Companies that view sustainability as a cost center need to rethink their priorities. Leading organizations are becoming aware of the circular economy as a massive business opportunity—an engine for innovation, new revenue and sustainability. Indeed, one study predicts that by 2030, the circular economy could create a quarter-million jobs in London alone.
Circular business models can build economic, natural and social capital by designing out waste, keeping products and components in use and returning materials to the product lifecycle. Europe is widely acknowledged as the world leader in circular economy innovation, with the Netherlands often named as the tip of the spear. Interestingly, many point to regulation (not generally considered a friend of corporate innovation) as a driver. “The circular economy has become a development priority of the European Union,” this recent Greenbiz column notes, “and is part of its industrial strategy.”
The Cognizant take
In our report “The Future of Us,” we wrote extensively on the coming net zero era and the many benefits businesses stand to gain by embracing the circular economy. Companies face increasing penalties for resource-intensive and polluting products, need new sources of growth and differentiation, and must strengthen their supply chain resilience.
Product-as-a-service business models can help meet these needs. By embedding Internet of Things (IoT) sensors into products, providers can better manage product lifecycles. Because the business retains ownership over the product and its lifecycle, this adds incentive and opportunity to focus on and respond to what users need from the product, whether it’s better quality, easier maintenance or recyclability. Sensor-embedded products make it possible to digitally track, measure and conserve assets and materials so producers and customers can derive maximum value from them.
This business model isn’t for everyone—but if executed well, it can strengthen the business and help minimize waste, emissions and pollution. “Product-as-a-service business models are based on the idea that companies don’t just sell their products anymore—they move to becoming service providers that sell performance, an outcome or a result,” says Dr. Jan Konietzko, Sustainability Advisor in Cognizant’s Sustainability Services practice and a circular economy expert. Konietzko points to several successful forays, including examples from Hewlett-Packard, Grundfos and Volvo.
Product-as-a-service business models aren’t automatically circular or environmentally friendly; to achieve those goals, they must be designed accordingly. But once a product is provided as a service, its maker has an incentive to make sure it lasts as long as possible and that its value can be recovered after use.
Cognizant has helped numerous clients on their product-as-a-service journey. The model has several advantages:
- Lower operating costs and increased uptime via predictive maintenance and workflow-powered productivity gains.
- Recurring revenue and new revenue streams through added services. This improves the resilience and plannability of the business model. Data from IoT devices also allows businesses to better understand their customers.
- Profitability and flexibility. By avoiding large capital expenditures, customers increase budget flexibility and lower the risk of product failure or obsolescence.
But the transition to circular service business models isn’t easy, as businesses must ”swallow the fish” of increased cost and risk (due to inexperience in service provision) and decreased revenue (instead of the sales price, revenue comes in little drops over time). And they need to build stronger servicing and digital capabilities, which takes time.
While the product-as-a-service model isn’t universally applicable, it can kick off a process of dematerialization that benefits the environment and the business. Excess resource use becomes a cost—rather than an externality nobody cares about, as is the case in sales-based, business-as-usual models.