Business models for material efficiency services: conceptualization and

application

Dr. Minna Halme* (corresponding author), Markku Anttonen*, Dr. Mika Kuisma*, NeaKontoniemi*,

*Helsinki School of Economics, Dept. of Marketing and Management

P.O. Box 1210, 00101 Helsinki, Finland

e-mail:mailto:minna.halme@hse.fi

tel. +358 9 4313 8650 / fax +358 9 4313 8777&

Erja Heino, University of Helsinki, Department of Biological and Environmental Sciences,P.O. Box 27, 00014 Finland

Paper presented at the Greening of the Industry Network Conference, Cardiff, Wales, July 2-5, 2006.

http://www.mirkin.ru/_docs/book0308_033.pdf

Abstract

Despite the abundant research on material flows and the growing recognition of the need to

dematerialize the economy, business enterprises are still not making the best possible use of

the many opportunities for material efficiency improvements. This article proposes one

possible solution: material efficiency services provided by outside suppliers. It also

introduces a conceptual framework for the analysis of different business models for eco-

efficient services and applies the framework to material efficiency services. Four business

models are outlined and their feasibility is studied from an empirical vantage point. In

contrast to much of the previous research, special emphasis is laid on the financial aspects. It

appears that the most promising business models are ‘Material efficiency as additional

service’ and ‘Material flow management service’. Depending on the business model,

prominent material efficiency service providers differ from large companies that offer

multiple products and/or services to smaller, specialized providers. Potential clients (users)

typically lack the resources (expertise, management’s time or initial funds) to conduct

material efficiency improvements themselves. Customers are more likely to use material

efficiency services that relate to support materials or side-streams rather than those that are at

the core of production. Potential client organizations with a strategy of outsourcing support

activities and with experience of outsourcing are more keen to use material efficiency

services.

Key words: eco-efficient services, business models, material efficiency, sustainable services

1. Introduction

There are economic, ecological and political incentives for business enterprises to pursue

material as well as energy savings. More efficient resource use not only reduces the

environmental burden from industrial operations, but often translates into lower procurement

and waste management costs as well (Schmidt-Bleek, 1998, von Weizsäcker, Lovins and

Lovins, 1997, Hinterberger et al., 1997). It is now more than a decade ago that Porter and van

2

der Linde (1995) presented compelling empirical evidence that efficient resource use can be a

major competitive advantage for an enterprise. By now there is an abundance of research on

material flows and ways to dematerialize the economy (Bartelmus, 2003, Ayres and van den

Bergh, 2005, Bringezu et al., 2004). From an ecological point of view, inefficient use of

materials or energy causes pollution, destroys ecosystems and depletes natural resources.

The imperative of saving natural resources and minimizing pollution by using them more

efficiently in industrial production is acknowledged at both national and international levels.

Several political measures have been planned and introduced to minimize environmental

harm by steering manufacturing and other economic activity. For instance, the European

Union and the OECD are aiming to decouple economic growth and the use of natural

resources (OECD, 2002, European Union, 2002). The United Nations has also joined the

quest for more efficient use of natural resources (United Nations, 2002).

Business enterprises, however, are still not using their resource saving potential to the full.

Why is that? Firstly, quite a few enterprises lack the expertise to recognize other than the

most obvious opportunities for material or energy saving. This is especially true for energy

and support materials that do not lie in the organization’s area of core competence. Negligent

use of resources is frequently aggravated by the fact that in most firms, resource efficiency is

not a high priority since constant improvements in extraction techniques have made resources

ever more inexpensive. Secondly, even if enterprises do recognize opportunities for material

or energy efficiency improvements, they do not necessarily act upon them. All too often and

all too easily, there is a tendency not to go into any improvements that would require

investment – even with relatively short payback periods – or that would add to the workload

of management or staff (Halme et al., 2005, Kontoniemi, 2005).

This situation opens up business opportunities for various service providers offering material

or energy efficiency services. The basic idea is that the service provider takes over the

efficiency improvement, and that compensation to the provider is tied to the cost savings

achieved from that improvement. As distinct from other types of eco-efficient services, this is

usually called a result-oriented service. Compared to product-based or use-oriented services,

for example, result-oriented services arguably hold the greatest promise in terms of eco-

efficiency (Tukker, 2004).

Result-oriented services, however, are relatively unconventional form of business and they

are therefore not necessarily readily accepted in the market. Result-oriented services focus on

fulfilling customers’ needs, providing lit or warm space, for example (Roy, 2000, Hockerts,

1999). They can include various forms of contracting, such as energy contracting, facility

management, waste minimization services (Heiskanen and Jalas, 2003, Vine, 2005) or

chemical management services (CSP, 2004, OECD, 2004, Kortman et al., 2005). In essence,

the aim of result-oriented services is to ”sell functional results”. This not only breaks with

traditional economic thinking, but in some instances also creates difficulties with regard to

some financial stipulations, as will be discussed later in this article (Bertoldi et al., 2005,

Heiskanen and Jalas, 2003, Vine, 2005).

Eco-efficient products and services, which can help significantly to reduce the use of natural

resources while still meeting people’s needs, have attracted a lot of research and led to

numerous innovations since the launch of the concept in the mid-1990s. However, despite the

abundance of innovation and ideas, only few eco-efficient products and services have made

their way to the marketplace (Tukker, 2004). One of the reasons for the marginal market

penetration of eco-efficient services is the slow rate of change in institutions and in ways of

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thinking. However, there is also a lack of systematic analysis of the business perspective; the

main focus has been firmly on the technical design of eco-efficient services (Bleischwitz,

2004). The shortcomings in understanding the business perspective around eco-efficient

services became apparent a couple of years ago. It was widely recognized that one of the

reasons for the failure of what seemed to be sound eco-service concepts was the lack of

attention paid to the market viability of such services. Hence the term ‘business model’ has

proliferated in the discussion on eco-efficient or sustainable services (Mont and Jakobsson,

2004, Tukker, 2004).

However, while the business model terminology has now been widely adopted by those

promoting and researching sustainable services, it is still very rarely that any explanation is

offered as to what exactly it means (Tukker and van Halen, 2003); sometimes it is understood

simply as a revenue model (Vercalsteren and Gerken, 2004) or in terms of flowcharts

portraying ‘service logistics’ (Tempelman, 2004). This is not surprising because there is no

established or comprehensive definition of the term ‘business model’ (Timmers, 1999).

However, if we are to gain a better understanding of the business opportunities of eco-

efficient services, then some kind of conceptualization or framework for business models is

called for.

In this article we propose a conceptual framework that has its roots in the work of Normann

and Ramirez (1994), Räsänen (2001) and Magretta (2002). The proposed business model

framework allows us to analyse the competitive advantage of the services, the customer

benefits, the resources and capabilities of the services providers, and the financing

arrangement. After presenting the framework, we apply it to the material efficiency services

offered by outside service providers to client organizations. The actual material efficiency

improvements made by individual companies within their own facilities thus fall outside the

scope of our study. Likewise, we exclude services targeted for waste that has already

accumulated

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. The feasibility of these business models will also be assessed. The article ends

with a brief review of the different means of promoting material efficiency in industry.

2. The data and research method

The empirical data consist of material collected in 61 thematic interviews and 3 focus group

discussions organized in 2004 and 2005. We were interested to look into opportunities for

material efficiency services in the paper and food industries, and most interviewees therefore

represented these branches. In order to gain a better understanding of the potential demand

and supply of material efficiency services, as well as the necessary financial and regulatory

mechanisms, we interviewed representatives of four finance institutions, two waste

management companies, the country’s largest retail chain, four ESCOs (energy service

companies), a seller of chemical products, a manufacturer of pine oil based industrial

washing chemicals as well as environmental policy makers and regulators (see Appendix 1

for a more detailed description of the interviewees).

In the paper industry we set out to explore the interest in and obstacles to using material

saving services by interviewing representatives of ten different units at four corporations. In

1

Reducing material use (by improving efficiency) will reduce the need of waste treatment as well as transportation of materials in the

beginning and end of the life cycle. The latter also means less use of energy and vehicle emissions.

4

the food industry we focused on three companies: a meat processing company, a coffee

roaster and a dairy firm. In addition to personal interviews, we organized three focus group

discussions in order to elaborate the design, the conditions of interest and the potential

opportunities for the use of material saving services. It soon became clear that it would make

sense to focus on specific cases, because production processes and thereby the material

efficiency instances in the food industry involve more variation than in the paper industry.

The food industry cases were concerned with opportunities to: (1) reduce grease waste in

food production, (2) reduce gut waste in sausage production, (3) prevent harmful coffee

packaging waste (aluminium laminate) and (4) prevent packaging waste by introducing

reusable milk packaging (Kontoniemi, 2004, Halme et. al., 2005).

Additional data were also sought from archival material on energy services and chemical

management services from the United States and Europe. Moreover, data were obtained in

the form of feedback from the research project’s final seminar, which was attended by 40

industry representatives.

3. Business models: the framework and its application to material

efficiency services

The discussion around business models for eco-efficient services is still largely unstructured

and would certainly benefit from a more systematic approach. This would make it easier to

establish why some models are successful in the market and others are not. As mentioned

above, the whole idea of ‘business model’ is quite commonsensical and it is easy to overlook

the need for structuration. In order to provide a more solid foundation for systematic

discussion about business models, we propose here a simple framework which still captures

most of the relevant aspects that determine the viability of a service concept in the market.

The framework consists of four questions for probing the market viability of a service.

§ What benefits can users or customers derive from the service (compared to more

traditional ways and means of fulfilling their needs) – added value to the customer;

§ What kinds of competitive advantage does the sustainable service offer – the strength

of the service in relation to competitive alternatives;

§ What capabilities and other resources does the provider or the network of providers

have; and

§ How is the service financed (formation of the income flow)?

In this section we outline four business models for material efficiency services:

§ The MASCO model

§ Material efficiency as additional service

§ Material flow management service

§ Material consultancy service

One can question whether the four business models proposed here are genuinely separate

models or whether indeed some of them are variations of the same model. The logic here is

that when even one of the above factors (customer benefit, competitive advantage,

capabilities or finance arrangements) is different, the focal business is different from that in

the other models.

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3.1. The MASCO model

This is a business model that follows the ESCO concept (energy service company) as applied

in the energy field. An enterprise specialized in material efficiency (MASCO, material

service company) makes the material saving investment in the customer company and is

compensated on the basis of the cost savings achieved.

A MASCO takes charge of the whole material efficiency project within the customer

company. The service relationship often begins with a materials audit at the customer’s

premises. However, the customer may also bring in a MASCO to implement a material

savings investment that it already has in mind, and in this case there is no need for an audit.

In other words, the customer may specify the tasks it wants the service provider to carry out

on its behalf. A MASCO project may comprise all or some of the following elements:

§ Site survey and preliminary evaluation;

§ Identification of possible material saving and efficiency improving actions;

§ Assessment of material and cost savings;

§ Acquisition of project financing;

§ Engineering, project design and specifications;

§ Procurement and installation of equipment;

§ Project management, commissioning and acceptance;

§ Final design and construction;

§ Operation and maintenance for the contract period and

§ Measurement and verification of the savings results.

The MASCO will probably subcontract some or most of these tasks. In theory it could do

everything itself, depending on its qualifications, but in practice it unlikely that MASCOs

will deliver all services in-house.

The customer benefit is that no financial or personnel resources are tied to the investment and

project planning. The costs of the project will be covered by the savings achieved. The added

value results from the tailored material efficiency solution and the improved production

process. In a MASCO project, the income flow consists of the annual service fee, which is

tied to the savings achieved with the help of the investment. When the service period ends, all

savings will benefit the client company. The challenge for the MASCO is that it must be able

accurately to assess the amount of future savings in advance and, furthermore, carry out the

project in such a way that the projected savings actually materialize.

The competitive advantage comes from the financing model in which the customer company

only pays for actual results. Compared to the traditional engineering or consulting business

model in which the customer pays for hours worked, the MASCO model is more attractive

for the customer. In addition, if a MASCO specializes in certain techniques or technologies,

that has the potential to add to the cost efficiency of the business. In our food industry study,

the respondents felt that one of the competitive advantages is that the same party is

responsible for financing, implementation and maintenance. In this situation it is more likely

that the investment (equipment) functions according to plan.

What competencies and capabilities does a MASCO need? Its capabilities should include

management and implementation of the basic functions of a material efficiency project. On

the one hand, this means finding the best suppliers for various project parts and phases.

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Unlike energy services, materials and related technologies differ considerably between

industries and therefore it is likely that material efficiency companies would specialize in

certain branches of industry, or even in certain technologies or production lines within an

industry. Another, often more challenging task is to secure the necessary financing. Judging

by earlier ESCO experiences, this is likely to be a stumbling block for small MASCOs

offering only material efficiency services. A MASCO should also have the ability to find

customers and projects where a material efficiency investment can yield profits for both

partners. For the time being this is not easy since potential customers are not yet familiar with

the service.

To give an example,the first MASCO project in Finland was conducted in 2004 at the Tako

Board mill in Tampere between M-real Ltd., a pulp and paper company and Inesco, an

ESCO. As a result of this project, the production process at the mill was streamlined and

simplified, more fibre was recovered from the effluent flow for reuse as a raw material for

board, waste management costs were cut and even the quality of the product was improved.

The total costs of the MASCO project were approximately one million euros, the payback

time was 18 months (Halme et al., 2005, Viljakainen, 2004).

3.2. Material efficiency as additional service

Some companies can offer material saving services in addition to their main service;

examples include waste management firms, maintenance companies and equipment

providers. This business model is grounded in the same premise as the model above: the

provider takes charge of the material efficiency investment from financing to implementation

throughout the investment period. The competitive advantage and the provider’s competence,

however, are composed differently.

With respect to the competitive advantage, the service provider already has a relationship

with the customer and therefore has a thorough knowledge of the customer’s operations, or at

least parts of them (e.g. waste management, equipment or machinery). This means that the

provider is often in the position to recognize opportunities for material savings. Customer

benefit, then, shares some features in common with the MASCO model. The client does not

need to tie up any resources in the investment in production efficiency. An additional benefit

is that the client does not have to negotiate with new service providers. It emerged clearly in

the interviews that clients prefer familiar providers for this kind of service. Transaction costs

are lower in situations where the business partners know and trust each other. Project

administration is also likely to be more efficient.

The income flow is formed in the same way as in the MASCO concept. The only difference is

that the customer simultaneously pays the service provider for a basic service (e.g.

maintenance, waste management) according to the traditional model.

The competence component is also different from the MASCO model. In this concept, the

service company can often take charge of a larger part of the project itself, which means it

needs fewer subcontractors. For instance, a waste management company that is familiar with

the customer’s processes will know how much waste is accumulated in this processes, so it

will probably also be able plan and possibly implement process improvements. However

there still remains the challenge of providing the necessary funding. Equipment providers

may be an exception here: because of the nature of their core business (sales of industrial

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equipment and machinery), they have more experience of offering financial arrangements for

customers.

The growing interest in outsourcing non-core functions will probably lead to an increasing

number of business partnerships. Already many major production units at industrial facilities

have personnel who are employed by cleaning, waste management and technical service

companies. This is a particularly useful model in situations where the service provider and

the client company are in a development-oriented partnership.

Material efficiency services offer great new business potential for waste management

companies. The trend and commitment in modern society to reducing waste volumes means

that there is no growth in sight for traditional waste treatment businesses, and it is crucial

therefore that waste management companies find new business areas. However, starting up a

business that in the short term appears deliberately to try and reduce the volume of current

waste treatment business is a major challenge for the management logics of these companies

(Phillips et al., 1998, Ligon and Votta, 2001). The trend, however, is inevitable. The question

is not whether, but when material efficiency services will be reality. From a competition point

of view the key is who recognizes this first and who has the skills and the resources to

develop material efficiency services (or ‘resource management services’), thereby building

competitive advantage for themselves.

3.3. Management service for material flows

The third business model, ‘management service for material flows’, is distinctively different

from the two previous ones, and it has also more practical applications – albeit mainly in the

category of chemical materials. In this model, a service provider takes over the management

of a certain materials group, e.g. chemicals. In other words, its business is not based on a one-

off material saving investment, but on a long-term partnership with the customer. This kind

of service will typically cover ‘support materials’ in which the client organization does not

have strong expertise. There are many instances where a professional service provider can be

more effective in the management of support materials.The model can be applied not only to

chemicals, but other material groups as well. Resource Management (EPA, 2006, Ligon &

Votta, 2001, Ligon, Mishra & Votta 2000) is based on a similar idea: in this concept the aim

is to align the relationship between service provider and the customer in a way that they both

have incentives to move from traditional hauling and disposal contracts towards increased

prevention and to decouple service providers’ income from the quantity of the handled waste

(Ligon & Votta, 2001, OECD, 2004).

The customer benefit results from a more professional operator taking control of part of the

production process which is not core business for the client organization. For instance,

chemicals are crucial to the operation of air carriers and other transport companies, but they

are not an immediate part of their production and therefore not core business. The service

provider can take over a more limited or extensive set of responsibilities: buying the

chemicals, handling them throughout the production process, storing, and reporting together

with environmental and health and safety responsibilities (Jakl et al., 2004). In the most

extensive service, the ‘shared savings relationship’, the service provider may even participate

in production planning (Stoughton et al., 2003, Bierma and Waterstraat, 2000, Reiskin et al.,

2000).

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The conceptual roots of material flow management lie in the broader concept of performance-

based contracting, within which the service provider offers efficiency services and gains

revenues from the cost savings generated by optimized processes and reduced material

consumption and waste (Ligon, Mishra & Votta, 2000). The customer company pays for the

performance, not for the chemicals purchased or waste accumulated. Cost savings are the

basis of the income flow to the service provider. In chemicals management, savings accrue

because the cost of chemicals consists not only of their purchase price, but there are also

various other expenses related to different parts of the chemicals life cycle, such as handling,

storage and waste treatment. It has been estimated that for every dollar spent on purchasing

chemicals, an extra one to ten dollars has to be spent on these additional "hidden" costs (CSP,

2006, Oldham & Votta, 2003).

Competitive advantage results from a more efficient organization of the production process.

Chemicals management services can help to increase process efficiency by combining orders,

replacing more expensive chemicals with cheaper alternatives, and streamlining internal

logistics. This is possible because the service provider has more competence in the material

(e.g. chemicals) and the processing of that material. Corbett and Decroix (2001) emphasize

that long-term partnerships usually offer the greatest benefits to the service provider and user

(see also Ligon & Votta, 2001). Developing and maintaining such relationships requires

particular capabilities on the part of the the service provider, especially when it has multiple

competing customers in the same branch of industry (Corbett and Decroix, 2001).

3.4. The material efficiency consultancy model

The business models described above are suited to situations where considerable savings can

be expected, and where for financial or other reasons it makes sense to contract out the

management of the efficiency improvements to a service provider. On the other hand, there

are many instances where an ordinary consultancy service paid by the hour is a more

appropriate solution. If no substantial savings are anticipated, but there are other reasons (e.g.

regulatory pressures or image benefits) for the firm to undertake a material efficiency

improvement, and its own personnel are not in the position to do the job, material efficiency

consultancy may be a better option. Even if savings are anticipated, the customer firm may

prefer to pay for the service in the traditional way. For instance, the paper industry companies

in our sample were interested in material audits conducted by consultancy firms. However,

since paper industry companies have extensive technical expertise in-house and they tend to

have good solidity, they prefer to conduct and finance the project themselves. Since material

efficiency consultancy is based on the ordinary business logic, this model is not discussed in

more detail here.

Table 1. Summary of business models for material efficiency services (the consultancy model

is not included because it represents ordinary consultancy business).

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MASCO

Material efficiency as

additional service

Management service for

material flows

How does

the customer

benefit from

the service?

Does not tie up client’s

funds or [operational]

resources (e.g. time of

personnel)

Does not tie up client’s

funds or [operational]

resources

Outsourcing non-core

operations to a specialist

firm

What is the

competitive

advantage of

the service?

Financing model:

customer pays only for

results; cost efficiency

Existing contact

between provider and

customer: trust and low

transaction costs

More efficient

organization of

operations

What

capabilities

does the

service

provider

have?

Arranging financing,

finding suitable know-

how (subcontractors),

finding customers on a

regular basis

Knowledge of client’s

processes or part of

them, e.g. waste

management or

maintenance of

machinery

Profound knowledge of a

material/s and its

processing

How is the

service

financed

(income

flow)?

From the savings

gained from the material

efficiency investment

From the savings

gained from the

investment, but client

simultaneously pays

fees for other services

Charges are based on

results instead of paying

for material amounts

What kind of

instances is

the business

model suited

for?

Large, one-off projects

Material efficiency

improvements that

complement the

provider’s service

(equipment provider,

waste mgt company,

maintenance provider)

Long-term strategic

partnerships, e.g.

chemicals management

service

4. Feasibility of material efficiency services

The next question we need to address is the practical feasibility of these models. We begin by

looking at questions of financing in material efficiency services and then turn our attention to

the instances to which the various business models are best suited.

4.1. Financing challenges

The financing challenges related to material efficiency depend on the business model. In the

MASCO and ‘material saving as additional service’ models, the [main] challenge is usually

related to finding the necessary initial funding, because the model involves a substantial early

investment. The ‘management service for material flows’ model, on the other hand, does not

involve any up-front investment. The financial challenges centre around determining the

service company’s compensation.

Finance questions in investment-based material efficiency services

To begin with the financing of investment-based material saving services, we can draw some

inferences from the energy service business where there are three broad financing options:

the energy efficiency project is funded by the ESCO, by the customer or by a third party. If

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these funding options are applied to material saving agreements, the financing options could

be as follows (cf. Bertoldi et al., 2005).

In MASCO financing, the investment would be financed by the MASCO’s owninternal funds.

Lack of own funds would limit the MASCO’s capability to implement projects on a

continuous basis. The second alternative is customer financing, backed by a material savings

guarantee provided by the MASCO. Third-party financing refers solely to debt financing

from a third party, such as a finance institution. The finance institution may either assume the

rights to the material savings or it may take a security interest in the project equipment. The

money is borrowed either by the MASCO or by the client. In case the customer takes out a

loan from a finance institution, it is backed by a (material) savings guarantee by the MASCO.

The purpose of the savings guarantee is to demonstrate to the bank that the project for which

the customer is taking out the loan will generate savings that cover the debt repayment. In

other words the guarantee trims the bank’s perception of risk, which in turn will have

implications for the interest rates. The ‘cost of borrowing’ is very much influenced by the

size and credit history of the borrower. Small and/or undercapitalized MASCOs that cannot

borrow significant amounts of money [from the financial market] cannot finance material

efficiency investments (cf. Bertoldi et al., 2005, Halme et al., 2005, Parviainen, 2004).

The two major performance contracting models used in energy service contracts are

guaranteed savings and shared savings (NAESCO, 2006). To continue with the energy field

analogy, under a shared savings contract the cost savings are split for a pre-determined length

of time. In shared savings arrangement a MASCO would assume responsibility for financing,

either financing the investment with its own funds or by taking out a loan. According to

Bertoldi et al. (2005) the shared savings concept is a good introductory model in markets

where energy (or material) saving services are still at the early stages of development because

customers assume no financial risk. However, this model does tend to create barriers for

small companies; it could be expected that small MASCOs implementing projects based on

shared savings might rapidly become too highly leveraged and unable to contract further

debts for subsequent projects (Bertoldi et al., 2005).

A guaranteed savings contract is a scheme where the MASCO guarantees a certain level of

material savings and in this way shields the customer from any performance risk. It arranges

the necessary funding, but technically speaking customers are financed directly by a bank or

financing institution; they repay the loan and the credit risk remains with the lender (Bertoldi

et al., 2005). The guaranteed savings scheme has been applied in energy saving contracts. In

the United States, for instance, 90 percent of ESCO projects are financed under a guaranteed

savings arrangement (Hansen, 2002). However the guaranteed savings model is usually

considered less appropriate for markets where ESCO (or MASCO) business is newly

developing. If the customer’s own funds are tied to the investment, many will find the service

less attractive, and consequently the market penetration of ESCO (or MASCO) business will

probably be slower (Parviainen, 2004). Guaranteed savings contracting is probably a viable

solution only in countries with an established banking structure, where there is high

familiarity with project financing, and where there is sufficient technical expertise, even

within the banking sector, to understand energy efficiency (or material efficiency) projects

(Vine, 2005, Bertoldi et al., 2005).

Finance questions in the management service for material flows model

In the management service for material flows, model, financing is a less complicated issue,

but nonetheless challenging enough especially in the most extensive service relationships. To

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take chemicals management as an example, service use usually begins with simple additional

services such as concentrating the procurement or provision of environmental data for

compliance and reporting. In limited chemical management programmes, the fee structure

usually includes a dollar or euro-per-kilo fee plus services and management fees (Bierma and

Waterstraat, 2000).

In the most advanced chemical management service (CMS), a shared savings relationship, the

provider and customer align their financial interests to reduce the overall chemical volume. In

this model the chemical user no longer buys the chemicals, i.e. the payment to the supplier is

not tied to the chemical volume. Instead, the supplier receives a fee in exchange for meeting

certain performance expectations. Within a shared savings business model there are different

ways of determining the compensation: fixed fees, unit pricing and gainsharing. Under a fixed

fee structure, suppliers are typically paid a fixed monthly fee, against which the supplier

agrees to meet certain performance expectations negotiated for the plant. The monthly fee is

usually determined by historical chemical costs. The supplier can increase its profits by

decreasing chemical volumes. Ultimately, some of these savings must be shared with the

chemical user so that both parties have an incentive to pursue cost reductions (Bierma and

Waterstraat, 1999 & 2000).

A unit price is a fee paid to the service provider for every unit of product produced by the

chemical user. For example, the supplier might be paid five euros for each car or washing

machine produced by the plant. If a gainsharing agreement is applied, the cost savings will be

shared between the service provider and the user. Should a supplier’s idea or innovation

generate savings for the buyer, those savings are divided between both parties. This

strengthens the alignment of the buyer’s and supplier’s financial interests. Because

gainsharing can be extended to any savings, including those unrelated to chemicals, it

increases the potential benefits of the service relationship. It is typical of this arrangement

that if financial losses accrue, they too should be divided between the service provider and

user (CPS, 2004).

4.2. The business models with the greatest potential

At the time of writing, the idea of material efficiency services is still very much in its infancy.

At this early stage, we believe that the most viable business models are ‘material efficiency as

additional service’ and ‘management service for material flows’. The former requires an

initial investment – usually a considerable one – and the service provider should be able to

arrange the necessary financing. Reliability and credibility in the eyes of financing

institutions is therefore crucial to whole service concept. Companies that will probably be

seen as reliable include equipment providers, waste management companies (some of which

already call themselves environmental service companies) or ESCOs with good solidity and a

track record in energy services (upper right hand corner in Figure 1). Start-up MASCOs, on

the other hand, will probably have difficulties as long as material efficiency services remain

unknown among financing institutions (lower left hand corner in Figure 1) (Halme et al.,

2005, cf. Vine, 2005, Bertoldi et al., 2005). If these services become better known in the

future, it is possible that specialized MASCOs will enter the market as well. Figure 1

describes the propensity of various types of enterprises to offer investment-based material

efficiency services.

Figure 1

12

Insert Figure 1 here. Likelihood of different types of enterprise to offer investment-based

materials efficiency services. Dark shade indicates higher likelihood.

Our empirical evidence about customer preferences indicates that there are certain

preconditions for investment-based material efficiency services. One factor that needs to be

taken into account is that materials and technologies differ considerably between different

industries. For instance, in the paper industry material efficiency can be improved by

recovering raw material for reuse in the process, whereas in the food industry this is not

possible for reasons of hygiene. The implication is that some industries may lend themselves

more readily to investment-based material efficiency services. Namely, one of the

prerequisites for the economic viability of such services is that the investment is technically

easy enough to conduct with relatively little variation across multiple facilities. This is

preferable for at least two reasons. Firstly, excessive resources should not be devoted to

planning the investment in order to keep the costs manageable. Perhaps more importantly, the

technology should be known and the solutions reliable so that the service provider (MASCO)

can accurately assess the savings and not run the risk of negative returns.

Secondly, the willingness of potential client companies to use the service appears to depend

on their size and solidity. For example, most of the paper industry companies interviewed

were large corporations with a solid financial situation and strong in-house engineering

expertise. Except for material audits, they did not feel there was a need for efficiency

services. The food industry representatives, on the other hand, showed a keen interest in the

whole palette of a MASCO’s services. However, despite these differences, the empirical data

allows us to identify some general conditions under which the MASCO model and the

‘material efficiency as additional service‘ model appears to be most suitable (Halme et al.,

2005):

§ The potential for economic savings from the material efficiency investment is big

enough

§ The investment is so big that the customer company feels that planning and

implementation is too difficult or time-consuming

§ The payback period is more than three years

§ The project focuses on a sidestream of production rather than on the customer’s core

business

If there is only minor potential for economic savings, and if there is no other incentive such

as regulatory pressure or an image benefit, the reward will appear too insignificant for client

companies to engage in a project. Another point mentioned by the interviewees in favour of

using the services of a MASCO was the extent of the investment: if it is so big that the client

considers planning and implementation too complicated or time-consuming, then the service

alternative becomes more attractive. Payback time is yet another determinant. Not

surprisingly, the empirical evidence suggests that companies are more willing to use their

own funds when the investment has a short payback period. Three years was typically

considered as the watershed. Finally, organizations prefer to keep core products or business

lines under their own control. Sidestreams or support materials are more easily trusted to

outsiders. Material efficiency services are particularly suitable for those instances because

even economically profitable investments may be ignored year after year, while funds are

used for core business improvements.

13

As for the management of material flows, that is a service that can be offered for instance by

chemical suppliers who despite being engaged in chemicals production can see a business

opportunity in services aimed at reducing chemicals use. In the United States, approximately

75 percent of CMS providers represent this type (CSP, 2004). Hazardous waste management

companies can also develop new business out of material efficiency services aimed at

reducing the production of hazardous waste. In both types of firms a dramatic change is

needed in ways of thinking because the income flow would no longer be based on the amount

of chemicals sold or waste treated, but on the service that supports customers’ production

processes. One solution is to set up a subsidiary, but some problems may still remain.

According to CSP (2004), subsidiaries are biased to push their own products to service users

even if a competitor’s product were cheaper or more appropriate. This problem is less likely

to emerge if the service is provided by a separate firm operating in a different field than the

service (e.g. AGA Gas of the Linde Gas corporation, a gas company offering CMS. AGA

Gas, 2006), or if the service provider is an engineering firm or consultancy without its own

production. Figure 2 depicts the likelihood of different types of enterprise to offer services for

material flow management.

Figure 2

Insert Figure 2 here. Likelihood of enterprise types to offer services for material flow

management. Dark shade indicates higher likelihood.

There might be a mismatch between the supply and demand side. As indicated above, large

corporations with good solidity and strong in-house expertise are not that keen to use material

efficiency services, whereas smaller or medium-sized enterprises see more benefits in these

services. The study by Mont et al. (2006) on chemical management services, on the other

hand, indicates that CMS providers seek large customers because of economic feasibility.

Consequently, the large potential clients that are preferred by providers tend to have in-house

expertise and/or good solidity

2

, whereas small and medium-sized clients needing these

services are not considered lucrative prospect by providers.

5. Discussion and conclusions

Material efficiency services can produce three kinds of benefits: a reduced environmental

burden, cost savings and new business for environmental service companies. The latter is

particularly important in many Western (European) countries which are seeking to create new

job opportunities in the service sector in order to compensate for the steady decline in

industrial employment. If they are first developed domestically, environmental service

businesses may in time evolve into a new type of industrial expertise for export (Ekins,

2005). Despite its benefits, the business of selling “functional utility” flies very much in the

face of current business thinking, both at the supplier and the user end. Therefore the

alternative business models need to be carefully scrutinized so as to increase knowledge and

awareness about them.

The conceptual framework introduced in this article for purposes of analysing different

business models of eco-efficient services comprises the competitive advantage of these

services, the customer benefits, the resources and capabilities of the service providers, and the

2

The latter is a concern only regarding investment-based services.

14

financing arrangements. Applying this framework, we identified four business models for

result-oriented material efficiency services: the MASCOmodel, the material efficiency as

additional service model and the material flow management service model. In the MASCO

model, an enterprise specializing in material efficiency makes the material saving investment

in the customer company and is compensated according to the savings achieved. The

additional service model is essentially the same, but the service provider and user have an

existing business relationship, typically in the field of maintenance, waste management, or

equipment provision. The provider takes charge of a material efficiency investment from

financing to implementation throughout the investment period. Apart from the fees for the

ordinary service, the provider is compensated on the basis of the cost savings achieved

through the investment. The third model differs from the former two with respect to the

investment. Here the service provider takes over the management of a certain materials

group, such as chemicals. In other words, the customer company outsources the management

of a material flow to a service provider, and the compensation can be tied to an agreed result

measuring the outcomes of the client’s facility, e.g. the number of coated washing machines.

In theory it is also possible for service providers to combine two business models. Namely,

the service provider that takes charge of the management of the material flow could also offer

a financing service for material efficiency investments. However, we did not yet come across

this option in practice.

The benefits that customers can obtain from the services in question are savings in resources,

either time or costs. The competitive advantage of these services relates to the increased

efficiency that is achieved from the handing over of an activity to a professional operator.

Regardless of the business model, enterprises seemed to be more willing to use material

efficiency services for sidestream materials than for core business operations. That said, it

should be emphasized that not all manufacturers necessarily benefit from these services.

Companies with abundant funds of their own and/or in-house expertise in materials efficiency

improvements, may be best off going it alone.

Service providers should possess strong expertise and know-how in the materials concerned

and related technologies. In the case of investment-type services, they must also be capable

of arranging the necessary financing and recruiting a network of cooperators to whom to

subcontract various parts of the investment process. Which firms, then, are most realistically

able to offer material efficiency services? Here we must make a distinction between

investment-based services and those for the management of material flows. Investment-based

services are most likely to be offered by firms that have an existing business relationship with

the client, such as waste management companies. These firms should be viewed by financing

institutions as reliable partners so that they can arrange the necessary funding for the

investment. Secondly, ESCOs can also extend their business to MASCO. If and when the

business becomes more commonplace, it is likely that enterprises will emerge that specialize

exclusively in material efficiency investment projects. For the time being small, specialized

MASCOs do not enjoy sufficient credibility among financiers, and they usually do not have

enough funds of their own to invest in projects on a continuous basis. Material flow

management services are most typical in chemical management. Most of the providers are

subsidiaries of major chemical companies, whereas the remaining one-quarter are smaller

service providers without their own production (CSP, 2004). The former prefer large

customers Mont et al. (2006), whereas the latter group could serve customers that need lower

volumes and a higher diversity of chemicals (CSP, 2004).

15

What is the point of exploring all these options in one study instead of concentrating on one

of them, say chemical management services? By putting all the various material efficiency

services in one picture, we should be able to gain a fuller understandingof the ways and

means of introducing material efficiency to enterprises through external agents. Different

types of customers need different types of services. It goes without saying that co-operation is

more intense and deeper in material flow management services than in investment projects.

The latter are one-off projects and have a fixed end point, whereas in the former case an

employee working for the provider will usually be assigned to work at the client’s site and the

service relationship will run on a continuous basis, i.e. it is not usually projected to finish at a

certain point in time. Sometimes it may be a more attractive option to give one single

efficiency project to an outside provider rather than to outsource the management of an entire

material.

Since the models represent new ways of doing business, there are a number of organizational

and institutional aspects that ought to be taken into account. As for the organizational aspects,

the service provider has to convince its potential customers that the efficiency measures will

be profitable, that it is capable of handling the technological solutions and that it is capable of

managing extensive projects that are (usually) closely interwoven with the customer’s

production or operational process. The client organization, for its part, has to sell the idea of

the innovative service at many organizational levels. Here attitudes, experiences and contacts

between people and organizations are of crucial importance.

What about the future of these services? In spite of the economic and ecological benefits

foreseen, some mechanisms of promotion would certainly boost the demand for these

services and help them move on from the initial stage. These mechanisms can range from

well-designed legislation and regulation to a variety of voluntary measures (Halme et al.,

2005). To list just a few examples, we could mention environmental permits and BAT

reference documents under the EU’s Integrated Pollution Prevention Control (IPPC)

Directive; government grants for material efficiency projects; and the promotion of material

efficiency in public procument and the imposition of environmental taxes on selected

materials (cf. Ekins, 2005).

To name a few other examples, voluntary agreements, when properly designed, have also

proved a useful way to promote both energy and material efficiency (Bressers and de Bruijn,

2005, ten Brink, 2002, Delmas and Terlaak, 2001, Hardgroves and Smith, 2005, Kautto et al.,

2000). Access to data on material use at industrial sites would facilitate efficiency

comparisons between different sectors and encourage lower performers to make

improvements. In Denmark and Finland there are experiements where the public authorities

provide benchmarks by gathering data on raw material use and waste creation at industrial

sites and by making these data publicly available

3

(Danish EPA, 2003, YTV, 2006, Jokinen,

2005).

3

In Denmark, companies with more than 20 employees are obliged to provide annually so called Green Accounts, containing information

about use of raw materials and waste generation, thus providing indirect information about resource efficiency. The objective of Green

Accounts is to enhance the public access to information about the environmental performance of companies, in order to promote a dialogue

about environmental issues and to motivate companies to look at their processes and products and improve their resource efficiency, as well

as motivate them to work systematically for the environment (Danish EPA, 2003). In Finland the waste authority Helsinki Metropolitan

Area Council (YTV) has launched a waste benchmarking system, within which data about amounts of waste in relation to personnel work

years and the share of recovered waste on different sectors is gathered electronically. Data are gathered annually and at the moment the

register contains information of over 400 companies or offices (Jokinen 2005).

16

Environmental Management Systems (EMS) are another common management tool within

industry (Morrow and Rondinelli, 2002, Corporate Risk Management, 2006) that could be

used to promote resource efficiency. The targets that companies set themselves in EMS

usually concentrate on such areas as waste recovery rather than on reducing total material

flows by waste prevention (OECD, 2003, Kuisma et al., 2001). One mechanism is to make

external EMS auditors to pay attention to the resource efficiency perspective and make them

aware of material savings services. The difficulty here is that auditors get paid by the audited

company and there is no legislation for the auditors to lean on.

There are at least two issues that are likely to accelerate the emergence of material efficiency

services: the chemicals directive REACH in Europe and the trend of outsourcing non-core

operations. The findings of this study indicate that organizations with a strategy of

outsourcing support activities and with experiences of outsourcing, are keener and more

likely to use material efficiency services. If the organization has experience of outsourcing

more straightforward functions such as cleaning or catering, it will more readily outsource

more complex activities as well. This experience is needed because even if the materials that

need to be servicized are support materials, they are still usually closely intervowen in

productive operations and their management requires a certain level of professional skills.

Finally, it is important to stress that the approach presented here is only a partial solution to

the sustainable use of materials in the economic cycle. It needs to be coupled with other

measures. The attraction of this solution lies in the fact that it could be aligned with the

economic interests of business enterprises, on which it largely depends whether the intake of

materials in the economy can be reduced.

17

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22

Figure 1.Likelihood of enterprise offering investment-based material efficiency services.

Figure 2. Likelihood of enterprise types to offer services for material flow management

(MFM).

Solidity

High

Low

Specialized

MASCOs

Firms with multiple

product or service offerings

(e.g. waste management

companies, maintenance firms

and equipment providers)

Possible

Most prominent

Possible

(Yet only few companies

like this exist in the market)

Low likelihood

Offering

variety

Firms with no

production of

the material

for which service offered

(e.g. AGA gas)

Chemical producers

Waste management

companies

N/A

Engineering firms

Consultancies

Production

or waste

management

enterprise

Service

enterprise

Low: MFM services

do not compete

with existing business

High: MFM services compete

with existing business

Enterprise

type

Level of internal

competition