Podcast | Strategic and Sustainable Sourcing – with Radhi Subramanian and Debjani Mallick

Kevin Donahue: An increasingly important issue for board members to address today is sustainability — specifically, sustainable sourcing and operations. These challenges not only have global compliance implications but also pertain to brand and reputation issues, which are especially important to the board.

This is Kevin Donahue, a senior director with Protiviti, welcoming you to a new edition of Board Perspectives. In this episode, I speak with Protiviti’s Radhi Subramanian and Debjani Mallik about strategic and sustainable sourcing, including the whys and hows of the role of the board of directors. Radhi has more than 20 years of experience in operationalizing technology and digital transformations across industry, academia, startups, technology and consulting organizations. Her specialty is value realization at the intersection of business, technology and emerging trends. Debjani is a senior manager within the ESG and Supply Chain practice areas of Protiviti’s Business Performance Improvement group. Her primary focus is to develop the firm’s sustainable-operations business solution.

Debjani, it is great to speak with you. Thanks for joining me.

Debjani Mallick: Thanks for having me today.

Kevin Donahue: And Radhi, great to talk with you as well.

Radhi Subramanian: Thanks, Kevin. It’s good to talk to you as well.

Kevin Donahue: Radhi, let me ask you our first question. How would you define strategic sourcing and sustainable sourcing, and how would you differentiate those two? Is there a difference?

Radhi Subramanian: To understand sourcing, it’s good to take a step back. Sourcing is a fancy name for purchasing. Companies have had purchasing departments for quite some time, and most companies were what we call vertically integrated: They did everything themselves. As we entered a global economy, however, sourcing became a competitive advantage because we were sourcing from all over the globe. The ability to control these critical capabilities was a competitive advantage, so there was a focus on efficiency, cost savings — all the good things we know that go with strategic sourcing.

Enter sustainability, ESG, environment. Now there’s an emergence of new factors that go into sourcing. These add more criteria into how we are going to do sourcing. For example, in our supplier selection, earlier, we would look at pricing, quality, risk mitigation, but with sustainable sourcing, we’re looking at sustainability, ethical practices, ESG criteria. With strategic sourcing, KPIs are really important: We look at measures of total cost of ownership, efficiency metrics. With sustainable sourcing, we look at carbon footprint, social impact, compliance, sustainability.

What we’re seeing is there are different metrics, but sustainable sourcing is merging with strategic sourcing because the modern business needs both. If you don’t have strategic sourcing and sustainability as a combined business function, you will end up leaving a big hole in your strategic-sourcing practice.

Kevin Donahue: Thanks, Radhi. Looking at this from the perspective of the board, are these concepts important to the board? I’m guessing they are. And if so, why?

Radhi Subramanian: It’s an important question because, as we’ve talked about before, the two are merging. Boards are in the cockpit or at the control panel of a company. They have a lens into not just what’s happening in quarter over quarter but also what’s going to happen out two, three, five years. It’s the entire strategic direction of the company.

Boards are responsible for corporate responsibility, sustainable growth and shareholder value creation. As sustainable sourcing and strategic sourcing come together, the boards are finding themselves looking at KPI items that go into strategies that didn’t even exist before. We didn’t talk about sustainability the way we do today, but it is such an important metric in terms of how a company is valued, the brand of the company, whether this is a company that employees want to work with, whether this is a company that suppliers want to do business with. This is not just about compliance and reporting. This is about the entire awareness, presence and the ability of a company to be a good corporate citizen.

Kevin Donahue: Debjani, did you have a perspective on that as well?

Debjani Mallick: It’s important to recognize how this all ties into third-party risk management. TPRM has always been a critical component of sourcing strategies that go all the way up to the board level in terms of visibility. When we talk about sustainable sourcing, the traditional risk considerations, like the things Radhi said feed into total cost of ownership, are still incredibly relevant, but we’re expanding the scope. Now we’re considering things like environmental risks, value chain, greenhouse gas emissions. We’re talking about things like social risks, supplier diversity. We’re talking about such topics as ethics risks, like human rights violations.

As one example, the board has a lot of say when it comes to the technologies that support the processes within a business. If you look at TPRM tooling, TPRM software now offers a bolt-on module for ESG or sustainability risks. Sustainable sourcing is building on top of that traditional TPRM approach. It’s helping us have a more comprehensive or a more robust evaluation of suppliers’ purchasing strategy and impact.

Radhi Subramanian: Adding to what Debjani said, we are also seeing the emergence of new rules, new standards, things that we haven’t seen before, and there is a lot of variation by region, by country. For example, the EU introduced a new rule in alignment with the Paris Agreement to monitor labor standards. They’re starting to put fines of up to 2% of total revenue for companies that violate labor standards. With that implication and what that does to your brand, it’s not just a siloed function on the periphery. We are seeing sustainability from periphery to core to strategy, and at the board level. This is now very important for boards to be aware of.

Kevin Donahue: I love how both of you are describing the widespread impact of this — not just about compliance, but about brand and reputation as well. Debjani, in your work with your clients, what have you found to be the board’s expectations around sustainable sourcing?

Debjani Mallick: From client to client and from industry to industry, there can be some differences in the board’s involvement when it comes to the sustainable-sourcing strategy. But there have been patterns or themes or central, consistent things we see emerging across what the board wants to be involved with, what conversations they want to have.

Going back to what Radhi said, the board gets involved in ensuring an alignment with the overall corporate strategy. At the start of an engagement, typically, we get involved with drafting a sourcing policy statement that ultimately is going to be a part of the purchasing-supplier code of conduct. Boards will review that policy statement in great detail, and they will try to make sure that there’s tight alignment with the company’s mission, with the company’s values, their goals, etc.

The board is in a position to drive that conversation around ensuring that the activities on the shop floor or at the implementation level ultimately are aligned and consistent with the publicly stated corporate mission, values and vision. The second part of this is that boards typically are involved in the conversation around ensuring that there’s alignment with one or more credible sustainability frameworks.

There are so many sustainability frameworks to choose from, and a board is going to want to make sure that the frameworks a given organization align to are consistent with that industry’s peers and that industry’s competitors. That allows investors to have a more apples-to-apples comparison.

The next consistent theme we see is that boards are going to try to ensure that there are ambitious yet attainable sustainability goals. The board wants there to be no ambiguity in the sustainability targets. They want clearly defined targets related to sourcing, and they want regular reports that are going to demonstrate progress toward those goals. The board will want the goals to be ambitious enough where they’re driving an impact, but at the same time, they’re going to want to make sure that they’re attainable, because often, these goals are publicly disclosed, whether that’s in an ESG report or on the investor-relations website, etc.

Going back to my earlier comment about TPRM tooling, board members have been particularly focused on making sure that the right technology and tooling is in place so their management of the suppliers is sustainable into the future. The kinds of capabilities the correct ESG tooling would have would be capabilities for supplier engagement and assessment, risk management, tracking performance against goals, and then, very importantly, transparent reporting.

Kevin Donahue: That’s a great rundown. Thanks, Debjani. My follow-up question to this would be around the board’s role in helping their organizations future-proof their business. How do you see that happening with regard to sustainable-sourcing practices?

Debjani Mallick: It reminds me of the point Radhi was making earlier about how boards ultimately have responsibility over the long-term growth and viability and value of an organization. Sustainable sourcing is just one of the levers a board can lean on to help organizations to grow. As Radhi was saying, supply chains are becoming increasingly more complex as there’s global expansion through M&A or other types of vehicles of growth. As you have that type of fast-paced expansion, you need to make sure you have a strong backbone and foundation for controlling all those risks that pertain to the supply chain and your relationships with the supply base.

One example going through growth through M&A, if there’s a proven sustainable-sourcing framework in place, then postacquisition, that organization is in a place to get ahead of reputational risk, threats, etc. to help their brand get ahead of issues with access to limited natural resources or raw materials. The risk management framework and specific considerations for ESG risks allow you to have some stability as you continue to grow at a rapid pace.

Radhi, do you have anything you wanted to add to that?

Radhi Subramanian: Sustainability and sustainable sourcing have gone from the nice-to-have column to the must-have column. Take a step back and look at so many business functions we have today that we didn’t have 20 years ago. Twenty years ago, I don’t think we had a chief information security officer. There were a ton of things we didn’t have within companies. We didn’t have an e-commerce department.

Today, you would never dream of a company not having those, and sustainability is becoming one of those elements. Its importance is rising fast, because when things go wrong in all of the aspects Debjani talked about, the impact on your share, your brand, can be so damaging and so fast that trying to pedal backward is hard. It’s the fiduciary responsibility of the board to take a longer view, to say, “This is not just a tactical thing. This is something we need to think about strategically,” and “Are we covering all our bases and taking into account all these elements of sustainability not just in sourcing but across the broader operations of the company so we protect the brand and the value and the image and the shareholder value of this company?”

Kevin Donahue: Radhi, Debjani mentioned the board looking at an M&A — say, an organization that comes in through M&A, and if they have a mature function to leverage, I would imagine the inverse is true: If an acquisition or merger occurs and that organization has a sustainable-sourcing strategy on the lower end of the maturity spectrum, the board needs to look at that closely to make sure that maturity is elevated to meet the standards you’ve been talking about.

Radhi Subramanian: You’re right. We are working with two large companies, one in Europe, one in the United States, that are merging, and they are looking, function by function, at, how do you monitor security? How do you monitor data privacy? Sustainability is high on that so they can choose the best of the best and standardize with an understanding that the rules and laws are very different in Europe and in North America and across different parts of the globe.

Kevin Donahue: This has been a fascinating conversation. Thank you both again for joining me. One final question for both of you: What do you see as the key next steps boards need to take to ensure that sustainable sourcing is part of the business’s strategy?

Debjani Mallick: We touched on the sustainable-sourcing policy earlier — creating a comprehensive policy that does a good job of articulating what the expectations are of suppliers related to environmental, social, ethical performance. That’s one of the first things we think a company can spend time on and engage the board on. That policy ultimately is a supplier-facing policy that’s going to go into your code of conduct, be built into your supplier contracts, etc. It has an element of ensuring compliance as well.

The other next step, once you’ve got that overarching policy statement in place, would be to understand your current state and start the conversation around what those ambitious yet attainable goals are going to be. Some of the things a lot of our clients have engaged us for would be like ensuring alignment with the UN Sustainable Development Goals — SDGs, as we call them — or science-based targets. These are all goals that are globally accepted, so they have a level of broad-reaching applicability to them, as well as ones that a lot of the prevailing organizations are familiar with. It becomes a lot easier to communicate to investors, customers, etc. what your level of ambition is and what your priorities are using that common language of UN SDGs or science-based targets.

Other topics we’ve touched on throughout this would be starting to consider the data and tooling. What is your current technology roadmap? What does it look like? What are the tools and systems in place you use to manage all sorts of processes across the supply chain? What purchasing systems are in place, and how can those be enhanced or taken to the next level so they also have relevance to ESG topics? That’s a great starting point versus introducing new tooling that does not have integration with your existing systems in place.

I’ll let Radhi touch on the board’s involvement with engaging stakeholders, but that’s the last piece of this because it’s an exercise in change management. Understanding who your audience is and what the correct messaging is for each one of those people is a consistent role of the board and something that needs to get started early versus later.

Radhi Subramanian: The board, as we said, has access to the cockpit of the company. If this is a plane, they know where it’s going not just today, tomorrow, but years out. They’re in a position to say, “Sustainability overall, ESG overall, is not a nice-to-have. Mr. CEO and senior leadership, what program do you have in place? What is your baseline? How are you measuring yourself? What is your strategy?”

This elevates itself to becoming one of the items they are evaluating the company on, because the external shareholders are evaluating your company on that, the markets are evaluating your company on that. It is the responsibility of the board to make sure that internally, it becomes a part of the overall process.

That is where I have to add that the team at Protiviti can do a great job helping companies. We have, over and over again, been able to come in, do a baseline, help the company understand where they stand with respect to companies in their category, define the program, create a crawl-walk-run plan so they can slowly start executing on this roadmap with an eye toward “We need to be compliant, we need to do reporting, but then what are the additional things we need to start executing on so we can get ahead of our competitors, because we know they’ll be there tomorrow?” It’s much harder to catch up.

We also know this: We all buy brands that are far more environmentally conscious than brands that are not. That difference of 5–10% in sales is a huge difference in value. The time is now. That’s one of the roles boards can play: Ask their companies, “Do we have a program in place? Do we have a baseline? Do we have a partner who’s helping us to set this up? And what are we doing about this, Mr. CEO?”

Kevin Donahue: My thanks to Radhi and Debjani for joining me today. For more information on these and other ESG and sustainability topics, please visit the Protiviti sustainability page at Protiviti.com/ESG.