A Better P/E Metric for the Future: Platforms & Ecosystems

Salesforce.  Apple.  Facebook.  Google.  Alibaba.  Linux.  Digital platforms that spawn and enable ecosystems that, with proper and ever-evolving design, benefit a more broad and inclusive set of valuable participants.  Technology – distributed, mobile, embedded - enables reach unprecedented, both physical and geographical, as well as in use case and impact.  Development of such platforms – secure, while open, flexible and scalable – and catalysis of ecosystems of this scale require incumbents (intrapreneurs) and disruptors (entrepreneurs), as well as both collaborators and competitors.  Success hinges on trust: belief in shared prosperity and the opportunity for growth inclusive of all participants.  Ecosystems represent the collective eyes, ears, and opportunity for growth and expansion, with direct access inherently limited. Customers previously out of reach become active collaborators, crowdsourced ideas get implemented.  Public and private sector team to deliver tackle the real global challenges.  

Business and organization models have and must change. Lifetime value of a customer becomes paramount.  Values-based leadership wins in the face of hyper mobility of all – customers, workers, partners.  Gone are the days of ecosystems as channel - integrators, resellers, referral partners – in which one primary partner aligns exclusively its supporters along lines of commitment, often maintaining unilateral power over the network.    Diversity of actors drives growth rather than undermines it – just as in nature.  Think activation of assets versus control of assets.   Think of both the market efficiencies realized  in the on-demand economy and represented by companies like Uber, and - simultaneously - of the stakeholder returns and profitability of the German Mittelstand.  No model is yet perfect: the former, as example, carries controversial impact to labor dynamics and wages, while the latter may be more siloed, but together, these elements of leadership begin to showcase the piece parts of evolved and more efficient business models.

According to the Interbrands Global Brand Report for 2015, four of the 5 top global brands lead with platform-based business model.  The image below demonstrates the incredibly impressive reach of Salesforce’s achievements. 

And the the blurring of the digital and physical world platforms are coming.  Just contemplate for a moment the difference in the massive and vertically integrated GE of the mid 20th century versus the firm of today, in which GE Digital employees 25K people globally and seeks to connect and service the entire Industrial Internet with it’s Predix platform, which may in turn enable wholesale migration to product-as-a-service business models.

Ecosystems are not a new idea, but we can now envision platforms and enabled ecosystems in radically more interesting and dynamic ways than ever before.   In the future, the ecosystem enables reach, innovation, efficiency, the circular closing of the market and product loops, and even the more inclusive and impactful economic opportunity at hand.

What do Software-as-a-Service, Custom Denim Jeans, and the Hard Drive Industry Have in Common?

.... Surprisingly, quite a bit.  Collectively they help to illustrate both the incredible resource waste and inefficiencies of traditional manufacturing and the possibility of a better path.  And they directly inform this author's knowledge (having run businesses in all three spaces) and desire to effect a more circular economy.

Circular economic models are inherently about business processes that involve physical materials - the idea is to use less virgin raw material, expand maximum utility of goods, and recapture as much as possible for return into the manufacturing process, thereby moving toward a zero waste manufacturing and production cycle.  Indeed, waste becomes an asset, an asset with multiple levels of value.  The circular model is inherently regenerative and restorative of resources, while also offering a path to profitability... long-term, sustainable profitability.  To achieve it requires the following innovations: 

  • product design that targets extended lifetime, as well as ease of reuse, repair, remanufacture, and disassembly
  • manufacturing processes that use minimal and clean energy, and promote materials practices that facilitate recapture and recycling
  • business models focused on product use or performance that are designed not only to maximize profits but also to extend lifetimes, (including both initial and those realized as a result of cascading products into secondary and tertiary markets,) as well as to enable the recapture of goods and materials for reuse in 'new' product manufacturing   

While there are numerous potential models that facilitate the transformation to circular in part or in whole, (see the excellent report by Lindsay Clinton and the team at SustainAbilityModel Behavior: 20 Business Models for Sustainabilityhere), the Product-as-a-Service construct may represent the best opportunity to achieve a fully integrated, global, closed loop process.  In product-as-a-service, physical goods are sold not by the unit, but according to some metric of usage or performance, ownership of the product is not transferred to customers, but maintained by the company, values of both company and consumer are aligned around long-term value, and expectation is pre-established that end-of-lifetime products are not thrown away (or even recycled,) but instead returned to the manufacturer as part of the service.

I've spent the majority of my career building software-as-a-service (SaaS) companies in San Francisco and Silicon Valley.  Indeed, SaaS models have become the de facto standard for software delivery, for several important, if obvious, reasons:

  • streamlining code development and maintenance (each customer uses the same infrastructure, which can be continuously updated behind the scenes);
  • lower cost of goods (no physical product, no shipping, no on site integration services);
  • ongoing and direct customer interaction and touch points (visibility into environments, usage data, ability to provide customer service on the single system);
  • lower operations costs; higher profitability (per customer costs decline as users scale due to shared infrastructure, efficiencies gained from sales and services managed largely over the cloud); 
  • predictable revenue (multi-year, monthly increment subscription contracts v. one time license + services fees);
  • ability for customers to pay as they grow (lower barrier to initial sale, easier and more fluid scaling);  
  • controllable investment vehicle - known cost of customer acquisition (CAC) and lifetime value of customer (LTV) metrics enable companies to dial up/ down marketing engines and make investments, knowing they can return to target profitability margins as needed via the same dials.  

But what does this have to do with circular economy?  SaaS is inherently circular, using zero raw materials and producing zero waste from the outset.   Isn't it therefore irrelevant?  

No.  Indeed, the model directly can serve to directly inform entrepreneurs, intrapreneurs, and investors thinking about the need for, and opportunity in, driving efficiency in the production of manufactured goods that is essential to a sustainable, next era of industrial development.

Here's a look at how the SaaS characteristics outlined above might apply to this new model:

Take-away: 'yes to all' belies opportunity for product-as-a-service opportunities and evaluation.

Take-away: 'yes to all' belies opportunity for product-as-a-service opportunities and evaluation.

The critical enablers of the SaaS model are technology (cloud infrastructure, performance, analytics) and a fundamentally transformed culture that recognizes and rewards customer experience and long-term relationships.  These will be paramount in the analogous move from unit-based product sales to true product-as-a-service business models.  Investments are necessary in infrastructure to enable the 'loops' of circular materials flows, as well as to track physical location of both goods and local service providers and facilitate cascading markets and reverse logistics, and the customer relationship management including new sales, pricing and billing systems.  Think of this as "thinking like a software company," as discussed here in the Harvard Business Review.  

Radical operational and cultural shifts are also paramount, along with education/ reeducation of investors as to the opportunity for improved long-term profitability AND broader stakeholder value that arises from the new model.  Imagine for example, that a hard drive manufacturer was not valued solely on 'units shipped per quarter' (the current metric,) but rather total storage deployed, durability of storage, resale of down generation products into markets desperately in need of technology infrastructure, and the recapture and reuse of the precious rare Earth materials currently dug anew, in full, for every new drive produced.  

Of course, one needn't look far to see exceptional examples of technology-enabled 'everything as a service' already in action... in part.  Uber facilitates 'cars as a service', while Airbnb enables 'homes as a service.'  (Among numerous others.)  But, these are adaptations of the taxi and hotel service offerings; they are innovations on transportation and lodging service industries, despite that the underlying asset is a product (e.g. car.)  Nonetheless, they are illustrative and impressive as indicators of what technology can enable in the creation of exchanges and of max utilization values.  

Also importantly, true product-as-a-service is also here, and has been for quite some time in at least a couple of industries.  Perhaps the longest running is the Rolls Royce 'Power by the Hour' program, more than 50 years old, that 'sells' jet engines-as-a-service based on flight hours.  But what about smaller commercial and consumer goods, those characterized by the fastest make/ waste cycles and greatest volume of non-recyclable materials?  Let's revisit that comment above about custom denim... I lived first hand through the tremendous waste that characterizes denim manufacture - both biological and physical materials used in production, as well as unsold, returned, and discarded product.  For a better way, see Mud Jeans in Europe, which launched recently offering jeans-as-a-service and a wholly circular model.  

It is these latter, comprehensive models to which we need to strive  with manufactured goods, large and small, commercial and consumer.  Fortunately, the value to the bottom line in doing so seems it can be additive and attractive, not something to be begrudgingly considered to appease the social do-gooders.  The technology platforms that enable Uber and the rest of the sharing economy lay important groundwork.  

Next up... the entrepreneur v. intrapreneur opportunity, and facilitating the 'last mile' loops of local product repair, recapture, and the new ecosystems necessary to do so.