I am encouraged to see the increasing attention on sustainability and ESG (Environmental, Social, and Governance) based business strategies not only because it is my area of expertise, but because I have always felt a company’s greatest tool to improve social performance is to leverage their supply chains to localize benefits to their areas of operation. Recently many in the industry have asked what the keys are to building a localization program. I don’t think there is a one size fits all approach, but there are some key aspects and activities which, if addressed, can help companies get on the right track.
I believe a good role model is the extractive industry. Mining and oil and gas companies have been executing localization programs for decades. They call these local content, supplier diversity, community development, or indigenous participation programs. I have been working in this area for an oil and gas company for over a decade.
To set the table this paper will lay out a case for change for international companies with global production and sourcing activities to adopt effective sustainable business strategies. Then I hope to convince you that localization or local content is the best lever for almost any company to deliver game-changing social performance results. I will provide examples of program elements to be considered in a strong localization program and give a high-level roadmap for implementation. Throughout this paper, I will refer to “local content” and because of my background, it will reflect what happens in large multinational extractive companies. These are characterized by a corporate center (CENTER) and country-level business units (BUs). I think you will see that this model has elements that can be utilized across many industries including agriculture, pharmaceutical, IT, and others.
No two situations are the same, but I hope this can provide sustainability a strategic model to press for change in their communities, companies, and countries.
So why are we talking about local content and sustainability?
Localization in a Changing Landscape
“Whosoever desires constant success must change his conduct with the times.”
-Niccolo Machiavelli
As defined in the extractive industry – Local Content is the value that an extraction project brings to the local economy through hiring local labor and procuring local goods and services from the host country. For extractive industries, local content has been a regulatory compliance requirement and social license to operate activity, but several sustainability frameworks have thrust local content into a more visible role.
An early model is Creating Shared Value (CSV) which was popularized by Michael Porter from Harvard business school. This approach is an evolution from Corporate Social Responsibility (CSR). CSV is a collaboration-based model to drive positive social and economic outcomes. This framework is very prevalent in corporate strategies in the extractive sector.[i]
Recently UN Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by the United Nations in 2015 as a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity. There are 17 SDGs, and local content is a key contributor to SDG #8: Decent Work and Economic Growth.[ii]
As you have probably heard Environmental, Social, and Governance (ESG) is all the rage. This methodology is focused on business strategies where local content is a key component of the “S” or Social Performance aspect. Social Performance addresses the relationships a company develops and the reputation it fosters with people, institutions, and stakeholders in the communities where it does business.[iii]
So you can see that companies inside and outside the extractive industry have looked at this for more than a few years, but in general, have not looked to fully leverage their business and supply chain to boost these areas. Too often, driven by high priority outcomes (production, safety, quality) and year-to-year compliance targets localization has been looked at as a secondary or “add on” issue meant to satisfy local or national governments.
So how can a company adapt to a changing environment and have long-term, sustainable results?
Creating a Case for Change
“Our ability to adapt is amazing. Our ability to change isn’t quite as spectacular. “
—Lisa Lutz
At the most basic level, strong localization programs boost a company’s reputation and improve its Social License to Operate which in turn reduces the risks associated with social unrest and work stoppages.
While these outcomes have overlap with ESG outcomes, they are not the same. As discussed, local content is a strong driver of the S, or Social, outcomes in ESG. There can be significant benefits to a company from high ESG performance.
Companies that score well on ESG metrics are believed to better anticipate future risks and opportunities, be more disposed to longer-term strategic thinking, and be more focused on long-term value creation. With investors using ESG scores in their investment strategies, the consequences of a poor rating can be significant.[iv] Research shows that companies that embrace a strong ESG strategy can capture increased profits, lower costs, increased productivity, be seen as a partner of choice to local governments, and have increased access to funding on more desirable terms than their competitors.[v]
As international firms face more global competition from foreign firms and national companies who do not embrace a shared value strategy, there is an opportunity for ESG business strategies and Local Content development to be a key differentiator in the race for increased market share, employee retention, access to lower-cost capital, and better governmental relations. To be truly effective, companies will need to look for long-term, competitive, and business-driven localization.
For companies which are committed to an ESG strategy, how do you include localization?
Developing a Strategy
“Winning should be at the heart of every strategy.”
– A.G. Lafley & Roger L. Martin
ESG focused companies should look to follow a leader strategy where not only are they able to lead in their industry ESG rankings but able to build the internal alignment and processes to create a sustainable competitive advantage over industry peers.
To be a leader will mean winning in ESG and Local Content. To win, companies should embrace a shift in their Social or Local Content strategy and employ sub-strategies that will provide durable and sustainable results. These include having operations-led, collaboration-driven, and communication-enhanced strategies.
An operations-led local content program will not only mean having a strong understanding of the global, regional, and local business; but also knowing how to interact with and influence operational leadership and technical subject matter experts. This means the program will need to have stakeholders from the operations, leadership, and supply chain functions to be effective. By creating a logical, competitive, and realistic plan directly with the on-the-ground operations team, companies can start to build impactful, sustainable local content initiatives which can lead to improved results and positive reputational impact.
A collaboration-driven model will have the company focusing on those high-value, complementary stakeholders who can help drive localization programs such as the government, associations, finance organizations, development firms, and business partners. By co-investing and taking collective action, companies can realize greater business opportunities while simultaneously driving system-wide evolution. [vi]This strategy has obvious benefits, but finding a good organizational, professional, and cultural fit is difficult. Companies and organizations do not have an abundance of time, so doing extensive market investigation and due diligence, and ensuring aligned priorities and values is critical.
Finally, a communication-enhanced localization plan requires that not only are results achieved but they are measured and communicated. All too often localization work is done by technical teams, suppliers, and supply chain professionals and no one hears about it. It’s important to get the results, but it is just as critical to effectively communicate them to key stakeholders to achieve full reputational benefit. An additional benefit is that this internal and external promotion will help create a virtuous cycle where employees, suppliers, and stakeholders are recognized for their contributions and will be positively influenced to provide more in the future.
Implementation
“In real life, strategy is very straightforward. You pick a general direction and implement like hell”
– Jack Welch
There are many areas on which a local content program can focus, and the effort and resources will be determined by the local content strategy, KPIs, and capacity for change. In general, an international company will have both a global (corporate) and country (business unit) structure. In an operations-led program, the global program should focus (and be evaluated) on the support it provides to the business units to achieve localization results and the ability to capture and communicate these results to key stakeholders. Below is a list of program elements at the global and corporate levels to be addressed during the program design stage. Not all of these may be implemented, but they should all be considered.
Global Corporation (or Center) Program Elements
A strong global program will have several aspects focused on business unit support and communications to key stakeholders.
- Global Local Content Framework: Like many business units of larger corporations do not have individual resources to dedicate to local content, the global center needs to provide a framework and resources for them to quickly identify the correct strategy, develop a fit-for-purpose implementation plan, and access global expertise to address challenges.
- Subject Matter Expertise: To have an operations-led program will require experienced support to the field and therefore the local content function will need to be staffed with experienced local content practitioners so they can provide guidance, program design, and Scope of Works (SOWs) for local content solutions. This includes: supplier development, impact measurement, stakeholder management, communications, and others. In general, SCM or sustainability personnel can be involved, but given that local content and economic development are complicated areas, it is best to look to practitioners who have spent significant time in the area and the field.
- Business Unit Support Systems: Part of an operations-led local content program will be supporting the business units in the most efficient manner. Therefore, it is critical to set up a structure to create communications channels, share best practices, identify common issues, and prioritize global resources to support the business units. Aspects of this structure can include: local content Center of Excellence (CoE), Community of Practice (CoP), and resources (processes, best practices, latest research).
- Global Partner Identification: Since you will be following a collaboration-based approach to unlock expertise and resources, the Global Center needs to have the experience and relationships to identify those global and regional entities that can provide services to further local content Strategy. To dispatch these resources quickly and efficiently to the business units it is often helpful to negotiate and execute global Master Service Agreements (MSAs) which the BUs can leverage at the country level.
- Sustainability Reporting: A communications-enhanced program will relentlessly identify and gather relevant localization information from the business to support sustainability reporting, which is a key element of any ESG ranking. Gathering business unit data and success stories for corporate reporting can be used to solidify or improve ESG positioning.
- Stakeholder Management: There are key stakeholders who not only can provide strong information and guidance but also have an outsized role in defining high-performing companies in ESG and local content. These include the World Bank, IFC, OECD, and others. It is critical to identify and engage global stakeholders to gain access to resources and improve company reputation.
- Communications: A communications-enhanced strategy will require a significant focus on sharing localization achievements to strengthen reputation and partner of choice designation. Communications units should play a part; however, they often have many conflicting priorities, so successful localization programs work directly on content and materials to provide to the communications unit. This results in more accurate stories, published faster and more regularly. Both internal and external communications should be a focus. So set up a plan, KPIs, and focus both on internal and external communication.
Business Unit or Country Level Localization Program Elements
At the country or business unit level, there is a greater focus on implementation and communicating results. Some aspects are:
- Operations or Sponsor-based Local Content plan: This is one of the most important aspects of an “operations led” program. Often, business units will be broken into different groups (ex. Drilling, production operations, IT, etc.) which have managers (or sponsors) who are responsible for the operations and budget of that group. The “Local Content Sponsor Plan” will require significant engagement with operations leadership to identify opportunities, gain commitment to action, and follow through on implementation. These plans should be realistic and reviewed quarterly.
- Performance Management: A key aspect of the sponsor-based local content plan will be performance management. This means knowing what to track, how to track it, and setting targets (both regular and stretch). In many business units, there may be localization metrics defined, but a good review of all potential metrics is recommended to ensure that they underpin strategic outcomes, but also that there is an airtight definition and strong controls on the collection of the data. The tracking of performance versus targets will not only drive performance but can also serve as the foundation for a benchmarking strategy to further improve results.
- Supplier Development: One of the key aspects of a local content program is developing sustainable, competitive suppliers to participate in business unit sourcings. This will not only increase local competition, but also companies that go through a development process become more competitive and contribute more to the economy as a whole. In the extractives sector, this type of activity is synonymous with supplier qualification and gap analysis. However, a stronger approach is to build capacity in local companies through capacity development engagements which can include: business planning, quality certifications, process improvements, and others. Traditionally gap analyses are done by internal resources, while true capacity development is performed by 3rd parties specializing in those areas (ex. ISO, HACCP, etc.).
- SCM Support (market search, bid evaluation): In an operation-led program, SCM has a critical role to play. SCM is at the nexus of data and process which is necessary to design and implement a localization program. Therefore, it is critical that the localization program leverage SCM’s data and provide sourcing support linked to local content. This can include market searches, localization bid strategy, local content bid package (formulation & evaluation), and evaluation of local content sections for final submissions.
- Supplier Management: As most spending runs through strategic suppliers, the development and monitoring of Local Content Plans for their contracts are critical to drive large-scale increases in local content. It is impossible to manage all suppliers deeply and strategically. So, it is recommended that business units create a fit-for-purpose methodology where different contracts have different levels of local content controls. This could mean very low spend contracts do not have localization plans, and long-term, high-value ones have more detailed plans which can include investment, nationalization, training, sourcing, and social projects. These plans need to be negotiated in the process, executed in the contract, and monitored regularly.
- Stakeholder Management: In a “collaboration-focused” local content plan, the engagement of stakeholders is critical. The development of a simple stakeholder engagement plan with several key stakeholders (Ministries, local governments, associations) will not only improve reputation but head off potentially damaging words or actions by these powerful stakeholders. Also, as a Business Unit, you should be consistently scanning the landscape and identifying new partners to help develop local content.
- Communications & Advocacy: Just like at the global level, a “communications enhanced” program will require significant effort. This includes creating strong links to the global level, harvesting stories from the business unit, developing in-country stakeholder management plans, and creating an advocacy plan to address key local content constraints to the appropriate stakeholders.
It is critical to treat local content like any business initiative. There should be defined tactics, identified milestones, and powerful KPIs. These should be tracked and shared frequently in scorecard form with global and business unit leadership and most importantly the business.
Go slow to go fast…
When setting up a program, momentum is important, but in many companies, this will require a shift in mindset and a rebalancing of priorities. It is difficult to force this quickly. I recommend an initial 90-day phase which would include a strong ESG business case, heavy stakeholder engagement, steering committee formation, strategy approval, KPI development, work plan/budget approval, and capturing several quick wins (usually internal/external communication of current local content successes).
A fantastic outcome from these first 90 days not only should be the quick wins but a commitment to action from the enterprise with sign-off from the leadership on inclusion in the enterprise strategy. A true bonus would be the inclusion of localization metrics in enterprise and business unit scorecards. The company may be skeptical of metrics and scorecarding in this initial period, so don’t force it — but you will need to continue to manage internal stakeholders to get to this point by the next year’s business plan cycle.
Then the first year should be spent doing two things. First having a signature program or two which can achieve results will be critical for gaining credibility for the following year. Second, you will need to set up the underpinning structure for success. This can include a fit-for-purpose resource center, locking in key strategic partners, improving corporate local content reporting, and onboarding business units to the localization program by criticality and need. You only get one chance to make a first impression, so this first year is about change management. Gaining credibility through results, aligning stakeholders, and getting resources in place.
Why do well-conceived programs fail?
“Building a visionary company requires one percent vision and 99 percent alignment.”
– Jim Collins & Jerry Porras, Built to Last
So why do well-designed or conceived programs fail? My experience shows that in many cases there is a disconnect between the corporate center and the business unit, and between the sustainability professionals and operations staff. The business unit, corporate center, sustainability professionals, technical subject matter experts, and supply chain may look at the situation differently, and certainly have different metrics and priorities.
So, how do you address this? Slowly. Changing a culture requires consistent messaging from the top and the inclusion of ESG principles in the corporate and business unit strategy and linked to scorecards and performance evaluations. Only with this alignment are you ready to implement a localization program. This alone can take months in even the readiest of companies.
So have patience and collaborate and build relationships across all sectors of the business. There is not a one-size-fits-all approach, and a good practitioner will need to be flexible depending on the situation and the personalities involved.
Wrapping it up…
There have always been powerful strategic drivers to be good at local content, whether it is risk mitigation, social license to operate, or supporting the business. However, recent developments have created a greater push for company accountability around sustainability and ESG activities. The keys to achieving an industry-leading position are to have clear corporate ESG strategies and messaging, operations-focus, good program design, strong partners, and a powerful communication plan.
For many companies, now is the time to take a renewed focus on local content strategy and implementation to further improve results and reputation. This will then support improved ESG ratings and their corresponding benefits including increased revenue, productivity gains, access to capital, and reduced government interventions
FOOT NOTES
[i] HBS – Shared Value in Extractives; https://www.hbs.edu/ris/Publication%20Files/SV%20in%20Extractives%20MEP%20Presentation%20Deck%20-FINAL%20as%20presented_568c0a23-50c7-4a25-baa0-668da6222384.pdf
[ii] UN Sustainable Development Goals LINK
[iii] McKinsey ESG Framework, 2019 LINK
[iv] https://simply-sustainable.co.uk/insights/why-esg-ratings-matter-and-how-companies-use-them
[v] McKinsey, 2019
[vi] https://www.resonanceglobal.com/blog/how-partnerships-build-more-resilient-and-sustainable-supply-chains