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As business conversations around the circular economy shift from conceptual aspirations to concrete action plans, leaders are preparing to reshape traditional business models into circular successors. However, the road from intention to implementation is long and complicated, with few points of reference to gauge progress along the way.
Building upon the latest insights from circular economy think tanks and thought leaders, this blog series explores ways in which the circular transformation can be measured at the business level through sustainability performance management systems.
Definition of the Circular Economy
A circular economy is one that is restorative and regenerative by design, and which aims to keep products, components and materials at their highest utility and value at all times, distinguishing between technical and biological cycles – Ellen MacArthur Foundation
Summary: As Product as a Service business models gain traction across various sectors, organisations looking to capitalize on its growth require new ways of measuring and managing the performance of their efforts. This need can be met by adding selected utility indicators to existing sustainability performance management systems.
The business case
Three trends highlight the business case for adopting the Product as a Service business model:
- Increasing customer demand for access to product utility (rather than ownership) is creating new markets for service providers
- Improved product connectivity (within the internet of things) is facilitating sustained utility through monitoring and predictive maintenance
- Product standardisation around common components is improving the viability of extended service programmes
- Consequently, businesses are initiating a shift from product sales to Product as a Service within segments of their portfolio.
What is Product as a Service
- The manufacturer or retailer absorbs total cost of product ownership and sells only the product’s utility
- Products are installed, serviced and recovered for refurbishment (at end of life) by the service provider or contracted third parties.
- Moves business focus away from the quantity of products sold to the serviceability and durability of utility sold
The challenges ahead
The conditions for Product as a Service have never been better, particularly within developed cities where high population density and advanced infrastructure facilitate service delivery. However, the shift away from conventional sales faces a number of challenges:
- Diverse design approaches and planned obsolescence restrict the widespread serviceability of products
- Service models that have been piloted are nascent or narrow, with scarce evidence of universal scalability
- Continued customer conditioning towards product ownership creates inertia in the market place.
Despite the challenges stated above, the outlook for Product as a Service remains attractive. To facilitate and accelerate its broader adoption, specific Product as a Service indicators can be introduced to feedback on its effectiveness. Therefore, the remainder of this blog post proposes responses to the question ‘which indicators can be added to sustainability performance management systems to measure the adoption of Product as a Service?’
Focusing efforts… The strongest opportunities for the addition of Product as a Service indicators are within the utility category (see heat map below – as explained in the first Circular Optimisation blog). This alignment corresponds well with the business model’s focus on product durability and serviceability in order to maximize the value from its utility alone.
Establishing circular indicators
A starting point for measuring the adoption of Product as a Service could be to estimate the proportion of a product portfolio that is viable for conversion. With a baseline in hand, subsequent indicators can measure the extent to which the opportunity is exploited. Within product segments that are delivered as service, indicators capturing the duration of service intervals and number of reinstallations can serve as a proxies for durability. More sophisticated indicator sets could interface with metering systems to monitor the efficiency of service delivery. Furthermore, businesses operating Product as a Service approaches could establish indicators to understand their benefit to the community through local job creation. Either through the local recruitment of internal servicing teams or through the engagement of third party providers within the customer’s geography.
Setting circular targets
To accelerate the adoption of Product as a Service approaches, or improve their efficacy, users of this business model can set targets such as:
- Improve the efficiency of product utility
- Extending service interval duration
- Increasing local employment for product servicing
The Product as a Service approach is redefining business performance for those who adopt it. The focus on process improvement up to point of sale is expanding to include service effectiveness. The additional data required to measure and manage performance in this ‘new’ area can be collected through sustainability performance management systems.
Sarah Hill is a consultant at cr360. Her focus is on enabling the efficient use of energy and material resources.