A surefire way to get funding for green IT projects

Green may be fashionable, but it’s also a hard sell – unless you know this magic method to calculate ROI

This article was contributed by a reader. If you have an opinion or technology experience you would like to share, contact Online Community Editor Julie Bort at bort@nww.com.

Energy conservation is one of the most overlooked ways a company can boost its bottom line without adding staff, space or operating hours. But you’ll need to do a great job of selling for your “green” projects to survive the budget review process. Too often, conservation projects are viewed as nice and optional things to do, rather than as serious savings opportunities. That will change in a heartbeat once you articulate the financial benefits.

One reason the value of conservation projects tends to be minimized is because of the way they are presented to management. Typically, such projects are sold on simple payback, in which the capital cost is divided by the (undiscounted) annual energy savings, resulting in a payback period of years. One problem with this approach is that many managers insist on a payback of less than three years to green-light capital projects not directly related to production. This criterion greatly limits the range of conservation opportunities available. With this method, for instance, an air conditioning system upgrade that costs $20,000 and will save $5,000 per year will have a simple payback of four years. That’s not a financial measurement that’s going to wow them in the boardroom.

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This article was contributed by a reader. If you have an opinion or technology experience you would like to share, contact Online Community Editor Julie Bort at bort@nww.com.

Energy conservation is one of the most overlooked ways a company can boost its bottom line without adding staff, space or operating hours. But you’ll need to do a great job of selling for your “green” projects to survive the budget review process. Too often, conservation projects are viewed as nice and optional things to do, rather than as serious savings opportunities. That will change in a heartbeat once you articulate the financial benefits.

One reason the value of conservation projects tends to be minimized is because of the way they are presented to management. Typically, such projects are sold on simple payback, in which the capital cost is divided by the (undiscounted) annual energy savings, resulting in a payback period of years. One problem with this approach is that many managers insist on a payback of less than three years to green-light capital projects not directly related to production. This criterion greatly limits the range of conservation opportunities available. With this method, for instance, an air conditioning system upgrade that costs $20,000 and will save $5,000 per year will have a simple payback of four years. That’s not a financial measurement that’s going to wow them in the boardroom.

A more sophisticated analysis might look at comparative life-cycle costs to develop a net present value (NPV). The NPV shows the positive (or negative) cost of a long-term project in today’s dollars, and is a good way to compare two projects. In this case, the NPV of the green project then would be compared to maintaining the status quo.

The good news about the NPV approach is that it does a better job of showing the value of long-lasting conservation upgrades. The downside is that it requires quite a bit more economic savvy to develop. Surprisingly, I also have found it requires more economic savvy to grasp and often isn’t well understood by management. (In fact, I once analyzed two multimillion-dollar capital projects and discovered one had a NPV of $750,000 more than the other, only to be told by management that “only” a $750,000 difference made the two projects “basically equal”!)

To get around the shortcomings of simple payback and comparative NPV presentations, I have developed a third way of positioning conservation projects that has met with considerable success. For lack of a better name, we can call it the “argument of avoided production,” because it evaluates conservation projects relative to revenue. Here’s how it works:

Let’s assume I could reduce my annual utility costs by $100,000 after spending $300,000 on energy-efficient capital upgrades (lighting upgrades, a green data center, and so forth) This project delivers a three-year simple payback (three years is typical for conservation projects). Do I do the work?

Well, many companies would dismiss a three-year payback out of hand (or would look very hard at competing capital requests first). But consider the project and savings in a different light. A typical commercial enterprise might recognize a profit margin of 10%. Saving $100,000 in energy costs means that my profitability can be maintained with $1,000,000 less in annual revenue. Or, more desirably, my revenue can be maintained and my margin increased.