For the past few months, I have been thinking about the evolution towards services and service businesses. Instead of writing one huge post (which I have been trying to do), I am going to try to write several smaller ones. The basic idea is that product-businesses from the Industrial Revolution are evolving into service-businesses for the Information Revolution and that software in particular is ready for this transition.
I plan three articles: 1) Products become a service, 2) Software becomes a service, 3) Software is already a service
Closed Systems
I just finished a fascinating article from HBR. (Sorry I cannot link to it. HBR has some wonderful protection system that wont let me.) The article is about the environment but I found the closed-system viewpoint and the idea of evolving products into service useful beyond the environmental argument.
A Road Map for Natural Capitalism
May 1999 Issue
Reprint # 99309
Abstract:
No one would run a business without accounting for its capital outlays. Yet most companies overlook one major capital component--the value of the earth's ecosystem services. It is a staggering omission; recent calculations place the value of the earth's total ecosystem services--water storage, atmosphere regulation, climate control, and so on--at $33 trillion a year. Not accounting for those costs has led to waste on a grand scale. But now a few farsighted companies are finding powerful business opportunities in conserving resources on a similarly grand scale. They are embarking on a journey toward "natural capitalism," a journey that comprises four major shifts in business practices. The first stage involves dramatically increasing the productivity of natural resources, stretching them as much as 100 times further than they do today. In the second stage, companies adopt closed-loop production systems that yield no waste or toxicity. The third stage requires a fundamental change of business model--from one of selling products--to one of delivering services. For example, a manufacturer would sell lighting services rather than lightbulbs, thus benefitting the seller and customer for developing extremely efficient, durable lightbulbs. The last stage involves reinvesting in natural capital to restore, sustain, and expand the planet's ecosystem. Because natural capitalism is both necessary and profitable, it will subsume traditional industrialism, the authors argue, just as industrialism subsumed agrarianism. And the companies that are furthest down the road will have the competitive edge.
The authors argue that perpetuating the current system of product-centered companies will continue to destroy the environment and ultimately kill us. What we need is a new economic system that replaces products with services.
The article starts with the Biosphere 2 project and it's failed attempt to create a self-sustaining biosphere as an example of a closed-system. The authors point out that the Earth is also a closed-system (albeit a really large one) and that our business practices are threatening it's survival.
The authors argue that the root of the problem is our system of manufacturing goods created during the Industrial Revolution. That system was based on scarcity of people and abundance of raw materials, but the world has changed. Doing business today involves an abundance of people and a scarcity of raw materials, including the materials that make the Earth a livable environment for us.
Our product-centered system encourages short-term decisions despite the long-term consequences. Today's system is only sustainable if manufacturers continue to make and sell new products while consumers continue to purchase those products. Since many products last a long time, it is in the company's best interest to build them with planned obsolecence in mind or to encourage fashions that cause people to "upgrade" long before the product is worn out. For instance, most people only use their cars for 3 years even though cars continue to perform their function for much longer.
The problem is that we are running out of raw materials and the byproducts of manufacturing and product-use damage the environment that our lives depend on. The authors argue that a closed-system view is the answer because it forces people to think not just about the products themselves but the entire product life cycle, including the by-products and waste.
This closed-system perspective leads to new ideas about sustainable business. By looking at the whole life-cycle of a product, we get totally different business models that were not possible in the old system.
The current system encourages short-term, low-cost thinking without regard to the long-term consequences. Instead of providing an endless stream of products, the new system encourages manufacturers to reinvent themselves as service, not product, providers. As a service provider, companies can optimize the whole system, from creation to disposal, creating value in the process.
For instance, instead of providing cheap light bulbs, a company can provide "lighting services" by collecting a fee for lighting instead of for light bulb purchases. Since the company owns the product, they can focus on solutions that are the lowest costs over their entire lifecycle. These products are likely to be more costly in the short-term but provide a much better return over 10 to 30 years. This new way of thinking is a win-win-win situation because it is good for customers, for companies and for the environment.
the service evolution
Moving to a service model makes a lot of financial sense for customers and businesses and it provides a natural evolution for business. It allows companies to focus on what they are best at (their own products), solves the customer's needs and helps the social good we call the environment. The authors even argue that their idea makes a lot more profit.
I like this "service evolution" idea for traditional products, but as a software guy, I think it is particularly useful for addressing a flaw with today's software products which I will write about in part 2.
