Green Outsourcing, Energy Efficient Data Centers and Sustainable Supply Chain Agreements

1. Green Outsourcing, Energy Efficient Data Centers and Sustainable Supply Chain Agreements William A. TanenbaumChair, Technology, Intellectual Property & Outsourcing Group andGreenTech Group, New York

2. Which Is Greener? • Paper or plastic bags? • Plastic – if you reuse • Washed or dirty car? • Dirty • Hand drier or paper towels? • Electric hand drying machine • Movies from video store or online store? • Online • Print or online newspaper? • Paper, if reading for more than 30 minutes • Organic beef or stock-yard beef? • Stock-yard beef Based on Nov/Dec 2008 issue of Mother Jones, article by Ben Whitford/Wired mag. 31900508

3. A Word on the Word “Green” Substitute “energy efficiency” for “Green” to emphasize the cost-saving issues that are relevant 3 31900508 31801198.PPT

4. What Corporate Goals Are Driving New Roles for IT and Outsourcing? • Reduction of energy costs • Implementation of corporate sustainability initiatives • Reduction of carbon footprint and the need to pay for carbon credits • New Role: Green IT Business Process Management (Green IT BPM) 31900508

5. Prediction • Corporations will begin charging each of their internal business units for the cost of carbon credits and will impose a penalty (or allocate a cost) for a business unit’s failure to meet corporate GHG emissions reduction targets 31900508

6. New Roles for IT • Become responsible for electricity costs in data center and computer operations • Prediction: combination of IT and Facilities Management departments • Corporations will implement “smart technology” to achieve sustainability goals • IT will take on responsibilities outside of traditional roles • Become part of general operations • Become a corporate strategic asset 31900508

7. New Roles for Sourcing and Outsourcing Teams • Manage compliance with corporation’s sustainability requirements, including supply chain and providers • Technology-enabled sustainability improvements • Green IT BPM – implementation of technology to meet regulatory requirements or voluntary carbon cap practices • IT, Sourcing and Outsourcing will become part of corporate sustainability and carbon footprint reduction • Impact of GHG Protocol formula • (1) Sourcing/Outsourcing = outside of corporation carbon footprint, or • (2) Sourcing/Outsourcing = within carbon footprint; outsourcing expertise used to reduce footprint 31900508

8. New Role for Data Management and Mining • Use of data to achieve energy efficiency, reduced emissions and sustainability • Data as asset • Data as IP • Role for IP 31900508

9. What to Do With Existing Outsourcing and Sourcing Contracts Now • Review contracts for energy inefficient provisions, such as automatic pass-through of fuel surcharges • Renegotiate or replace contracts to provide more “sustainable” provisions • Contract requirements should reflect results of “energy audit” of company operations 31900508

10. What to Do With Contracts Going Forward • Identify energy efficiency and sustainability risks and requirements during development of sourcing strategy • Include requirements in RFP • Assess provider ability and financial impact of requirements as part of down-select process • Due diligence – use well-defined checklists of energy considerations to ensure operational compliance • Sourcing management – conduct audits based on established written ground rules and specific performance measurements 31900508

11. Impact of Measuring Emissions and Carbon Footprint • EPA and other regulatory monitoring and reporting requirements • Once company measures or reports emissions, it knows them • Impact on SEC filings, financial statements, financial reserves • RPF have potentially similar impact • Structuring treatment of monitoring and reporting activities • Information from consultants and retaining third parties • Use of outside law firms 31900508

12. Data Center Operations • Data centers are often a corporation’s single largest source of energy consumption and, for some, the largest source of carbon emissions • EDS report called data centers the “SUVs” of high tech: accomplish much, but energy inefficient • If data centers were considered a separate industry, they would be the sixth largest electricity user (The 451 Group) 31900508

13. Data Center Operations (2) • Gartner: Power and cooling expenses will increase from 4-10% of IT budget to 50% in next 5 years • IT and communications industries = 2% of global emissions, almost equal to aviation • IDC: 50% of total cost of ownership of hardware is for power; expected to increase to 71% over next 4 years(a 54% increase) 31900508

14. Definition of the Data Center Energy Problem • Energy costs are significant for internal corporate and outsourced data centers and IT infrastructures • Powering equipment • Cooling equipment • “Inefficient” equipment operations, e.g., data servers “spinning” when no active operations are being performed • In “old days,” energy costs were assumed to be free • In current environment (pun intended), equipment costs have been reduced, putting focus on energy costs 31900508

15. Data Center Energy Use • In 2006, U.S. data centers used about 61 billion kWh—roughly 1.5% of the nation’s electricity • McKinsey study predicts that world’s data centers will produce more Greenhouse Gases (GHGs) than the airline industry by 2020 31900508

16. What Problems Does Using Green IT Solve? • Reduces costs • Running out of room to expand? • Minimizes real estate costs • Introduces technological efficiency • Meets corporate sustainability goals • Reduces costs of purchasing offset credits 31900508

17. Financial incentives alone are sufficient reason to reduce energy costs of data centers Datacenter Conclusion $ $ $ $ $ $ 31900508

18. What Energy Efficient Technology and Methods Are Available? • Server virtualization • California PG&E and other utilities provide rebates for qualified virtualization projects • EMC report: health care provider moved from 120 small to 60 large drives; saved $700,000 in 1 year with no performance degradation • File virtualization • Optimizes file storage and access by separating physical from logical location • Tiering of different data to different speed drives 31900508

19. Data Center Technologies (2) • “MAIDS” • Modernize wiring, interconnections (Fiber cable over Ethernet) • Data de-duplication 31900508

20. Data Center Technologies (3) • “Hottest” technology is cooling technology • EDS located data center in UK to take advantage of cold North Sea breezes • Extraction vs. cooling of server-heated air • Land-based, wave-powered data center, Islay, Scotland • On-site co-generation of electricity • Including use of renewable sources 31900508

21. Figure from Google Patent 31900508

22. Benefits of Technology and Outsourcing • Results in lower maintenance and upkeep and faster upgrades • Results in lower manpower needs • Less manpower = fewer background checks = greater security • Greater data security (from technology perspective) • But where does “the cloud” fit in? 31900508

23. Potential Problems Arising from Virtualization • Virtualization of application servers vs. number of data servers needed • Virtualization can conflict with current enterprise software licensing model of large software vendors • Efficiency of virtualized servers makes the input and output of applications the current “bottleneck” 31900508

24. Contract Practice Tips • Where return on investment will occur within 1 or 2 years, make technology implementation part of base agreement • Where ROI will take longer, make subject to SOW, SLA, Project Plan, etc. • Specify either specific performance level or specific technology to be deployed • Use security improvement contract provisions as model for energy-use improvements 31900508

25. Driving Energy Efficiency Down Through Useable Contract Metrics • EPEAT and DOE’s DC PRO software tool from Federal contracts and use them in private section sourcing and outsourcing agreements • EPEAT = Electronic Protection Environmental Assessment Tool • DC PRO = Data center software assessment tool to benchmark data center energy use and efficency • Minimizes contract negotiation time 31900508

26. EPEAT: Is it a Green Computing Standard? • “EPEAT” = Electronic Product Environmental Assessment Tool • See www.epeat.net • Developed over two-year period by EPA and Green Electronics Council starting in 2006 • Green Electronics Council operates website product declaration system for manufacturers, a verification system designed to ensure accuracy and credibility, and a listing of registered products 31900508

27. EPEAT Goals • Improved energy efficiency • Eliminate or substantially reduce hazardous metals such as mercury and lead • Easier to upgrade • Easier to recycle • Longer useful life 31900508

28. Bronze, Silver and Gold Classifications • IEEE Standard 1680 consists of 23 required criteria and 28 optional criteria in 8 categories • Bronze (Good) = product meets all required criteria • Silver (Better) = product meets all required criteria plus at least 14 (1/2) optional criteria • Gold (Best) = product meets all required criteria plus at least 21 (3/4) optional criteria • Green Electronics Council reports that 109 million EPEAT products were sold in 2007 (27 manufacturers, 590 separate products) 31900508

29. Department of Energy (DOE) Green IT Initiatives • “Save Energy Now” data center program • Part of DOE’s Industrial Technologies Program (“ITP”) to reduce energy consumption • “DC [Data Center] Pro” software tool • Designed to assess data center efficiency • http://www1.eere.energy.gov/industry/saveenergynow/printable_versions/partnering_data_centers.html • Site provides description of DOE program and how companies can sign up to participate 31900508

30. DOE “DC Pro” Software Tool • Software assessment tool to measure data center energy use and efficiency as part of Save Energy Now program • Overview is available at http://www1.eere.energy.gov/industry/saveenergynow/pdfs/dc_pro-tools_suite_overview.pdf • DC Pro tool is available at http://www1.eere.energy.gov/industry/saveenergynow/partnering_data_centers.html 31900508

31. Private Sector Use of DC Pro Tool • Use to assess data center efficiency • Determine “gaps” between actual and best practices and/or contract goals • Develop plan to close gap • Use of outsourcing, SLAs, etc. • Use as objective measure of compliance • Time required to conduct DC Tool assessment 31900508

32. Adopting EPEAT and DC Pro for Private Sector Outsourcing Agreements • Contracts: Adopt Federal contract provisions to establish EPEAT requirement for applicable products • In online procurement systems, block non-EPEAT products from electronic catalogues in applicable categories or, alternatively, require special justification to order non-EPEAT product where EPEAT product is available • Require periodic reports of number of EPEAT products procured under long-term contracts or procurement systems • Provide for updating of procurement systems as new products are certified and new categories are certified • Evaluate vendors’ EPEAT performance 31900508

33. Getting to Energy Reduction: Combine IT With Facilities Management to Reduce Energy Costs • Buildings • Site location to optimize use of nature – look to LEEDS • White roof, roof-top co-generation • Location • Near power grid to optimize peak and off-peak power • Near telecommunications node to enable high-speed remote access • Near water requirements 31900508

34. Reevaluation of Business Models • “Just in time” inventory management systems can be energyinefficient • Existing contracts date from time when fuel was inexpensive, fuel surcharges were automatically passed-through, and emissions were irrelevant • Legacy result - Many smaller shipments and more truck runs result in large carbon footprint and potential expense under cap and trade and emissions regulations • Technology viewed as a critical enabler of new practices to manage bulk rather than small shipments • Role of outsourcing – Logistics/Shipping companies’ technology and information management 31900508

35. Convergence of Energy Efficiency, Security and Anti-Terrorism Requirements • Cargo shipping -- Address the following risks: • Terrorism • Theft • Security of infrastructure • Liability under government regulations • Unauthorized entry to company real estate through shipping and modes of transportation 31900508

36. Regulations Applicable to Cargo • SAFE Port Act • Transportation Security Administration • Department of Justice • Department of Defense • Department of Transportation 31900508

37. How to Use Green IT Business Process Management (Green IT BPM) • Add “smart” and “location-aware” technologies • Realtime monitoring • Realtime exception reporting • Realtime dispatch of emergency response and security personnel • Authenticating proper employee access • Theft protection • Monitoring actual vs. scheduled shipment arrivals • Tacking location of key items 31900508

38. “Smart Grid” Technology to Increase Energy Efficiency • “Smart” grid technology has a company-based as well as utility-based component • IT-enabled optimization to maximize equipment use and off-peak power use • Example of IT BMP • Over the horizon: • Truck fleet as “RESUs” • Rolling energy storage units • Buffer and contribute power to grid or company power system 31900508

39. Calculating True ROI • Payment period for switching to “smart” lighting systems • Has the company considered all costs under local union rules? 31900508

40. Making Supply Chains Sustainable • Business drivers: • Renewable materials • Reduce energy costs • Reduce emissions liability • Above combined in redesigning packaging and logistics of shipping • Impose compliance with corporate sustainability policy on supply chain • Customer company conducts energy audits of suppliers • Avoid negative publicity from supplier activity 31900508

41. Supply Chain Sustainability Agreements • Leverage your company’s global expertise • EU recycling regulations • IT and data management • Outsourcing certification and verification • GHG Protocol = measure carbon footprint • Scope 1 = direct emissions • Scope 2 = indirect, purchased electricity • Scope 3 = more or less suppliers/outsource providers • Carbon Disclosure Project rating 31900508

42. Walmart’s Sustainability Supplier Assessment Questions • See http://walmartstores.com/Sustainability/9292.aspx • 4 major areas • Energy and GHG • Using materials efficiently • Responsibly sourced raw materials • Managing facilities and employees • Walmart questionnaire • Questions are weighted in Walmart’s scoring methodology, and phased in, • Scores are: Below Target, On Target, Above Target 31900508

43. Energy and Climate Questions (30%) • Purpose: Reduce energy costs and GHG emission • Measure GHG? • Report GHG to Carbon Disclosure Project? • What were total annual GHG emissions? • Does supplier have and, if so, what are GHG reduction targets? 31900508

44. Using Materials Efficiently (30%) • Purpose: Reduce waste and enhance quality • Walmart uses a Packaging Scorecard • Solid waste from facilities producing products for Walmart • Are there reduction targets? What are they? • Total water use • Are there reduction targets? What are they? 31900508

45. Responsibly Sourced Raw Materials (20%) • High quality, responsibly sourced materials • Are there sustainable purchasing guidelines for supplier’s suppliers that govern • Environmental compliance, employment practices, ingredient safety? • Are there third party certifications for products sold to Walmart? 31900508

46. Facilities and People (20%) • Does supplier know location of facilities producing products? • Does supplier evaluate quality of production before retaining manufacturing subcontractor? • Does supplier manage local law and Buyer’s Code of Conduct labor law compliance at manufacturing level? • Does supplier work with manufacturing subcontractor to correct defects and implement improvements? • Does supplier invest in community development activities in subcontractor’s community? 31900508

47. Remanufacturing • Reuse of key manufactured systems from products • Reduce use of raw materials • Eliminates energy to manufacture and ship 31900508

48. Legal Issue: How Will “New” Be Defined? • “New” will be equivalent to scope of warranty to repair or replace 31900508

49. The Patent Exhaustion Doctrine • Purchaser’s price paid to patent owners includes patent license fees • Purchaser’s customers (or transferees) do not have to pay additional patent license royalty • Put another way: Patent owner (also called “patentee”) cannot recover license fees from purchaser’s transferee in a patent infringement suit 31900508

50. Key Issue Under Case Law • “Refurbishment” used as general (and neutral) term (see Jazz Photo Corp. v. Dynatec Int’l, 264 F.3d 1095 (Fed. Cir. 2001)(Judge Newman)) • “Permissible repair” vs. “prohibited reconstruction” (see id.) • Repair generally deemed less than making a new article (product) • Make like new vs. make a new product • Must consider scope of patent claims to made determination, especially when product consists of multiple components 31900508