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Servicizing:

The Quiet Transition to

Extended Product Responsibility

Allen L. White, Ph.D

Mark Stoughton

Linda Feng

Submitted to:

U.S. Environmental Protection Agency

Office of Solid Waste

May 1999

Servicizing:

The Quiet Transition to Extended ProductResponsibility

Submitted to:

U.S. Environmental Protection AgencyOffice of Solid Waste

Submitted by:

Allen L. White, Ph.D.Mark Stoughton

Linda Feng

May 1999

Servicizing: The Quiet Transition to Extended Product Responsibility

Tellus Institute • iii

AcknowledgmentsWe gratefully acknowledge funding for this project by EPA’s Office of Solid Waste un-der Cooperative Agreement CX-826825-01-0. Special thanks are extended to Clare Lind-say for her guidance and critiques throughout the preparation of this study.

Our case studies would not have been possible without the generous donation of time andinsights of our industry colleagues, including: Jan Agri (AB Electrolux), Don Dorsey(Castrol Industrial North America, Inc.), Lee Eilers (Coro, Inc.), Fernand Kaufmann(Dow Chemical), Leigh Hayes (Radian, Inc.), and Dawn Rittenhouse and Jim Dentzer(DuPont, Inc.). Many thanks also to Janet Ranganathan (World Resources Institute) andBette Fishbein (INFORM) for their valuable comments on an earlier draft of the study.

An earlier version of portions of this report appeared as:

White, Allen and Linda Feng (1998). “Servicizing: The Quiet Transition to EPR,” paperpresented at the OECD Workshop on Extended and Shared Responsibility for Products:Economic Efficiency/Environmental Effectiveness. Washington, DC, 1–3 December.

Any remaining errors of fact or interpretation, of course, are the sole responsibility of theauthors.


Tellus Institute • v

Table of Contents

Executive summary ............................................................... 1

1. Services and the Environment ......................................... 9The growing importance of services 9

Challenges and opportunities for environmental policy 9

Product-Based Services 10

Product-Based Services and the “Functional Economy” 13

The Functional Economy as Green Economy 13

Focus and Approach of This Study 14

2. The Servicizing/EPR Linkage ..........................................19Extended Product Responsibility 19

Manufacturer Responsibility: US and Europe 19Environmental benefits of EPR 20

Servicizing and EPR 21Potential economic incentives from servicizing that drive environmental improvement 21Servicizing does not always generate these incentives 24Surmounting organizational barriers 25

3. Servicizing Drivers, Challenges and OrganizationalResponses.............................................................................27

Drivers and Approaches to Servicizing 27

Internal Challenges and Responses 29Internal challenges 29Firm responses 30

External Barriers and Challenges 32Gaining market acceptance 32Information requirements 32

Implications for EPR 33Transmission of incentives 34Does servicizing “break ground” for EPR? 34Environmental drivers in the market 34

4. Environmental Impacts of Servicizing...........................37Key Concepts of Lifecycle Analysis for Servicizing 37

Service units as a basis for comparison 37

Tellus Institute • vi

Use vs. non-use impacts 39Effects of reclamation activities 39

Reducing Use and Non-Use Impacts Under Servicizing 40Reducing in-use impacts 40Reducing non-use impacts 41Summary 44

Turnover, vintage and use impacts 46

5. Roles for Public Policy ....................................................51The Emergence of Servicized Products 51

Potential Environmental Gains. . . 51

Realizing Environmental Gains is Not Automatic 52

A Role for Government 53Explicit environmental policies 53Taxes 53Documentation 54Convenor 54Research 54

References ............................................................................57

Appendix A: Case Studies...................................................61

FiguresFigure 1: Structural change in the U.S. economy .................................................9

Figure 2: The Functional Economy.....................................................................12

Figure 3: Servicizing of a durable good: product take-back................................22

Figure 4: Servicized PC Product Offering ...........................................................22

Figure 5: Incentives in a traditional sales model versus a service model ...........22

Figure 6: Service and manufacturing: separation to integration .........................31

Figure 7: The product lifecycle............................................................................37

TablesTable 1: Possible reductions in environmental impacts derived from servicizing .4

Table 2: Examples of product-based services....................................................11

Table 3: Examples of Manufacturer Extended ProductResponsibility in the U.S.............................................................................20

Table 4: Summary matrix: Possible reductions in environmental impacts derivedfrom servicizing...........................................................................................45

Table 5: Rough lifecycle impact data for two durable goods ..............................46


Tellus Institute • 1

Executive summary

Services and theenvironmentOver the past generation, the economies ofthe U.S. and other wealthy industrializedstates have undergone significant structuralchanges. Services have attained new promi-nence, and the relative contribution of tradi-tional manufacturing to these economieshave diminished. These changes have cre-ated enormous opportunities for entrepre-neurs and new national wealth on the onehand — and huge social costs attendant tothe decline of traditional industries andchallenges for public policy on the other.

Because the human impact on the environ-ment is intimately linked to economic activ-ity, these changes present both challengeand opportunity for environmental policy.The structural changes producing a serviceand information-led economy is often pre-sented in environmental terms as graduallydivorcing economic growth from materialand energy throughput and environmentalburden. The idea of a functional economy— in which the focus of consumption is notgoods per se, but the services which thosegoods deliver — has been associated withthe idea of eco-efficiency. In a functionaleconomy, commercial and domestic con-sumers buy cleaning services instead ofwashing machines, document services ratherthan photocopiers, and mobility servicesrather than cars.

Systematic analysis of the environmentalimplications of a service and information-led economy is just beginning. It is clearthat the simplest and most optimistic view— a service economy is inherently cleaneconomy — is insufficient and incorrect.Instead, the service economy is better char-acterized as a value-added layer restingupon a material-intensive, industrial econ-omy. All else equal, economic growth inservices may be less environmentally prob-lematic than growth in manufacturing. But

that is not sufficient when society alreadyexceeds environmental limits in a number ofcrucial ways. If services are to produce agreener economy, it will be because theychange the ways in which products aremade, used and disposed of — or becauseservices, in some cases, supplant productsaltogether.

Our focus: product-basedservicesThe idea of services supplanting productshas received significant attention — for ex-ample, the “dematerialization” potential ofinformation technology in reduced traveland transport of physical goods. Clearly,however, all products cannot be demateri-alized— not only does the provision of ba-sic needs (e.g., food, shelter, clothing) re-quire the mobilization of an irreduciblephysical minimum of material and energy,but the information technology which maymake dematerialization possible rests uponan extensive, sophisticated manufacturingand maintenance infrastructure.

This study thus focuses on the environ-mental implications of an emerging class ofproduct-based services, with emphasis onthe business-to-business markets. Product-based services include the familiar — war-rantees, maintenance agreements — as wellas the less familiar — chemical management

If services are to produce a greenereconomy, it will be because they changethe ways in which products are made,used and disposed of — or becauseservices, in some cases, supplant productsaltogether.


services, mobility services, furnishingsmanagement.

What these services have in common is thatfor the consumer, consumption shifts frompurchase and use of a product to purchase ofa service. For manufacturers and serviceproviders responding to — or driving —

these market changes, involvement with theproduct is extended and/or deepened inphases of the product lifecycle. In somecases, formal property rights may change asa result — for example, a manufacturer mayretain ownership of its product through theuse phase, via a leasing arrangement. Evenif this does not happen, a service orientationnecessarily involves a greater involvementwith the product in its use phase than doesthe provision of “product in a box.”

Our term for the emergence of this growingclass of product-based services, which blursthe distinction between manufacturing and

traditional service sector activities, is“servicizing.” In a servicizing environment,the notion of straightforward buying andselling softens and diversifies into a spec-trum of property rights arrangements, in-cluding leasing, pooling, sharing and take-back. Value is increasingly created andmeasured by the function provided, and forthe manufacturer, the product increasinglybecomes a means of delivering this function,rather than an end in itself. To date, this“servicizing” phenomenon has been drivenlargely by business, not environmental, con-cerns. It can be seen as one aspect of a ma-jor shift in how firms think about and ap-proach competitiveness.

Servicizing and extendedproduct responsibilityWhat is the potential for environmentalgains from servicizing and, in particularwhat policy initiatives and governmentalrole might be helpful in realizing thesegains? Can servicizing be a driver towardsextended product responsibility (EPR)?

EPR is the principle that actors along theproduct chain or lifecycle share responsibil-ity for the lifecycle environmental impactsof the whole product system, including up-stream, production and downstream im-pacts. The greater the ability of the actor toinfluence particular environmental impactswithin the product lifecycle, the greater theshare of responsibility for addressing thoseimpacts should be.

Thus, EPR is a principle whose applicationsshould result in lower lifecycle environ-

mental impacts forproducts or productsystems. Servicizingdescribes a businessstrategy which definesand serves a market’sneeds for speed, con-venience, flexibility andother value-added at-tributes by changing theway in which the func-tion embodied in prod-ucts is delivered.

Servicizing:The emergence of product-based serviceswhich blur the distinction betweenmanufacturing and traditional servicesector activities.

Extended Product Responsibility:The principle that actors along the productchain share responsibility for the lifecycleenvironmental impacts of the wholeproduct system. The greater the ability ofan actor to affect the impact, the greaterthe responsibility.

EXTRACTIONPRIMARY

PRODUCTIONMANUFACTURING

WHOLESALE/RETAIL

USE COLLECTION

reuse

remanufacturing

recycling

Transportation

Transportation

Figure ES-1: The product lifecycle. EPR is a lifecycle-based concept.



The link between servicizing and EPR isthat both require manufacturers or serviceproviders to extend their involvement with,and responsibility for, the product to phasesof the lifecycle outside the traditional seller-buyer relationship. If servicizing containswithin it potential environmental benefits, itis because this altered relationship with theproduct drives superior environmental per-formance — in short, because servicizingdrives EPR.

Achieving EPR in a non-regulatory contextmeans that the market must act to align en-vironmental responsibility and incentives toimprove environmental performance withthose actors who have the ability to reducethe lifecycle impacts in question. There arethree means by which environmental re-sponsibility or incentives might be placedupon the manufacturer or service provider:

• when the business arrangement servesto internalize use or disposal costs;

• when the product in question has sig-nificant value at end-of-life;

• when provision of the product is viewedas a cost, rather than a profit, center.

Does servicizing lead toEPR?EPR is a lifecycle-based concept, and it isappropriate to employ a lifecycle frameworkexplicitly in assessing the linkages betweenservicizing and EPR. Further, a focus on theproduct lifecycle or the product system isappropriate because it highlights the abso-lute environmental impacts associated withthe manufacture, use and disposal of a par-ticular product in the economy. If serviciz-ing is to be meaningful as a route to eco-efficiency, it must reduce these absolute im-pacts — not simply create a larger value-added to spread across the same environ-mental burden.

Using a lifecycle framework, the potential,generic means by which use and non-use

environmental impact reductions may beachieved over any product’s lifecycle are setout. The potential for servicizing to achieveeach type of reduction is discussed in termsof the three categories of economic incen-tives. As depicted in Table ES-1 below,servicizing has the potential to create situa-tions in which these economic incentives toEPR arise.

An examination of the experiences of sevenfirms with servicizing, however, shows thatthe simple picture of “economic stimulusand firm response” which our theoretical,lifecycle-based analysis depicts is signifi-cantly more complicated in the real world.These complications are likely to have sig-nificant implications for the ability of servi-cizing to drive EPR:

• Among the case study firms, the rela-tionship between manufacturing andservice provision exists on a spectrumfrom near-total autonomy to near-totalintegration. Autonomous operationsavoid many potential conflicts betweentraditional sales and manufacturing unitson the one hand and service provisionon the other. These conflicts tend toarise when servicizing has the effect ofdecoupling product volume from prof-its. Autonomy is also, however, likely todiminish the possibility that servicizingwill drive environmental gains in prod-uct design and manufacturing methods.

Servicizing has the potential to createsituations in which. . .economic incentivesto EPR arise. . .{but this] simple picture of“economic stimulus and firm response” isconsiderably more complicated in the realworld.


Table 1: Possible reductions in environmental impacts derived from servicizing

Source of impactreductions Conditions to achieve reductions Examples (real and hypothetical)

Via product designUse related environmental costs are internalized, andthese costs may be reduced by better design ofproduct.

A manufacturer provides refrigeration services on a fixed fee basis. Aselectricity costs are a substantial portion of the costs of providing theservice, the manufacturer has incentive to produce a more efficient unit.

Via increased turnoverServicizing drives more rapid turnover of productstock in use combined with progressive efficiencyimprovements in consecutive model years.

A major appliance market becomes servicized under leasing arrange-ments, concurrent with mandated efficiency improvements. Resale ofolder, “post-lease” units is prohibited.

An energy services company (providing heating services at a fee in-dexed to outside temperature) replaces a heating system in a commer-cial building with more energy-efficient/cost-saving equipment.

Use

Im

pac

ts

Via more optimal opera-tion of existing product

(maintenance, training,process efficiency)

• Use-related environmental costs are internalized,and these costs may be reduced by more optimaloperation.

• Where the product is a cost rather than a profitcenter, and more optimal operation extends prod-uct life/reduces product consumed.

A cleaning services provider absorbs the costs of equipment breakdownand consumable supplies, providing incentive to train operators for moreoptimal operation of the machines.

A chemical management services provider is compensated on the basisof service delivered rather than the volume of chemicals sold. Chemicalsbecome a cost rather than a profit center; the provider has incentive toincrease process efficiency in the plant.

Via reductions in numberor volume of productmanufactured

(increased durability,larger service capacity,more efficient utilization)

The product is a cost rather than a profit center, pro-viding incentives for any of the following:

• more durable products

• products of a larger service capacity, via the re-alization of economies of scale

• more efficient utilization of products in use

A manufacturer of commercial laundry equipment offers “launderingservices” to large customers, guaranteeing machine availability and agiven service capacity. The manufacturer thus has an incentive to pro-vide large-capacity, durable machines which reduce maintenance costs.

Via reductions in the vol-ume of materials mobi-lized per unit

(reclamation activities)

The product has economic value at end-of-life, orwhere end-of-life costs are internalized — in eithercase stimulating reclamation activities.

No

n-

Use

Im

pac

ts

Via improved environ-mental performance ofnon-use processes. (esp.disposal impacts; recla-mation activities)

The product has economic value at end-of-life, orwhere end-of-life costs are internalized — in eithercase stimulating reclamation activities.

A manufacturer and provider of desktop computing services guaranteesa two-year upgrade cycle to its customers, taking back obsolete equip-ment and incurring responsibility for its disposal. The provider has an in-centive to treat this equipment as an asset, minimizing disposal costsand maximizing savings from recycling and reuse of viable components.This reduces virgin material employed in the manufacture of “new units.”It also reduces disposal impacts of end-of-life units and may improveenvironmental performance of primary and product manufacturing.



If service units have no linkage withmanufacturing units, there is no readymechanism whereby economic incen-tives arising from service activities canbe transmitted to design and manufac-turing activities

• The practice of lifecycle design is acomplex process requiring close inte-gration across business functions andspecialized decision-support tools. Ab-sent this capability within the firm, eventhe presence of an economic incentivemay not lead to effective practice oflifecycle design. This, in turn, will di-minish the prospects of realizing thepotential environmental gains associ-ated with servicing and, more generally,EPR.

Finally, not every servicizing situation givesrise to the three economic incentives — in-ternalized use or disposal costs, high eco-nomic value in the end-of-life good, or therendering of a product into a cost rather thana profit center.

Experience with servicizing also revealsthat, although servicized product offeringsmay be increasing, market barriers to itssuccessful practice can be significant. Fromthe buyer’s perspective, servicized productstypically demand closer coordination with,and trust in, suppliers, as well as a more so-phisticated understanding of costs than istypical of the conventional seller-buyer re-lationship. Where technological or regula-tory change is rapid, e.g., in telecommuni-cations and electronics, these barriers di-minish relative to the customers’ needs forspecialist services and knowledge whichthey lack or find increasingly difficult tomaintain in-house. Given a relatively stableproduct technology or business environ-ment, e.g., autos, white goods, servicizedproducts seem to have more difficulty gain-ing market acceptance

Roles for governmentThe emergence of product-based services —servicizing — is a phenomenon in whichpublic policy thus far has played little role.However, policy does have a number ofroles to maximize the prospects of the po-tential environmental gains implicit in theemergence of product-based services — andperhaps, in making the servicized productmore attractive in markets where acceptanceis most difficult.

Explicit environmental policiesRegulatory measures can focus the attentionof firms on achieving environmental im-provements under servicizing. If one com-pares Europe to the U.S. from a policystandpoint, it is clear that European initia-tives in the areas of EPR and product policyare both older and more aggressive. Thoughthese policies have received their share ofcriticism, they have undoubtedly focused theattention of firms on providing environ-mentally beneficial end-of-life services.

While the U.S. seems unlikely to pursue theEuropean approach, at least at the federallevel, policies which incorporate the socialcosts of materials extraction and disposalinto the purchase price of products are likelyto have two effects: (1) building furthermarket demand for decoupling ownershipfrom product use; and (2) building demandfor lifecycle management as an explicitcomponent of service offerings. Such poli-cies include, for example:

• Removing virgin material subsidies,explicit and inherent. Any policy thatsubsidizes virgin materials extractionand use to the disadvantage of reuse,remanufacture, and recycle of secon-dary materials tends to add net envi-ronmental burden. More materialthroughput means more extraction, andmore extraction means more emissions.Thus, as a general statement, govern-ment subsidies via below-market con-cessions on public lands for petroleum,minerals and forestry activities works to


the disadvantage of dematerialization.The converse is also true: policieswhich remove economic privilege fromsuch activities support materials recla-mation. In short, subsidies that reducethe cost of making new "stuff" are in-consistent with efforts to steer theeconomy away from goods and towardmore service-oriented modes of enter-prise.

• Remove disposal subsidies. At theother end of the product cycle are dis-posal subsidies. Government policy thatartificially reduces the cost of productdisposal runs counter to extracting envi-ronmental gains from servicizing. Inlessening the cost of outright productdisposal, end-of-life reclamation ac-tivities (recycling, remanufacturing, re-use) are placed at a competitive disad-vantage. End-of-life reclamation activi-ties are a key means by which environ-mental gains can be derived from servi-cizing.

• Driving efficiency improvements is anobvious role for environmental productpolicy when servicizing drives morerapid turnover of a durable good withhigh use-related impacts. If coupled

with tax schemes which encourage thisturnover and policies which incentivizereclamation activities, gains can bemaximized.

TaxesAs we have seen, decoupling ownershipfrom product use is a key driver of servi-cizing. Any tax policy — credit, deductions,accelerated depreciation, for example —that favors commercial or household equip-ment ownership to the disadvantage ofequipment leasing represents an impedimentto servicizing products. In contrast, tax poli-cies that favor retention of ownership of du-rable goods by producers or sellers is sup-portive of servicized arrangements. Thesepolicies give producers the incentive to en-gage in reclamation activities at the end ofproduct life.

DocumentationThis study represents only a start in under-standing the full scope of how servicizing isunfolding and what ramifications it holds forenvironmental benefits. Though rich in in-sights, the cases we evaluated here are fewin number. A valuable government role issupport for more documentation of the kindpresented here. Questions to be addressedinclude: Are there other sectors where theservice transition is observable? Do thegeneralizations that emerge from this analy-sis hold up in these sectors? What are thespecific seller -buyer arrangements — in-cluding the specific financial and contrac-tual arrangements — that will secure the en-vironmental gains achievable under certainforms of servicizing? How can environ-mental metrics, fixed management fees andpricing per unit of service (e.g., per paintedcar, per cleaned circuit board) be mobilizedto realize the potential environmental gainsof servicizing enterprises? Case studies,model contracts, and more quantitative envi-ronmental analyses will inform both policyand private sector decision-making.

ConvenorPotential service providers will benefit fromlearning and emulating other providers. This

Government and policy roles:

Explicit environmental policies(aside from mandated responsibility,these include removal of virgin materialand disposal subsidies, and drivingproduct efficiency improvements.)

Tax policy which favors producer, notcustomer, ownership of durable goods.

Convenor and facilitator

Documentation

Research



is amply demonstrated in the case of chemi-cal management service (CMS) whereworkshops organized by the ChemicalStrategies Partnership have provided valu-able fora for both sellers and buyers in ad-vancing chemical management services.One can envision government playing con-venor of such fora for a number of otherservicizing sectors. Of course, there arelimitations: “first movers” may be reluctantto share strategies aimed at building a strongfoothold among customers in an emergingmarket. Thus, timing and expectations ofsuch initiatives must be carefully managed.

Research“Functionality” is in the eyes of the cus-tomer. This means that the marketing offunctionality must occur with a clear senseof how product users perceive and measurefunctional value. Transforming productowners into non-owner product users isneither easy nor automatic, even when theeconomics are compelling. Even under thebottom-line mindset of most managers, evenequipment leasing may be stigmatized forcultural reasons. In the household sector, itmay be relatively easy to envision the be-havioral changes necessary to transitionfrom washing machine or refrigerator own-ership to washing and cooling services. Butwhat about autos, with their brand equityand prestige factors that accompany owner-ship? And internal to the enterprise, thechanges required to reorient traditionalproduct and sales-driven organizations to aservice-based mentality presents an array ofresearch questions. In this sense governmentcan play a valuable role in defining the op-portunities and limits for building buyer andbusiness acceptance for servicized offerings.

Finally, while we have focused almost ex-clusively in this study on the transformationof manufacturing firms to service-orientedorganizations, the role for new enterprisesformed from the outset as functionality-based businesses should not be overlooked.These are the new breed of car-sharing,computer equipment leasing, home tele-communications, and chemical services

firms which were never producers of mate-rial goods. Nonetheless, their role as aggre-gators, marketers, and middlemen merits theattention of researchers and policymakers.Creating favorable business conditions fortheir formation and success is another vehi-cle for fostering the product-to-service tran-sition already emergent in manufacturingindustries.



1. Services and the Environment

The growing importanceof servicesStructural economic changes in the U.S. andother advanced industrial economies in thepost-war era have been dramatic, particu-larly since 1970. In the U.S. and Europe,manufacturing’s relative position as an eco-nomic lead sector has declined and serviceshave risen to new prominence.

Once called the “tertiary sector,” after theprimary extractive sector and secondarymanufacturing sectors, the service sector isanything but tertiary in the U.S. economy(Figure 1). Narrowly defined, the sector’srelative contribution to U.S.GDP has in-creased by over 200% since 1950. Over thepast decade, manufacturing employment hasshrunk at an average annual rate of 0.3%while service employment has grown at anannual rate of 4.2%. These changes havecreated enormous opportunities for entre-preneurs and new national wealth on the onehand — and huge social costs attendant tothe decline of traditional industries andchallenges for public policy on the other.

Challenges and opportuni-ties for environmentalpolicySociety’s impact on the environment is, ofcourse, intimately linked to economic activ-ity; it is thus of little surprise that this mix-ture of opportunities and challenges is re-flected in the environmental implications ofthis structural transformation:

• From the standpoint of environmentalprotection, any structural change in theeconomy is of keen interest and con-cern. As certain economic activities be-come more prominent, so too do theirenvironmental impacts. The traditional

system of environmental protectionheavily focused on the manufacturingsector must be revisited to reflect thisgrowing dominance of the service sec-tor.

• The opportunities for environmentalgains seem impressive. In very generalterms, the service and information-based economy may be a means to di-vorce economic growth from growth inmaterial and energy throughput and en-vironmental degradation. Measuringand realizing these potential benefits isa major policy challenge.

Figure 1: Structural change in the U.S. economy

0

10

20

30

40

50

60

70

1950 1970 1997

con

trib

uti

on

to

GD

P (

pe

rce

nt)

manufacturing

services-narrow

services-broad

Source: U.S. Bureau of Economic Analysis

In this section, references to services follow the U.S. Bureau ofEconomic Analysis definitions. Services narrowly defined includeeconomic entities and activities such as hotels and lodging;entertainment; auto repair; membership organizations; and personal,business, legal, educational, and health services. Services broadlydefined also include transportation and utilities, wholesale and retailsales, financial services and real estate.


The environmental opportunities presentedby a service transition have been the sourceof much general discussion, but seriousanalysis is just beginning. At the least, it isfair to say that the simplest, most optimisticview — a service economy is a clean econ-omy — is incorrect. As it now stands, aservice economy is better thought of as avalue-added layer resting upon a material-based, industrial economy. All else equal,growth in services may be less environ-mentally problematic than growth in manu-

facturing. But that is not sufficient whensociety already exceeds environmental local,regional or global limits. If services are toproduce a greener economy, it will be be-cause they change the ways in which prod-ucts are made, used and disposed of — orbecause, in some cases, they supplant physi-cal products altogether.

While the latter case may have receivedmore attention — e.g., the “dematerializa-tion” potential of information technologyvia reduced travel and transport of physicalgoods — the case in which services alter theways products are made, employed, anddisposed of is our primary focus. Thus, ex-amine critically the environmental implica-tions of an emerging class of product-basedservices, the potential they may have forachieving environmental benefits, and thepolicy changes which may be required to re-alize these benefits.

Product-Based Services“Traditional” services include economic ac-tivities such as the provision of lodging andentertainment; personal services (e.g., haircare); and legal, business, financial andhealth care services. These services tend to

rest on the provision of labor and expertise,not physical goods. They are typically de-livered by enterprises created at the outsetas service firms and offered at the site of theservice provider. Thus, the infrastructureand goods that supports them typically re-mains in the hands of the service provider,and their purchase involves relatively littlematerial flow. And indeed, growth in theservice sector — and the sustained expan-sion in the economy at large — has been ledby huge growth in information and tele-communications services. These are serviceswhich largely fit the traditional model ofenterprises delivering value with relativelylow material intensity.

Yet, it is increasingly clear that if the tradi-tional model of services was ever an ade-quate approximation, it is certainly nolonger so. With the service sector’s growthhas come increasing complexity and diver-sity. An important category of services —and one that appears increasingly prominent— is quite different from the traditional“pure” form. Driven by efforts to define orserve a market’s need for speed, conven-ience, flexibility, or cost savings, manymanufacturing firms have begun a processof reinvention that shifts their focus awayfrom product manufacture toward servicedelivery; that is, their products function ei-ther as a vehicle or platform for the serviceprovided.

Some of these product-based services arefamiliar, e.g., warrantees, maintenanceagreements on appliances, autos, and officefurniture. Others, such as those depicted inTable 2, are less familiar, more recently ar-rived in the marketplace. Chemical man-agement services (CMS) — essentially,outsourcing of chemical management in anindustrial plant — is a growing example ofproduct-based services. CMS firms promiseuse reductions to their customers, invertingthe traditional supplier-customer relation-ship from one where profits are tied to salesto one where profits are tied to efficiency(Reiskin, White and Johnson, 1998). Xerox— a company built on copier manufacture— now promotes itself as a document serv-ices company, focused on the integration ofdocument reproduction and storage withbusiness systems. And IBM’s belated aban-

Servicizing: the emergence of product-based services which blur the traditionaldistinction between manufacturing andtraditional service sector enterprises.



donment of its “mainframe” culture and re-invention as an “e-business” and “informa-tion solutions” company is perhaps the mostvivid example of this product-to-servicetransformation. But there are many othersthat are less dramatic and still in process,but collectively no less significant (Box 1).

For these traditional manufacturers,reengineering as service providers, one ef-fect is to extend and/or deepen their in-volvement with their product in all phases ofthe product lifecycle, not just its manufac-ture. Formal property rights may change asa result — in product-based services, thetraditional buyer/seller relationship is sof-tening and diversifying into a spectrum ofproperty rights arrangements, includingleasing, pooling, sharing and take-back(James, 1998). For example, a manufacturermay retain ownership of its product throughthe use phase via a leasing arrangement. Buteven if this does not happen, a service ori-entation necessarily involves a greater in-volvement with the product in its use phasethan does provision of the traditional “prod-uct-in-a box.”.

In all of these examples, the seemingly sim-ple question of whether customers are pur-chasing a product or a service becomesblurred. A blend of services with products,and vice-versa, is increasingly commoncommerce and a distinct class of “productservices” is emerging, particularly in thebusiness-to-business markets (Box 2). It isthis transformation— a phenomenon we call“servicizing” — and particularly its envi-ronmental implications that is the focus ofthis report.

Table 2: Examples of product-based services

Service (Sample pro-vider)

Description

Chemical man-agement services

(Castrol IndustrialNorth America)

Manages chemical procurement, delivery, in-spection, inventory, storage, labeling anddisposal for industrial customers. Seeks pro-cess efficiency improvements. Compensationcan be based on cost savings delivered, notvolume sold.

Document serv-ices

(Xerox)

Integrates document storage and reproduc-tion technology — Xerox’s traditional manu-facturing strength — with customer’s busi-ness systems to produce automated, just-in-time, customized document production.

Mobility Services

(Call-a-Car ~Netherlands)

On-demand car rental. A fleet of cars isowned by a membership organization; sub-scribers pay fixed costs and per-kilometer/perhour fees. Cars are reserved “on demand” viaa central reservation point.

Furnishing serv-ices

(Interface;DuPont FlooringSystems)

Interface experimented with an “EvergreenLease” program. Customers leased installedmodular carpet, which Interface undertook tomaintain to a given appearance standard withselective rotation or replacement (with recy-cling) of worn tiles. DuPont, in addition toleasing carpets, also provides a series ofcarpet-related services throughout the car-pet’s lifecycle.

Source: Case studies, Appendix A; Meijkamp, 1994

Box 1: How extensive are the “new services?”

Quantifying the current value of, and growth in, “servicizedproduct offerings” is difficult. Economic accounting for servicesis problematic in any case, and the blurred line between prod-ucts and services which servicizing represents only adds tothe difficulty. Beyond the gross and very aggregate figures de-picting an increasingly service-oriented economy cited above,a growth trend in servicized product offerings does seem clearanecdotally:

• Our case studies (Appendix A) provide evidence that newvarieties of service offerings are available from many in-dustrial sectors whose firms traditionally focused on theprovision of “product in a box.” This is reinforced by thewritings and case-study accounts of a growing literature inthe area of “eco-efficient services” (Stahel, 1997; Axt et al.,1994; Hinterberger et al., 1994)

• Outsourcing in the U.S. economy is a decade-long trend;the fact that firms can and do outsource innumerable serv-ices formerly performed in-house points to the existence ofgrowing offerings among non-traditional service provides,including firms historically defined principally as componentand materials suppliers to manufacturing and service enter-prises.


Figure 2: The Functional Economy

TransactionalEconomy

Functional orService

Economy

Servicizing

Examples:

Buying washers

Buying chemicals

Buying copiers

Buying cars

Examples:

Buying cleaning services

Buying chemical management services

Buying document reproductionservices

Buying “mobility” services

Box 2: What is driving growth in the new services?

The growth in product-based services can be viewed as one manifestation of an economic tran-sition away from fordist (mass and standardized) modes of production towards flexibility andcustomization of product offerings. Attendant to this transformation are significant changes whichhave emerged since the 1970s in the ways U.S. business thinks about creating value and gain-ing competitive advantage (Sibbet, 1997). The fordist focus of management — how to makemore goods more efficiently — has gradually shifted in competitive global markets to includequality and value-added as well. These management models focus on the organization — onideas of continuous organizational learning and agility, along with reengineering, outsourcing,supply chain management, and “virtual” organizations. Knowledge, information, and core com-petencies, rather than physical assets, increasingly define leadership enterprises. Firms are in-creasingly comfortable looking outside themselves for skills and services that are not their stra-tegic focus — and indeed, may be compelled to do so.

Product-based service offerings fit well with this new competitive model in numerous, often inter-related ways: (Several of these are addressed in greater detail in Section 3):

• Cost control. Purchasing a product-based service (e.g., chemical management services)rather than only a product (e.g., chemicals) can be a means of strategic outsourcing, replac-ing services previously performed in house with those provided by a specialist to whom theyare a core competency. Similarly, product leasing rather than purchase can be a means toexternalize the costs of capital expenditures, thereby improving the balance sheet of the en-terprise.

• Need for specialist skills. Rapid change in the information technology underlying businesssystems, increased requirements for integration of these systems, and increasing complexityin the regulatory and business environment in general increasingly require specialist skillswhich most firms find difficult to maintain in-house.

• Product differentiation. Production is increasingly mobile, but effective service delivery re-quires local knowledge and infrastructure. Product-based services thus can be used toachieve successful product differentiation and market advantage, even for manufacturers whoare not the lowest-cost producer.

Finally, environmental regulation in Europe (but not yet in the US) is increasingly fixing responsi-bility for end-of life treatment of the product upon the manufacturer. In various EC countries,packaging, automobiles, white goods, and electronics are, or may soon be, subject to take-backrequirement. These regulations force manufacturers to add end-of-life services to their productofferings, typically implemented through PROs (Producer Responsibility Organizations). In theUS, however, environmental regulations have made firms concerned with the need to controlpotential liabilities, spurring demand for specialist, product-based services in certain areas, suchas chemicals



Product-Based Servicesand the “FunctionalEconomy”Clearly, the service economy is steadilystretching its boundaries. A useful way toview this growth in services is that ofchange from the sale of product to the saleof function or utility. (See Box 3 for onetaxonomy of different types of services.) Ithas been suggested that in today’s market,where mobility and flexibility are of highvalue, what the customer ultimately wants isnot ownership of products, but the utility orfunctions provided by the products. (Friend,1994 & 1996; Pantzar, 1994; Margetta,1997; Popov and DeSimone, 1997): AsHawken (1993) has observed:

“What we want from these products isnot ownership per se, but the servicethe products provide; transportationfrom our car, cold beer from the refrig-erator, news or entertainment from ourtelevision.”

One must be careful not to overstate thiscase. Consumer preference for ownership ofcertain products, especially those withstrong brand signals, is in fact deeply rootedin subjective needs for security, control,prestige and status (See AB Electrolux,Appendix A). But it is certainly true thatthe objective economic worth of products isbased upon the function they deliver. Thisfunctional. or utility-based view of productconsumption, is finding increasing expres-sion in the business-to-business marketswhere functionality and cost-effectiveness— not prestige or status— dominate. Forexample:

• Office equipment customers may wantmaintenance, repair, upgrade, and op-erations assistance along with the hard-ware itself, including computer andcomputer-related hardware and soft-ware.

• Commercial cleaning service firms maywant their equipment customized,maintained, upgraded, and removed as

their needs change week to week andmonth to month.

• Industrial firms may want to extract thevalue of chemicals as cleaners, de-greasers, and metal coaters withoutworry about the procurement, storage,labeling, permitting, and waste disposalassociated with chemical use.

This shift in the manufacturer’s role fromproduct provision to service provider hasbeen called by other authors “functionaliza-tion” or “functional economy” (Stahel 1997;Ayers, 1998) (Figure 2). In this study, wecall it “servicizing” in order to emphasizethat it is a dynamic state of change from apure product model toward a more service-oriented business model. By our definition,both enterprises and products may be in theprocess of servicizing.

The Functional Economyas Green EconomyA functional economy has been equatedwith the idea of a greener, more eco-efficient economy. Stahel (1997) states thisexplicitly. He notes that a functional econ-omy is not only one in which customers areusers of functions and services rather thanconsumers of products, but one that

“. . .optimizes the use (or function) ofgoods and services and thus the man-agement of existing wealth (goods,knowledge, and nature). The economicobjective of the functional economy isto create the highest possible use valuefor the longest possible time while con-suming as few material resources andenergy as possible.”

This idea that “eco-efficiency” — extractingmore value per unit of material input — canarise or be facilitated by a service transitionis increasingly popular. (Popov and DeSi-mone, 1997; Hinterberger et al., 1994). Thisview frequently cites the case of the “servi-cized product” in which the manufacturerretains ownership of the product throughout


its lifecycle, ensuring proper end-of-lifemanagement, and driving increased durabil-ity, remanufacturing, materials recycling,and more efficient utilization of the productstock.

More generally, the potential for eco-efficiency gains from servicizing lie in thecloser alliance between seller and buyer,producer and customer, that is one of the de-fining elements of the servicizing enterprise.This relationship is the vehicle throughwhich information and knowledge flowbetween the two parties, typically in two-way fashion. When a firm’s product be-comes a servant to the solution that its cus-tomer seek rather than an end in itself, thenchanges in the product — in its nature, its

design, its disposition — are far more likely.Where less of a product, or a different prod-uct altogether, is capable of delivering equalor greater value, the firm which has servi-cized will make the indicated changes. Inthis solution-based mindset lies the seeds ofdematerialization. As we see later, the ex-tent to which environmental gains areachieved through such dematerialization de-pend on the nature of the servicized productand the particular set of incentives faced bythe buyer and seller.

Analysis of the relation of product-basedservices to eco-efficiency improvements,however, has largely remained at this level

of generality, and policy discussions areequally general. (James, 1998)

Focus and Approach ofThis StudyAgainst this background of uncertainty,three points are clear:

• The service transition represents an im-portant and ongoing structural changein the U.S. economy. More than simplygrowth in traditional services, this tran-sition has increased the diversity andcomplexity of service offerings, and isbeginning to blur the line between“products” and “services.”

• The services transition presents impor-tant questions to policy-makers. A cru-cial question regarding the “greening”potential of an increasingly service-based economy is how services maybring about changes in the product en-vironmental lifecycle by affecting theirmanufacture, use and disposition.

• Precisely because they are product-based, an emerging class of servicesseems to have particular potential toachieve these changes in the productlifecycle. In “functionalizing” the econ-omy, product-based services have beenargued to promote eco-efficiency.

Thus far, this proposition has been subjectto little detailed analysis. There is a clearneed to examine the environmental implica-tions of these product-based services, thepotential they may have for achieving envi-ronmental benefits, and the policy effortswhich may be required to realize these bene-fits.

This study is an effort to begin such ananalysis, focusing on product-based servicesin the business-to-business markets. To thisend, our approach in this study is as follows:

• Section 2 examines at the linkage be-tween servicizing and extended productresponsibility (EPR), the emerging no-

“In “functionalizing” the economy,product-based services have been arguedto promote eco-efficiency.

Thus far, this proposition has been subjectto little detailed analysis. There is a clearneed to examine the environmentalimplications of these product-basedservices, the potential they may have forachieving environmental benefits, and thepolicy efforts which may be required torealize these benefits.

This study is an effort to begin such ananalysis.



tion that reducing product lifecycle im-pacts is a shared task for all who are in-volved over the product lifecycle. EPRis the principle that the greater the abil-ity of an actor to reduce environmentalimpacts within any phase of the life-cyle, the greater the responsibility to doso.

• Section 3 discusses the drivers, chal-lenges and organizational responses toservicizing, focusing on why firmschose this route and what obstaclesmust be overcome.

• Section 4 turns to a discussion of envi-ronmental impacts of servicizing, usinga simple conceptual lifecycle model toexplore under what circumstances, andby what means, servicized productsmay yield environmental gains.

• Finally, in Section 5, we conclude withsome thoughts on the policy implica-tions of our study: what options areavailable for tapping the potential ofservicizing to deliver environmentalbenefits?

All sections are informed by the set of sevencase studies of servicizing firms that appearin Appendix A.


Box 3: A Taxonomy of Services

ServicesServices

Non-materialServices (e.g., banks,

hair salons)

Material(Product-

Based) Services

DematerializedServices

(substantiallyeliminating the need

for physical product —e.g., centralized

voice mail)Product Function

Services (service provider ownsphysical good — e.g..,

traditional & non-traditional leasing)

Product ExtensionServices

(customer owns physicalgood — e.g., warranties,maintenance agreements,IT integration services)

Scope of thisstudy

At the most elementary level, it is useful to divide services into two major categories — material (i.e.,product-based) and non-material:

A. Non-material servicesNon-material services are delivered via a supporting infrastructure and goods that remain in the hands ofthe service provider. Their value to the customer is totally — or near totally — tied to the information ortechnology embodied in the transaction. Non-material services include health care, hair salons, insuranceand banking – essentially, the whole range of activities normally associated with the tertiary sector of theeconomy. Many, such health, lifestyle, and financial services, rely on relatively little material input. Oth-ers, such as transport and recreation, may be more material-dependent, but still well short of the materialinputs associated with product extension and product utility services described earlier.

Non-material services include as a sub-category dematerialized services. In these cases, technologyhas obviated or drastically reduced the need for products altogether. In other words, the function oncefulfilled by a product is now fulfilled essentially by information. One example is that of centralized voicemail supplanting answering machines (in which the messaging service once provided by a desktop ma-chine is now provided by a combination of remote hardware and information transmission over the phoneline. Compared to desktop answering machines, the hardware requirements are much reduced on a per-user basis.) Another example is the genetically-engineered pest-resistant seed. Here, instead of relianceon physical inputs (pesticides and fungicides) to deliver the desired service (crop protection), genetic in-formation is encoded in the seed itself to defend against insects or disease.

B. Material, or product-based, services,Material, or product-based, services by contrast, use an established, physical product as the vehicle, orplatform, for delivering services related to the product for customers. For example, chemical managementservices center around the use of chemicals in a plant. Network integration services center around com-puter and telecom hardware and software systems. Material services incorporate both product-extensionand product function services. These are the focus of our work, and are described in more detail on thefacing page.



Service taxonomy (cont’d)

B1. Product Extension Services. Product extension services are characterized by customer ownership ofthe physical good, and thus represent only a minimal departure from a traditional, pure sell-buy arrangementwhich places full responsibility for the product in the hands of the buyer. Product extension services enhancethe utility that ownership of the product delivers to the customer. The most familiar versions of these servicesinclude warranties and maintenance agreements.

In the case where the product must integrate into a complex environment, product extension services canmean managing the interface between the product and its work environment, hence maximizing the product’sefficiency as well as effectiveness. The case of Xerox’s document services, where document managementactivities beyond stand-alone copying are integrated within a networked and increasingly digital enterprise, issuch an example. Another is Herman Miller’s Coro commercial furnishings services business; Coro’s post-occupancy services manage moves and inventory in customer’s high-churn office environments. (See Ap-pendix for case studies)

Characteristics likely to make products particularly suited for this type of servicizing include:

• Material difficult to handle and/or requiring regular maintenance. Industrial cleaning and officeequipment are examples of items with frequent maintenance and repair requirements.

• Products requiring extensive networking and/or technological expertise. Information technologyand computer networks demand integration and maintenance that are often more time-consuming andmore costly than the initial purchase of the equipment. In such cases, product providers can often createcompetitive advantage by also providing the integration and maintenance service needs associated withthese products; customers can obtain “one-stop-shopping” solutions.

B2. Product Function Services. In this category of services, ownership of goods resides with the serviceprovider. Customers have the use of the product, but maintenance as well as end-of-life disposition are theresponsibility of the service provider. Thus, the customer gains the function of the product is provided withoutownership. Thus, traditional rental or leasing arrangements fall into this category. Product function servicescan be seen as a temporary flow or transfer of material goods from the provider to the customer (Graedel,1997).

Also in this category are non-traditional leasing arrangements. AB Electrolux, for example, is experimentingwith a “functional sales” concept, in which customers pay a monthly fee for the guaranteed “function” deliv-ered by a product — e.g., professional kitchen equipment. In contrast to a traditional product lease, the ar-rangement is monthly, and the fee is for a guaranteed function rather than a particular piece of equipment.

From the customer’s perspective, products particularly suited to this kind of servicizing include the following:

• Product with lifetime greater than average customer use period. Products such as elevators and of-fice furniture, which often outlive the business or organization that uses them. The Swiss companySchindler AG began to sell “vertical transport” services to take advantage of the longevity of elevators. Itsleasing contracts include maintenance and services, and in 1992 accounted for 70% of Schindler’s reve-nues. (Weizsacker, Lovins and Lovins, 1997)

• Products with low utilization rate and/or heavy infrastructure requirements. Automobiles, for exam-ple, are often inconvenient to own because of cost and/or outright absence of parking space. Traditionalcar rental is a well-known of example of auto servicizing, wherein the customer is a temporary user whoextracts the utility (mobility) value of the product on a temporary basis and is charged on a time and/ordistance basis. Leasing, of course, is a variant on this arrangement. Taking traditional arrangements onestep farther, the emerging “Mobility Services” enterprise provides the customer with the utility of a vehicle“on demand” without being encumbered with vehicle storage, insurance, maintenance, or repair. Serv-ices such as Call-a-Car in the Netherlands and Honda’s Intelligent Community Vehicle System are ex-amples of this newer service concept. Because easy accessibility of vehicles is crucial to customer sat-isfaction, mobility services enterprises require real-time information regarding demand.

• Products characterized by rapid obsolescence. Personal computers, for example, can become ob-solete so quickly that it often discourages consumer investment. For these and similar products, serviceswhere the product supplier will provide periodic upgrades may gain a market advantage. For example,IBM has created a service called SystemCare, which includes an option that allows buyers to upgradetheir computers after 24 months (Narisetti 1997).



2. The Servicizing/EPR Linkage

Extended ProductResponsibilityExtended product responsibility (EPR) isthe principle that actors along the productchain share responsibility for the lifecycleenvironmental impacts of the whole productsystem. The greater the ability of the actorto influence the environmental impacts ofthe product system, the greater the share ofresponsibility for addressing those impactsshould be (PCSD, 1996).

• Consumers, for example, can affect en-vironmental impacts of product systemsin a number of ways: via purchasechoices (i.e., choosing greener or moreefficient products); via maintenance andenvironmentally conscious operation ofdurable goods and appliances (e.g.,proper maintenance of automobiles im-proves fuel efficiency); and via disposal(e.g., recycling to the extent possible).

• Suppliers may have significant abilityto influence the environmental impactsembodied in the materials and compo-nents they provide to product manu-facturers. A supplier may have thechoice, for example, between obtaininghardwood from a sustainably managedforest, or one subject to destructive for-estry practices. Suppliers may applypollution prevention principles to theirown manufacturing operations.

• Product manufacturers are situated toreduce lifecycle environmental impactsof their products through their influenceon product design, material choices,manufacturing processes, and productdelivery (EPA, 1998a). Thus, for manu-facturers, EPR is pollution preventionapplied across the product lifecycle,extending well beyond the factory

gates. Further, it is pollution preventionapplied across business functions; ap-plication of lifecycle approaches inmanufacturing necessarily extends be-yond the EHS department to includeproduct designers and production engi-neers, supply and operations, and prod-uct distribution and support (Stoughtonet al., 1998).

Manufacturer Responsibility:US and EuropeMany of the most commonly cited examplesof manufacturer EPR involve take-back ac-tivities. As the matrix below (Table 3)makes clear, however, manufacturer respon-sibility is not limited to these end-of-life ortake-back activities. What these diverseEPR activities have in common is an exten-sion of responsibility for, and involvementwith, the product beyond historical practice,often into phases of the lifecycle in whichthe manufacturer has traditionally had littleor no involvement. This may involvechanges in formal property rights.

To date in the US, extensions of manufac-turer responsibility are, for the most part,voluntary — albeit often inspired by the les-sons learned in dealing with mandatesabroad or by the desire to forestall mandatesat home. In Europe and elsewhere, take-back and other regulations are assigning re-sponsibility for elements of lifecycle per-

Extended Product Responsibility:the principle that actors along the productchain share responsibility for productlifecycle environmental impacts. Thegreater the ability of an actor to affect theimpact, the greater the responsibility.


formance to actors in the product lifecycle.This mandating of “extended responsibility”has focused largely on end-of-life impactsand has assigned responsibility primarily tomanufacturers. This focus is reflected in theterminology employed — in Europe, EPRstands for “extended producer responsibil-ity.”

Table 3 summarizes categories of EPR ac-tivity by manufacturing firms and providesexamples of specific offerings and pro-grams.

Table 3: Examples of Manufacturer Extended ProductResponsibility in the U.S.

Corporate or Industry-wide Stewardship Programs

Voluntary measures ad-dressing environmentalmanagement systems anddownstream environmentaland safety aspects of prod-uct use (product steward-ship)

• Chemical Manufacturer’s Asso-ciation Responsible Care initia-tive

• User training programs (e.g.,Monsanto) and user site audits(e.g., DuPont)

Take-Back or Buy-Back Programs/Initiatives

Take-back of product, prod-uct components, or packag-ing for reuse, recycling orwaste management.

• Product take-back by Nortel,IBM, and Xerox

• (European auto and electronicsinitiatives)

Leasing Systems

Ownership of (usually dura-ble) materials and productsis retained by the manufac-turer or supplier

• Interface’s carpet leasing pro-gram

• Emergent leasing systems forPCs and other electronicequipment

Lifecycle Management

Approaches to product de-sign and development andmanagement which attemptto minimize lifecycle impactsof products, typically includ-ing working with suppliersand users, and working toincorporate reused or recy-cled materials

• IBM’s Environmentally Con-scious Products Program

• Nortel’s Design for Environ-ment Initiative

• Xerox’s Environmental Leader-ship Program

Partnerships for Recycling/Waste Management

Cooperation among compa-nies in the product chain tocreate common systems forrecycling and waste man-agement.

• Rechargeable Battery Recy-cling Corporation (rechargeablebattery producers)

• Vehicle Recycling Partnership(VRP) (Ford, GM, and Chrys-ler)

Source: Adapted from Extended Product Responsibility: A NewPrinciple for Product-Oriented Pollution Prevention. (Davis andWitt, 1997). For more examples, see case studies, Appendix A.

Environmental benefits of EPRThe environmental benefits deriving fromwidespread application of EPR potentiallyinclude more efficient use of resources,cleaner products and technologies, more ef-ficient manufacturing, reduced environ-mental hazards associated with storage,shipping, handling and disposal, increasedrecycling and recovery, and greener con-sumption (PCSD, 1996).

These benefits arise from the assumption ofresponsibility for lifecycle impact reduc-tions by those in a position to effect suchreductions. The allocation — or internaliza-tion— of responsibility in the product chainshould lead to greater efficiency in the utili-zation of resources across the lifecycle, witha concomitant reduction in waste-relatedenvironmental impacts at any given level ofeconomic activity.

Often this responsibility was previously un-allocated — with manufacturers’ responsi-bility for goods ending at the point of sale,and consumers’ responsibility ending whenthe good is no longer useful. In this case,society bears the externalities representedby waste, pollution, and resource depletionarising across the product lifecycle.

With internalization, the environmental im-pacts associated with process wastes, prod-uct disposal, or in-use impacts will representreal economic costs to actors who have theability to reduce these costs. In this sense,EPR can be thought of as a means of opera-tionalizing the “polluter pays principle” — aconcept well established in Europe. By as-signing responsibility according to the abil-ity of the actor to bring about environmentalimprovements, however, EPR goes beyondthe polluter pays principle. For example,while consumers may be responsible,strictly speaking, for the use-related impactsof their automobiles, under EPR both con-sumers and manufacturers share the burdenfor reducing these impacts — consumers viapurchase decisions and driving habits,manufacturers via vehicle and engine de-sign.

Figure 3 depicts an EPR scheme in whichthe manufacturer accepts (or is assigned) re-sponsibility for (1) costs of breakdown andrepair during an extended warranty period,



and (2) disposal at end of life. Effectively,this means that the manufacturer assumesownership of the good at end of life, achange in typical property rights in whichthe manufacturer’s ownership ends at thepoint of sale. Because repair and disposalcosts are now internalized, the manufacturerhas incentives to reduce these costs by in-creasing product durability, reliability, recy-clability and remanufacturability. (This re-sembles European EPR schemes for durablegoods, where take-back obligations are as-signed. The scheme could apply to automo-biles, replacing the typical warrant associ-ated with auto purchase.

Servicizing and EPRWhat, then, is the relationship betweenservicizing and EPR? Servicizing is a busi-ness strategy which defines and serves amarket’s functional needs for speed, con-venience, flexibility, and other value-addedattributes. EPR is a principle whose appli-cation should result in lower lifecycle envi-ronmental impacts for products or productsystems. The intersection is that both re-quire manufacturers or service providers toextend their involvement with, and respon-sibility for, the product to phases in the life-cycle outside the traditional seller-buyer re-lationship.

If servicizing contains within it potential en-vironmental benefits, it is in large part be-cause this altered relationship with theproduct drives superior environmental per-formance — in short, because servicizingdrives EPR.

But does servicizing always lead to, or in-centivize, EPR? As the following discussionillustrates, there is no simple answer to thisquestion. Rather, the answer seems to bepotentially yes, in certain cases.

Potential economic incentives fromservicizing that drive environmentalimprovementAssuming that actors along the product life-cyle pursue voluntary EPR primarily for

economic reasons, then achieving EPR in anon-regulatory context means that the mar-ket must align responsibility and incentivesto improve environmental performance withthose actors who have the ability to reducethe lifecycle impacts in question.

Based on the discussion thus far, threesituations would appear to position servi-cizing as a vehicle which leads manufactur-ers (or service providers) to reduce lifecycle

environmental impacts. These are situationsin which the servicizing arrangement:

(1) results in internalizing use or disposalcosts;

(2) is driven by the economic value of theend-of-life good; or

(3) reconstitutes the product as a cost ratherthan a profit center.

Each of these scenarios is described below.All potentially lead to environmental impactreductions by providing economic incen-tives to increase the efficiency with whichresources are utilized in various phases ofthe lifecycle.1

1 Resource efficiency is a necessary attribute of a

more sustainable economy and underlies the“eco-efficiency” concept introduced by theWorld Business Council on Sustainable De-velopment (Schmidheiny, 1992). Eco-efficiency rests on the proposition that cur-rent industrial economies employ resourcesin extremely inefficient ways. It thus is possi-ble to decrease the environmental burden as-sociated with each unit of economic valuecreated by increasing the efficiency withwhich resources are utilized.

If servicizing contains within it potentialenvironmental benefits, it is in large partbecause this altered relationship with theproduct drives superior environmentalperformance — in short, becauseservicizing drives EPR.


Figure 3: Servicizing of a durable good: product take-back

Phase Design M anufacture Distribution Use M aintenance Disposal

CostBearer M anufacturer Custom er Society

Phase Design M anufacture Distribution Use M aintenance Disposal

CostBearer M anufacturer

Custom er — consum able supplies

M anufacturer — costs ofbreakdown & repair

M anufac-turer

Manufacturer’s incentives to increaserecyclability/remanufacturability

Manufacturer’s incentivesto increase durability/dependability

Outright purchase

Purchase with warranty &takeback

Source: Tellus Institute

Figure 4: Servicized PC Product Offering

Manufacture

Provide to different client

Product upgrade

Additional resources

Components,MaterialsSub-assemblies

PrimaryResources

Update/replace

recycle/remanufacture

Productprovision

Service/repair

Resell on used market

Disposal

Source: Tellus Institute

Figure 5: Incentives in a traditional sales model versus a service model

Traditional RelationshipConflicting Incentives

SUPPLIER

Materialproducts

wants toincrease

BUYER

wants todecrease

Servicizing RelationshipAligned Incentives

SERVICEPROVIDER

value of servicesthrough products

wants toincrease

BUYER

wants toincrease

Source: Reiskin, White and Johnson, 1998.



Consistent with the focus of this work, thediscussions focus on servicizing as a busi-ness strategy with possible environmentalimplications, rather than a business strategypursued, or marketed with, an explicit envi-ronmental component.

Internalization of use or disposal costs

Some servicizing arrangements internalizeenvironmental costs associated with use ordisposal of the product. In such cases, themanufacturer has an incentive — in theory— to reduce these costs to improve thecompetitiveness of its product.

• An appliance manufacturer offers afixed-fee contract to provide commer-cial laundering services. Launderingconsumes significant amounts of waterand energy, both of which add to themanufacturer’s costs. In a competitivemarket for such services, the manu-facturer will have an incentive to pro-duce machines efficient in both waterand energy use. Reduced resource usewill lower costs and allow more com-petitive pricing or higher margins.

• A truck manufacturer leases vehicles ata fixed price per mile and includes allmaintenance and repair. Becausemaintenance and repair are now coststo the manufacturer, an incentive mayexist to build a more durable, lowermaintenance vehicle.

• If the truck manufacturer also incursdisposal costs, the manufacturer mayhave an incentive to design a more re-cyclable/remanufacturable vehicle.

Typically, the costs internalized will not bethe full social costs of resources consumedand wastes produced, but rather the directcosts of fuel, electricity or consumable sup-plies, and the economic costs of disposal.Cost internalization is thus partial, not full.The effectiveness of cost internalization as adriver to minimizing use and disposal im-pacts is likely to depend on: (1) the size ofthese costs relative to total costs and (2)

whether or not these costs can be passedthrough to the customer.

Economic value of end-of-life good

Some servicizing activities may be driven inpart by the economic value of the end-of-lifegood. The good may contain reusable com-ponents or valuable materials, embodyingenergy, labor and capital. In such cases, theservicizing activity may be motivated by theopportunity to recover this value by productreclamation activities — recycling, remanu-facturing, reuse. All have the effect of re-ducing end-of-life disposal impacts and re-

ducing the amount of virgin material andenergy mobilized to make the good.

This second scenario, of course, relates tothe previous one, in which a servicizing ar-rangement internalizes to the manufacturerthe disposal costs of a good. The firm mayin this case be driven to examine this end-of-life product as a potential asset, or tomake efforts to increase its value. Such ef-forts might include introducing design fordisassembly or upgradability. It should alsobe noted that the benefit of recovering em-bodied labor, material, or capital is likely todepend significantly on the costs of a recov-ery infrastructure. Where an existing infra-structure processes end-of-life goods or canbe adapted to this purpose, material or com-ponent recovery may be achievable at sig-nificantly lower cost than if a manufacturermust create such an infrastructure fromscratch.

Economic incentives to EPR which mayarise from servicizing:

internalization of use or disposal costs

recovery of economic value of an end-of-life good

transformation of the product into a costrather than a profit center


Figure 4 depicts a servicized product offer-ing for PCs, loosely modeled on IBM’sSystemXtra PC leasing program for com-mercial customers (see IBM case study,Appendix A). The manufacturer retainsownership of the machines throughout thelease period, and has in place a distributionand service system serving the customer on-site. Thus, the reverse logistics arrange-ments which permit product take-back andreclamation activities are already in place,and the manufacturer has incentive to re-cover value from post-lease machines —both because they are an owned asset, andbecause disposal incurs costs.

Product as cost, not profit center

Where the servicizing arrangement meansthat provision of the product is a cost, ratherthan a source of profit, the service providerwill have incentive to reduce the number ofunits employed to yield a given quantity ofservice.

• Consider, for example, a chemicalmanagement services (CMS) model inwhich the chemical supplier takes overaspects of chemical management fromthe chemical user (a manufacturer)(Figure 5). These activities range fromprocurement, delivery, and inventorycontrol to EH&S reporting and end-of-life management. In a typical supplier-customer relationship, the supplier’srevenues are driven by volume sold —an incentive perverse both to the manu-facturer’s best interests and those of theenvironment, which would be bestserved by chemical use reduction.

If the CMS provider’s compensation isbased on service provided and gain-sharing from provider-identified effi-ciency improvements in the manufac-turer’s processes, supplier and manu-facturer incentives become aligned. Thesupplier’s profitability is divorced fromvolume sold, and in fact increases whenchemical use decreases. And the cus-tomer enjoys the benefits of higher effi-ciencies and lower cost. In this model,the supplier-manufacturer relationshipbecomes an alliance in which eachpartner exploits their core competency.Such a relationship demands closer co-ordination and a greater degree of mu-tual trust than is typical of a standardsupplier-customer relationship.2

Servicizing does not always generatethese incentivesAgain, servicizing is a business strategywhich might move the firm into EPR activ-ity and yield environmental benefits. Thesebenefits derive from reallocation of propertyrights or responsibility across the productlifecycle and the consequent internalizationof environmental costs and benefits.

The existence in a servicizing situation ofone or more of the three incentives just dis-cussed would seem, a priori, to makeachieving these environmental benefits fromservicizing much more likely. These incen-tives define an alignment between economicincentives facing the firm and environmentalbenefits to society:

• when servicizing has the effect of inter-nalizing use or disposal costs;

• when the product concerned has sig-nificant end-of-life value;

• when servicizing renders product provi-sion into a cost rather than a profitcenter.

2 For a description of the CMS model, see John-

son, White and Hearne, 1997; Reiskin,White and Johnson, 1998; Votta, et al.,1998.

These incentives highlight possibilitiesfor, not assurances of, environmentalgains from servicizing. The situationsthemselves may not apply to any particularservicized product offering — and if theydo, the cause-and-effect relationships theydescribe (economic stimulus yields firmresponse) may be insufficiently strong toinfluence firm behavior.



These incentives highlight possibilities for,not assurances of, environmental gains fromservicizing. The three situations may notapply to a particular servicized product of-fering — and if they do, the cause and effectrelationships they describe (economicstimulus yields firm response) may be insuf-ficiently strong to influence firm behavior.

Section 4 looks at this question in detail.

Surmounting organizational barriersBeyond potentially giving rise to economicincentives which spur the manufacturer orservice provider to reduce product lifecycleenvironmental impacts, servicized productofferings may reduce organizational resis-tance to EPR.

Organizational resistance to extending in-volvement with a product beyond point-of-sale and historical practice has been identi-fied as a major barrier to increased manu-facturer responsibility in environmental im-pacts of products (Stoughton et al., 1998).This resistance is rooted in the changes im-plied by this extended involvement —changes in metrics of performance and hu-man capital requirements, the need for newforms of coordination across business func-tions, and the need for closer interactionwith other actors in the lifecycle chain.

If a firm voluntarily pursues servicizing ac-tivities, then this resistance has — prima fa-cie — been in some measure overcome bythe strength of the market and businessanalysis which led to the decision to “servi-cize” the product. A significant barrier toEPR practice — a reluctance to extend pro-ducer involvement with the product —in alllikelihood has been diminished.

•

As the case studies (Appendix A) andSection 3 make clear, these institutionalbarriers are surmountable. In certaincases, servicizing is driven by a discretemarket opportunity, or simply repre-sents a gradual evolution of existing of-ferings and engagement with the cus-tomer. In other cases (e.g., IBM,Xerox), servicizing is perceived as asurvival strategy in the market or, inthe case of DuPont, as part of a generalinnovation-seeking growth strategy in amature industry, chemical manufacture.

• It is clear, however, that integration ofEPR into servicizing activities is by nomeans automatic, even once the barrierto extended lifecycle involvement hasbeen overcome. Standard businessanalysis tools are not well-suited to al-low firms to assess the business case forEPR activity. Adding environmentalconsiderations to the product develop-ment cycle is often seen as lengtheningtime to market. Environmental and eco-nomic gains for the firm from EPR ac-tivities may not be reflected in the in-centives of individual departments orline businesses (Stoughton et al., 1998

Servicized product offerings may reduceorganizational resistance to EPR.



3. Servicizing Drivers, Challenges andOrganizational Responses

How does the market environment and na-ture of the product affect the drivers andchallenges of servicizing? How do firms re-spond and adapt organizationally? How domarket and product characteristics and or-ganizational response affect the possibilitythat servicizing will lead to EPR activity?These are critical questions whose answersmust inform any policy design process.

To explore these questions, we examinedseven companies spanning a diversity ofsectors, engaged in servicizing activity:

• AB Electrolux (Appliances and “func-tional sales”);

• Castrol Industrial North America (Lu-bricants and metal-working fluids andchemical management services);

• Coro (A Herman Miller business; post-occupancy furniture services);

• DuPont (diversified chemicals andchemical products; car-painting busi-ness and carpet services);

• IBM (computer hardware and softwareand “information solutions”);

• Radian International and Dow Chemi-cal (chemical management services andchemical manufacturing); and

• Xerox (document storage and repro-duction and “document services.”)

Case studies (Appendix A) of the first fivecompanies are based on interviews supple-mented with secondary material. The IBMand Xerox studies were based on publishedarticles and literature and company reports.

Drivers and Approachesto ServicizingWhat triggers the move toward a servicizingbusiness strategy or a servicized product of-fering? Our cases reveal several impetuses.In two cases — IBM and Xerox — a deci-sion was made at the CEO level to defineservice rather than product provision as thecenter of a new business strategy. The lead-ership of both companies felt that a serviceorientation was a survival strategy in theirrespective markets — and that it was betterto lead than to follow.

In IBM’s case, the company had accumu-lated spectacular losses in the early 1990s($18 billion by 1993), was widely perceivedas having lost touch with its customers, andhad clearly misjudged the significance ofthe personal computer and the consequencesof desktop computing of its traditionalmainframe hardware-and-software business.IBM had protected that business at hugeopportunity cost. In the case of Xerox, thecompany had successfully won back signifi-cant market share from competitors — butin defending its core light-lens copier busi-ness, the company had failed to capitalizeon a number of its own inventions and inno-vations.

Seven servicizing case studies: AB Electrolux Castrol Industrial North America Coro DuPont IBM Radian International/Dow Chemical Xerox


Both CEOs (Xerox’s Allaire and IBM’sGerstner) realized that technology was rap-idly redefining the markets their firmsserved — broadly, business managementsystems. A trend towards increasing inte-gration of previously distinct business sys-tems and hardware would progressively de-crease the utility of both firms’ stand-aloneproducts. This can been seen as a techno-logical deepening, that is, increased tech-nology infrastructure requirements, for thesebusiness functions. The specialist skills re-quired to acquire, integrate and service thisinfrastructure are increasingly difficult forcustomers to provide in-house. Thus, Xerox

began focusing on its document strategy,integrating document storage and reproduc-tion technology with customers’ businesssystems to produce automated, just-in-time,customized document production. IBM be-gan focusing on the hardware and softwareintegration underlying “e-business” (elec-tronic commerce).

This said, service provision did leveragetraditional product strengths in both cases.That is, both firms’ products were not aban-doned as much as redefined as vehicles tomeet customers’ functional needs. ForIBM, “e-business” exploits the company’straditional strengths in large-scale process-ing and storage. For Xerox, xerographic re-production is still a central part in its docu-ment strategy. Nonetheless, it is clear thatthe service reorientation of both firms re-quires a fundamental shift in corporate cul-

ture and market engagement — albeit a shiftstill ongoing, and one whose ultimate out-come remains uncertain.

In comparison to IBM and Xerox, techno-logical change is considerably slower in themarkets served by other firms in the casestudies — e.g., appliances, lubricants, proc-ess chemicals, diversified chemical-relatedproducts, office furnishings. While there issome willingness among customers in thesesectors to consider servicized product of-ferings as outsourcing options, their busi-ness environment is not changing so rapidlyas to demand specialist services from sup-pliers. In these markets, servicized productofferings replace services previously carriedout in-house. In such cases, the burdenseems to be much more on the service pro-vider to prove the economic benefits of theirofferings.

Thus, the servicizing approaches of fivefirms we studied — AB Electrolux, CastrolIndustrial, Coro, DuPont, Radian/Dow —may be characterized as more incremental.Their efforts may be viewed as (1) a moregradual evolution of existing lines of busi-ness and/or (2) a decision to pursue a spe-cific and relatively narrowly delineatedmarket opportunity as a new addition to ex-isting business.

• DuPont, as a car paint and carpet fibermanufacturer, is now implementing acar painting service and carpet leasingprogram.

• Coro identified post-occupancy fur-nishings as an untapped market; this isa stand-alone business pursued i

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