How technology will drive the next wave of circular and service-based economics

By Rob van den Heuvel, Senior Vice President Global Asset Management at DLL Business leaders today face unprecedented challenges, in part due to the astonishing rate of technological advancement. The main topic of discussion at the World Economic Forum in Davos in January this year revolved around the impact of digital technology and the Internet of Things, which is set to revolutionize the way businesses serve their customers. In this new age, there are great commercial opportunities for those that utilize this new technology effectively. At the moment, much of this potential is being lost because the data is not being fully utilized. However, if businesses do draw on it effectively, the new industrial wave could generate up to $11.1 trillion a year by 2025, according to McKinsey[1]. Technology unleashes new potential Harvard professor Michael Porter, a globally recognized authority on competitiveness, believes the Internet of Things is reshaping business and society. The rise of smart, digitally connected products will, he writes in Harvard Business Review, "generate real-time readings that are unprecedented in their variety and volume. Data now stands on par with people, technology, and capital as a core asset of the corporation and in many businesses is perhaps becoming the decisive asset."[2] While technology might unleash a new industrial revolution, we are also living in an age where our economic activities are threatening the planet on which we all depend. The great challenge, therefore, is for business leaders also to develop models that draw less and less on finite, non-renewable resources such as metals and minerals and reduces carbon emissions, offsetting two of the biggest environmental challenges we face: resource scarcity and global warming. Sustainable economic growth is circular There is a way forward which addresses both these issues and could help businesses to both engage their customers and develop a more environmentally friendly approach to commerce known as the circular economy, in which goods are designed to be recycled, reused, refurbished or remanufactured, extending their product life cycles. The circular economy concept, informed by such ideas as cradle to cradle, is also about driving towards a low carbon economy and utilizing healthy materials to make products, all of which lends itself to creating positive closed loop manufacturing systems. This is the ideal. But how do we get there? The answer could be through developing service-based models, facilitated by servitization, in which customers demand smarter, added value services. Instead of selling an asset in a one-off transaction, the supplier provides a service such as selling the service of light rather than supplying lighting products or providing on-going medical scans rather than a scanner. This model is already familiar in some sectors such as office technology. Customer service is at the heart of the new economy But the revolutionary shift is that more and more suppliers can go down this road. Porter describes how the service-based model, underpinned by the Internet of Things, will boost customer engagement: "The ability to remain connected to the product and track how it's being used shifts the focus of a company's customer relationship from selling—often a predominantly onetime transaction—to maximizing the customer's value from the product over time. This opens up important new requirements and opportunities for marketing and sales." They will maintain ownership of the product and will often be responsible, as part of the deal, for servicing it during use. The Internet of Things means that most suppliers will be able to monitor and keep in constant touch with their equipment digitally, facilitating an enhanced service: they can optimize the equipment, predict problems before they occur and fix them without breakdowns and radically improve minute by minute, their understanding of customer behaviour and needs. The second thing this service model does is enable the producer to maintain control over the assets in service and plan for their return and next life cycle. They will be incentivized to make things that are durable and perform well and that can be remanufactured, refurbished or recycled at the end of their first lifecycle. The process is, therefore, both profitable, competitive and environmentally responsible. Peter Lacy and Jakob Rutqvist, authors of the new book, Waste to Wealth, see such service-based models as one of the clear routes to the circular economy and describe how manufacturers should, "consider the entire product lifecycle when setting strategy". In this scenario, products "must be designed for optimal use, maintenance, reuse, remanufacture, and recycling to avoid issues such as fast quality degradation, short lifespan, low utilization rate, and low recycling/return, which can directly impact the company's bottom line."[3] Making the service economy a circular one too Putting together these deals is, however, more complex than a straightforward sale of an asset. First, you need to decide on the model to be used such as pay for use, leasing and rental, and then find ways to agree on terms that are viable for both parties, and enable the supplier to take back the asset at the end of use and recapture its value in a second or third life cycle. This is an area that DLL has been heavily involved in and from our experience, we can see that the right financial solutions will drive forward these new customer-centric circular economy models. Indeed, Lacy and Rutqvist explain that companies thinking of adopting a service-based model may "need to think creatively about financing, potentially collaborating with financial institutions such as banks and insurers to make it practically viable." At DLL we are seeing that financial institutions can do more, working as collaborators and partners in the journey to circularity. Lacy and Rutqvist add that more than 80 percent of the service based-models they have studied are "blending it with one or more circular business models", often paired with Product Lifecycle Extension models to repair or upgrade products. Indeed, we have built a Lifecycle Asset Management division, which facilitates revenue generating second and third life refurbishment business models.  It is here that we have been expanding our capabilities to provide asset data, giving our customers more insights into the usage of their assets through the whole product lifecycle. This service-based model helps customers reduce the costs of ownership, get more efficient usage of their assets, and is beneficial for business and the environment. In this brave new world, financial solutions like our own lifecycle asset management division can provide the wiring for this new infrastructure: the Internet of Things and service-based models linked to the circular economy. And this is driving a revolutionary shift in the way we do business. www.dllgroup.com For more information on DLL's Lifecycle Asset Management and to download our whitepapers on second life financing, please visit: www.dllgroup.com/LCAM Note: January 19th 2016, DLL won the Young Global Leaders' Circular Economy Investor Award at the World Economic Forum Annual Meeting in Davos. For more info, please see: www.dllgroup.com/Press/Latest/DLL-wins-Young-Global-Leaders-Circular-Economy-Investor-Award [1] James Manyika, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin, and Dan Aharon, Unlocking the potential of the Internet of Things, McKinsey Insights, June 2015 http://www.mckinsey.com/insights/business_technology/the_internet_of_things_the_value_of_digitizing_the_physical_world  [2] Michael Porter and James Heppleman, How smart, connected products are transforming companies Part II, HBR, October 2015. https://hbr.org/2015/10/how-smart-connected-products-are-transforming-companies   [3] Waste to Wealth

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