Structure of the Capability Trap developed by John Sterman

John Sterman–Professor of Management at MIT & Director of the Sloan Sustainability Initiative–discusses the power of process improvements and the role change management can play in society’s response to climate change.

Gridium:                    Hello everyone, and welcome to this conversation with John Sterman, the Jay W. Forrester Professor of Management at the MIT Sloan School of Management and a Professor in the MIT Institute for Data, Systems, and Society. He is also the Director of the MIT System Dynamics Group and the MIT Sloan Sustainability Initiative. Professor Sterman is a textbook author in addition to many scholarly and popular articles, including the two that we’ll discuss today; “Stumbling towards Sustainability” and “Nobody ever gets credit for fixing problems that never happened.

My name is Millen, and I’m with Gridium. Buildings use our software to fine-tune operations.

We’ll be talking about “Capability Traps,” process improvement, change management, and the fact that, to use professor Sterman’s words, “our civilization is unsustainable and it is getting worse fast.”

Ok, even in the face of that truly troubling trend, I am thrilled to speaking with you today Professor Sterman.

Prof. Sterman:         Well, I’m happy to be here Millen, thanks very much for having me.

Gridium:                    When we were introduced you were in Morocco for the United Nations climate change conference and I’ve seen you speak to U.N. Secretary General Ban Ki-moon in New York about society’s need for earlier and deeper greenhouse gas emissions cuts. This work, in this environment, it’s critical work to do, so thank you for that.

How’s it going, generally speaking, advocating for action on the world stage?

Prof. Sterman:                              Climate change is just about the most difficult challenge that humanity has ever faced. It’s a collective action problem, so it’s vulnerable to the tragedy of the commons. It’s got very long time delays. It’s coming from our addiction to fossil fuels. So, it’s fundamental to every aspect of our society.

So it’s very difficult. I think the way to summarize the current state is: everything is getting worse and worse and better and better at the same time and it’s all happening faster and faster. What I mean is, global greenhouse gas emissions are still going up when they need to fall starting as soon as possible and they need to fall dramatically.

So when you look at the climate science, the news is getting worse and worse as we learn more about the fragility of our climate in the face of greenhouse gas emissions and the warming that it’s creating.

But at the same, the economic news is getting better and better. Clean, low-carbon renewable energy, wind, solar, especially efficiency and also energy storage–the core elements that we need, wind, solar and storage and then efficiency as well–are getting cheaper and cheaper every day, and in many cases, especially with efficiency, even at current fossil fuel prices, so without properly pricing carbon to reflect its harmful externalities, many efficiency projects are economically attractive today. They are profitable. They generate high ROI, short payback times, and positive Net Present Value. So there’s a lot of win-win opportunities out there and I think we could talk about that later. Emissions are still going up..that cannot continue and lead us to a prosperous, healthy economy in the future. But, on the economic front, the technology is getting cheaper and more capable every day.

Gridium:                    You’ve described this as the defining issue of our time. What do you mean?

Prof. Sterman:          So I think the first thing is that climate change and toxics in our environment and air pollution, which the World Health Organization says kills about one out of every eight people in the world–they’re dying from the consequences of air pollution–these are not the problem, they are symptoms of a deeper problem.

And that deeper problem is the relentless growth in the material consumption that we as a species are burning through.

So if you calculate the global ecological footprint of humanity, which is not just greenhouse gas emissions, but also all the other resources that we consume and all the other wastes that we generate and you ask, how much land, sea, and air would be required to supply what we use and handle the waste we generate today in a sustainable fashion.

It would take one and half planet Earths to do so. And obviously we only have the one planet Earth.

So what that means is we are grossly out of balance, grossly unsustainable relative to the biophysical resources of our planet. And since we’re not going to Mars in any numbers any time soon, although I would dearly love it if we can explore there, we’re stuck on this planet for at least the rest of this century. That’s the defining period of time.

We are going to find out–by the year 2100–whether or not we are able to bring the ecological footprint of humanity down below one planet Earth.

It’s going to come down below one Earth.

That’s not in doubt. The only question is, will it do so in a way that we have chosen and that leads to a healthy, prosperous, equitable, and safe economy and society for everyone, or will nature force it down in ways that will be violent, unpredictable, and harm human wealth.

So, that’s the defining issue and the scientific evidence is very clear; we’re over the limits now, we’ve overshot the carrying capacity of the planet Earth, despite all the wonderful technological innovation that has happened and that we hope and require will continue to happen.

But this is a situation where we’re living beyond our means.

Students sometimes ask me, by the way, “Well, how is it even possible to have one and half planet Earths of consumption when we only have the one Earth? And the answer is simple. You know, I can live above my means, I can spend more money than I earn. But how would I do that? Well, I would do it by selling my assets and borrowing money.

And of course I can only do that temporarily because after a while I will have sold everything I have, spent the money, and I will have borrowed as much as anybody is willing to lend me, and at that point, my standard of living will crash down. And the only real difference here is that unlike the financial world, where if I were too big to fail, I could get a bailout, nature doesn’t do bailouts.

So, we’re using 1 and 1/2 planet Earths of resources now, only temporarily, until our natural capital has been drained and the debt to nature we are accumulating–in the form of our wastes and greenhouse gases and so forth–compel our global consumption to fall.

Gridium:                    To account for this, you’ve identified changes that need to occur across basically every level of society. What are those changes?

Prof. Sterman:          Here at MIT Sloan, in our sustainability initiative, we have a framework that we call PROMISE. It addresses sustainability at every level.

P is personal. What can you do as an individual to reduce your ecological footprint and become more sustainable. You can’t do it all by yourself.

There’s a relational aspect; the relationships you have with friends and family and neighbors and others in your community.

Most people work in organizations, business or other organizations. So there’s an organizational change dimension here.

Those organizations are embedded in markets and those markets both enable and constrain what an individual company or organization can do and those markets in turn exist in an institutional context.

For example, do you operate in a society where you can count on the rule of law, where you can rely on people to carry out their contracts and if they don’t you have remedies in the court system. If you don’t have such confidence, it dramatically constrains what you can do.

In turn those institutions are embedded in societies which have norms and cultures that evolve slowly and both enable and constrain what you can do. Finally, every aspect of human society–from the individual all the way up through markets and institutions and society, they are all embedded in the natural environment.

We work at all levels in that PROMISE framework and there’s interactions across all the levels, and it actually makes a difference to view the world that way.

You know, when sustainability first became popular, a very common and still popular approach was the so-called triple bottom line.

And the triple bottom line, as I think you and your audience know, says that well, there’s profit for companies and obviously companies must be profitable to continue to exist, but then they should also think about their impact on the bottom line for people and the planet; so profit, people, and the planet.

And although I think that’s a much better framework than the old framework that says the duty of management in a company is to maximize shareholder value, period—which is not a legal requirement by the way, and yet many people think it is—the triple bottom line is better than that, but it’s still fundamentally misleading because it treats each of these three areas–people, planet, and profit–as is if they were somehow separate. And then the goal of management is to find some sweet spot where they intersect.

I think that’s fundamentally wrong.

You can’t have a profitable company if the environment has been destroyed. And likewise, you can’t have a healthy environment if people are hungry and insecure and have no opportunity and don’t have a warm, dry, safe place to sleep.

Because hungry, desperate people will cut down every tree, will catch every fish, and will eat the seed corn even though they know that doing so destroys their future. And you know you and I would both do that too if we were desperate enough, so there’s not an opposition and a trade-off, there’s a fundamental alignment between healthy people, a healthy society, and a healthy environment.

And so that’s why you want to envision the society, the institutions, the markets, the organizations, and you as individuals as embedded in the natural environment.

Destroy the one, you destroy everything.

Gridium:                    We need to make changes, and your work has thought a lot about how those changes can be made, what improvements need to occur. You’ve also looked at how improvements spread across a process, across an organization.

What’s the “Improvement Half-Life” and how’s that affecting the changes that we need to see across the PROMISE framework?

Prof. Sterman:          Yeah, that’s a great question.

In the early part of my career, I worked extensively on the dynamics of process improvement, starting with TQM, BPR, etc, all the different quality movements.

And we studied how organizations were able to successfully implement and sustain quality improvement programs. And that includes not just defect reduction, quality improvement, cycle time reduction, removing non-value-added time from any process, but also improving safety and improving EHS (environmental health and safety) issues in a company, and improving sustainability.

So it’s quite useful to look at a sustainability program that a company might implement as a process improvement project.

You have a desired state of higher performance: lower greenhouse gas emissions, fewer toxic releases, less ecological footprint on every dimension…that’s analogous to the goal of, say, zero defects or reducing the cycle time to one shift in your manufacturing process.

And you’ve got to make changes to be able to do that and, just as in the quality movement where long ago, Deming and Juran and the other leaders of that movement taught us that: number one, it’s possible, number two, you do it by continual experimentation; the famous Deming Shewhart cycle of PDCA etc. You do it by giving the frontline workers, the people who experience the system every day, more and more decision-making authority.

So those principles also apply in sustainability. The difference is that there’s not only a business case for sustainability projects; you lower your costs if you take energy and waste out of your process; so there’s the possibility of win-win projects where you’re improving the environment while lowering your costs and improving your profitability, but you’re also doing well by the environment. You’re reducing climate change and that helps everybody.

So then the question comes up: how fast can you make these changes?

And one of the things we discovered actually was due to work of one of our graduates, many years ago, Art Schneiderman, who became a Baldrige Examiner and the first Vice President of Quality at Analog Devices–a very well-known MIT-founded semiconductor firm here in Massachusetts, but operating globally–he studied hundreds and hundreds of quality improvement projects and what he found is that they tended to improve in an exponential way…meaning you could reduce the defects in a process by half in a more-or-less a fixed amount of time.

That’s analogous to the concept of the half-life for a radioactive isotope, where half of it decays in a fixed length of time. That’s a very important concept because he also showed that the improvement half-life for any process depended on how complex that process was. He broke it down into two main dimensions of complexity. One is technical complexity and this is fairly straightforward.

You know, as a woodworker, I have a lathe in my basement workshop and improving that lathe’s performance is very simple, technically. It’s not a complex piece of equipment, but the half-life for improvement is going to be much longer for a $100 million, complex stamping machine in an auto plant because there’s so much more going on.

So the more technically complex the process, the longer the half-life for improvement is going to be…the slower it’s going to be between when you spend your resources on improvement and when you see results. But even more importantly, he found that the half-life depended strongly on what he called the organizational complexity.

So here the question is how many people from how many different functions in your organization, how many different organizations, including those outside your company, need to be involved in the improvement project for it to be successful.

For the lathe in my basement, I can improve it myself. I don’t need anybody else. Improvement half-life’s going to be very short. A complex machine tool; it’s more technically complex. But I also need more and different kinds of people to succeed in improvement. I’m going to need the operators, the mechanics in my organization. I’m going to need the technicians and engineers from the supplier, and just getting them all together, having them coordinate is going to take longer.

And then you can extend this–imagine a supply chain. Now, I’ve got to deal with many, many partners in that improvement project. Not just my tier-one suppliers, but all the way back to raw materials and maybe all the way forward to end-of-life issues. I am going to need marketing people and finance people and legal and compliance people and environmental folks and maybe I’m going to want to partner with some NGOs to make sure that everything I do is fully transparent and they don’t protest against my organization. That’s going to dramatically raise the organizational and social complexity of the improvement process.

So even if it’s technically simple, it’s going to take longer. Let me give you an example.

The transition to clean, low-carbon power is moderately technically complex. Microgrids to accept solar panels, and wind and storage to partner with the intermittent renewables so we can have lights on whenever we want, even when the sun might not be shining or the wind may not be blowing.

But, you need a lot of coordination across multiple organizations: the electric utility, the regulators, the solar manufacturers, the storage providers, the appliance providers, smart metering, real time pricing, etc.

But here’s another example where technical complexity is very low, but organizational complexity slows down improvement. Several years ago, there was a horrible fire in a garment factory in Bangladesh, the Tazreen garment factory. There were many fatalities. There have been many such incidents, including the collapse of the Rana Plaza garment factory in Bangladesh, where over a thousand people were killed.

But just consider…the cause of that fire was too much flammable material packed into an overcrowded factory, and the fatalities were due to the fact that they didn’t have a fire suppression sprinkler system. They didn’t have fire extinguishers. They hadn’t conducted evacuation drills in case of emergency and in many cases, including this, the fire doors, the fire exits were too few and many of them were locked. And that arose because management didn’t trust the workers and the place was packed full with lots of flammable fiber.

So there’s zero technical complexity in fixing that from a technical point of view. There’s no technical complexity about putting fire extinguishers into a factory, conducting evacuation drills, and making sure your fire exits are adequate and not blocked.

The problem is organizational and social complexity.

So this is a factory in Bangladesh that is subcontracted by another garment maker to produce garments for all kinds of brands in the United States and elsewhere. The brands, such as Walmart, which used that factory, and many other brands that used that factory, they have a code of conduct that prohibits those practices. But there’s no easy way for them to help those garment factories implement the right policies.

And in fact, there’s evidence that some of the brands actively opposed implementing these practices.

So the social complexity is very high. And as a result, improvement wasn’t happening and many many many people lost their lives. So our view on this is that first of all, there’s pretty solid data that helps you estimate your improvement half-life and set appropriate goals. And secondly, it’s the organizational, social, and political complexity of the process that often determines how fast progress can be made.

And many of the problems we face have moderate, easily handleable technical solutions…low technical complexity. But the challenge is how to create alignment of incentives, trust, and commitment to improvement across multiple organizations spanning the globe.

Gridium:                    As you you’ve been talking about complexity, Professor Sterman, one of the words that comes to my mind when I think about climate change is complexity…the issue that the problems aren’t fixed as climate change gets worse, clearly new problems will arise. Is there a feedback loop at work here, and how does that make the challenge greater?

Prof. Sterman:          There are many feedback processes that operate in the climate, in between the climate and human activity, our economy, our society. And part of the problem is that those feedbacks are very powerful. But they’re not well understood by the public. For example, many climate deniers argue that we’re not certain about how much warming will result from continued emissions of greenhouse gases.

Let me be very clear.

The science is unequivocal about this. This isn’t me speaking. This is the scientific community speaking…97% of all climate scientists agree that the climate is warming and that it’s primarily caused by human activity, specifically the greenhouse gases we emit, most of which come from burning fossil fuels.

There’s no doubt about that. There’s considerable strong scientific consensus that we’ve already warmed our planet more than one degree C, almost two degrees fahrenheit above pre-industrial levels, and that if we don’t cut greenhouse gas emissions dramatically, and soon then we’re headed for a world of three, four, or even more degrees C of warming. Up to almost nine or so, maybe more, degrees fahrenheit above pre-industrial temperatures.

And the result of that, and I say this as a scientist, is potentially catastrophic for humanity and within this century, so within the lives of many of your listeners and their children. But we’re not sure just how fast and how much it’s going to warm.

We know it’s going to warm. It’s already been warming, that’s not in doubt.

But how bad is it going to be? Is it going to be horrible or catastrophic?
And a lot of the climate deniers say, well, because we’re not sure we should wait and see, we should wait and see how bad it’s going to be because you wouldn’t want to spend money to solve a problem that turns out not to be a real problem.

Well that wait-and-see policy would be a good idea if there were short time delays between detecting how bad it’s going to be and taking corrective action. So, you know when you’re boiling water to make a cup of tea, you can use the wait-and-see policy here; you wait for the whistle of your tea kettle to blow and then you take it off the stove.

But imagine what would happen if there was a one-hour delay between hearing the whistle and being able to take the pot off the stove. The pot might run dry and your kettle could become red-hot and cause serious damage. Well in the climate story, people believe that wait and see is appropriate. They say, you know, it would be imprudent to spend a lot of money before we know how bad it’s going to be.

But there are very long delays in every link of this chain. So there’s long delays in detecting how bad it’s going to be. There’s long delays between discovering how bad it’s going to be and building political will to take action. Then there’s delays in passing appropriate legislation or in companies taking action to cut their emissions.

Once you’ve got those policies in place, there’s additional delays before emissions begin to fall and then there’s long delays in the climate. Emissions can start to fall, but the total amount of carbon dioxide in the atmosphere will still be increasing for many years and then warming increases as long as CO2 is high enough to create an energy imbalance for the planet and then the impacts of warming persist for decades and centuries or millennia.

When you have these long delays, you can’t afford to wait and see. You’ve got to take action in advance, despite whatever small uncertainty there might be about how fast the warming is going to unfold.

Let’s come to the feedback story.

We know that there are a variety of potentially dangerous, reinforcing feedbacks in the climate system that could lead to a worst case scenario of runaway climate change. For example, the climate is already warming and in many places in Alaska and Russia and other Northern latitude countries, permafrost is already melting. This is creating damage because buildings are falling down and it’s causing a lot of cost, but more troubling, all that carbon in the permafrost, which is many thousands of billions of tons of carbon–when it’s frozen, it is biologically out of circulation, but when the permafrost melts now all that permafrost carbon is available for bacteria and fungi to use as food.

As they munch on it, they produce carbon dioxide and methane– which is a very powerful greenhouse gas–and those releases from the permafrost further accelerate warming in a vicious cycle. There are many other such examples.

The warmer it is, the warmer the ocean becomes, the warmer the ocean is, the less carbon dioxide it can hold, which reduces the transfer of carbon dioxide from the atmosphere to the ocean and makes climate change worse…and many many others. So these feedbacks are vicious cycles. They’re highly nonlinear. They create the possibility of climate tipping points, whereby we could reach a point where even if we cut our human emissions, the natural emissions triggered by these feedbacks could overwhelm those reductions and lead to continued, runaway climate change.

Now. Here’s the thing.

Nobody knows exactly where the tipping point is for these feedbacks. But that’s not good news, right? Maybe we get lucky and the permafrost will melt more slowly than we think or the ocean will warm more slowly than we think but maybe we’re unlucky and with about equal probability, we could be so unlucky that the tipping points could be close.

Here’s the analogy, you know, you’re driving your car. It’s a clear day with good visibility. You can drive a lot more aggressively than when it’s night and there’s a white out due to fog. If you know there’s a cliff out there, you better take your foot off the gas if you can’t see far ahead. You don’t know where the cliff is. You know it’s out there but you don’t know where it is. You better step on the brake right now because, you know, really is it worth your life to say…yeah, I think the cliff is pretty far out there and then be wrong.

So the combination of long delays, uncertainty, and feedbacks means that the only prudent course is to cut our greenhouse emissions as fast as possible and the cost of doing so are very low in general and they’re especially low compared to the risks that we’re taking.

Gridium:        I want to ask you about capability traps. And by the way, congratulations to you and Professor Nelson Repenning on your Accenture Award for the study you published in the California Management Review. What is a capability trap?

Prof. Sterman:          So if you think about a process improvement program, or any process, you’ve got with a target for throughput: how many widgets you need to crank out every day or how many lines of code you need to write or how many customers you need to serve, if you’ve got a target for that in any process and there’s an actual rate at which you’re doing that. And in many organizations there’s a gap where the organization is struggling to meet the requirements of the customers. That gap can be closed in one of two basic ways.

The first way is…we just have to work harder.

We have to put more hours in. We have to stay late, skip our meals, skip breaks to crank out the widgets and hit the customer’s requirements. We can also speed up the line, we can cut corners, we can cut testing. There’s a variety of things we can do that we classify as “working harder.” And they work, and they work fast and are pretty reliable in the short-run. But often it’s not that people aren’t working hard. It’s that the capabilities of the organization are not where they need to be in order to perform well.

Capabilities are multi-dimensional. There are things like how good is your CRM system or your production management system. How good is the tooling, the brick-and-mortar assets that you’ve got, but it’s also, critically, a variety of intangible assets.

What’s the skill of your employees? How good are they at problem solving and troubleshooting? How much do they trust one another and trust management so that they can rely on not being beaten up or fired if they try something to make the system better and it fails.

And the thing about capabilities is they are assets, you have to build them up through investment. You can’t go out and buy a fully functioning Six Sigma quality improvement program and culture for your organization. You have to grow it, organically. You can’t buy trust. You can’t buy tacit knowledge, it’s built up from learning by doing.

You have to grow it organically.

So like any asset, capabilities increase only when the investment in capabilities–the rate at which you’re adding to them–exceeds the rate at which they erode. And they do erode over time. Your computer system becomes obsolete, your product portfolio turns over and renders existing skills irrelevant, people leave the organization, trust can be broken down.

It’s like any asset. If your asset is going to grow, you have to invest faster than it’s depreciating. It’s like your bank account. You can deposit money in your bank account every month, but if you spend it at a faster rate, your balance goes down.

If capabilities are inadequate, and they often are, then what the organization needs to do is to invest more time and resources and energy in boosting those capabilities and that also helps solve the problem of the shortfall between your customer’s requirements and your performance. But it takes longer and it’s not certain.

So the first process: work harder, cut corners, cut testing, speed up the line, no breaks, no sleep. We call that working harder.

The alternative is working smarter: invest more resources and time in improving abilities, which is going to lower your costs and be more durable, but takes time, and is not certain. In many organizations, working harder takes precedence. We’ve got to solve this problem today!

In fact, it’s just the opposite because time is limited. So the more time people spend working, the less time there is for process improvement, in capability investment. So the way this typically plays out is, hey boss, I was supposed to go to the Six Sigma training today…’Oh, you can’t, we’re too busy, go next week after we’ve successfully solved this crisis and fought this fire.’

In fact, I run this exercise with my students all the time.

Diagnose or give an example from your organization of this trade-off between working hard and working smarter, and I show them the framework that we just discussed, where there’s working harder and working smarter…and one student raised his hand and said, well in my organization, we don’t call that working smarter….We call it the ‘it ain’t going to happen feedback’ because there’s no way…you’re going to solve the short-term problem and you’re not going to go to training, you’re not going to take that machine offline to do the maintenance that was scheduled for today because you need it now, you will do the maintenance later.

And of course what happens then is you’re cutting your capability investment and capabilities erode.

And now your performance shortfall is even bigger, and your fires are breaking out more often, and there’s now more pressure to work even harder and even fewer resources for process improvement, maintenance, skill building training, trust building, and so capabilities erode even more and so that’s a vicious cycle, just like in the climate, that can be a death spiral for your organization.

And what makes this a capability trap is that even if you understand that, and you say okay, we need to get out of this trap. We’ve got low performance, we’re unreliable, it’s unsafe, our costs are high, we’re losing business, we’ve got to get out of this trap. The very first thing that you have to do is increase the investment in process improvement, capability investment, training, and so forth.

And that’s going to raise your costs, and it’s going to pull resources out of production, out of meeting customer requirements and into improvement. You can’t meet with the customer and crank out the widgets at the same time that you’re in the Six Sigma improvement team meeting or going to a training workshop.

So the very first thing that happens when you try to get out of the trap is, costs go up and performance goes down.

Gridium:        This is your worse before better decision.

Prof. Sterman:          Right. Things get worse before they can get better. But in many organizations, the minute they start to get worse, people freak out and they pull the plug on the improvement program.

Oh, we can’t, you know, we’re barely meeting customer requirements now, we can’t let it get worse or we’re afraid we’re going to be fired, if we do. So that’s why it’s a trap. Many organizations are unwilling to experience that period of worse performance.

But if you do, if you stick to your guns, then, gradually, capabilities will improve, performance will rise, and then you’ve now got resources that you can reinvest in further improvement.

And this is the key.

Many organizations, they do a little improvement. They experience worse before better and then things start to get better and they take the cost savings, the resources that are now freed up, and they harvest them by downsizing or, you know, returning that money to corporate headquarters. And if you do that, then you starve the improvement process. You’ve choked it off. It can’t continue.

So what you have to do is, you have to make an affirmative decision to reinvest the savings from the initial improvement in further improvement. If you do that, you convert that vicious cycle…lower capabilities, poor performance, more pressure to work harder, less improvement, still worse capabilities…you convert that vicious cycle into a virtuous cycle where performance is rising.

Resources are invested in improvement and trust building and training; capabilities rise, performance goes up even more, and now there’s still more resources for improvement. But that requires an affirmative decision. In the vicious cycle mode people just more or less automatically cut the improvement activity because they’re desperate to survive and crank out the widgets. But investing the savings from improvement in further improvement is not something that happens automatically.

Gridium:        Do you think sustainability projects are in a capability trap? I believe that you’ve pointed out in some of your research that McKinsey, the consulting firm, has identified the fact that a third of global greenhouse gas emissions can be abated today at a positive ROI with well-established technology.

Prof. Sterman:          Yes, we have identified many instances of capability traps in the sustainability and greenhouse gas domain. The McKinsey study you refer to is about a decade old, but technology has improved dramatically since then, so there’s probably at least as many win-win opportunities today, where we could abate greenhouse gas emissions and make a profit doing it, as there were in 2009 despite the fact that we’ve implemented some.

And this is a puzzle for many people, right. A lot of folks, especially people who have strong training in finance, they argue that it’s impossible that there are any such win-win opportunities. Because, after all, if a company had an opportunity that was profitable and also happened to reduce their greenhouse gas emissions, they should do that, they should have already done that project…even if they don’t care about the environment at all.

The reality is that’s just not true.

There are plenty of win-win opportunities that go unutilized. This is the low-hanging fruit. Right here at MIT, we’ve got lots of them that we are starting now to take advantage of. I’ll give you a quick example.

I’m sitting here in our new Sloan School of Management headquarters building, which was completed in 2010. So all the design decisions were made in the mid-2000s. I was co-chair of the building committee with my faculty colleague in finance. I, and then eventually others on the team and our Dean, strongly supported building this building green. Now we started in the early 2000s, when the price of oil was really low and nobody really cared about sustainability nor had an interest in climate change.

And you know, I work in a fantastic organization, but we had no experience up to that point building green buildings, and there was no LEED system for certifying sustainable buildings at that time.

So it was really pretty early. We built this building to be as sustainable as we could, within the budget constraint and in fact it ended up using 69% percent less energy for heating and cooling in a pretty cold climate in winter and a pretty hot one in summer. 69% less energy for heating and cooling than the standard building that we could have built that would comply with the building code.

Now that saves a lot of energy, reduces our greenhouse gas emissions, and saves a lot of operating costs. Now how much more did it cost us in upfront design and construction costs to put in the extra insulation, the high quality windows, the energy heat recovery HVAC system, etc?

So let me ask you a question that I ask all my students.

What percent more do you think it cost in capital upfront construction costs to make that building green compared to the standard building? About the same, up to 10%, 10 to 20%, more than 20%?

Gridium:        About 10%, 10 to 20%.

Prof. Sterman:          So that’s a pretty typical answer. The most common answer is about 20% or more.

The actual correct answer is approximately zero. How is that even possible? Well, we did spend more money on the insulation, the high quality windows, making sure the building envelope was tight, the energy recovery system in the HVAC, etc, etc. There’s a long set of sustainability features we implemented. They did cost more, but there are offsetting savings.

For example, because the building uses less energy for heating and cooling, the HVAC system is half the size it would have been. That saves a lot of money because we don’t have as many ducts and fans and motors to drive and move the heated and cooled air around the building…that saves a lot on materials, on construction time, and so forth.

Gridium:        That’s great.

Prof. Sterman:          So there are offsetting savings, and even more interesting, because MIT is the owner and operator of our facilities, because the building uses half (actually much less than half, but our engineering models were conservative so we estimated half the steam for heating and chilled water for cooling) that means we didn’t have to build out our steam and chilled water capacity nearly as much, and that saved another approximately $2 million.

When you add up all the incremental costs for all these features and then subtract the savings for the things you didn’t have to spend on, that cost turned out to be on the order of $300 to $400 thousand on a $140 million project. And that includes the cost of our sustainability consultant and our LEED application. It’s a LEED Gold rated building. So that’s a quarter of a percent. In other words sustainability was basically free!

Gridium:                    That’s awesome.

Prof. Sterman:          No upfront incremental capital expenditure. And then we have ongoing perpetual operating cost savings. And so, the Net Present Value of that is almost $10 million, and the payback time was significantly less than a year.

That’s a win-win opportunity. And there are many such opportunities and not just for new construction, also retrofits and renewals and equipment as well.

So why don’t organizations do this? The answer, I think, is many are stuck in a capability trap. So, if you’ve got old facilities that have a lot of maintenance, a lot of breakdowns, your maintenance costs are high, your maintenance techs are running around doing hot and cold calls and emergency work orders, emergency repairs all the time, there’s not going to be a budget for preventive, predictive, or scheduled maintenance.

So the condition of your equipment deteriorates further and you don’t have the budget for capital renewal of your buildings. Completely replacing the roof, putting in more insulation, swapping out the windows, putting in a more efficient HVAC system, and so your operating costs remain high and your energy use remains high.

Now your budget is squeezed even more and you’re going to be stuck in the capability trap. I have a paper on this called “How to save a leaky ship” and I would urge your listeners to go to my website and take a look at it (see also this video abstract).

Gridium:                    Sure, we’ll put a link to it in the show notes as well.

Prof. Sterman:          What we did there is we looked at my institution, MIT, which is an extremely well-run institution, with leadership from very smart people, and we still got stuck in this capability trap around maintenance and building renewal. So we built up…and you know, this is all public, I love MIT…I’ve been here for my whole career, 41 year so far. But you know, the reality is we built up a big backlog of deferred maintenance and this raised our costs and constrained our ability to take advantage of these win-win opportunities.

So about 10 to 15 years ago, we really started to turn this around and there was a lot of low-hanging fruit. Some things as simple as…let’s do the routine maintenance to clean the steam traps so that they don’t just vent steam and waste energy. Let’s clean all the ducts. Lubricate the motors and fans and recalibrate the controls in our buildings because in a lot of the buildings, we found the controls had drifted over time or were deliberately reset so buildings were heating and cooling themselves at the same time. Now, you stop doing that. It costs you almost nothing and takes almost no time to do that and you save hundreds of thousands of dollars a year in avoided, wasted energy costs for each building. And you can then reinvest that as we are now doing in further improvement.

Everybody should take a look at that paper because there’s guidance in there for folks in any kind of organization. And you know what I tell people is look, MIT should be the least likely to fall into a capability trap because you know, we’re a non-profit, pro-social organization with an explicit mission that’s long term, to help the world. We have a large endowment. We have a diverse source of revenue, from tuition, research grants, alumni gifts and endowment yield. We’ve got a AAA credit rating, and we really are run by smart people, no short-term pressure for quarterly earnings etc., so we should be well positioned to avoid falling into the capability trap…and yet it happened anyway.

And now we’re climbing our way out and we’re finding, yeah, there’s a huge amount of win-win opportunity.

We’re generating a lot of resources for the institute and much of which is being plowed back into further improvement. We’ve got a lot of work still to do but we’re no longer bailing the boat frantically to avoid sinking, and I think my experience in consulting and with studying companies and other organizations…is that almost everywhere you find huge numbers of these win-win opportunities, which is potentially a huge source of competitive advantage as well as doing well by the planet.

Gridium:                    Does this give you optimism? I want to ask and put you on the spot if you don’t mind. Are you optimistic about where we’re headed?

Prof. Sterman:          So, you know, there’s an old joke, not original to me, it goes like this…The optimist proclaims “This is the best of all possible worlds!” And the pessimist says “That’s right.”

So I don’t believe this is the best of all possible worlds, in the sense that I think there are significant opportunities to improve our world.

I’d rather not speak of optimism or pessimism. There’s another old joke that says when you’re falling out of an airplane, it’s better to have a parachute than an altimeter. I’m not interested in predicting what’s going to happen. I’m interested in changing the outcome.

So what I say and what I believe is that I am hopeful. I am hopeful.

Now, hope doesn’t mean I think everything’s going to be fine. It’s a stance that I take that says, I believe this is a set of problems that are solvable. I believe that what individuals and companies can do matters. And I believe that we can gather the courage and demonstrate the commitment and persistence in the face of difficulty to bring that future about. But it’s not going to happen just because we think everything’s going to be okay. In fact, if we do think that, it’s certainly not going to be, because then you can sit back on your couch hoping somebody else will take care of it or that the market will solve the problem or that some magical technical innovation will come along.

That’s not hope, that’s wishful thinking.

So hope is the stance that what you do as a person, as a leader in an organization, can matter, but then you’ve got to get up and do it.

Gridium:                    Right. Thank you Professor Sterman for speaking with us today. Your work on change management, sustainability, climate change, really, please do keep it up and let us know how we can help.

For more information, the audience should see our show notes for links to Professor Sterman’s website and his award-winning pieces on creating and sustaining process improvement and working on climate change.

Thanks again.

Prof. Sterman:          Well, thank you very much for having me.

About Millen Paschich

Millen began his career at Cambridge Associates, trained in finance at SMU, and has an MBA from UCLA. Talk to him about bicycling, business, and green chile burritos.

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