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Savings Really Does Equal Waste

Guest post by: Eric A. Woodroof

Article Overview: There are many ways to communicate a project's value and I hope that more projects get implemented when a company realizes that savings really does represent existing wasteful processes.

Savings Really Does Equal Waste

Why?: People are more responsive to avoid PAIN than they are to achieve a BENEFIT.

For example, if I told you that you would receive $5,000 if you read 5 of my articles, some of you would jump at the chance (well maybe I am a little biased). Alternatively, if I told you that you would pay me $5,000 if you did not read 5 articles, most of you would take action and be sure to avoid such a penalty. Notice that the penalty is the same as the reward, but psychologically, most people will do more to avoid a penalty than to earn a reward. This aspect of human behavior can be used effectively in presenting the business case for energy management projects, which represent both: the opportunity to earn a reward and avoid a penalty at the same time.

Problem: Energy management projects can involve upgrades to lighting systems, HVAC, controls or other process changes/technologies/programs that reduce the amount of energy consumed by a facility. Often energy management project can have a very good return on investment, or achieve a short simple payback period.

During the past 30 years, these types of projects have often been described as "discretionary", meaning that a company can continue to operate "business as usual" without implementing an energy management project. Thus, despite their financial merits, energy management projects often receive a low priority and are put on the "back burner" by a company's management team. Whether due to the economy, production issues or other "critical needs", energy management or savings projects are perceived as being "less valuable" than other projects with equal savings or profit benefits. This is an illusion.

Opportunity:

The illusion is supported by the way that many energy managers present projects that save money. Energy managers will often say, "if we implement this project, we will save $X per year." This way of saying the benefits may capture the enthusiasm of a few people. However, an alternative message would be to say, "if we don't do this project, we will continue to waste $X dollars/year." The alternate format is not only accurate, but creates a sense of urgency as the audience realizes that they are wasting the money RIGHT NOW while they contemplate the decision. The alternate format could also be enhanced further to incorporate additional fear-based motivators that are completely valid. For example, the alternative method could become, "if we don't do this project, will continue to waste $X dollars/year and lose a competitive advantage". Thus, by incorporating "what competitors are doing" can motivate management to not be "left behind".

There are many additional ways to communicate the value of a project. Either way, the fact remains: any wasted dollars are as valuable as any other potential profits that exist in a business.

When projects require some sort of investment upfront, the alternative presentation approach can also be used for Net Present Value statements, which are a more complete evaluation of a project. In this case, the energy manager can say, "The NPV of a project also represents the NPV of the wasted dollars associated with doing nothing, or continuing to do business the way we are doing it now".

Additional Considerations: The fact that most people would rather avoid paying penalties can also become a factor when dealing with financing costs for a project. In this case, this factor can work against the project, at least initially. For example, assume you work for a company that has no capital budget to implement an energy management project and you have to borrow money from a bank to get a project started. To finance a million dollar project, you may have to pay the bank 10%, which (in simple terms) would be $100,000. Many folks in top management will have a natural tendency to avoid financing costs and in essence, avoid this "penalty" by not doing the financing (and therefore not do the project). Unfortunately for this logic, many energy projects can save 15%-25%, which means that even after accounting for finance expenses, the project still generates savings... or alternatively said- "the finance cost is the lesser of two evils". Personally, I like the saying, "the cost of delay is greater than the cost of financing".

In addition to capturing the energy savings (or current wasted dollars), there are often other benefits associated with energy management. For example, by saving energy, you also reduce your carbon footprint and your company could appear more ''green". Being more "green" could help you in many ways, like attracting better employees, improving community morale, improving sales versus your competitors or reducing risks of future energy price spikes. There are many other benefits to energy conservation and these are real dollars that are equally as relevant to any other profit centers in an organization.

Putting this all together might create a value proposition that sounds like this: "if we don't do this project, will continue to waste $X dollars/year, lose a competitive advantage and miss out on some green marketing opportunities to capture additional market share". Of course, the message that energy managers use depends on the audience and what is most important to that audience. For upper-level management, the message should revolve around money and gaining a strategic advantage over competition. For lower level managers/staff, the message could involve reducing hassle, making life easier, etc..

In summary, there are many ways to communicate a project's value and I hope that more projects get implemented when a company realizes that savings really does represent existing wasteful processes.

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Article Tags: Energy Savings, Eric Woodroof, Profitable Green Solutions, Selling Energy Projects



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