Thursday, 19 July 2012

From Products to Performance

At a recent Aldersgate Group panel session on the Circular Economy, hosted at BASE London,
Douwe Jan Joustra, Managing Partner of One Planet Architecture Institute, argued that “we do not have an energy problem”. The world has plenty of energy and nature has functioned for three billion years on solar-based energy systems, so “we have an intelligence problem that we are not able to get our energy systems up and running [and] solar based.”
Mr Joustra argued that instead of energy, the planet should focus on finite resources, given that “we will never get any new materials on this earth”, so shifting the economic system from a linear model to a circular one is paramount. The circular economy offers the opportunity for “a real systems innovation”. For example by changing the focus from product ownership to paying for performance: “do you want all the chemistry that you have in a television set or do you want to see the news?” In a circular economy, customers will pay for the service of a product, rather than the product itself.

This type of business model is not so controversial - it has been commonplace in some markets for decades. But the trick lies in converting more businesses to a performance-based model - and perhaps reviving it in some markets where it has fallen from favour. Just a few decades ago, it was almost unheard-of for a household to own a TV - all but the very wealthy rented them. Yet now, I can't think of a single businesses that routinely rents brown goods and most consumers don't even consider it. Outright purchase has become the norm, and if the purchase price is more than they can afford all at once, consumers sign a finance agreement or put it on their credit card. In fact, easy access to credit has done more to fuel consumerism than any other single innovation. Even the current economic conditions haven't changed our relationship with credit all that much.

There are some industries where the performance-based model is gaining ground - managed print or managed document services is one. Increasingly, companies are not buying printers and copiers but instead entering into a contract for the consumption of print and copies with a supplier that retains title the equipment which it maintains and manages for an agreed contract period. There is a good business case for this; it removes risk, offers tax advantages and provides management information on consumption which in turn can help to reduce print volumes, cutting both cost and environmental impact. Yet the attempt of Interface to introduce a similar service for office carpet - with equally compelling financial and environmental benefits - finally had to be abandoned because customers were not prepared to do anything other than purchase carpet outright.

As the saying goes, we can't solve our problems using the same level of thinking that created them. The concept of the Circular Economy provides opportunities to rethink business models, revisit ideas that were successful in the past and transfer business models from one market to another. And it starts with reframing the question "what do I want to buy?" as "what do I want to achieve?"

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