Waste Service Providers Become Resource Managers

From BioCycle
Journal of Composting &Organics Recycling
April 2000, Page 51

NEW PARADIGM FOR DISPOSAL CONTRACTS
WASTE SERVICE PROVIDERS BECOME RESOURCE MANAGERS
Contractual arrangements are tied to the value of materials recovery and waste minimization rather than the quantities of waste disposed.
Paul Ligon, P.N. Mishra and Tom Votta

VIRTUALLY all waste generated by nonresidential sources is handled through contractual arrangements, and some data suggest that two-thirds or more of the U.S. municipal solid waste stream is managed through contracts as well. Contracts establish the incentives under which solid waste management (SWM) service providers operate. Normally, the volume of waste disposed drives compensation for SWM contracts — more waste translates into more revenue for the SWM service provider. In such arrangements, the financial incentives of the waste generator and the solid waste contractor are at odds; the waste generator has an incentive to decrease waste quantity, while the contractor is better off handling continuously increasing quantities of waste (see Figure 1). These conflicting incentives work to impede serious progress in waste reduction.

Resource Management (RM), an emerging alternative to traditional disposal contracting, seeks to fundamentally change the relationship between solid waste contractors and their clients. RM contracts are structured to decouple the quantity of waste disposed from the contractor’s profit by providing financial incentives for services related to material consumption, use and recovery. For example, RM contracts may cap disposal costs (based on current costs) and then include a gain-sharing arrangement for successful waste minimization programs initiated by the contractor. When compensation is tied to the value of material related services, rather than the quantities of waste disposed, contractors receive the right price signals and their incentives align with their customers’ (see Figure 1).

A traditional disposal contract has the waste service provider’s responsibilities beginning at the dumpster or loading dock. RM contractors, on the other hand, start inside the plant. They address points throughout the material’s lifecycle, from procurement of raw materials and process/product design (upstream in the lifecycle), management of process by-products that selects a reclamation/reuse or disposal route (mid-stream in the lifecycle), to disposal (downstream in the lifecycle). RMs have more control and opportunity to influence upstream decisions that affect ultimate waste generation.

For example, in one instance, an RM contractor worked with a client’s internal process engineers and designers to eliminate a hazardous waste stream by identifying a viable substitute to a hazardous chemical used in its manufacturing process. The resulting $400,000 savings was split 50-50 between the contractor and the client. Such “win-win” situations are not limited to industrial settings, but can be adopted by municipalities, institutions, and commercial establishments that rely on disposal contracts.

Traditional waste management companies have an incentive to switch to an RM approach because it provides an opportunity to diversify their services and profit base. An RM-based contract facilitates longer-term relationships and partnerships with customers by enhancing their interactions and creating an opportunity to provide additional environmental services. Furthermore, the customers’ perception shifts from a vendor/cost focus to value-added/strategic service focus.

RESOURCE MANAGEMENT ORIGINS

RM’s conceptual underpinnings are rooted in the broader area of performance-based contracting and supply chain management. Energy service companies (ESCOs), which gained prominence during the 1970s, were an early user of performance contracting. ESCOs provide energy efficiency services and generate revenue through cost savings from reduced energy consumption.

A similar trend is happening among consumers and providers of chemical products seeking to reduce wasteful and inefficient use of chemicals by focusing on provision of services rather than products. In such arrangements, the service provider is compensated based on the value of the service function of the chemical. For example, a chemical service provider that produces cleaning solvents might take over a client’s cleaning operation and be compensated based on the number of parts cleaned. The shift in focus from sales volume to service creates a profit incentive for the service provider to clean more with less (not more) chemicals. This service principle is also key to RM, where an RM service provider has a strong profit incentive to address efficient material use through waste minimization and diversion.

EARLY RESULTS SHOW PROMISE

Recent experience at the General Motors Corporation (GM), a leader in the use of RM-based contracting, illustrates the tremendous potential for this approach. GM plants that have implemented RM have reduced waste by 50 to 80 percent while also decreasing costs of managing affected waste streams by one-third or more.

Work by the Tellus Institute with GM has focused on the potential for waste minimization and cost savings resulting from service-based RM contracts. To date, the analyses and RM pilot projects at eight GM plants have resulted in the following conclusions:

— Although heavy industrial processes dominate GM’s operations, approximately half of the disposal stream is comprised of municipal solid waste materials such as paper, plastics, pallets and corrugated. Despite the size of this waste stream and the multitude of cost-effective options for recycling it, these materials are often overlooked in corporate waste minimization efforts because they are relatively inexpensive to dispose. What may seem relatively inexpensive to GM in terms of disposal, however, may have a much higher value to the RM contractor that would share in the revenue from sale of recyclables.

— GM currently recycles about one quarter of its waste, but Tellus estimates that implementing RM in all of its U.S. facilities would result in at least a 30 percent increase in waste minimization at a net savings to GM. Much of this initial increase would result from recycling the MSW materials just mentioned. However, waste minimization opportunities often are not tapped because they are not a priority.

— Resource management contracts would allow GM to focus on its core business while utilizing the unleashed potential and expertise of waste management companies. Once in place, this redefined relationship will provide a basis for achieving corporate waste minimization and cost reduction goals.

Getting to the next level of waste minimization require more innovative solutions. RM moves beyond recycling to embrace a new vision of wastes as resources and waste managers as resource managers. It strategically positions organizations that rely on disposal contracts for continuous cost and environmental improvement.

ACCELERATING RESOURCE MANAGEMENT

While the initial indications of RM appear to be a “win-win-win” for the environment, suppliers and contractors of solid waste services, important questions remain. How large is the RM market? In what settings is it most appropriate and what are its limitations? What are the true financial and environmental benefits? What tools, case studies and model contracts will best accelerate RM adoption? To this end, Tellus is advancing a RM research agenda to assess when, where and how RM can drive resource efficiency. The agenda includes the following elements:

1. Use environmental accounting techniques to evaluate the potential for RM as an alternative to traditional waste management. Organizations that rely on disposal contracts are usually aware of the disposal or treatment cost they pay to external waste management companies, but often do not account for all the internal and hidden costs associated with managing waste. For example, in related work with corporate chemical suppliers, Tellus found that companies spend between $1 and $6 managing chemicals for each $1 they spend on purchasing chemicals (see www.chemicalstrategies.org for additional details). Similar ratios should be developed for internal waste management and material handling activities.

2. Investigate potential demand for resource management. RM opportunities and impacts will vary for municipalities, manufacturers, retailers, financial institutions and service-based organizations. A sectoral analysis should be performed to investigate the economic and environmental potential for RM across a spectrum of organizations.

3. Investigate the capabilities of existing companies best situated to become resource managers. Determining RM capability among solid waste and other material service providers is essential. This research would identify technical, institutional and organizational barriers to enlarging the number of qualified RM providers.

4. Develop case studies, tools and best management practices to accelerate RM. This research would provide empirical examples of commercial RM contracts and their effect on waste minimization and overall waste management costs. Model contractual mechanisms, such as gain-sharing arrangements that have the potential to foster environmental improvements, should be investigated.

5. Identify policy instruments for advancing RM. Selected policy instruments in the form of tax incentives, depreciation allowances and outreach/education may help fuel the RM market from both a supplier and customer perspective.

This research will provide a framework for advancing resource management contracting opportunities and foster its promotion as a voluntary, market-driven mechanism that corporations, municipal governments and other organizations can adopt to achieve continuous cost and environmental improvement.

Paul Ligon and Tom Votta are senior scientists with the Tellus Institute in Boston. Dr. P.N. Mishra is a manager in General Motors Corporation’s Worldwide Facilities Group in Detroit.

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