Value creation: problem and solution approaches Jan Holmström Industrial Engineering and Management Aalto University School of Science

Waste in energy systems? Are energy systems as effective as they could be? What are the types of waste?

Waste in energy systems: A business perspective Does someone benefit from the waste?

Wasteful business models … Energy: utilities profit from inefficiency and waste of consumers After-sales service: equipment manufacturers profit from breakdowns Construction: designers and contractors profit from bad initial design

… and even criminal business models Warranty fraud: fabricate claims on manufacturers Kick-backs: pay decision-maker part of the profit

Problem: Conflict of interest Drivers of supplier profit Consumption Transactions Design changes Breakdowns customer value ≠ supplier profit

Business logic: Many ways to do business Business logicTerms No service (Disposal)Dispose products when they fail or need to be upgraded Ad hocPay for support as needed WarrantyPay fixed price at purchase LeasePay fixed price for a fixed time; option to buy product Cost-plusPay fixed price based on cost and pre-negotiated margin Performance basedPay based on product’s performance Power by the hourPay for the value in use

Pay for support as needed 8

Pay for value in use 9

Train example: Aligning interests to deliver value ALSTOM and Virgin Trains Background: Virgin Trains buys Pendolino tilting trains. Wanted ALSTOM to deliver the needed number of fully functioning trains to the platform each morning for the next 12 years. Will not pay if there is no train when needed. Instead, wants ALSTOM to pay penalties if not required ‘service availability’. ALSTOM’s response: ‘Design for maintainability’ to reduce penalties and need to invest in trains. Creation of Train Care as a new stakeholder (new subsidiary of ALSTOM) Contracting of suppliers within an explicit ‘design for maintainability’ framework derived from Virgin’s requirements Money initially set-aside for penalty redeployed to fund technology solutions developed through reliability conferences between Train Care, ALSTOM, and suppliers 10

11 Energy example: performance improvement business Energy Service Companies (ESCo) are firms that help businesses and families to trim their energy bills – From $3.6 to $5.1 billion business to in the US from 2006 to 2011; yearly growth about 10 % Business model: – ESCos design a scheme to reduce a building's energy bill, borrow money for equipment, installs and maintains it over a fixed period. Clients pay ESCo's for the savings – ESCos unburden their balance sheets and lower their borrowing costs by securitizing revenues Challenge is to widen market to smaller customers where the transaction costs tend to outweigh the savings – One solution is for municipalities to aggregate many similar properties and “mediate” contracts between small customers and equipment manufacturers, ESCos and banks

Mechanisms to generate value Align interests Performance improvement Life-cycle extension Reuse of designs and processes

Align interests for performance improvement 13 Value creation Time Performance improvement Align interests

Extend lifecycles to accumulate value Value creation Time Align interests Reuse designs and processes Extend life-cycles Performance improvement

15 Pre-industrial business Skill: Unique product and unique process 1. How reduce cost while increasing scale Industrial business Efficiency: Market mass- produced product assortments 3. How reach the customer? 4. How give customer more choice? 2. Make or buy? Standard product + Standard process Order/delivery process Distribution Purchasing Partnership Product assortment Production control Economies of scale: Reuse of designs and processes

Modeling construction and use in the built environment Performance modelling Solution design Use and operations User requirements Technical specification Budget User experience? Technical performance? Actual costs? Construction As- designed

Closing the gaps for performance improvement in built environment Performance modelling Solution design Use and operations User requirements Technical specification Budget User experience Technical performance Actual costs Construction As-built Identify improvement opportunities Evidence of outcome Performance monitoring As- designed

Closing the gaps: Possible energy futures? Guarantee performance of solutions (design and construction companies) Allocate investment where best pay back (property portfolio owners) Mobilize consumers and intelligent devices to deliver demand flexibility (utility companies) Alignment of business logic in multi-firm networks (utility, contractors, designers, service providers) Do you have more ideas?