s Centre for Economic Performance, suggests that some of them do not. In an innovative study, they surveyed the quality of management processes at 300 medium-sized manufacturing firms in the UK, with open-ended telephone conversations ranging from just-in-time inventory management to performance reviews and whether targets were realistic and internally consistent.
The economists then compared those results with data on production and energy use. The results are striking: better-managed firms use less energy for any given amount of output, and they also use less energy per worker. A firm whose management processes put it barely in the bottom quarter uses 20 per cent more energy than a firm that is barely in the top quarter.
It’s impossible to draw a firm causal link between good management and energy-efficiency, but it’s striking to note that the statistical relationship held up when the economists adjusted for potential confounding factors such as industry sector, firm size and firm location. It seems as though modern management isn’t just hot air.

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