Original Artcile Here. By Lloyd ODonnell, October 25th 2022.
“Learning about Ecological Footprint really opened up my mind on available tools to measure our pressure on the planet. … The [EUSTEPs] module helped me reflect not only on my daily choices but also on the possibility to use the Ecological Footprint as an instrument to raise awareness and engage other people, too.” SARA GALENTINO, Ph.D. student, Sustainable Development and Welfare, University of Ferrara (Italy)
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WE APPLY THE PRESSURE
Corporate leaders today face a more complex business environment, and more pressure, than any leaders ever before.
Don’t believe me? Let’s consider the significance of the below challenges on a global enterprise’s business strategy, transformation urgency and current performance.
If these pressures aren’t enough, industry leaders are also feeling pressure from customers, employees, investors, regulators, family and friends to “do something” about how their companies are impacting the world — and with good reason.
Below are some materials based statistics that paint a daunting picture:
Clearly, these dire numbers demonstrate society is accelerating ecosystem destruction and that things will get worse without fundamental shifts in global corporate behaviour.
However, some of the Sustainable Development Goals (SDGs) are in conflict with this goal under our current economic model.
Why? Some of the SDGs are trying to raise the living standards of the worlds least privileged citizens, which will raise the consumption profiles of ~5 billion people over the next 30 years.
While this goal of raising living standards is noble and must be maintained, it is important to note that if everyone mimicked the USA’s average consumption profile, we would consume 5 planets worth of renewable resources every year, leading to near total ecological destruction for all other species.
This situation will not improve for as long as we continue selling products, because companies are not motivated to design for recycling and consumers (product owners) have shown they will not recycle their products efficiently.
Product Selling is Unsustainable and Needs to Stop
Selling physical products for profit is inherently unsustainable, because:
- Profit is made by always selling more products, so marketing motivates desire for the “new”.
- Industrials are not motivated to make better (longer-lasting) products, unless they can sell them for more money.
- When they sell a product they lose control of the materials management, so the opportunities for materials optimisation and continued value extraction across all usage cycles are lost.
- Waste management and recycling is inefficient because the products are dispersed across billions of owner users (as noted earlier, we currently recycle < 9% of materials globally).
- New materials must be continuously introduced into the economy, due to this inefficient circularity.
How the Circular Industrial Economy delivers maximum social good (performance) per raw material unit:
The Circular Industrial Economy (CIE) Value Chain relies on four main value drivers and supporting business models, like Servitization, to enable them.
The basic principle is to enable maximum value delivery from each raw material unit. This is achieved by:
- maximising usage per unit of time (via asset sharing across many users)
- extending usage (by making longer-lasting products and redistributing them across multiple customers, usually with some refurbishing)
- creating new lives for the materials (via recycling or as regenerative fuels)
- reusing the materials (via remanufacturing and circular supply chain)
All of these value drivers are easier to realise under ‘as-a-Service’ business models, because enterprises retain ownership of the materials, which means they can manage optimal maintenance, participate in all of the value chain and the materials are always contractually obliged to return to them once a customer has finished using them.
The $4.5 Trillion opportunity in the Circular Industrial Economy
Without even considering the revenue opportunity provided by Servitization, through improved customer relationships, the Circular Economy represents a $4.5 trillion opportunity to improve market share and profitability; especially for first and early movers:
Why Servitization is the KEY to the Circular Industrial Economy
When you sell performance, instead of selling your physical products, the way you make profit completely changes. You consider revenue maximisation per raw material unit either through asset sharing or product life extension. You retain ownership of materials, so become profit motivated to make better products that last longer; and are easier to ship, install, maintain, and remove. Importantly, materials management also ensures you can readily refurbish, remanufacture and recycle materials; extending life and creating a circular supply chain that is more affordable and resilient.
These changes can generate MASSIVE improvements in ESG outcomes:
If you consider how these product footprint metrics work together and how circularity extends the amount of performance delivered by each raw material unit across multiple customer cycles, it is easy to understand how these gains can be achieved.
Importantly, these tangible benefits can be planned for, quantified and marketed to customers, employees and investors as important steps the company is taking on the road to sustainability.
Servitization brings many benefits beyond Circularity and Sustainability
Consider a premium electronic device under Servitization:
As you can see above, Servitization also supports Supply Chain Resilience, enhanced Customer Experience, Product-as-a-Platform, Purpose-Based Marketing, avoidance of Repairability Laws, easier compliance with ESG Regulation and, of course, Customer Non-Ownership.
Under Servitization, the premium manufacturer can also profit from FOUR new ‘lower-tier’ customer types:
- Environmentally conscious buyers trying to minimise their footprint.
- Buyers who can afford premium devices but prefer pragmatic spending with a second hand device.
- Buyers who cannot afford premium devices but would not buy a second-hand device without a performance guarantee.
- Buyers who already buy the premium device second-hand, from external retailers, on the open (private) market.
Offerings can include physical products, software, services, and bundles; across both B2B and B2C markets.
Each industry will have its own challenges but the core principles of profitable servitization remain:
1) design offerings that maximise revenue across various customers, by delivering the performance outputs customers expect; and
2) maximise profits by minimising the costs and raw materials consumed during the entire performance lifecycle.
ReUse & Sharing:
Most common forms of ReUse are asset rentals (cars, construction equipment etc), the renting out of human capital (i.e. consultants) and, more recently, the renting out of IT infrastructure and outcomes (via hyper-scalers).
However, many equipment-based companies now offer outcome-based, short-term, services; where the revenue incorporates service advisory, installation of physical assets, onsite operation and decommissioning at the end of the project.
This approach enables their customers to receive the performance they need, when they need it, at a lower level of cost, without the need to recruit internal capability for operating the asset. Meanwhile, the provider benefits from higher margins, especially once the equipment they are using has been used over multiple customers.
Servitization enables the streamlined ‘take back’ of assets, under a contractual arrangement. In between customers, the provider can then provide the asset with the right treatment to maximise value potential. This can involve partial disassembly, repair, component replacement, cleaning or full remanufacture (see next section).
With the right product design and intelligent technologies, refurbishing products across multiple customer cycles will enable providers to deliver more performance and more revenue from the same raw materials. The level of profit is then determined by the optimisation of the end-to-end materials management lifecycle.
This approach is taken where the wear and tear on assets through normal use can be erased by rebuilding a worn-down component. Examples of this can be as simple as re-treading a vehicle tyre through to a complex machine rebuild.
This choice is appropriate where the process can deliver an ‘as-new’ machine at a lower cost — and lower environmental footprint — than a new product with minimal or no loss in performance.
As a result, the provider has the opportunity to make a much higher margin over time. This is especially true under a servitization scenario because no buyback is required and ‘as new’ products can be contracted out at full rates (because the provider is selling performance, not the product).
Recycle and ReCommerce:
Recycling processes are augmented and streamlined under servitization because all assets come back to the provider, contractually, at the end of life.
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This motivates designing for proactive disassembly and ease of recycling; in order to extract maximum value from the component parts. It also enables efficient take back planning and execution.
What are the challenges of Servitization?
There are a number of challenges to achieving Servitization that vary depending on your industry’s maturity in customer experience, your balance sheet and current GTM channels.
If your balance sheet is cash heavy, this investment in the future-of-business is an optimal cash allocation that attracts and retains customers, shifts cash into capital assets that will benefit your future recurring cashflows, and have the added advantage that depreciation costs will offset profits during their productive lifecycle.
If your customers already access your products using financing, Servitization also provides the opportunity to absorb the financier’s margin and to capture the direct insurance market for your products, while out ‘in the field’.
If your balance sheet is leveraged, Servitization can be appear challenging due to the shortfall in near-term cashflow created by spreading revenue across the performance period of the contract. This, coupled with the transformation costs of moving to the new business model, can make the transition feel prohibitive.
There are several ways to overcome this challenge -
- Look for key suppliers that will supply their key components on similar performance-based contracts (spreading supply side costs).
- Consider securitising the insured assets you have in the field, which provides upfront cash (noting this will reduce margin); and
- Offer existing customers an attractive trade-in program, to provide ‘used’ stock, while driving them towards a new model.
Option 3 enables the returned assets to be refurbished and offered, under Servitization, to new customers at an attractive initial discount. This cheaper, as new, subscription option will accelerate acquisition of cost-minded new customers while retaining the core of existing business. The approach can test market appetite, offer a way to grow new markets and improve short-term revenue by moving more customers to new models.
Target Operating Model:
Manufacturers and asset managers often have a network of B2B distribution relationships, but minimal CX maturity across marketing, Commerce, CRM, Customer Service, Loyalty and, potentially, even Field Services.
It is impossible to transform an entire enterprise quickly, so providers must take care to assess their product portfolio and capabilities in the operating territories before developing their target operating model and the road map required to get there.
Conducting this exercise is fundamental to identifying the appropriate pilot programs and tactical roadmap, if the business model transformation will achieve the outcomes described earlier in this article.
Delivering Guaranteed Performance or Outcomes:
One of the key pillars that differentiates ‘as-a-Service’ business models from normal selling models is that the ‘warranty’ is unlimited and the outcome is contractually guaranteed at a fixed, pre-agreed, price.
This enables the provider to optimally design performance and maintenance delivery while providing the customer with assurance that they will get what they paid for.
As you can imagine, this presents opportunities and challenges in many parts of the business:
- Customer Research
OEMs and Product Makers may have a paucity of customer usage data, making lifecycle design complex.
- Product and Offering Design
Product designers need to be able to simulate various customer revenue lifecycles and product cost + servicing lifecycles to develop an optimal offering; including designing for Circular Asset Lifecycle Management (see right).
- Asset Intelligence
Owning the assets provides more room for IoT and data intelligence, but — to be impactful — this has to planned, modelled, implemented, monitored and improved. Overall, this data will be critical in the intelligent Circular Asset Lifecycle Management.
- Field Services
Ideally offerings will be designed to be self-serviced by customers and refurbished in-between customer cycles, however the provider of Servitization needs a fully enabled services network to ensure that unexpected performance failures are addressed within contractual SLAs. This is likely to be a mix of internal and third party service providers and requires advanced technology to appropriately co-ordinate guided and verifiable servicing.
Organising Circular Asset Lifecycle Management Processes:
While extending the life of assets and recuperating value provides obvious revenue and value opportunities, the profitability of the process is largely driven by intelligent systems guiding asset treatment during the takeback cycle.
- Takeback Intelligence: ReFurbish & ReDistribute
At scale, it is ideal that the Warehousing & Distribution system knows exactly what to do with a returned asset based on its intelligently-tracked usage. Knowing what to dismantle, which components to replace, how to re-distribute to the next customer and responsibly treat end-of-life components is key to circular behaviours at scale.
In some cases, particularly metal machines and equipment, Servitization providers will have the opportunity to remanufacture their machines back to full quality. These ‘as new’ machines enable the provider the abilty to offer the same (or comparable) performance quality for a fraction of the cost and footprint of a new machine. The challenge is to understand and optimise the opportunities to take advantage of this process.
- ReCycle and ReGenerate
Well-designed products must also take into account value recovery in all end-of-life materials. This is partly to avoid costs associated with waste and EPR (extended-producer responsibility) but also plays an important role in the organisation’s ESG footprint. Can those materials be recycled, repurposed, resold or, importantly, returned to the environment for a net positive impact (i.e. as natural, soil-building, fertiliser). Any waste in a Servitisation business model should be considered a failure of planning and execution, so must be minimised as a key facet of design and operation.
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CALL TO ACTION
How many earths are required to support your daily choices?
This is directly referenced from the best-selling amazon SelfCare Book "Lifestyle Medicine For the People" by Rory Callaghan. If you would like to read more content like this. Grab the free online chapters of the book or a hard copy.
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