Simply speaking, sustainability is about human well being, this generation and future generations. It is not limited to environment protection. It extends to managing socio-economic impact of decisions by different entities, including companies. Three Ps – planet, people and prosperity, capture the core principle of sustainability. A company contributes to sustainability only if it follows ethical practices and takes corporate social responsibility (CSR) seriously. A simple operational rule in business ethics is to ask whether the business decision will cause injury to any of the stakeholders, including the future generations of stakeholders. Stakeholders include the local community and the society in general. It is true that managers, all the time, cannot avoid decisions that would inflict injury on some of the stakeholders. But use of a decision-model that requires managers to estimate the amount of injury that the decision will cause to others, helps in minimising such injuries and checks careless approach in decision-making. CSR activities are those, which contribute to improve the living of outside stakeholders (e.g., local community) without directly contributing to the firm’s success in terms of creation of shareholder wealth.
Whole life costing (WLC) is a management accounting model that fits into the business model of responsible companies, which behave ethically and take CSR seriously. Till recently, there was no clarity on how WLC differs from the life cycle costing (LCC). As WLC is evolving, a common body of knowledge is being developed about WLC. WLC goes much beyond LCC. LCC considers all costs ‘from cradle to grave’. It takes into account all the costs involved from research and development to disposal of the product (usually a system) in determining the product cost. In particular, it takes into account ownership costs – cost of operating and maintaining the system, and also the cost of disposing the same after it is retired from use. For example, the owner of a car incurs costs on running and maintaining the car and the cost of disposing the car on expiry of its economic life.
In the case of a car, for most owners, the disposal cost may be negative because they sell the used car before the expiry of its economic life. But in case of other systems, the disposal cost might be significant. The buyer of a car considers ownership costs, in addition to the price, in making her choice. Therefore, car manufacturers design cars to optimise the LCC and share the benefits by charging a premium on their product.
The scope of WLC is much wider than LCC. In addition to costs covered in LCC, it takes into account costs and benefits of externalities created by the production process and the product. A product creates externalities in the course of its storage, dispatch and use.
Construction industry provides a good example of the use of WLC. The concept of ‘green building’ is fast becoming a norm rather than an exception. Developers endeavour to minimise the negative impact on the environment during the construction phase and also during the use of the building. Environment is only one of the dimensions of WLC. Developers are now required to reduce the negative socio-economic impact of the real estate development on the well being of original inhabitants of the locality where the developer is building a large township or a residential/office complex. For example, they need to consider socio-economic impact of the development of a township, in a rural or semi urban area, on the livelihood, life style, culture, education and health of original inhabitants of the village/locality. Similarly, if a shopping mall is coming up at the centre of a city, the developer needs to find out a solution to the road congestion that might be caused by the increase in the number of vehicles.WLC supports this inclusive approach.WLC model takes into account positive and negative externalities to determine the cost of the township or residential/office complex.
The developer aims to minimise the total cost rather than focusing only on the construction and ownership costs.
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Companies adopt a new business approach when it makes a business case. For example, manufacturers of systems have adopted LCC when buyers started evaluating alternative choices by taking into account both the price and the ownership cost.
CSR had received serious attention when companies found that CSR activities indirectly support the objective of creating shareholder value.
WLC will not make a business case until buyers while making the choice will prefer that alternative which will make a more sustainable globe. Regulators can accelerate the process of evolution of WLC by bringing appropriate regulations.
asish.bhattacharyya@gmail.com Affiliation: Director, International Management Institute – Kolkata