Businesses must see their products as a service to fuel a more sustainable, circular economy

The shift can make economies more circular by breaking patterns of mismatched supply and demand while generating growth opportunities for any industry
Building a circular economy requires gold-standard systems for taking back products and preparing them for their next life, as well as shifting revenue streams

Michele Madonini

Published: 2:30pm, 22 Jul 2021

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The concept of a circular economy is not new. Retailers, especially fast fashion brands, have been at the forefront, driving new initiatives to change the paradigm through concrete programmes to reinvent the manufacturing and recycling process while making fashion a sustainable industry.

But one industry is not enough. According to the Circularity Gap Report 2021, the global economy was only 8.6 per cent “circular” in 2020, down from 9.1 per cent two years earlier.

Building a circular economy requires businesses across all industries to lean in. There is an opportunity to profoundly change how products are designed, manufactured, supplied and consumed. The “product-as-a-service” business model must be our end goal.

This is a radical departure from a commoditised model whereby companies sell a product and consider their job done. Instead, the producer retains ownership of – and responsibility for – the product throughout its entire life cycle.

The customer has full use of the product for as long as is needed, paying only for outcomes instead of the product itself or its upkeep. The producer, in turn, is responsible for building a quality product that lasts and is energy- and material-efficient. It is also their role to take the product back and prepare it or its components for reuse.

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The “as-a-service” notion is an iteration of the “cradle-to-cradle” design concept developed at the end of the 20th century. The essence of its design remains true in our modern world when building a circular economy.

It requires companies to go beyond being “less bad” by reducing their environmental impact and becoming a positive force. Such efforts include optimising products during the design and manufacturing process with a view to making the material resources for their next service life as new products.

The seeds of this notion are being planted across different sectors. Philips sells “light as a service” to build smart cities. The company cites figures of up to 80 per cent savings in energy consumption.

Desso, a global supplier of carpets for commercial use, designs products according to the cradle-to-cradle principle. This means the company can lease its carpet tiles, taking care of the installation, maintenance, return and recycling.

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It is important not to underestimate the shift that moving to “as-a-service” entails for a company. Ideally, it is as part of a broader business and digital transformation strategy that embeds sustainability.

This not only makes our economy more circular, by breaking established patterns of mismatched supply and demand, it also has the potential to generate significant growth opportunities for any industry.

In the tech industry, an “as-a-service” model will help organisations eliminate the problem of over-provisioning – a common practice in which companies overbuy IT services – and achieve a win-win outcome for both the business and society.

Take data centres as an example. In the conventional IT consumption model, 25 per cent of computer resources are not doing valuable work while the remaining resources are operating at a small fraction of their capacity.

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In addition, inefficiencies of ageing equipment mean that 65 per cent of the power used by IT in data centres processes just 7 per cent of the work. As a result, businesses have to bear the brunt of higher costs and unnecessary power, space and cooling consumption.

Finally, as part of Hewlett Packard Enterprise’s “as-a-service” model, we take back IT assets at the end of their use because we have invested in major advances to extend the life of retired IT equipment and reuse and remanufacture components for a second life.

Therefore, enterprises earn back the residual value of their IT assets – close to US$1.6 billion was infused back into our customer budgets in the past five years. In addition, refurbishment services also reduce carbon emissions and keep e-waste out of landfills.

Building a circular economy requires companies to have gold-standard systems for taking back products and preparing them for their next life, but that is just one piece of the puzzle. Even more complex is changing revenue streams from traditional sales revenue to recurring revenue, which reduces short-term revenues and increases them long term.

This in turn affects sales, partner incentives and motivation, financial reporting and investor relations. It is no small challenge to bring salespeople, commercial partners and investors on board with this shift in mindset, but we must address these challenges and do so with a sense of urgency.

Of course, companies cannot go it alone. The conversion of industry to “as-a-service” needs to be accelerated with the right government policies. Policies destined to drive the industry to achieve climate goals should, whenever relevant, favour a switch to service- and consumption-based models.

Sustainability can drive business outcomes, and vice versa. The ball is in our court to build a circular economy where individuals and companies thrive in a sustainable way powered by as-a-service business models. It is time for serious change.

Michele Madonini is vice-president and managing director of Hewlett Packard Enterprise (HPE) Financial Services, Asia-Pacific & Japan

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