Dr. Mads Lauritzen has led some of McKinsey's largest operations transformations worldwide during the past 14 years. Today, he is a Partner and leads McKinsey's South-East Asia operations practice. Dr. Lauritzen is also the Global Leader of McKinsey's Green Campus, the first process model factory at McKinsey that is dedicated to the successful design and implementation of energy efficiency initiatives.
Dr. Lauritzen holds a PhD in Applied Mathematics from the Technical University of Denmark.
1. What are the energy challenges and opportunities in South-East Asia today?
Mads Lauritzen: Energy prices in Southeast Asia, like the rest of the world, are increasing by five to ten per cent every year. Given the rising demand for energy and environmental challenges, prices are expected to be both higher and more volatile in the future. With expenditure on energy making up 10 to 50 per cent of operating costs for most companies across different industries, it is important that companies in the region begin to focus on energy efficiency as a key driver of productivity and competitiveness.
The good news is that there is significant opportunity. Our experience has shown that energy efficiency transformations can reduce energy consumption in companies by 10 to 20 per cent. The advantage that many organizations in Southeast Asia have is that they are at an early stage of development and can incorporate energy efficiency into their development plans from the outset – unlike many of their counterparts in Europe and North America who face the challenge of retro-fitting existing plant or operations to secure greater energy efficiency. Southeast Asia can build efficient designs into new capital expenditure and capture greater opportunities in the future. Globally, McKinsey's research suggests that two out of three business executives believe that access to energy and the cost of energy are among the top three business priorities for the next ten years.
2. Energy efficiency is one of the top priorities for many businesses today, yet nine in ten companies continue to fail in their efforts, according to McKinsey. Why do companies find it so difficult to sustain successful energy efficiency initiatives?
Mads Lauritzen: McKinsey's research shows that 90 per cent of energy efficiency transformations fail after four years. This is largely due to an inability to sustain improvements. Many of the technical solutions can be bought with money. However, we find that insufficient focus on non-technical issues such as management behavior and employee resistance to change, contribute to the failure of transformation efforts. Some typical reasons include the lack of leadership capacity in driving improvement efforts, limited organizational capabilities and knowledge to enable and sustain change, poor accountability and ownership of performance by relevant employees, and misalignment between organization-wide aspirations and individual goals and targets.
3. Small and medium enterprises (SMEs) often are the backbone of many emerging economies. What special challenges do SMEs face in implementing energy efficiency measures for their businesses? How can these be overcome?
Mads Lauritzen: There are several challenges that SMEs face in implementing energy efficiency measures:
1. Resources are constrained
Most SMEs have limited resources – both financial and manpower – and have tended not to use those resources to focus on energy efficiency. However, we have found that there is a significant opportunity for improving the energy efficiency in SMEs without requiring additional capital expenditure. In terms of manpower constraints, we believe that the cost of energy needs to be factored into normal operations (like safety and reliability) and not be viewed as a separate function or cost by companies. That requires building in energy efficiency awareness into basic operations.
2. Lack of in-house experts
SMEs typically lack both the technical and soft skills to drive energy efficiency transformations, and hiring people with these skills on a permanent basis might not be sustainable.
We suggest instead that SMEs strive to build the skills of their current employees to enhance their understanding, knowledge and experience of energy efficiency. Training programs such as the McKinsey & Company Green Campus "Learn and Activate program" for SMEs are aimed at developing capabilities within the organization itself to drive energy efficiency transformation programs. McKinsey has found that a six-month course conducted using the "Field and Forum technique" is sufficient to equip employees with basic technical and management skills. The "Field and Forum" technique involves a unique combination of classroom and experiential learning designed to give hands-on, practical experience. The SMEs in Singapore who have visited the Green Campus at Jurong Island have found the training center accessible and relevant to their needs.
3. Changing mindsets is difficult
Sustaining energy efficiency requires everyone in the organization to develop an adaptable mindset. This is an issue of both skill and will.
Management needs to use a variety of techniques to achieve this, including communication about transformation objectives and the need for energy efficiency; training to give confidence to the employees that they can actually bring about change; role modeling to show the management's commitment to the cause and the employees and finally, formal mechanisms such as targets to ensure employees understand their goals.
4. Lack of willingness to share knowledge between local and foreign workers
With a large number of foreign workers in the SME sector (in Singapore?), the diversity inherent the SME workforce needs to be recognized and appropriate steps taken to ensure that efforts to build capabilities are both inclusive and have lasting impact. This requires management to think strategically about their approach to ensure that everyone in their organization is able to contribute to the organization's goals.
5. Low retention of knowledge due to high attrition
McKinsey research suggests that the attrition rate appears to be increasing, especially right after employees have acquired the necessary skills. Some ways to overcome this issue are by ensuring a certain lock-in period after trainings, conducting frequent knowledge sharing sessions to cascade knowledge to other employees, creating formal codifications and developing a simple knowledge management system, and including the improvements in Standard Operating Procedures.
4. McKinsey set up the Green Campus in Singapore in 2012. Tell us about it. What does it aim to accomplish? What are the plans for the centre in the next five years?
Mads Lauritzen: The McKinsey "Green Campus" is a model factory on Jurong Island, which helps companies understand the drivers for energy consumption while providing an experiential learning opportunity in a live process plant. We launched this initiative in 2012 as part of the McKinsey Innovation Campus, in partnership with the Singapore Government through the Economic Development Board (EDB).
Our experience working with companies in Singapore and across the region has led us to one important conclusion: there is real scope for players in the region to transform their operations to become more energy efficient and competitive. The Green Campus offers companies a hands-on opportunity to drive an end-to-end energy transformation. With a focus on practical experience, the Green Campus model factory trains executives and frontline operations managers across a range of core operations issues. It gives participants an opportunity to learn energy-efficient processes across six live learning stations – from a water cooling system to an operational furnace. Our capability center offers world-class training programs led by McKinsey experts from Singapore and around the world.
Our plan for the next five years is to help our clients turn energy efficiency into a source of competitive advantage.
5. What do you think is the unique value that public-private partnerships like the Green Campus bring to the global energy ecosystem?
Mads Lauritzen: Energy efficiency and resource productivity has clear ramifications on the socioeconomic landscape and also on businesses. The solutions to these everlasting problems have both technical as well as behavioral solutions.
While global warming and climate change are issues that worry society and governments alike, the adverse impact on profitability in lieu of higher energy costs and low energy efficiency and resource productivity worry most business leaders. In turn, the impact on business worries government leaders - as decline in profits can imply lower tax revenue for governments. There is therefore the imperative for public and private sector organizations to collaborate and coordinate performance improvement initiatives.
While many governments in South-East Asia and around the world have embarked on developing energy efficiency road maps, most national oil companies and big multinational companies in the region have also initiated energy efficiency transformations The task on hand for both parties (governments and the private sector) is so significant that only integrated efforts can see success in the foreseeable future. For example, greenhouse gas emission reduction and energy efficiency require a behavioral transformation of every citizen. Governments can come forward with policy changes and regulatory steps to make this happen. For example, by providing incentives for energy conservation, waste reduction, water conservation, energy efficient capital equipment designs, and regulatory guidelines that impose penalties for consumption beyond a maximum load. On the other hand, businesses often struggle with a lack of capability and leadership in the area of resource productivity. This becomes a bottleneck to improve performance to overcome the pressure from energy cost increases and related regulatory situations.
At this juncture, we see that the goals are very much aligned to create an ecosystem to collaborate and succeed. Government policies, regulatory actions and incentives are complementing business organizations' efforts in investing in the right designs and developing capabilities – both hard and soft skills – of employees.