Ep 147: Scaling product-as-service with Stena Consulting

Seb Egerton-Read 00:03

Welcome to the Circular Economy Show. I'm your host, Seb. From the very beginning of the analysis done on the circular economy, a critical aspect of the transition has been the need to shift the business model for many products. Specifically, the shift from selling a product outright, like a car, a washing machine, even our lighting, to selling the service of that product. Yet, despite the data showing both the economic potential of this and the potential value to the end customer, it's hard to see evidence of major movements towards this shift in the economy today. So what's holding it back? And what can be done to push it forward? In this episode, I speak to Matt cylinder and Mark Berg fours from Steena, circular consulting, co authors of the report product as a service in the circular economy, the nine critical challenges and how to fix them. I'll find out what they learned and how they're using their research findings to work with businesses on this journey. So Matt's and Marta, thanks so much for being on the circular economy Show. Welcome to the podcast and, Mats, it's a bit of a reunion for us. You're a former Ellen MacArthur Foundation employee, a former colleague of mine, what have you been doing since you left the foundation?

Mats Linder 01:25

It's great to be back. First of all, it feels like yesterday, as they say. Yeah, what I've been doing since I left Foundation, I've been working on circle economy, of course, what else? But long story short, I think what really intrigued me and wanted me to explore further, during my time at the foundation was like making this change happen on the ground on the shop floor. Not just a beginning, from the ideas and the fundamentals and the principles, turn that into an actual new business, or change the way the business is actually working. So that's what I've been pursuing. And I guess that's...

Seb Egerton-Read 02:11

I guess it's worth. It's worth saying that's the, in your time, the foundation, you're instrumental in a number of our kind of thought leadership efforts, you know, the policymakers toolkit, our new plastic economy, report intelligent assets. So you've been at the coalface of developing the kind of economic case and a rationale for moving towards a circular economy, including the transition to new business models, which is a subject matter of a podcast today. And then I really hoping you're gonna say the name of your consultancy for this week. In several briefing calls we've had I've said it different ways are not managed to set correctly. But But you've taken that work now into how do we apply it into practice?

Mats Linder 02:51

Thanks a lot. Let's really nicely put. Exactly. So kind of going from, like, how do you take that economic rationale and make it happen? Essentially, that's really what I'm interested in. And yeah, destiny has taken me to a company called Stena Circular Consulting. That's part of a larger business group called Stena, which most people associate with boats, actually. And that's part of the story, but not the whole story. And what we do at Stena Circular Consulting is basically try to help companies find circular economy business Solutions, practical and profitable business solutions. And one part of that, of course, is looking at the area we are talking about today, which is what are the business models that can really work.

Seb Egerton-Read 03:40

And I was gonna say, like, you have consequently done some work and some research on the topic of product or service, business models and, Marta, that's also partly where you come into the story at Stena, as you're instrumental in developing that research. I wonder though, if you could just Matt peep, some of our readers may remember Matt's from previous at the MacArthur Foundation appearances, but I wonder if you could give us a kind of 30 seconds, comic book style intro to your background and how you came to be working on this topic.

Marta Bergfors 04:11

Yeah, so my background in within environmental economics and my professional path has worked through the r&d department that's there in the recycling group. And then since three years back at the centre circle consulting, working with how we can change design, but also mostly the business models for a more circular economy and make this transitioning happening. So it's been very exciting to be in this project, focusing on product as a service.

Seb Egerton-Read 04:42

Thanks, Marta. So I feel like I'm going to learn a lot over the course of our conversation and excited to you know, come in here is a relative circle, a business not model novice compared to each of you but I guess like, the kind of elephant in the room that we'll get to in this podcast is we've been talking about circular business models for quite some time. And the question is kind of like, what are the barriers? And what action can we take? And how do we scale them? But before we go there, Mats? So I wonder if we could start with a bit of a recap like, why? What are what when we say product as a service business models? What are we actually talking about? And maybe the second question is, why are they important for a circular economy?

Mats Linder 05:23

Yeah, I'll begin by saying that, I think product as a service as a concept was, for me the nail in the coffin that got me really hooked on circular economy.

Seb Egerton-Read 05:34

Did you say that in the coffin?

Mats Linder 05:37

Maybe the wrong maybe the wrong word, but that's what I did. But that made me go there and never come back. So I read the first EMF report, back in 2013, I guess. This was the one thing that excited me the most like turning something that we sell over the counter transfer ownership to somebody who's not actually a very good steward of that product, where it is really a one way street. From that point on, for that product to become waste into a model where the product by design is made to be used by multiple stakeholders, sometimes several stakeholders at the same time, right? is designed to be sturdy enough for that kind of use model, but also to be taken back repaired, refurbished parts replaced cetera, and where the revenue comes more from the utility of that product, rather than just the unit price. That, for me, is really exciting. It is also, I guess, my best way of defining product as a service, I know that there's a lot of scholars out there that are more academically versed in the topic than than we are, who would say oh, you know, it's certain certain things are products and service, certain things are not, it's more like leasing, it's something else, I think, we, from our perspective, are not so interested in in the drilling deeply into the definition for us, the most important thing is that you move from a ownership based business model to one where the control, more importantly, than maybe the legal ownership of a product at any point in time, but the control is maintained or retained by the company, or business that is selling it.

Seb Egerton-Read 07:33

And it's a fundamental transformation that we're talking about there with. I mean, the classic example in that first report, of course, was this notion of a washing machine, most of us would buy a washing machine, we own it, and then at the end of X amount of 10, 15, 20 years, we've got to figure out what to do with that washing machine. Ultimately, we're buying another washing machine and and of course, the entire model of the economy from the how jobs are created, how economic growth is generated, is built on that model. And and if you turn it around, it's you know, if you say, well, actually that wash machine is you don't I never own that washing machine, I release the use of it and the end of its life, it is going to be taken away by the the actual owner of the product or company. It just a very different incentive model.

Mats Linder 08:20

It is and it kind of becomes more and more interesting and revolutionising even the more you start poking at it, because like in the washing machine example, you might say, What's the difference really, I buy this, I instal it, I use it, or I need to pay some sort of monthly fee. Actually, I might be more attracted to paying upfront to not have to deal with with costs later on. But then I'm also exposed to a lot of risk coming home finding like three feet of water in my laundry or in my cellar because something broke or just having a nasty surprise when it breaks down I need to pay another 1000 pounds for a new one. Right? These these are things that also this business model can can relieve it for the user. But if we go back to sort of the circular economy benefits, the business model can really truly changed everything I think in terms of how much saving you can do on the resource side, how much more interesting things you can do with the product itself, its components and its materials. Once you have that control. One of the big problems in terms of implementing circularity generally is lack of control and lack of traceability and they go hand in hand right. product as a service addresses that very problem by kind of retaining control by design and that's why it's also such a big cornerstone in making circular economy happen for so many different I think business areas and and product

Seb Egerton-Read 09:58

and bring you in a moment martaba In some ways, like, just to put kind of provocatively or simply for a moment, Mats, I guess what you're saying is like, that kind of dream of individual customer stewardship of any of all the individual products that go on the marketplace, say every individual is somehow responsible for the stewardship of their washing machine. In a circular economy. It's just feels infeasible. And it's kind of like maybe the old promise of, of I don't really want to characterise it as sustainability, because I don't think that's an oversimplification. But perhaps the old presacral economy narrative of how to deal with the challenges the linear economy, what the product to service solution is saying, well, that stewardship kind of needs to be it's not just stewardship, but a massive opportunity, the responsibility of the organisations that manufacture and understand the products.

Mats Linder 10:49

Yeah, it's true. I mean, if, if you think about it, it's very unbusinesslike. In modern business, we obsess about, you know, division of labour, making sure that the best possible actor is responsible for a specific part of specific steps in the value chain, a particular unit operation, because that is how you do it the most efficiently. But some, some, somehow those bets are off once you sell the product. And suddenly, I as a consumer should talk about the washing machine, and I'm responsible for my washing machine, and I'm totally incompetent. In that area, right? And, yeah, I'm not the professional. Let's handle it, let's, let's leave it to the professionals to deal with the stewardship. Speak

Seb Egerton-Read 11:31

for yourself on incompetence with dealing with washing machines.

Mats Linder 11:36

I have a hunch....

Seb Egerton-Read 11:39

But, Marta, so, you know, I've been very lucky to be engaged on work today. And I'm a combination now for nearly 10 years, and I've seen many, I've seen a transformation happen in terms of the use of terminology in terms of the prevalence of the idea, in terms of its utilisation, in business strategy and policy documents, you know, it's come from an idea that was pretty fringe and niche to something that is quite prevalent in many ways. But I'm disappointed to say that I'm still owning my washing machine. And that doesn't feel like there's, you know, the kind of elephant in the room, as I said earlier on is that, that that articulation, it's not that Mats and I have just concocted this on the podcast now, like the articulation of that opportunity. And that benefit as points of circular economy has been around for a long time. But products to service models are still facing barriers. And and that's where SDN and DNSSEC consulting have come in a bit, because you have recently published I'm not sure how recently, actually, but in the last few years, published an analysis of this. I wonder if you could say a bit about just what led you to do that work? And the kind of headlines of, of what that work suggested produced? Found?

Marta Bergfors 12:48

Definitely, well, I think the first thing that led us there was the impatience by maths. He was like, we talked about this for so many years, why isn't it happening? So we started off with, with this project, and the focus was to find why isn't it happening? We have these ideas, we know that it's important that it has great potential, especially theoretically. But what are the barriers, so what we could see then when we looked at other cases, and other businesses, both the ones who have succeeded, but also the one who failed, is that there are barriers, we could identify nine barriers within three categories. And if we stick to the categories, like the first category is about customer acceptance, but it's about getting your business client or your customer to want to have this product on a subscription, or pay per use, instead of owning it. And the fact is that we all kind of like ownership, we're used to it, it's very safe, we know what we got. Also, we tend to not really think about the cost we have that we need to store it or things like that. And when we looked at the the examples of businesses offering products as a service, we realise that it's quite difficult to create an attractive offering. Also, we found quite a few unattractive offerings that we all realised that we would never sign up to. And I think one of the things is the stewardship that you talked about, because I think within stewardship, it's this added value that you need to add to the product as a service to make it attractive. You need to give something else beyond the product. If I just get the product or not really even getting it it's more like in instalments payment and then instead of getting the product I have to return it in many cases in the original book locks. If we found in several cases, then it's just a hassle. You don't get any benefits, you want to have someone that is an expert that that curates you as a customer, you can have an upgrade ability, you have someone that says Now it's time for maintenance, or and maybe coming up and out to you. So you need to add this added value to really create an attractive offering for the customers to make them sign up and and like this.

Seb Egerton-Read 15:33

And what you're saying there martyr in that first category is that it can look like a very it can be an it can look like a very attractive proposition from a circular economy or product as a service perspective, this is a great thing to offer as a product service doesn't necessarily mean that when it comes to actually utilising that product, as a customer, it is better, even if there are some. But you know, like there might be a benefits category that says that over 20 years you save X amount of money and your washing machine, it doesn't actually mean that your experience is better in terms of the things you genuinely value about having a washing machine or access to a washing machine.

Marta Bergfors 16:10

Yeah, definitely. And you have to make that offering attractive. And you have to listen to the customers, what are their pains that you can actually take away from from them to make them want to continue to have their subscription to sign up, and also continue to pay per usage or, or have a subscription. So you need to work more with the customers to move around is the other category is more connected to the operational capability costs that you can have as a provider, because instead of selling a product, and once you sold it, you just sell the next one, right. If you have someone paying for every subscription, and paying for every time you use it, you will need to curate that customer, you will need to have a service team that really helps you out that makes you keep your customers. So it's really important to to work with with your own capabilities. Instead of having a perfect sales team for selling products, you might need a perfect service team that curates the customers, you might need other capabilities for like maintaining and having some kind of remanufacturing capacity, instead of having only a production capacity. So you will need other things within your own operations.

Mats Linder 17:50

I guess one of the things that came out of the research was that maybe I mean companies that try their hand with this, in this category, maybe a little bit too naive in terms of what it takes from their own organisation, their own skill sets their own processes to actually pull it off. Operationally, it is, as my method describes is pretty different. It's pretty different operational model requiring different capabilities and skills. And on top of that, probably a lot of different sort of back office solutions, everything from software and inventory management to transactions and you know all of these things.

Marta Bergfors 18:36

Then the logistic cost is often like underestimated when you start...

Seb Egerton-Read 18:42

The business cost of recovering back things are taking their the more like to and from exchange that invariably happens in that model?

Marta Bergfors 18:50

Yes. Because especially for shared products. You only get paid when they are used right. That's when you create value. So you get your payments when they are used and the customer will experience value when they use it. We could see this for clothing for example, with clothings and clothes that you as you only earn money or create value when they are used you need to minimise the time in storage but also in logistic flows. So when they are in transport or in storage, they will not generate value. And for clothing where you might need many different sizes, maybe different styles. It's difficult to keep, like a high enough rate in use. And the logistical challenge was we found several examples where it was underestimated or like under you they didn't pay enough attention to this challenge of having customers both speaking up and also like standing back At the clouds, and this was a quite large barrier for them. So

Seb Egerton-Read 20:07

So we've had operational on the third category?

Marta Bergfors 20:11

Yes, the third category category is the financial category. It's, it's super interesting actually, because it's also differs a bit between smaller or larger businesses. But one thing with this business model is that you have a smart saying said, the provider keeps the ownership of the products. This means that they stay on the balance sheet. So you get an asset heaviness, which is not like an ordinary product sales model. On top of that, you will have your revenue coming in over time. So you will have the revenue coming in like recurring. This makes you have two challenges at once. So you have this problem of being a bit asset heavy, and at the same time, you will not get the the amount of revenues that follow the standards, which in turn will give you very bad KPIs for the financial institutions that you might go to and ask for, for loans. And when we looked at this, there are quite a few strategies you can use. But it's, it's it's a real barrier. And we've found this company that we're using bikes, they had bikes as a service. And the barrier of having those bikes on the balance sheet made them it stopped them from expanding from scaling, because all their capital were like locked in the bikes. So they this was a real challenge for them. And they actually ended up with using as like sales and leaseback model to be able to free capitals. But then you Yeah, it has it's both pros and cons for doing that. They could expand. But still, of course, it's they're not owning it anymore.

Seb Egerton-Read 22:12

So there's something about like, how do we make these products, better products like acknowledging that the Innovation Challenge is not just about making them product or service or making them circular, but it is also about how do they offer the customer something that's fundamentally better. There's something about like, and then there's something about like the mindset and the actual business shift that's required to move your operations and finance towards a different a cleaner model operating. And I guess, in that, in that era era, you'd say there's economies of scale at play, like like some of these, like competitive issues, kind of competitiveness issues relate to that. Not that it's necessarily the case that moving clothing between two users actually costs more on a case by case basis. But the scale around the linear throughput model is so large, the economies of scale, pull the price down, you know, and then there's incentive. And so I guess, like what I'm getting at there is a little bit like, we know that there are we know, the idea has been out there for a while, as we talked about the beginning, we know that there are these barriers, and I really liked that articulation, that kind of three categories. And we know there's a number of solutions needed a number of action areas, and some of those economies respond to economies of scale around policies and incentives and financial structures. But I know that what you did off the back of that research, because, you know, Matt's you lead at the front and and Marty, you said that Matt's kind of I don't know how you describe it against, you know, like, impatience. I think you said, you know, how do we translate into action? Because even though there are certain things that only policy can do it only legislative frameworks and financial mechanisms can do. They're also things that businesses can do large businesses and, and innovators. And I know that you took the research you did and you originally had some recommendations, and you've kind of expanded upon those to say, actually, there is, you know, you can there is an opportunity for businesses to already step into this space and, and have success if they're up for the Innovation Challenge.

Mats Linder 24:08

Yeah, I think we, we felt but if we would have only given the kind of recommendations to policymakers, to the financial institutions, etc, we would basically repeat exactly the same recommendations as all reports and certain economy have given for the last 10 years and we would not have added much new to the table. These are still solid recommendations, right, but they're not new as, as anyone who's followed this for a while would know. So we wanted to, I guess just kind of recognise the fact that no, it's not a level playing field for products or service because of how everything from raw materials to policy to consumer behaviour works, right. These these are real facts that we will not change overnight. How do we work with them, what can businesses actually do? Still, even if then may not face the tailwind that we all foresaw in the golden age of 2012 2014? Whatever. So that's what we focused on.

Seb Egerton-Read 25:17

And what did you and I know you've got this kind of like, almost sequential process that you kind of created? Like, maybe you could walk us through that just might get smarter in terms of like, what can businesses already do? Or what should they do?

Marta Bergfors 25:34

Yes, definitely. So the first thing was that we, we said that, okay, so this is what you should do. But we also wanted to provide like, how do you do it? So you really get into action? So actually, its first step is all about that like finding your personal, perfect case. So in your business, maybe you have several products, or you have one product, then the first tool is about analysing that product. What advantages do we have? And what are our challenges? And if you have several products, you can choose the one where do you think you have the best chance. So let's start with your find your past advantages, what we call it, and it's about choosing the product and choosing the customer.

Mats Linder 26:23

This may come as a surprise or not, but like the craft and art of developing a really I can viable product as a service offering we believe is? Well, it's basically the same cross not as any business proposition, a human need to be really sharp. In developing a viable business case, you need to be prepared to do the work be very serious about the details. And I think that's also what, like these tools that we developed are about it's not, it's not like you do them in an afternoon, then you're done, you probably need to spend quite a lot of time researching, answering the various questions, and then testing, failing iterating, just like in any kind of business development process. What we hope we do, and Marta will take you through the other steps is to make that journey a little bit more guided, a little less confusing. And make sure you don't sort of drop the ball because you miss something that is kind of a particular thing you need to pay attention to with product or service.

Seb Egerton-Read 27:33

I might be making this up, this might be a case of "Sebo-pedia" going on here, but I feel like I've read somewhere that you know, for every business success succeeds, there's 10 that fail. And there's something about like, that's going to be as true maybe even higher rate for something that's disruptive to the market. So I guess in some ways, the challenge is how do we get more volume of people trying to make product or service businesses work.

Marta Bergfors 27:59

But once you have identified your your product, but also the customer actually because there are customers that are more easy to address than others all depending on if you are like how digital you are and how digital your clients are. Do you want to go for b2b or b2c? There are several like choices to do also in which customers to target. But once you know that it's all about the customer journey just like any other. But here we have developed a customer journey that is adapted for circular economy, that includes the way of like what happens when you would you take back the product, what happens if you have a subscription, and then you need to like upgrade, you'd need to update it you need to service maintain. So you have all these actions that is not within the customer journey or a classical linear customer journey where you you have a sales work, and then you you sell the product, and then you might have some service offerings. So it's, it's a bit more extensive in in these ways. And it also offers questions on how to help the businesses develop strategies on how to overcome the barriers. If they have a shared product, for example, they need to have strategies, so how to overcome the the problems of like products, moving from one unknown from one user to the other user, and things like that. And one thing that we learned in the pilot project that we did was that it's very important to meet with your clients and your customers to actually discuss this new offering that you have to understand what are their costs and their pains that we can actually take away from them to make sure that you create this added value, this stewardship that you talked about, like the added value that the customer acts They once and one of the companies in among our pilot companies actually found quite a few administrative challenges for their clients that they didn't know about, that would actually be relieved if they kept if the provider kept the ownership of the product. And

Mats Linder 30:21

And in many cases may be more true for the business to consumer. segment, the user in other words, you and me have very little understanding or idea of what it actually costs to own something. So like total cost of ownership is unknown, we we see and look at the price tag. And that's what we compare against, but you need to as a first step, educate, if you will, the consumer, what the real cost of owning versus the cost of product service, so that you can actually make an apples to apples comparison. Otherwise, I mean, the math will will tell the customer falsely that, you know, after three years of subscription, I'm actually paying more than just buying so I might just as well buy, but that's not true, right? So that's important, but it's also can be kicker is that it's maybe not enough, especially not true consumers, because of all the psychology that goes into owning as, as we already talked about. And I think a great example of this is car ownership, this good old example that we always kind of drag in from the cold. Because with car ownership, a lot of I mean, all car owners have sworn over the latest like, you know, workshop bill. There's a lot of very visible costs about car ownership. And yet people tend to own them. Or they tend to at least fail, making the correct comparison when it comes to owning versus like getting on to one of these like car sharing platforms.

Seb Egerton-Read 31:54

Sorry, Marta, we cut you off from this, this, this journey you were taking us through so sorry, carry on? Step three, I think we're on.

Marta Bergfors 32:03

Yeah, we're just step three. And now we have to think okay, so we have the customer journey we want we know what the business wants to deliver to the customers. And then the next step is then to how do we deliver? How do we, what do we need to deliver? what capabilities do we need? Do we have them? How can we reach them? And or get access to them? Because we don't necessarily have to do all the investments by ourselves remembering the the third challenge of the assets, heaviness, you have to be prudent with which investments you decide to do. So here, it's about looking at what you want to offer, in your customer journey, that what is your offering? What are the capabilities we have? And where do we have the gaps? Most businesses have gaps? And it's not always where you think they are, because you have a sales department, right? So they could sell functions, or they could sell products. Actually, it's not really like that. So the sales department is an important part of the product that you need to really be prudent about because the selling product and the function is different. Also, the incentives are often motivating the salesman. And if you're not changing their bonuses, you will not make them sell functions, right? Because the revenue coming in over time. If you land, subscription or pay per use, then someone else will get that bonus later on, or how does it work. So you have to like really look at your internal organisation, and make sure that it fits also for the product as a service selling.

Seb Egerton-Read 34:05

So you're mapping your competitive advantage, you're mapping your customer journey, you're looking at your capabilities and needs. And then what's the final what's the final piece of the puzzle?

Marta Bergfors 34:17

The final piece of the puzzle is two very nice Excel sheets where you can yes, you can work with your business case and your total cost of ownership. And the pilot companies that we worked with, of course, they actually liked both of them because the business case makes you realise what happens if I have a better quality on what happens D or 12. How does it how is my revenue affected if I have a longer like improved quality or if I have better service or something like that? but also for the total cost of ownership is basically a way to, to estimate your customers total cost of ownership for the current solution. And that will give you a hint on which price level you could expect for the subscription. Like, what are they paying today, both in cash and in time. And so what is our actual competition about? And that is something that you also can bring to your customers and ask, we think that you have these costs. Is that correct? Is it something that we missed? Or is it something that's correct? That are that we need to add? And starting from there, you will know like, where is your range for your product as a service.

Seb Egerton-Read 35:52

The way in which we engage with our products or the products that we're able to engage with and how we engage them as being constantly changing through our history. In fact, it'd be weird if it stayed the same. It'd be strange if it stayed the same than if it changed. And I guess that's the encouragement, of course, you know, that innovation is often not controlled. And there's some specific timelines and challenges that the circular economy is trying to provide an answer for. That is making us want to steer that innovation towards positive outcomes for the economy, environment society in a way that maybe other innovations haven't been. Well haven't been deliberately manufactured towards. So we say, but thank you so much, both for joining us on the Circular Economy Show, it's been great to have you on the podcast and hopefully, we'll speak to you again soon.Thank you for listening to this episode of the circular economy show. The research project referred to was co funded by the European Regional Development Fund and was co authored with Cradle Net, a business network for circular economy. The link to the report will be in our show notes. So please do check it out. And remember to like and review our podcasts, wherever you're listening to us. We'll speak to you next time.