The new Combient event series Transformation stories, launched this spring, reached its third gathering on April 25th, 2023. This time SEB hosted the session and Jakob Hansson, Asset Solutions, Corporate Banking, shared some insights of SEB’s journey supporting companies in their transition towards circular business models. The attendees from the Combient member companies, KONE, Saab, Stora Enso, Konecranes and Wärtsilä, spent the afternoon discussing the features of as-a-service models and what it takes to initiate a circular offering.
As-a-service solutions increase asset’s flexibility
Product-as-a-service or asset-as-a-service business models are one of the most significant circular economy business models in the manufacturing industry. Most companies in the Combient network operate in the manufacturing industry, making these business models highly relevant. In as-a-service models the producing company has complete control over the product specifications, and the product often stays on their balance sheet. Consequently, the company gets most benefits from designing long-lasting, easily repairable, and reusable products.
By using circular economy, a producing company can both create value and accelerate sustainability. It enables companies to decouple the linkage between profit and production and create solutions to tackle resource scarcity creating positive environmental impacts. Also, when a company is not tied to external resources, the business becomes more predictable and stable.
It is important to note that the as-a-service model on its own does not make an asset circular and environmentally friendly, but circular features need to be added. Recyclability is perhaps the most known feature but in addition there are plenty of circular actions to perform in different life cycle stages that focus on utilizing materials at their highest value while minimizing waste. Reuse, repair, refurbish, remanufacture, and repurpose are examples of circular strategies that extend the life time of a product, out of these five strategies reuse is considered to have the highest level of circularity.
The idea of the as-a-service models is still waiting to be applied extensively on an industrial scale, but it is not a new one and within the Combient network there are inspiring examples of companies moving in this direction and offering product as-a-service solutions. One example is Epiroc that operates within the mining and construction industry. Epiroc offers Batteries-as-a-Service, which means that their customers with battery powered electric vehicles can buy the battery operation service and count on Epiroc taking responsibility for the performance of the battery throughout its life cycle.
Another example is Wärtsilä that offers technologies and solutions for the marine and energy markets. Wärtsilä is moving from a solely transactional business more and more towards strategic partnerships with their customers offering e.g. Optimized Maintenance Agreements and Guaranteed Asset Performance Agreements. This type of business model gives Wärtsilä more control of how the assets are used and consequently also their environmental performance, while maintaining a long-lasting relationship to their customers.
New thinking to finance
As-a-service offerings in most cases means higher upfront investments and more evenly distributed revenue. This forces the product provider to solve challenges related to high fixed costs, weaker liquidity, and access to capital from traditional investors. Consequently, new solutions from the financing sector are also needed to enable the manufacturing industry to start to move towards circularity. The financial sector needs new ways to both evaluate and measure assets as collateral and to support the lifetime extension of the assets. Evaluating an asset that is old, reusable, refurbished and has a long service-life ahead which drastically differs from traditional linear assets demands new perspectives for assessing value creation. To make a substantial impact the financing sector needs to start not only thinking and working in new ways but also creating new financing instruments that help their clients make the transition to a circular economy.
According to SEB, access to asset data and availability of its characteristics would help and increase the willingness to finance the as-a-service offerings. More data would open to new possibilities in financing the longer lifecycle of the asset. This would mean disclosing information of the asset’s characteristics in addition to traditional usage data. By improving the data collection and transparency of the asset’s characteristics companies providing as-a-service offerings can increase their attractivity to the financial sector.
Internal and external collaboration needed to succeed
Although it is important that new circular business models are financially bankable, financials are not the trickiest part when initiating an as-a-service business model. Instead, according to SEB, the hardest obstacle for companies to overcome seems to be the internal change to adapt the new business models in all business areas and operations of the organization. The change needs to be thorough and solved in the early stages to have a full impact.
Going forward it is important to keep in mind that the as-a-service model is not circular on its own, but circularity needs to be considered from the start and integrated into the model. In addition, companies need to begin the circular journey towards an as-a-service business model by collecting data regarding the asset and start with a small-scale pilot. And finally, the key is to find the right partners that can help and support the organization in their circular journey. No one can succeed tackling this challenge alone.
Sources: Potting, José, et al. "Circular economy: measuring innovation in the product chain." Planbureau voor de Leefomgeving 2544 (2017).