Circular Economy with XaaS – Insights from SYSTEMIQ
What does “XaaS” mean and what makes it climate friendly? Georgina Fleming, Investment Director at SYSTEMIQ Capital, and Dr. Manuel Braun, Director and Sustainability Lead at SYSTEMIQ Ltd., are experts on XaaS aka Everything-as-a-Service-models. We are honored they shared their approach to circular XaaS models at our CHOICE Event #36. These are the key insights of their presentation.
FROM PRODUCT TO SERVICE
The way we do business is undergoing a major transformation. Many companies still focus on the products they manufacture rather than on the outcome and the benefit they provide for the user. But every product can be thought of and commercialized as a service. That is the principle of XaaS aka Everything-as-a-Service.
Everything-as-a-Service is essentially a business model innovation that focuses on selling services or the utility that consumers are interested in instead of the product itself. For example:
We don’t need cars, we need mobility.
We don’t need washing machines, we need clean clothes.
We don’t need refrigerators, we need fresh food.
A strategic shift to XaaS models can be observed in many areas across sectors. A major benefit of XaaS models is that they can be a game changer for climate transformation if they are executed the right way. So what is the right way?
NEW DIRECTION: CIRCULAR
Structural waste is everywhere. The reason for that is the inefficiency of our system. To name just one example, 50% of inner city land is used by traffic – not an efficient use of infrastructure. The restructuring towards a circular business model is therefore a vital step towards a positive climate transformation.
XaaS models typically allow companies to maintain product ownership and lifecycle responsibility. As a consequence, producers are incentivized towards circular business models, such as long-lasting circular design, use phase intensification, maintenance, repair, reuse, remanufacturing, refurbishing and recycling.
Circular business models reduce inefficiencies and create value for companies. That requires a complexity of measures that we can sort into five clusters.
- CIRCULAR SUPPLY CHAIN – Reform use of resources
- RECOVERY & RECYCLING – Recover value in waste
- SHARING PLATFORM – Optimize capacity use
- PRODUCT LIFE EXTENSION – Extend life cycles
- EVERYTHING-AS-A-SERVICE [XaaS] – Offer outcome oriented solutions
XaaS is the most ambitious type of circular business model. It optimizes for high utilization and can deliver environmental as well as economic benefits.
DESIGNING CIRCULAR BUSINESS MODELS
As previously mentioned, XaaS models can be powerful climate compatible solutions and increase economic value, if they are designed right. What needs to be considered?
Configuring XaaS models should build on four critical design blocks:
- Sustainable value proposition design
- Business model and financial design
- Product and operating model design
- Ecosystem design
SEVEN CIRCULARITY LEVELS
Simply switching the business model to XaaS is not enough though. A circular product and a circular operating model have to be built. That means designing and developing a product for lifetime and quality, optimizing material supply, production and energy efficiency, improving repair/service/maintenance/updates for better availability, optimizing towards maximum utilization, reusing/refurbishing and remanufacturing/recycling.
XaaS models require readiness on three ecosystem levels. Especially in large companies it can be challenging to enable this ecosystem. For that reason it is important to build the right partnerships. Companies might not be able to build everything in house at the pace you want to have, establishing the right partnerships therefore is a critical step towards successful XaaS models.
If you want to build such a model, another vital part is to run a solid analysis and quantify an ambitious case to have a north star of where this offering could maximize the impact.
HOW DO VENTURE CAPITALISTS LOOK AT THIS TOPIC?
XaaS models are more capital efficient than traditional manufacturing companies. As a venture capitalist it’s quite difficult to make the case to invest in a typical manufacturing model because it takes more capital to scale. XaaS models require less capital.
Venture capitalists will be looking for companies with higher profit margins than traditional manufacturing companies. Typically with XaaS models you’ll see revenues that are more predictable. The utilization rate becomes key because the more you utilize assets, the more you grow your profit margins.
Everything-as-a-service models can open up opportunities for business innovation. New finance mechanisms, new insurance opportunities will show up around a successful XaaS model which leads to new investment opportunities for Venture Capitalists. It also allows the company that is offering the service to innovate more rapidly because it’s much easier to change and adapt a software solution than a hardware product. That allows companies to be a lot more innovative, a lot more flexible and cater to changing market demands which is very attractive to VCs, especially when you’re investing in an early stage you want to see that a company can adapt to changing markets.
Key considerations for investments are:
- Enhanced customer experience
- SAAS metrics (MRR/ARR, Bookings; Churn, Renewals; Profit margins)
- Other XAAS metrics (utilization rate, TCO, Materials and CO2 avoided)
XaaS investments opportunities at the moment are for example on-demand pooled transit models, plastic reuse due to incoming regulations in e.g. France and Germany and Fashion-as-a-Service models.
Enabling technologies to accelerate the adoption of XaaS models are IOT which enables real time feedback on the asset itself to the asset owner and any third parties involved, AI machine learning to optimize the product and blockchain technology to provide proof of the product’s quality which also helps with supply chain transparency.
XaaS can be a driver for resource productivity and a significant impact leap. Shifting to a XaaS model is a pro-market, pro-growth and pro-technology agenda. It requires support, strong digital infrastructure to track and trace products along the supply chain, the right policy interventions around CO2 pricing and partnerships among companies, enabling actors to work together towards climate compatible businesses. Entrepreneurs and investors need to support those models.
If you want to know more about Everything-as-a-Service, have a look at SYSTEMIQ’s report on how businesses can thrive in these times of climate transformation and digitalization.