How to use a capability assessment to improve cost-efficiency in your Product-as-a-Service business model
Article 5 of 5 - How to seize the potential of a PaaS business model in your business context
Changing your business model from product sales to Product-as-a-Service (PaaS) is one way to help your business succeed with the implementation of circular economy practices. Nevertheless, changing your business logic is by no means a small endeavour. If the product that your business offers was previously the core focus of your organisation, the type of services your business offers will now enter the centre stage. To succeed, you will likely need to acquire new types of capabilities such as competence, processes, technology, and equipment – which may generate additional cost. At the same time, it is critical to stay cost-efficient in order to avoid financial instability.
To manage the transition, businesses can take inspiration from traditional asset-light business strategies which seek to minimise the need for investments in assets such as equipment, competence, and labour. This reduces financial risk while increasing flexibility and agility.
Strategies for a Product-as-a-Service provider to become more asset-light
We have identified three main strategies that businesses can use:
- Continuous improvement of the processes to operate, monitor, maintain, upgrade, and dispose of assets. An asset management platform may be used to achieve cost efficiency.
- Limit asset ownership to mitigate the financial risks of being “asset-heavy”. Purchase production, equipment, and other functions as-a-Service or use a sale-leaseback agreement to lighten up the balance sheet.
- Focus on core capabilities. Outsource or enter into partnerships to secure access to capabilities that are beyond the organization's expertise or require significant investments.
One first step towards realising the above strategies is to identify which capabilities your companies need to have access to in order to operate the PaaS business model.
Examples of relevant capabilities in a PaaS business model include logistics, marketing and sales, and activities necessary for re-circulation (cleaning, repair, refurbishment).
Logistics is the cornerstone of a PaaS business model as products often are pooled between users and returned for maintenance, reconditioning, repair, and refurbishment. Sending, receiving, and stocking products create logistic challenges that drive cost. At the same time, products only generate revenue when they are in use, meaning that businesses need to minimise the time that the products spend in transport or storage.
Marketing and sales are other areas where businesses often struggle due to their lack of knowledge in function or use-oriented sales and marketing. This, combined with the use of traditional sales KPIs, have a tendency to disincentivise sales staff to sell and promote PaaS.
Lastly, extending a product's life through maintenance, repair, and refurbishment tends to be labour-intensive and for that reason costly. Therefore, it is important to stay cost-efficient so that the generated cost savings from the reduction in the number of units produced stays above the added labour cost.
All the above cost challenges can be mitigated by using digital and data-driven solutions to optimise logistical flows, reduce the administrative burden of customer care, and track product health. This is one of the main reasons why the time for Product-as-a-Service has never been better.
However, implementing such solutions also require certain capabilities and investments.
So, how can a business move forward?
First, decide which capabilities your organization needs
Identifying the capabilities that your organisation need can be a bit abstract, and it will ultimately depend on whether your company is in a pilot or upscaling phase. If you are planning to test your offering on a small scale, you can afford to perform more work manually for the sake of learning. But if you are in the position to scale up the offering to a larger customer base, you will need much more digital and physical infrastructure in place.
Regardless of the phase that your business is in, we recommend building upon your PaaS customer journey and developing a first service blueprint on how your organization could provide the intended service to your customer (more info on how to work with your customer journey is found here. In short, a service blueprint is a diagram that visualizes the touchpoints and relationships between your customer journey and the service components and processes needed to realize it. This first step will help you map out the capabilities you need.
Second, develop a strategy to access the needed capabilities
Once you have a good overview of what capabilities you need to provide the PaaS offering for your customer, it is time to think about how to best access those capabilities. Is it through internal development, strategic partnerships, or outsourcing? To help you, we have developed a capability assessment tool to facilitate discussion and decision-making. The tool allows you to think about how to balance the need for certain capabilities while keeping costs and investments down.
The assessment is based on self-evaluation of the capabilities identified in your service blueprint. To ensure you do not overlook any critical skills, the capability assessment tool also includes a list of common PaaS capabilities.
In the self-assessment, you will evaluate your capabilities according to their strategic importance and ease of implementation.
Strategic importance is based on two factors: strategic value for your customers and strategic value for your company. Strategic value for your customers refers to your capability to deliver value that is highly important to and prioritised by your customer, whereas the strategic value for your company is based on the capability’s contribution to your company’s long-term goals or the possibility to differentiate yourself from the competition.
Ease of implementation is based on two factors as well: the current level of maturity and ease of implementation. The level of maturity is based on your level of existing resources and expertise, whereas the ease of implementation refers to the level of investment and change in systems, processes, and culture, needed for the implementation.
Once you have completed the assessment, you will find your results in the capability assessment matrix. The result will support the discussion and decision-making toward establishing:
- Which capabilities are core and should be kept and developed internally?
- Which capabilities should be developed in close collaboration with partners?
- Which capabilities provide little added value and can be outsourced or phased out?
Once you know how to best secure access to the needed capabilities, you can start developing a strategy for implementation.
The tools described in this article are found here. For more information on the topic of Product-as-a-Service, please have a look at our report “Product-as-a-service in the circular economy: the nine challenges and how to fix them.”
