Stop Sanctifying Savings, Recognizing ROIs without Research, or Seeking Solutions Solely in Software

If you’ve been reading the doctor for any length of time, you’re probably a bit confused about the third part of this title — as the doctor is one of the biggest proponents of sustainable software solutions that cover the extended Source-to-Pay process and enable next generation Sourcing and Procurement. However, just because he believes you should have an appropriate software solution for every stage of the source-to-pay process, that does not mean he believes all of the solutions are in software alone. Some are in systems, which are composed of talent, technology, and transformation(al processes).

Sometimes the solution to a challenge isn’t (just) a better system, it’s a better process. Take invoice overpayments, common in large organizations due to over-billings, duplicate billings, and even fraudulent billings. The current “solution” is to use a recovery firm who will take 1/3 of what they “recover” for you as their fee, but they won’t recover everything (since anything off contract is hopeless, as is any fraud that slipped through — the perpetuators are long gone, and even if the authorities find them, by the time you get a judgement in court, they’ve spent, laundered, or transferred the money to somewhere you can’t touch it). This is not much of a solution, because if only 50% of the overspend is addressable, and you lose 1/3 of that in fees, you’re only recovering 1/3 of your overspend. Ouch!

The solution here is better process enabled by technology. When an invoice comes in, the system auto-processes it and auto-matches it a purchase order and a goods receipt. If there is no PO, and it’s not a pre-defined monthly billing, it’s marked as no-pay until manually verified by the buyer that a) the invoice is for goods that were ordered and b) all of the units / services are the agreed upon prices or rates. And even then it’s held for payment until the goods are marked as received or the services delivered. If there is a PO, it must match all of the yet unmatched units (if multiple shipments, and thus invoices, are made against the PO) and each unit must be billed at the approved (contracted rate). If not, it’s flipped back to the supplier for correction. If the supplier won’t correct, possibly because the order was expedited at managerial insistence and the supplier agreed only if a premium could be charged, then it needs managerial approval before a payment can be issued, and if that is not given, it needs to enter a dispute process. In other words, no invoice is paid until matched, verified correct, and, when necessary, granted managerial approval — and the entire invoice management function is governed by a well thought out, defined, and detailed process (with flow-charts that govern process flows) that ensures every invoice is processed correctly in every situation (based upon whether or not the goods and/or services are under contract, PO, cyclic billing agreement, ordered from a catalog, requisitioned at a defined rate scale, bought in an e-auction, etc. In other words, the process comes first, and the technology enables it.

This means that while the software should enable as much of the process as possible, you shouldn’t look to the software, or even the vendor, to define the process for you. The vendor should have best practices, and should provide you with sufficient configuration options to make it work for the process you need, but you need to understand what you need before you select a solution. Some solutions on the market will be really rigid, and others will expect you to configure it to your needs. In other words, software can provide you with what you need to complete the solution, but software alone is not a complete solution — you need the right process and the right people using it. So don’t look to a software provider as the solution, look to a provider to provide software that will provide the software part of the solution.

And, more importantly, don’t accept the promised ROI without doing your own research. Most providers will promise you an ROI of 5X to 15X in an effort to convince you that NOT buying their solution wold be the stupidest thing ever as every day you’re not using their solution you’re flushing money down the toilet. And if the ROI of a solution is that high, you should definitely have a solution — but the solution that gives you that ROI might not be the one that promises it. Remember, ROI is realized return / total solution cost, and depending on how good you were doing before buying the solution, the current market conditions, your industry, and the ancillary costs of the solution (implementation, integration, training, etc.), the ROI for your organization could be drastically different than their average ROI for their average customer. For example, while the vendor’s average customer might see an ROI of 5, you might only see an ROI of 2.5, and at a multiple of less than 3, it’s likely not the solution for your organization. (Unless it’s the only solution and you need a software solution, but it’s rare that there’s only one software solution that would work.)

If you’re given an ROI, ask for the calculation the vendor uses and how you would calculate it for your own organization and do it yourself. Add padding into the price, and when you have an expected range of savings and/or cost avoidance, err on the side of caution (the lower end). That’s the number you use when considering the value, not the vendor’s number. Every situation is different, and you need to understand how different your situation is from their average customer.

However, the most important thing to understand is that you need to stop sanctifying savings and believing that the savings numbers provided by a vendor are a result of their solution. Or that you will achieve anything similar. Remember, “savings”, which is usually just “unnecessary cost avoidance”, is a function of how much the organization is spending across its addressable categories, how much overspend is across those categories, and how much was able to be captured — and this is dependent on organizational size (annual revenue), industry, and spend profile. If your organizational spend is considerably smaller, your addressable spend is less than industry average (long term locked-in contracts, etc.), or your overspend in high volume / dollar categories is less than industry average (either because you had good negotiators, or you cut the contracts at the most opportune time), then your expected “savings” will be considerably less than their average customer savings they are presenting to you. In other words, like ROI, the advertised number may not be what you get. Specifically, your savings might not be anywhere close to their advertised number.

But that’s not the most important reason you need to stop sanctifying savings — the most important reason you need to stop sanctifying savings is that there is absolutely no correlation between the savings numbers and their software. Let’s repeat that. There is absolutely no correlation between the savings numbers and their software. Why? The same reason you should not seek solutions solely in software.

The reality is that, depending on the situation at hand, sometimes most of the “savings” or “cost avoidance” results from a better process alone and has nothing to do with the software solution whatsoever. Also, sometimes the solution that is needed is simply a workflow that enforces a process, a RFX solution that collects comparable information, an e-procurement solution that supports contracted rate catalogs and rate cards, etc. These standard solutions are offered by dozens of vendors and if the majority of the “savings” or “cost avoidance” comes from a baseline solution, it literally doesn’t matter what vendor’s solution you use! Literally. So if the vendor with the significant savings number is asking 1M annually in license fees and a smaller vendor offers a solution with all the necessary baseline functionality for 120K annually, you could get the same savings for 1/8th of the cost (which would significantly impact the ROI).

In other words, when you are given a savings number, you have to do your research and figure out

  • what percentage of those savings results solely from the fact that the implemented solution enforces a proper process
  • what percentage of those savings results solely from the baseline functionality that is available in at least 3 to 5 other solutions (at a lower annual license cost)
  • … and what percentage of those savings result from advanced features found only in that solution

For example, if only 5% of the savings results from advanced functionality and your estimated annual savings from addressable spend for the first 3 years is only 10M per year, are you really willing to spend 8X as much in license fees for an incremental savings of 500K? The answer here should be a resounding NO as that incremental savings is less than the incremental solution cost! But if you’re a multibillion dollar corporate, that could save 50M a year for three years, with a 10% incremental savings from the advanced functionality, then you would be saving an extra 5M per year at an incremental cost of 800K (which is a 6X ROI) AND have advanced functionality that could be applied to all categories that might squeeze out an extra percent here and there.

In other words, what solution you should buy depends on which solution you expect will give YOU the greatest ROI based upon YOUR calculation, not the vendor’s customer averages (or outrageous quotes from multinationals who spend 10X what you do). Furthermore, don’t misread the title — you do need software to enable your Sourcing, Procurement, and Supply Chain, but the software is not the total solution — which requires the right process driven by the right people. So don’t expect the vendor to solve all your problems, just the software portion (which you should only buy after identifying what you need, and the vendor you should choose should be that which has the greatest expected ROI for your organization, as calculated by you).

Source-to-Pay+ is Extensive (P24) … Time for More Contract “Management”, but it’s a NAG. Let’s end with Governance!

In Part 21 we noted that after Supplier Management came Contract Management because the only way to lock in the opportunity was to get a contract signed on the bottom line. However, like Supplier Management, Contract Management isn’t consistent across vendors because each has a different idea on what Contract Management actually is … and sometimes isn’t. (And most vendors are jumping on the AI bandwagon faster than fleas on the only stray dog in town, but that’s a rant for another day, or week — there’s so much absurdity here.)

However, as noted in our last two posts, Part 22 and Part 23, most of the definitions, and the implemented capabilities, tend to fall into three categories: Negotiation, Analytics, and Governance. Two days ago we started by breaking down negotiation and yesterday we tackled analytics, so that just leaves governance. So today we’ll tackle governance.

Before we continue, we should point out that what we are calling contract governance includes the baseline functionality that many people used to call contract management in the early days, but since

  • the capabilities of contract systems have multiplied and varied significantly since the early days, resulting in the definition of management being too jumbled and nebulous to be useful and
  • management is more than just an electronic filing cabinet, especially when an organization really needs is control of, and by, the contract (which is an archaic definition of governance, by the way)

what we are really talking about here is not nebulous “management” but true contract governance, and a foundation for relational governance as part of an organization’s GRC (Governance, Risk, and Compliance) strategy (but that’s beyond this series).

Finally, please remember that this is not meant to be an exhaustive list of capabilities you may find, or need, but a starting list of capabilities that should be present in any tool you are considering.

BASIC

indexing and classification w/ full doc management capability
At its foundations, a governance solution must support full document management functionality with deep indexing and classification support for contracts. And that indexing must be customizable to the organization for fast location of contracts by customizable hierarchical indexes, key metadata, filters, and easy searches.

obligation, deliverable, and expiration tracking and management
The entire point of contract governance is ensuring the contract is executed because, while you may want a SaaS solution configuration to be “set and forget”, that’s the last thing you want a contract to be! While you want to trust your supplier, you also want to verify that the obligations are being met, on time and to spec, the billings are done for agreed upon rates, to the payment terms, and any issues are appropriately addressed and adequately resolved within the specified timeframes.

This means that obligations, deliverables, and expirations need to be tracked, their current state maintained at all time, and issues need to be easily surfaced and reported on.

alerting & notifications
In addition to constant monitoring, the platform must also support the definition of custom alerts and notifications, with email/instant messaging support and escalations through channels and notification chains if issues (such as deliverables being late, disputes going unresolved, etc.) are not resolved within a timely fashion.

amendment and addendum management
Few contracts, especially in the project / services category, survive their lifespan without needing at least one amendment (or addendum) as a result of a needed change order, so it’s critical that the solution support amendment and addendum management as well.

equal support for buy-side and sell-side
We really shouldn’t have to say it, but a contract governance system should govern ALL contracts, both buy and sell side. You have obligations, deliverables, terms and conditions on both types of contracts and need to manage, monitor, and report on them both on a regular basis.

ADVANCED

dispute resolution
The goal of a good contract negotiation is to end up with a contract that both parties are comfortable with, agree to, and are willing to execute to the dotted i’s and crossed t’s. However, despite the best of intentions, sometimes misunderstandings will arise, and these could lead to disputes. [And sometimes the best of intentions were not in the hearts of all people on one, or both, side(s), and issues are going to arise, and some of these issues are going to turn into disputes.] Disputes need to be resolved, and the process needs to be managed, the communications tracked, and the resolutions and agreements archived in an effort to prevent the disputes from recurring.

asset management
Contracts are for goods or services. Contracts for goods are for goods for use or goods for resale. Goods for use fall into two categories, consumables, which should be managed as inventory, and durables, which are used for execution of the business (like furniture, machinery, electronics, etc.). These durables are typically assets and should be tracked and managed in conjunction with the contracts that governed their acquisition (and their warranty and associated services, etc.). And while there are separate asset management systems, and the organization may prefer to acquire and use one, you still want the link between assets and contracts because, chances are, the asset management system will generally not maintain that link.

project management
Services contracts are generally for the implementation and delivery of projects with multiple phases, deliverables, and obligations, which need to be managed … like a project. While the organization can choose from a multitude of traditional project management solutions to manage the project, the project should not be managed independent of the contract, so a good contract governance solution should contain at least standard project management capabilities.

budget support
The entire point of a contract is to manage spend, and, hopefully, stick to the budget. So while your e-Procurement solution should support, and monitor spend against, the budget, it’s also very, very, useful if the CLM solution can, on a regular basis, import spend and monitor spend against active contracts and show performance against budget for all contracts in a category, for a supplier, etc. so that an organization can see if the contracts are keeping the projects and categories on budget, or not.

event monitoring (re obligations, deliverables & clause triggers)
While you likely have solutions that monitor external events that might impact your suppliers, or your organization in certain geographies (natural disasters, political events, new regulations, modified tax/tariff/custom rates, etc.), how many of these monitor events and identify those that might impact specific contracts? Likely none. That’s why a good governance solution will import this event data from these solutions and associate it with contracts, and then use the alerting and notification capability of the platform to let you know when a contract (obligation and deliverable) might be at risk.

Next up: The Vendor List in Part 25!

Source-to-Pay+ is Extensive (P23) … Time for More Contract “Management”, but it’s a NAG. Let’s continue with Analytics!

In Part 21 we noted that after Supplier Management came Contract Management because the only way to lock in the opportunity was to get a contract signed on the bottom line. However, like Supplier Management, Contract Management isn’t consistent across vendors because each has a different idea on what Contract Management actually is … and sometimes isn’t. (And most vendors are jumping on the AI bandwagon faster than fleas on the only stray dog in town, but that’s a rant for another day, or week — there’s so much absurdity here.)

However, as noted in our last post, Part 22, most of the definitions, and the implemented capabilities, tend to fall into three categories: Negotiation, Analytics, and Governance. Yesterday we started by breaking down negotiation and today we’ll continue with analytics.

Before we begin, we should point out that contract analytics is not contract spend analytics, which in many platforms is merely a summary of spend under contract, but an analysis of the contractual documents of the organization. We will also remind you that this is not meant to be an exhaustive list of capabilities you may find, or need, but a starting list of capabilities that should be present in any tool you are considering.

BASIC

Clause, obligation, term, deliverable, etc. identification and extraction
The foundation for contract, not contract spend, analytics is the ability to semantically analyze, parse, and extract key pieces of data and metadata on a contract on which to do contract, and contract pool, analysis. An organization wants to know more than just how much contracts contribute to spend under management, but how they contribute to risk mitigation (by ensuring the supplier is responsible to adhering to key governmental requirements), policy compliance (by ensuring there are clauses for mandated diversity programs or industry certifications), insurance, privacy, and other business factors in addition to providing the contracted product (using only approved parts and/or raw materials) or service (using only certified personnel).

While an advanced Negotiation offering will include some of this semantic capability, it may not support anything beyond basic clause identification and not support the necessary meta-data extraction and enrichment necessary for the analytics the organization wants to perform. Significant up-front research and live confirmation of capability (against organizational paper, not demo documents in a vendor system) may be required to verify this.

Search by clause type, obligation type, payment terms, deliverables, etc.
In addition to being able to parse a contract for key meta-data necessary for contract (pool) analysis, the platform must also support extensive search and filter capability on this meta-data. Knowing that 20% of your contracts do not address privacy in a country where a new privacy regulation has just been approved is good, but being able to quickly identify all of the active contracts is better. When an organization needs to assess readiness for a regulation or a risk or revisit their payment policies, they need to be able to quickly figure out what the precise impacts will be, and this will require advanced contract search and filter capability.

Analytics on document/clause/obligation/payment term/deliverable types
As indicated above, its more than just analytics on spend, but analytics on how many different contract types are used in an organization, how common/prevalent a clause is or isn’t, how often a variation is used, the average number of obligations, the OTD (on-time delivery) of those obligations, standard and variant payment terms, the direct and indirect cost of those payment terms and potential cost avoidance from changes to those terms, typical deliverable categories, and how these metrics change over time from one-period to the next. Also, average contract lifespan, renewal rates, decreases in evergreen renewals over time (as these are typically bad — out of sight, out of mind, out of control), and shifts in contracted supply base, geographies, etc. are as important as the spend the contracts control.

Process / state analytics
An organization also needs to understand its overall process and its state of affairs relative to contracts at any time. It’s not just how many contracts are active, but how many are now expired and how many are in process for signing/renewal. What’s the average time from award identification to signing, for implementation, and for conclusion. And how does it vary by category, geography, and supplier and how does that change over time?

Summaries
It must also allow for the construction of custom summaries (views, widgets, etc.) of any and all analysis each role and stakeholder wants to see when they sign into the system, and must support full drill-down and filter to individual contracts, clauses, and terms as required.

equal support for buy-side and sell-side
Why should you have one system for analyzing buy-side contracts and another for sell side? It’s just as critical to understand revenue, margin, profit, risk, obligation, etc. on the sell-side contracts as well!

ADVANCED

Contract Component based spend / supply / supplier analytics
A great contract analytics solution will not only support best-in-class spend analytics capability, but also allow all of the contract meta data to be defined as cube dimensions and used in formulas, filters, and metrics and allow spend to be sliced and diced by contract dimensions — to find out how much spend is covered by an appropriate risk mitigation clause, and how much is not; how much spend is adequately insured and how much is not; how much is tied to performance and may be recoverable as damages for late delivery/project completion; and so on.

Performance analytics & benchmarks
In addition to process/state analytics, the platform should also support performance analytics with respect to overall contract execution and completion timeframes; performance against obligations, payment terms, agreed upon rates and costs; expected demand and utilization; spend to budget; and so on. It should also support the creation of internal benchmarks by year, category, geography, etc. for judging contract performance (over time), and support the importation of external price / rate benchmarks and standard public contracts for relative analysis of organizational performance to the extent possible.

Duplicate / redundant clause analysis and suggested standardization
If you don’t have a contract negotiation platform and all contracts have been created free-form by the legal team, chances are you have more variations of every “standard” clause than you have standard contracts. (Yes, you read that right. Remember, you have expired contracts too that you should be maintaining for 7 to 10 years to backup any spend that you made for financial purposes, as well as maintaining for the length of time any non-compete, warranty, or liability clauses remain valid — so you can easily have more clause variations than you have active contracts when every lawyer uses their own preferred wording of a clause).

Contract risk analysis based on key contract factors
We know that there are separate solutions for “risk” in our space, but most of those solutions are focussed on supplier/supply-chain risk and compute that risk based upon external factors. However, every contract you sign carries risks — risks defined by whatever the contract didn’t cover (and explicitly transfer liability to the supplier for if they violated a regulation or law) and what it does. Your contracts not only explicitly define the products and services you are buying, and the regulations you are subjected to, but your sell-side contracts also define the associated liabilities you are assuming! And a good CLM should support all of your contracts, not just buy-side, even though chances are the sell-side will be initiated by the supplier (and negotiated in their system) and all your system will store is the final contract (which you also want to be able to analyze as well).

Next up: Governance in Part 24!

Source-to-Pay+ is Extensive (P22) … Time for Contract “Management”, but it’s a NAG. Let’s start with Negotiation!

In our last post, Part 21, we noted that after Supplier Management came Contract Management because the only way to lock in the opportunity was to get a contract signed on the bottom line. However, like Supplier Management, Contract Management isn’t consistent across vendors because each has a different idea on what Contract Management actually is … and sometimes isn’t. (And most vendors are jumping on the AI bandwagon faster than fleas on the only stray dog in town, but that’s a rant for another day, or week — there’s so much absurdity here.)

However, most of the definitions, and the implemented capabilities, tend to fall into three categories: Negotiation, Analytics, and Governance. So these are the three categories we will tackle, and breakdown at a high level one-by-one, starting with Negotiation.

Negotiation platforms revolve around authoring, negotiation, and signing — and seem to think the need is met when the ink is dry (which it’s not, but we’ll discuss that in our next two instalments). Within this category, they tend to focus strongly on either template libraries, clause libraries, or AI authoring support; collaboration features to allow for team-based creation and multi-party redlining; and/or change management and/or e-signature support.

Note that key capabilities of templating, collaboration, change management, and e-signature are (also) needed for full negotiation support, and the value only shines through when certain capabilities are well thought out, deep, and complete. But not all capabilities are necessary to meet the baseline, so we will separate out our discussion of capabilities into basic and advanced.

BASIC

Templates
A decent Contract Negotiation Management system needs to support contract templates that can be indexed, copied, loaded, and used as the initial draft of a contract once the parameterized fields are filled in, either by automatic pull from a connected e-Sourcing / e-RFX system with the data, or through a wizard that allows a user to quickly complete a draft from the template for the supplier through the definition of a small number of fields and the inclusion of attachments as necessary.

These templates can be static, or automatically assembled from clauses in a library using manual selection based on clause requirements, assembled using hybrid AI that uses a set of clause specifications and meta-data to find the right clauses in the library, or fully drafted using AI and only the demand forecast, final bids and the winning supplier as inputs.

Clause Based Contract Construction / Modification
In addition to supporting templates, the contract negotiation tool should also support clause libraries, preferably with multiple clause versions when the organization needs to work with suppliers in multiple geographies where different regulatory requirements need to be adhered to, and indexes by geography or any other data dimension that may require standard clause variants (such as industry, product/service category, etc.)

Change Tracking
While collaborative authoring, or even authoring support, is not required within the platform if the platform supports Word documents (and the contracting personnel work in Word), it must at least support difference and change tracking and contract redlining from one version to the next.

Negotiation Support
If the tool is a contract negotiation tool, then it must support negotiation. However, the baseline support is simply the ability to export a document to send in an e-mail to a supplier, who returns a document, that is then imported, compared to the previous version, and the changes redlined for review. A better platform allows the contract draft to be shared from within the platform and the supplier to either do their redlining with the platform, or upload their redlined contract to the platform, while maintaining a full audit trail of activity by both parties and a basic chain of document custody. More advanced platforms, will embed AI to make suggestions at each step of the contract.

e-Signature Integration
A contract is not a contract until it’s signed. A core requirement of a Negotiation platform is support for one or more recognized e-Signatures like Adobe or DocuSign. A platform can also support a vendor’s proprietary e-Signature solution if it meets the regulatory requirements and is acceptable to both parties.

equal support for buy-side and sell-side
While the chances are that your organization will be forced to interact with the buyer’s system and process when you are trying to sell, sometimes you might be able to use your system and paper, especially when it’s a new category / atypical purchase for the buyer or they don’t have a good system to manage the process.

ADVANCED

Auto contract type / clause identification & extraction for counter-party paper
At a basic level, most contract negotiation platforms only support organizational contract creation, not counter-party paper which is critical if the supplier has the leverage and will only use its own paper, or the organization needs to fast-track a buy for a product or service it doesn’t have a template for and needs to start with counter-party paper.

A key capability here is automatic contract type identification, clause identification, term and obligation identification with associated text-based extraction and auto-indexing using advanced semantic technology.

Auto clause suggestion based on geography, supplier, product/service, regulations, etc
At a basic level, the authoring capability needs to support templates and clauses, but a good negotiation solution will use contract meta data and key indicators to recommend the required clauses, and the preferred version. This doesn’t necessarily mean, or require, anything close to AI as a rule-based expert system designed / tweaked by experts can be the perfect solution for most organizations, but could include machine learning that learns user preferences over time and tailors its suggestion to the user (and not the organizational defaults). Regardless of mechanism, an advanced negotiation platform helps the user author their contract.

Collaborative Authoring
All negotiation platforms must support authoring, but collaborative authoring is not an absolute requirement. However, it’s very useful when a team can collaboratively comment on, and even edit, a draft of a contract before it is locked down and sent to a supplier, especially if specific expertise from a large group of people is needed in various parts of the statement of work, appendices, etc. for complex direct manufacturing contracts or complex project contracts.

Dynamic Templates / Template Generation
Templates are a must, but all classical platforms had, and all basic platforms have, is static, user / vendor constructed templates. A modern ML/AI enabled platform will, based upon the responses to a few questions, category metadata, and chosen supplier, automatically generate a template that takes into account this information, the geography, the industry regulations, and other known factors and automatically generate a starting template using all available clause templates and variations to build a template expected to be as close as possible to what is needed to quickly draft the contract.

Word / Email Integration
The final advanced feature is integration with Microsoft Word to allow contract editing, change tracking, and redlining inside every lawyer’s favourite tool (Microsoft Word). Similarly, it should integrate with the organization’s email platform to allow contracts to be directly sent through email from within the platform, and when the supplier returns them, automatically identify and extract them back into the platform, with versioning and an audit trail generated automatically.

And the best platform should also support every buyer’s favourite tool — Microsoft Excel — for the creation of the pricing schedules, associated timelines, and charts.

This is not all of the features that a Negotiation platform could possess, and not even all of the features that a modern Negotiation platform should possess, but the baseline of what it must posses to support baseline functionality and more advanced functionality for efficiency and effectiveness.

Next Up: Contract Analytics in Part 23.

Carbon Calculation is Great, But What You’re Really Concerned About is YOUR e-Liability

A few weeks ago, we ranted that Carbon Tracking is Important — But a Calculator or a Credit is Not a Solution! The reasons that credits were not a solution were that most “credits” were iffy at best, and downright fraudulent at the worst. The only solutions to carbon are actual reduction or proven capture. But that’s a diatribe for another rant. A calculator is not a solution either. It’s important to understand YOUR carbon footprint, but simply understanding your footprint is not addressing your footprint. Plus, it’s not just your inbound footprint you need to worry about, it’s your outbound footprint as well. You are NOT responsible for any carbon in your organization associated with products or services that are being sold to another business. You are only responsible for the carbon footprint of products are services that are being sold to a consumer or that you incur in running your operations.

In other words, what you need to be tracking and addressing is your e-Liability, which was well defined in a recent Harvard Business Review article on accounting for climate change. And this is not scope 3 carbon tracking or ESG reporting under the GHG protocol which contains flaws that result in the same emissions reported multiple times throughout the chain by different companies and other emissions being completely ignored. All emissions need to be captured ONCE and allocated as appropriate between the different entities in the supply chain, depending on which business is the last business to acquire the products or services that the emissions are directly correlated with.

Note the concept of direct correlation. All of the GHG produced mining a rare earth mineral is direct GHG associated with that rare earth mineral, and is passed up the supply chain to the buyer who buys that ore to process it, whereas all of the GHG produced by the CEO flying around on his private jet just because he can is indirect GHG that is the liability of the corporation that needs to be accounted for, and offset in someway, but that cannot be passed on to an organization that buys its ore (as it was not GHG absolutely necessary to extract the ore).

The best part of the HBR e-Liability recommendation by Kaplan and Ramanna is that it is based on financial accounting principles which track liability inflows and outflows the same way an accountant or economist would track inflows and outflows. It’s mathematically sound, makes perfect sense, doesn’t double count, and properly used, won’t miss anything either. If you want calculator, get a proper e-Liability calculator.

But remember that understanding your e-Liability is only your first step. The next step is to find ways to actually reduce your GHG footprint by reduction of unnecessary activities, production process improvement (including energy and water efficiency), and product design improvements. (Not BS credits.)