Servicize me

Question: If sustainability requires consumers to reduce consumption, how can a company that makes money selling products address this concern while maintaining profits? The answer, according to a handful of analysts and companies, is “servicizing.”

The idea of “servicizing” — shifting a company’s business model and mind-set away from selling products toward selling a mix of products and the services those products provide consumers in order to reduce the number of products sold without reducing profits — has been around for decades. The model gained currency in business-to-business applications during the 1990s, when companies including Xerox (NYSE: XRX) and Interface Carpets (Nasdaq: IFSIA) modernized the office by providing “document services” and “carpet services” as opposed to the products themselves.

These companies realized business customers didn’t need printers and faxes and carpet. They needed to be able to print materials and share information. They needed attractive, clean flooring to work on. From this realization, the servicizing model was born.

In more recent times, technology has created more opportunities for similar innovations. Companies now lease computers from IBM (NYSE: IBM), Dell (Nasdaq: DELL) and Hewlett Packard (NYSE: HPQ), and can upgrade machines easily — without large up-front costs — as new technology becomes available. And companies interested in solar power can now avoid the costs and risks involved in building a solar energy plant by opting for renewable energy services instead.

Rita Gunther McGrath, associate professor at the Columbia Business School and co-author of “The Entrepreneurial Mindset and MarketBusters: 40 Strategic Moves that Drive Exceptional Business Growth” calls it “finding a new unit of business” and says it’s something a lot of companies are looking to do.

“The most successful companies capture the absolute greatest amount of customer spending, or create far lower costs for themselves by altering what they sell,” she says.

The potential for business-to-business servicizing is huge at the moment, according to servicizing expert Sandra Rothenberg, assistant professor at the Rochester Institute of Technology. Between bottom line savings and meeting environmental regulations and goals, Rothenberg suggests it’s a model that makes a lot of sense for many businesses. But, to date, the only successful example of the model in a consumer market is car-sharing.

“Businesses are more focused than probably the average consumer on economics,” Rothenberg says. “They’re willing to change behavior to save costs. If you get a proposal to them with a mix of services and products and the bottom line reduces costs, they’ll go for it. I’m not sure the average consumer cares as much. They want to save money, but what they want is the same thing for less. Consumers are not so willing to change to reduce costs.”

On the provider side, Rothenberg says services can be resource-intensive for companies thinking about meeting the needs of individual consumers. It’s much more straightforward to create a product-and- services package that addresses the needs of a few hundred companies than it is to tackle the needs of millions of consumers, she notes.

Still, as society places more and more of an emphasis on innovation and environmental impacts, products and technology are evolving more quickly than ever before. Servicizing allows companies to gain more customers for each product, and customers to keep up with the pace of innovation. Companies that view time as a commodity and opt to provide a service that maximizes free time for consumers could be on to something.

Carpooling for profit

ZipCar covers gas, insurance and maintenance costs. Users pay out of pocket for a quick trip to the grocery. Courtesy ZipCar.

As cars and the costs associated with them have become increasingly more expensive, private companies have seen potential for profit in carsharing. In the United States, car-sharing gained popularity in the 1990s with nonprofits and city governments seeking to provide a service for those who could not afford their own cars, reduce the amount of drivers and cars, and close a gap in city transportation systems.

Companies such as Flexcar and ZipCar began for-profit car-sharing services, offering better service and cooler cars than their nonprofit counterparts. Instead of shelling out for a car, maintenance, gas and insurance, city dwellers and college students are increasingly opting to sign up for car-sharing. For qualified drivers, car-sharing companies provide members with a fleet of cars that they can use for a flat monthly rate or on a per-drive basis. Companies buy fleets of various types of vehicles — hybrids, trucks, SUVs — so customers will have the right car for any situation.

By 2005, car-sharing had proven itself profitable enough to attract venture capital, and both Flexcar and Zipcar landed multi-million dollar investment deals: ZipCar received $10 million from Benchmark Capital, the investment company headed by eBay (Nasdaq: EBAY) co-founder Robert Kagle, while Flexcar received an undisclosed amount from former AOL founder Steve Case’s investment firm, Revolution [see “AOL’s Steve Case bets on Flexcar,”SI, September 2005].

In the wake of these investments, Flexcar hired former Daimler-Chrysler (NYSE: DCX) CEO Mark Norman to oversee its expansion [see “Flexcar taps auto exec as new CEO,” SI, August 2006]. And both companies have recently received more funding to continue rolling out fleets. ZipCar announced a $20 million investment from General Electric Capital Corp. (NYSE: GER) in May 2006 and a $25 million round of private financing in November 2006, and Flexcar received a second influx of still undisclosed financing from Revolution.

But just how profitable is car-sharing? It might not be posting numbers large enough to make the Big Three automakers squirm just yet, but ZipCar is profitable in all of its established markets, according to marketing director Tobia Ciottone in a report by Benchmark Capital. The company claims it has more than doubled the number of its new members and new vehicles in the past year, and doubled revenue each year for the past three years.

For consumers, car-sharing reduces not only the costs, but the environmental impacts of car ownership. According to ZipCar, its customers drive 50 percent less and buy 40 percent fewer cars. The company also estimates each ZipCar replaces approximately 20 privately owned vehicles. Flexcar puts that number at 15 cars replaced by each car-sharing vehicle, and both companies make an effort to stock fuel-efficient vehicles, including hybrids, and to offset company carbon emissions.

Though car-sharing has proven profitable, and there appear to be enough consumers to support multiple car-sharing companies, it does have its limitations: It’s not a model that is likely to work all over the country, especially in rural areas where getting to a car docking station could have people driving more instead of less.

Keeping up with the Gateses

Sun Microsystem’s thin-client machines provide networked users with access to computing power without the need for fully loaded PCs.

The technology sector, where products are obsolete practically before they leave the store, is ripe with potential for seeing services, not products, as the foundation for business. For certain segments of the tech industry, providing a service has always been part of the business model. Still, even in the tech industry, servicizing is typically applied only to business-to-business sales.

“Software as service” companies are the mainstream frontrunner of the servicizing trend in the tech sector: Companies own the storage and servers required to run computing-heavy applications so businesses don’t have to. They then provide the software application as an online service. Hosted e-mail services are a common example.

Steve Kasser, PhD, a consultant with hosted email provider USA.Net, says most small and mediumsized businesses today are choosing hosted email services over the purchase of servers, software and support. According to Kaster, hosted e-mail provides advantages for a variety of businesses, including financial services companies concerned about record keeping for legal compliance, companies concerned about data storage and costs, and companies looking to know — up front — how much e-mail services will cost rather than dealing with surprise expenses should an internal server fail or be compromised.

Increasingly, companies are learning the benefits of servicizing hardware, as well as software. IBM, Dell and HP all offer programs that allow companies to lease PCs. For companies eager to stay on top of the technology curve and avoid tying up funds with large capital costs, it’s a good solution. As manufacturers roll out newer technology, they trade out newer models and either recycle or refurbish and resell the previous models. This results in cost savings for customers, and waste-reduction benefits for all.

HP’s Financial Services division, which handles all leasing and financing agreements, pays corporate customers for their takebacks, recycles them appropriately and, in some cases, refurbishes old equipment and sells it again as “pre-owned” to corporate customers. In this scenario, the customer gets a lower cost, and HP gets to sell its product twice.

Sun Microsystems (Nasdaq: SUNW) may take the idea one step further through its “thin client” innovation. Introduced in 2005, “thin clients” shift away from the current model of personal computers for every employee to a system in which files, applications and settings are stored on highly efficient, shared servers and accessed by logging into network-enabled terminals (the “thin clients”).

Sun calls it “Desktop over IP” (Internet protocol) and claims such systems require about one-tenth the energy required by current network configurations. According to Subdodh Bapat, vice president and distinguished engineer for Sun’s System Level Energy Strategy at Sun, the company’s thin clients are not only energy and resource-efficient, they almost never need to be replaced.

For Sun, the business proposition makes sense: Rather than upgrading personal desktop computers, clients would upgrade their servers, which are at the core of Sun’s business model. The company’s servers sell for $1,000 to $54,000 each, while thin clients start at $249.

“Sun makes the machinery that allows the big data centers of world to offer computational services over the Internet and the network,” Bapat says. New virtualization software, which divides the operations of one server into separate “virtual” areas, each of which acts like a separate physical server, allows machinery (and its corresponding computing power) to be shared among users, not unlike a ZipCar among members. The software maximizes the server’s efficiency and allows the host data center to increase its customer base.

Solar for the people

Fetzer Vineyards partnered with MMA Renewables to install a solar project on the roof of its Red Barrel Vineyard bottling plant. Courtesy Fetzer Vineyards

A new industry beginning to explore the potential of servicizing is renewable energy. The upfront costs associated with buying and installing photovoltaic panels or wind turbines are beyond the means of the average corporate customer. But the price tag hasn’t dampened interest in such systems — a fact that has sprouted a new crop of companies focused not on making thin films or increasing the efficiency of solar panels, but on installing and maintaining solar power systems for business customers.

Maryland-based Sun Edison Corp. is the largest of these companies in North America, and business is booming. The company lists Staples (NYSE: SPLS) and Whole Foods Markets (Nasdaq: WFMI) as customers and recently announced a purchase order of $500 million worth of solar panels from Massachusetts-based Evergreen Solar.

Sun Edison CEO Jigar Shaw says 2007 is the year the sun rises on the solar services model, calling the traditional business case difficult to make and limiting for broad adoption. “In the past, solar has been a products/manufacturingbased industry, which required that businesses incur upfront capital outlays in the millions for their own solar plant, and then had to maintain that solar system for 10 to 20 years,” he says.

The services model his company follows shifts the ownership — and the risk — of a solar power plant from the business to the solar energy services company. In addition to reducing capital and maintenance costs, Shaw says the Sun Edison model locks in energy rates at or below current retail rates and keeps them there, assuring predictable pricing for solar energy — allowing companies to manage the spiraling costs of traditional energy. Sun Edison charges customers only for the power that they use and sells additional power back to local utility companies. For Sun Edison, the arrangement results in two paying customers for every one installation. While Sun Edison doesn’t offer solar energy services for residential customers, it’s a model that could be applied to individual consumers in the future.

Start on the coasts
Where to begin importing the servicizing model into consumer applications? “I think you must start with regions or demographic groups that are really interested in consuming less, and concerned with environmental impacts, and then expand from there,” Rothenberg says.

Infiltrating the consumer market might require a whole new type of company or industry or, as Rothenberg points out, it could come from an industry with overly commoditized products — such as the auto industry — that needs to find new ways to squeeze value out of its products.

She speculates if the auto industry were to shift and become the “transportation industry,” it might be able to diversify its portfolio of offerings enough to stay in businesses. Could the Big Three bring Amtrak into the 21st century? It’s a stretch, but if they did, Rothenberg says, they’d be making a profit even when customers opted for public transportation instead of a car. Which just might be the only chance the auto industry gets to be sustainable.