The IoT, Performance-Based Business Models and the Circular Economy

The Internet of Things (IoT) can serve as an important enabler of performance based business models and these performance based (PB) business models offer one of the strongest levers towards the transition to a circular economy.

Performance based business models encourage organizations to rethink traditional approaches to the ways that they offer products and services to customers. One way to understanding performance based business models is to view them through the lens of product service systems. Product service systems (PSS) describe a marketable set of products and services that fulfill a user’s needs. There are 3 distinct categories for PSS:

  1. Product Oriented PSS Business Models: consists of a customer purchasing a product from a provider that also comes with additional services that add value to the product. The models are often related to maintenance and monitoring of products through services. (Ex. a health care equipment supplier might offer an additional service in which it agrees to retrieve equipment after use for recycling or disposal)
  2. Use Oriented PSS Business Models: consists of a customer purchasing the use of a product with ownership remaining with the provider. These models are often related to sharing, renting, and leasing of products. (Ex. Car Sharing Services)
  3. Results Oriented PSS Business Models: consists of a customer purchasing a result or competency rather than a specific product or service with ownership of any asset required remaining with the provider. These models are related to selling a result or a capability. (Ex. Rolls Royce’s Total Care Package)

This third category of results oriented or performance based business models is the most transformative and has the largest potential to drive both growth and innovation. However, adoption of the models to date remains limited.

There are several factors that have contributed to this limited widespread adoption:

  • Increased complexity: requires a shift from product thinking to systems thinking
  • Required shifts in corporate culture, organization, and skills
  • Difficulty in pricing the service (especially when trying to scale)
  • Difficulty in communicated the value of the service (during both development and operational phases)

The introduction of smart, connected objects along with big data and analytics now provides an opportunity to overcome many of these hurtles. As a result, the introduction of these novel technologies provides the potential for business to fundamentally change the way that they operate.

Ben Evans, an analyst from the VC firm a16z in San Francisco, described that the introduction of IoT tools is going to create feedback loops. He believes that, initially, as a new tool is introduced industry tends to shape them to fit existing processes — ‘do exactly the same thing, but do it better’. However, over time these tools actually reshape the business and allow it to operate in a fundamentally different way.

This is a great analogy for the potential of the IoT. The introduction of intelligence to previously ‘dumb’ objects and processes not only provides the opportunity for improvements in efficiency but also allows for radical change on a systems level — i.e. performance based business models and the introduction of circular economy principles.

A number of people have already written about the potential of IoT in terms of efficiency improvements and, to a more limited extent, performance related thinking. However, there is very little discussion, particularly from the technology sector, regarding IoT and circular economy innovations.

There is real potential in this area, especially for providers of IT services as IoT enables PB business models and PB business models incentivize Circular Economy principles.

The incentive to apply Circular Economy principle is driven by the provider maintaining ownership of an asset used to deliver the agreed outcome/result. Although increased ownership can result in increased risk, it also has the potential to provide significant benefits.

For providers of hardware this will require a rethink of how its hardware is designed. To maximize value, hardware will be designed to facilitate the use of life extension strategies (maintenance, repair, upgrading, and adaptation) and end-of-life strategies (reuse, remanufacturing, and recycling). This will require rethinking what is the optimal life of a product by considering not only the products ‘physical life’ (Internal Factor) but also the ‘functional’, ‘technological’, ‘economical’, and ‘social/legal’ life (External Factors).

The introduction of ‘smart’ capabilities will aid in determining this optimal life by providing information on the assets performance (real-time/historical data). ‘Smart’ capabilities will also allowing for the tracking of material through life-cycles allowing for better decisions regarding asset retirement and appropriate ‘next use’ of the components and material.

From a Circular Economy perspective both of these strategies lead to an increase in resource productivity. But this also has the potential to provide additional benefits for the provider, such as, securing future access to scarce critical materials and decreasing challenges associated with resale of a providers product on the grey market.

Additionally, theses technologies will also enable customers of IT service providers to create PB offerings and maintain ownership of their assets. This is made possible by utilizing IT technologies to enable ‘smart’ products and by sharing expertise (consulting) on PB models. I believe that this will provide the largest potential for original equipment manufacturers (OEMs) as they will be able to provide a differentiated value proposition that is more aligned with their customer’s needs; one that decouples economic success from material consumption.

This maintenance of ownership has the potential to have a massive impact on margins for both IT service providers and OEMs. Reusing functional equipment in other markets can generate additional revenue and harvesting functional components and recovering valuable material can dramatically decrease future manufacturing input costs. I believe that this increase in margin is the “icing on the cake” with regard to PB models both internally (IT service provider hardware) and externally (OEMs).

However, to get the most out of a PB model will require an integrated approach across multiple areas — business development, finance, product design, reverse logistics etc. As such, connecting all of these stakeholders may provide the largest hurdle to overcome when implementing and maximizing the benefit of performance based models.

Over the last year a large portion of my work has revolved around exploring that transformative potential of using smart, connected objects as system enablers. The above is a summary of some of my thinking that has evolved overtime through my work as a Schmidt-MacArthur Fellow regarding the Internet of Things (IoT), performance-based business models, the circular economy and the opportunity for providers of IT services.