Supply on demand Adapting to change in consumption and delivery models Sponsored by A report from the Economist Intelligence Unit Supply on demand Adapting to change in consumption and delivery models Contents About the report Executive summary Consumers want convenience and value, and they want it now Reasons to be cheerful What is cheap, reliable and everywhere? 11 Growing pains 14 Conclusion 16 Appendix: survey results 17 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models About the report Supply on demand: Adapting to change in consumption and delivery models is an Economist Intelligence Unit (EIU) report sponsored by Zuora It delves into the shifting attitudes among business executives towards new consumption and delivery models, the drivers of change, and how companies are adapting to accommodate the trend l Thomas Amos, co-founder, Sidekicker To shed light on this topic, the EIU surveyed 293 business executives in July-August 2013 Nearly two-fifths of the survey sample (39%) are based in the US, 31% in the UK and 30% in Australia They hail from 18 sectors, with financial services, professional services, technology, and healthcare, pharmaceuticals and biotechnology especially prominent in the sample The respondents are relatively senior—61% hold C-suite positions—and they work in organisations of different sizes, with 54% posting annual revenue of US$500m or more l Saar Gillai, senior VP and general manager, HP Converged Cloud To complement the survey findings, the EIU also conducted in-depth interviews with senior executives and industry experts We would like to thank all survey respondents, as well as the following executives (listed alphabetically) for their time and insights: © The Economist Intelligence Unit Limited 2013 l Giles Andrews, CEO, Zopa l James Beshara, founder, Crowdtilt l John Compton, manager, Streetclub by B&Q (Kingfisher) l Chris Fletcher, research director, Gartner l Ed Lee, mayor, San Francisco l Ann Mack, director of Trendspotting, JWT Worldwide l Paul Marsden, consumer psychologist l John Mewett, marketing director, Screwfix (Kingfisher) l Mark Norman, CEO, Zipcar (Avis) l Aleyn Smith-Gillespie, associate director, Carbon Trust Advisory Services The report was written by Sarah Fister Gale and edited by Zoe Tabary of the Economist Intelligence Unit Supply on demand Adapting to change in consumption and delivery models Executive summary Under the impact of advances in technology, economic pressures and shifting cultural norms, consumers are looking for cheaper goods and more convenient ways of accessing them New models of personal ownership are gaining attention in many industries based on the idea that people are increasingly interested in consuming and paying for temporary or limited access to goods and services, rather than purchasing them outright Judging by this Economist Intelligence Unit survey, businesses are responding by changing how they price and deliver goods and services, with subscription-based models in which companies offer ongoing access to a product or service for a periodic fee; rental models that give consumers temporary use of a product or service; and sharing models that allow groups of people to jointly share ownership of a product or service among the preferred options Advances in technology are enabling this trend, both by giving consumers greater insight into where and how they can access products and services, and by allowing businesses to rapidly ramp up new sales models at relatively low costs Businesses believe that these new models will enable new revenue opportunities, better differentiation from competitors, and access to new customer segments They will also create new © The Economist Intelligence Unit Limited 2013 opportunities for businesses to engage with customers on a more regular basis and foster stronger relationships For consumers, reduced transaction costs and more convenient use of goods and services should be the biggest benefits But adapting to these new consumption and delivery trends will not be easy, and they will not impact every product or business in the same way Financial constraints, technological complexity, shifting regulations and the need for new marketing strategies and extensive change management are just a few of the challenges that companies must address to succeed in this transition The key findings of this research include the following: A majority of businesses are changing the way they price and deliver their goods and services Four-fifths of respondents see changes in how their customers access goods and services For individuals, subscriptions and rental options are the most appealing consumption models to emerge from this trend As a result, over one-half of companies (51%) are changing, or are in the process of changing, how they price and deliver their goods and services The biggest change is the introduction of subscription options for goods and services (implemented by 40% of companies), Supply on demand Adapting to change in consumption and delivery models followed by the enabling of sharing models (27%) The revenue impact is still relatively small, but is expected to grow steadily More than one-half of the companies surveyed report that these new delivery models represent 10% or less of their annual revenue, and 12% say that they represent more than 50% of revenue However, 84% of respondents anticipate that the share of revenue will change “somewhat” or “significantly” over the next two years Technology is proving a powerful enabler of new consumption and delivery models “Any area where you’ve got fairly expensive goods that customers don’t feel like they have to own, and enabling technology that allows them to easily use them, will be open to transitions in business models,” says Aleyn Smith-Gillespie, associate director at Carbon Trust Advisory Services Consumers benefit from cheaper, more convenient products, while businesses generate new revenue streams “Consumers are getting accustomed to pay-as-you-go models, and they like that flexibility They can instantly get all the capabilities without paying up-front for the cap-ex, © The Economist Intelligence Unit Limited 2013 and they have better control over their spend,” points out Saar Gillai, senior VP and general manager at HP For businesses, the leading benefits are access to new revenue opportunities (37%), differentiation from competitors (27%), and accessing new customer segments (27%) Cost, technical complexity and regulation may hamper the implementation of new consumption and delivery models Internal co-ordination (selected by 33% of respondents), technical complexities (30%) and compliance regarding data privacy and protection (27%) are viewed as the key difficulties in implementing these new delivery models Regulatory hurdles can also be a stumbling block for lean start-ups, according to experts Each company faces a different set of circumstances, but there are some common elements all should think about, say executives interviewed in this report Backing new delivery models with a strong business case, developing a seamless user experience, working with regulators and monitoring corporate reputation are some of the specific areas which new delivery models need to encompass Supply on demand Adapting to change in consumption and delivery models Consumers want convenience and value, and they want it now Consumers’ desire to own high-value goods, such as cars and apartments, is being trumped by their interest in finding cheaper, more convenient options to use them In an increasingly costconscious world, the benefits of temporary just-in-time access to products and services— without the cost and hassle of ownership—are becoming more appealing and advisory company “Consumers are demanding new types of services, and technology innovations are enabling those services.” Executives today are keenly aware of this transition Fully 83% of survey respondents agree that consumers in general are changing how they prefer to obtain access to goods and services, and 80% are seeing these changes in their own customers At the same time, the explosion of social media and mobile devices, as well as the growth of cloud computing, are dramatically increasing the speed with which information is reaching consumers and facilitating their access to goods and services Subscribe, rent, share For individuals, subscriptions and rental options are seen as the most appealing consumption models to emerge from this trend Asked about their preferences as consumers, 38% of executives say they increasingly prefer to access goods and services via subscription rather than purchase them “It’s a chicken and egg scenario,” says Chris Fletcher, the research director of enterprise applications at Gartner, a US-based IT research Chart Q What you see as the main benefits to consumers from new consumption models? (% respondents) 36% 34% 33% Reduced transaction costs More convenient use of goods and services Easier to upgrade or downgrade products and services 27% Reduced amount of waste from underused assets 20% More convenient payment for goods and services 16% Greater personalisation of products and services Ability of consumers to act as product and service providers themselves Ability to connect with a like-minded community of users Other Don’t know 9% 7% 3% 1% Note: Figures not add to 100% as respondents were able to select more than one option Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models outright, and 26% prefer to rent The models they prefer shift somewhat based on their location US executives are the most interested in subscription options (42%), compared with just 31% of their UK counterparts; and twice as many UK as Australian respondents prefer to share ownership of goods and services ❛❛ If you can add value to the customer, if you can reduce their cost and make things more convenient for them, then these models can work ❜❜ Aleyn Smith-Gillespie, associate director at Carbon Trust Advisory Services These changing preferences are not surprising, says Aleyn Smith-Gillespie, associate director at Carbon Trust Advisory Services, a consultancy offering expertise on sustainable business strategy and models “If you can add value to the customer, if you can reduce their cost and make things more convenient for them, then these models can work.” He anticipates that similar trends are likely to occur with appliances, equipment and high-value goods “In these models, customers don’t just reduce their costs, they get an additional level of expertise and access to evolving technology without the capital investment,” he says This idea is reinforced by the fact that reduced transaction costs are viewed as the number one benefit of this trend for consumers The ease with which consumers can upgrade or downgrade services and reduce waste also ranks highly on the list of benefits “We are in an ‘as-a-service’ economy, where customers expect options,” agrees Saar Gillai, senior vice president and general manager at Hewlett Packard Converged Cloud, an IT multinational company Having open lines of communication with customers enables businesses to proactively provide those options, he says “We can see what the customer is trying to do, and tailor a solution that’s flexible enough to meet their needs.” Convenience also makes the list of top benefits— © The Economist Intelligence Unit Limited 2013 and it’s one of the most critical components for success, says Paul Marsden, a consumer psychologist “The consumer doesn’t want to anything extra, so the business model has to be effortless,” he says “Or the value they derive has to be so great that it can overcome their laziness.” Interestingly, the two benefits most often touted by peer-to-peer sharing companies—the ability to connect with like-minded users and the opportunity for consumers to act as product and service providers themselves—receive the lowest scores in the survey This suggests that the business trend is about value and convenience rather than community-building or altruism [It should be noted, though, that the interviewees in this survey were business executives rather than broad consumers.] Respondents’ personal preferences also bleed over into how they business, with 37% saying that their business units increasingly prefer to rent goods rather than purchase them, while 35% prefer to access goods via subscription and 16% prefer to share ownership UK businesses are more interested in renting (42%), while US businesses lean towards subscription (44%) Ultimately, companies will need to adapt their business models to account for regional differences in infrastructure, cost structures and customer behaviour, says Mr Smith-Gillespie “For a global company, this will probably be starkest between developed and developing economies, and can be both an opportunity as well as a challenge For example, in some regions business models requiring live tracking of vehicles and products may find local infrastructure and mobile services to be lacking—although this is improving On the other hand, urban density and premiums on space can be a driver of sharing models.” Supply on demand Adapting to change in consumption and delivery models ❛❛ This is a pay-asyou-go economy To succeed, companies need to create payment and delivery infrastructures which support that environment ❜❜ Saar Gillai, senior VP and general manager, HP Converged Cloud Reasons to be cheerful The demand for temporary access to goods and services has the potential to upend longestablished business models that are built on a financial foundation of receiving full payment in exchange for outright ownership of goods For companies to alter this model requires them to radically change the way in which they operate They seem to be figuring it out, though A majority of companies in the survey have already changed or are in the process of changing how they price and deliver their goods and services That number jumps to 67% in Australia, compared with 42% in the US and 48% in the UK Adapting pricing and delivery models is a necessary part of the transition from one-off sales to a subscription, rental or sharing-based offering, according to Mr Gillai: “This is a pay-as-you-go economy To succeed, companies need to create payment and delivery infrastructures which support that environment.” The most popular addition is the introduction of subscription models (40%), followed by the integration of shared goods and services (27%) In Australia, 46% of respondents are incorporating subscription models, compared with 40% in the UK and 34% in the US Smaller companies are also more likely to embrace subscription options (45%), while larger companies are almost as likely to enable sharing (31%) as subscription (33%) In the past few years start-ups and established businesses alike have begun offering rental, sharing and subscription options for everything from cars, textbooks and entertainment to part-time workers and heavy equipment The trend even extends into the financial services industry, Chart Q How is your company primarily changing, or how does it intend to change, the way it prices and delivers goods and services? (% respondents) We are integrating subscription goods and services to our business model 40% We are integrating shared goods and services to our business model 27% We are integrating leasing/rental goods and services to our business model We are integrating exchange (barter) of goods and services to our business model Other Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2013 17% 2% 14% Supply on demand Adapting to change in consumption and delivery models where companies are creating virtual environments in which consumers can source, lend and borrow money electronically without the time and costs associated with traditional banks Mr Smith-Gillespie points to Digital Lumens, a US lighting company that has shifted from selling equipment to delivering lighting-as-a-service under a “managed asset” model: “Customers pay for the outcome, not the product.” It is still early days for many of these fledgling businesses, but there is a lot of optimism about their future success Small revenue, big growth expectations More than half (53%) of respondents say these new delivery models represent 10% or less of their annual revenue, and only 12% say they represent more than half of their revenue The financial impact is somewhat higher in UK and US companies than in Australian companies, with respectively 16% and 14% saying they represent more than half of their revenue, against 6% of Australian companies But the revenue impact from these models is on an upward trend Fully 84% of respondents anticipate the share of revenue they represent to change somewhat or significantly over the next two years Smaller companies are more likely to anticipate a significant increase (34%), compared with 21% of larger companies Mr Smith-Gillespie is not surprised by their optimism “Goods and assets that have a relatively high cost but low utilisation will be open to a shift away from ownership towards a leasing, rental, or subscription-based business model, particularly when combined with a service package that guarantees convenience and access,” he says He also believes that these new delivery models can provide greater financial stability for the vendor by turning a single sale into a long-term revenue stream But that can require upfront financing by the business to cover the initial cost to deliver the product or service system, as well as cash flow to cover maintenance, insurance and any other ancillary business costs It won’t work for everyone, however In sectors that offer lower cost, disposable or frequently used goods, the model won’t be cost effective, maintains Gartner’s Mr Fletcher: “It’s hard to argue that you would generate enough revenue from renting a ladder or a lawn mower And if it’s not going to be profitable, it doesn’t make sense.” In those cases, business owners can look for added-value opportunities, suggests John Mewett, the marketing director of the Screwfix Community Forum, a trade forum for contractors hosted by Kingfisher, a European home-improvement retailer Although Kingfisher’s products not lend themselves to a rental or subscription model, the company has invested in building a sharing environment Chart Q How, if at all, you expect the revenue your company gains from new delivery models of goods and services to change over the next two years? (% respondents) 28% Increase significantly 56% Somewhat increase 13% Stay the same Somewhat decrease Decrease significantly Don’t know 1% 0% 2% Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Chart Q What are the key business benefits you would associate with implementing new delivery models? (% respondents) 37 % Opening up new revenue opportunities 27% 27% 25% Differentiation from competitors Accessing new customer segments Increasing customer loyalty 21% 19% 17% Reducing waste from underused assets Strengthening our brand Accessing new product markets 8% Improving our environmental footprint 4% Other Don’t know 2% Source: Economist Intelligence Unit The Screwfix Forum brings together professionals and DIY enthusiasts to exchange tips about home improvement projects, socialise and even share tools or business opportunities “These services aren’t monetised and don’t generate revenue directly, but they build brand loyalty and can indirectly generate sales in stores,” says John Compton, the manager of Streetclub.co.uk, a sharing website for neighbours by Kingfisherowned B&Q, another DIY firm Unlocking business benefits According to the survey, the leading business benefit of these new delivery models is access to new revenue opportunities (37%) Differentiation from competitors (27%), accessing new customer segments (27%) and increasing customer loyalty (25%) also figure prominently These new models also allow businesses to form closer relationships with the customers they serve, Mr Smith-Gillespie points out As the owner of the goods, be they cars, equipment or virtual servers, the vendor takes on the role of a trusted and expert supplier, providing maintenance and services to support the product and the customer “This value proposition opens up opportunities for long-term customer relationships with multiple touch-points, thus enabling providers to broaden and deepen their revenue streams,” he says © The Economist Intelligence Unit Limited 2013 Even in sectors such as hard goods, where the fundamental product is still a one-off sale, companies are creating add-on services that are bundled with the core product General Motors’ subsidiary Onstar, for example, is a subscriptionbased roadside assistance service that car owners can pay for through a monthly fee For other organisations, these new models are seen as an opportunity to alleviate the impact of rising manufacturing costs Businesses that devise ways for customers to reuse existing products can derive more long-term value from the assets they pay to create, while simultaneously allowing customers to reduce their own cost of ownership and environmental footprint “Resource efficiency is a core part of the proposition,” says Mr SmithGillespie “It is a real value add that a provider can give to a customer, and that customers are seeking.” To fully benefit from new delivery models, organisations need to work proactively with manufacturers, vendors and material suppliers to design products that best accommodate consumers’ demands If companies can deliver reliability as part of the value proposition, they can secure customer loyalty while lowering their own maintenance and support costs Supply on demand Adapting to change in consumption and delivery models Harnessing small players ❛❛ It is logical that these acquisitions will continue in other sectors as companies demonstrate that they can produce sustainable business models with proven profitability ❜❜ Ed Lee, mayor, San Francisco 10 In the meantime, the market to accommodate consumers’ demand for subscription, rental and sharing options is still fairly wide open Thanks to the proliferation of cheap, reliable, virtual technology, anyone with some spare cash and an idea can start a company, which means that lean start-ups have a chance to step into wellestablished marketplaces and lure dissatisfied customers with more agile delivery models Smaller firms tend to be more alert to shifting market trends and are more able to adapt than their larger counterparts The survey highlights this idea, with more than one-half of executives at large firms saying their company underestimates the impact of changes in the way consumers want to access goods and services, compared with just one-third of executives at small companies However, big companies have the advantage of deep pockets While it may take them longer to adapt their culture and processes to the new trends, they have the option to acquire smaller companies that have demonstrated success as a way to gain immediately access and expertise in this area, says Ann Mack, the director of Trendspotting at JWT Worldwide, a marketing communications firm “Instead of fighting the encroaching competition, partner with them,” she advises © The Economist Intelligence Unit Limited 2013 This approach has been practiced for years in the software-as-a-service sector, where global enterprise software firms, including Oracle, IBM and SAP, have acquired dozens of cloud-driven start-ups to round out their service offerings It is also moving into the car rental business, where in the past year Avis Budget Group has purchased Zipcar, a US membership-based car-sharing company, and Enterprise Holdings has acquired Zimride, a ride-sharing and car-pooling company “These acquisitions have enabled the acquired small firms to rapidly expand their reach In the case of Zipcar, it means continuing its quest to build a global fleet”, says Mark Norman, the company’s CEO, albeit under the aegis of a larger owner “It is logical that these acquisitions will continue in other sectors as companies demonstrate that they can produce sustainable business models with proven profitability”, according to the mayor of San Francisco, Ed Lee, who is credited with coining the term “sharing economy” to identify entrepreneurs using the Internet to connect services and products with buyers “It makes sense that [these companies] will become attractive for purchase or imitation by already established businesses in the marketplace,” he says Supply on demand Adapting to change in consumption and delivery models ❛❛ You can connect with people in a way you couldn’t previously, and it’s changing the mindset of businesses and consumers ❜❜ Thomas Amos, co-founder of Sidekicker What is cheap, reliable and everywhere? The Internet, mobile technology, secure online transactions, social media and the ubiquity of cloud computing are among the many technological advances that are making it possible for companies to provide these kinds of delivery models for any number of products and services, remotely and electronically, to a broader community of customers perceived drivers of change in this area Economic factors and demand for greater convenience—both issues that can be addressed thanks to technological advances—complete the list of the top three drivers “You can connect with people in a way you couldn’t previously, and it’s changing the mindset of businesses and consumers,” says Thomas Amos, the co-founder of Sidekicker, an Australian firm that links companies with people seeking temporary work assignments Not surprisingly, technology-driven products and services that can be accessed and purchased electronically—including software, news media, consumer electronics, and music and entertainment—are expected to see the biggest shifts in consumption and delivery patterns over the next three years More durable items, including cars, homes, appliances and fashion, are seen as least likely to experience big shifts in the near term The survey shows that advances in technology, including cloud computing, are top of the list of Location, for example, can be a challenge in providing durable goods, particularly for small Chart Q Of the following, which would you say is the single most important driver of changes in the way consumers obtain access to goods and services? (% respondents) Technology advances (eg cloud computing) 37% Economic factors (eg, cost pressures, demand for greater value for money) 27% 25% Demand for greater convenience 5% Policy or regulatory changes Environmental concerns Other 2% 3% Note: Percentages were rounded up and may not add up to 100% Source: Economist Intelligence Unit 11 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models firms While the Internet makes it possible to reach clients all over the world, delivery models for these goods have to support that reach with fast, efficient and cost-effective options That can be tricky for smaller companies with limited budgets, says Mr Amos “You’ve got to be able to ramp up, and match supply with demand.” We’re all tech companies Mr Norman of Zipcar credits innovative technology—including GPS, secure ignition, the mobile web and apps, RFID access and proprietary fuel access—with the success of his company He refers to it as “a technology and service company that happens to manage a large fleet” “Ubiquitous wireless networks enabled the existence of Zipcar in 2000,” he says “And the preponderance of smartphones, downloadable apps and broadband wireless continues to allow us to evolve the service.” Such models are of particular interest to younger consumers, who have grown up being able to access their email, their banking and get their groceries delivered, all from their laptops and mobile phones They also recognise the value in having access to goods without the burden of ownership in a way that previous generations may not have had A survey released in February 2013 by Zipcar shows that 80% of millennials (commonly referring to people born between the 1980s and the 2000s) find it much harder to own a car because of the high cost of petrol, maintenance and parking, compared with 69% of those aged 49 and above They also feel more comfortable working with peer-based companies, thanks to the grassroots conversations that often support these new Zopa revolutionises banking Zopa is a UK-based peer-to-peer lending service launched in 2005, at a time when UK consumers were highly indebted and bank lending had reached historical levels “It started because we didn’t like the way banks were treating people,” says Zopa’s CEO, Giles Andrews “We wanted to create a more efficient business that created value for customers and allowed us to make a profit.” The resulting service allows people to sidestep banks and lend directly to each other at lower rates and with a higher interest on savings To ensure borrowers repay their debts, the company built its own risk management engine that assesses borrowers’ credit history and likeliness to repay The company also vets all lenders to make sure the money is legitimate and legal “It has all the administrative functions of a bank, but it is simpler because we don’t require buffer 12 © The Economist Intelligence Unit Limited 2013 capital,” says Mr Andrews, referring to the excess capital banks are required to hold as part of financial industry regulations And he couldn’t have done it without the far reach and easy access of the Internet “It provides enormous distribution possibilities, which allowed us to scale and provide checks and balances at all stages of the transaction,” he says Though he notes that recent advances in technology would probably have made it a lot cheaper to build Despite the initial costs, the business has taken off, and Mr Andrews believes that Zopa will be competitive with major global banks in a matter of years It loaned £90m in 2012 at an average of £50,000 per lender, and £6,000 per borrower He expects to lend £200m in 2013 and is targeting a billion in loans annually by 2015 Supply on demand Adapting to change in consumption and delivery models Enabled by cloud While cloud computing capabilities have been around for years, it only began to take off as a business model in the early 2000s, with the advent of Salesforce.com, Google Apps and the proliferation of virtualisation technology Less than a decade later 75% of companies use some sort of cloud platform today, according the 2013 Future of Cloud Computing Survey of North Bridge Venture Partners, a US-based venture capital firm Eliminating the capital costs of hardware and software as well as the personnel costs related to maintenance and upgrades is a boon for companies looking to cut their IT expenses It also allows them to share resources in a way they can’t when technology falls under the control of specific individuals or divisions in company And while the cost-savings can be enticing, it’s the time-saving that draws people in, says business models, says Mrs Mack: “They don’t think twice about doing business with peers or start-ups, particularly if the solution is less expensive than the established alternative.” 13 © The Economist Intelligence Unit Limited 2013 Saar Gillai, senior vice president and general manager at Hewlett Packard Converged Cloud, an IT multinational company “Most customers see improvements from weeks to hours because cloud automates so many things that were once manual.” Many companies are now extending the benefits of the cloud beyond internal efficiencies to generate new revenue streams and even launch new companies, from banks that sell their internal credit rating tools as a cloud-based service, to entertainment companies such as GameFly and Netflix, which rent games and movies to members for a monthly fee “Consumers are getting accustomed to pay-as-you-go models, and they like that flexibility,” according to Mr Gillai “They can instantly get all the capabilities without paying up-front for the cap-ex, and they have better control over their spend.” However, they are also quick to abandon companies that fail to deliver quality service or goods, she says “Tools like user reviews and track records can allay a lot of concerns about quality.” Supply on demand Adapting to change in consumption and delivery models ❛❛ Building a seamless user experience is the most important factor—and that takes a lot of effort on the back end ❜❜ James Beshara, CEO of Crowdtilt Growing pains The time- and cost-savings from which consumers can benefit through new consumption models can translate into financial benefits for the companies that can deliver these goods and services However, establishing an interface and delivery system to support them is not easy Survey respondents cite internal co-ordination, technical complexities and compliance regarding data privacy and protection as the key risks or difficulties in implementing such new delivery models Cost is also a primary concern Smaller companies, in particular, worry about the technology and cost to get these models up and running “Building a seamless user experience is the most important factor—and that takes a lot of effort on the back end,” says James Beshara, the CEO of Crowdtilt, a crowd-funding platform where consumers can create groups to fund anything from a fantasy football league to a community park His team of 26 employees includes 22 software engineers, who are focused on making the site seamless and user-friendly They are currently putting the finishing touches on a mobile environment that will allow users to launch a funding project in under eight seconds from their phones Achieving this ease of use is difficult and fraught with security risks It’s not just about making the technology work, says Mr Beshara His team had to work closely with payment processors, credit companies, banks and regulators to make sure that Chart Q What are the key risks or difficulties you would associate with implementing new delivery models? (% respondents) 33% Organisational (lack of internal co-ordination) 30% Technical (too complex to integrate) 27% 26% Compliance (data privacy and protection issues) Financial (deferring up-front cash and revenue) 22% Regulatory (industry-specific regulations) 18% Talent (skills shortage) 14% Lack of management commitment 6% Other Don’t know Source: Economist Intelligence Unit 14 © The Economist Intelligence Unit Limited 2013 2% Supply on demand Adapting to change in consumption and delivery models Sidekicker navigates employment law In 2012 Thomas Amos launched Sidekicker, an Australia-based company that connects businesses with people looking for temporary work assignments Unlike traditional temp agencies, Sidekicker does not employ workers Instead it acts as a matchmaker, giving employers a place to post openings and review the profiles of hundreds of pre-screened workers on demand The goal of the company is to streamline the hiring process for both sides, but in providing that convenience, Sidekicker dropped itself into a regulatory black hole Mr Amos had to work closely with regulators to prove the company does not deliver or take ownership of any work and that none of the “sidekicks” are employed by the company or even guaranteed jobs Sidekicker also had to reassure its business customers that the service complied with all of their legal and tax requirements as they managed their own employment records Even though all Sidekicker workers are independent and responsible for their own taxes, the company took steps to ensure they all met their tax obligations “It’s one way we stay ahead of the regulations,” says Mr Amos “And it solves the problem of ‘sidekicks’ avoiding paying their taxes.” every field and interaction that customers have with the site guarantees their data are protected Giles Andrews, the CEO of Zopa, a UK based peer-to-peer lending service, agrees “The winners are the ones who can figure out how to build a platform that protects customers while adding value in the market.” ❛❛ The technology and the business model have evolved so quickly, the policy hasn’t had time to catch up ❜❜ Mark Norman, CEO, Zipcar (Avis) Regulators race to catch up New models of delivery also have to accommodate regulatory requirements, which can be tricky in industries where the evolution of business models is outpacing governments’ ability to keep up “Entrepreneurs are coming up with new solutions and innovations almost daily, and it’s important for government to be nimble and flexible so that we can adapt to our residents’ demand for changes in consumption,” says San Francisco’s mayor, Mr Lee But regulators are not known for speedy decisionmaking, and they have many decisions to make From defining financial oversight rules and insurance requirements to establishing data security guidelines for information exchange and collection, regulators are being forced to rethink how these industries will be tracked 15 © The Economist Intelligence Unit Limited 2013 “The technology and the business model have evolved so quickly, the policy hasn’t had time to catch up,” says Zipcar’s Mr Norman This lack of rules is making some business owners nervous and can delay their ability to make strategic business decisions “Our biggest ask [from regulators] is certainty in what the regulations will be so we have a solid foundation to navigate from,” says Crowdtilt’s Mr Beshara He is not alone in this concern Compliance with data privacy and protection ranks number three among the key difficulties in implementing new delivery models Larger firms rank it second on their list The lack of rules may seem like a boon for young businesses eager to make their footprint in uncharted territory, but companies are just as likely to benefit from regulations as suffer from them— depending on the decisions regulators make, according to Mr Andrews Pushing for specific regulations can increase the validity of the industry and the chance that the right regulations will be enacted, he says “If executives don’t participate in the process, they face a greater risk that regulators will overreact and try to implement rules that get in the way of their business growth.” Supply on demand Adapting to change in consumption and delivery models Conclusion Shifting cultural norms, lingering economic challenges and steady advances in technology are changing the way consumers think about how they want to access goods and services Together, these trends have helped to make the value and convenience of temporary access more appealing to consumers than the intrinsic satisfaction they once derived from ownership They have grown comfortable with the idea of using rather than buying goods and services, and they expect companies to give them these options in userfriendly and secure environments This convergence of trends is forcing companies to re-evaluate their own delivery models and overcome the technical, organisational, regulatory and financial issues that stand in the way of making them work This transformation has already proved to be successful in a number of sectors, from software to automotive and finance But executives still need to focus on sound business principles “It doesn’t matter how cool the idea is or how many people tweet you or like you,” Zipcar’s Mr Norman says “Without solid, underlying fundamentals and a path to sustained profitability, your idea will never go mainstream.” Executives interviewed in this report offer advice on how to succeed in building new delivery models that provide value to consumers and their own bottom line l Do the math New delivery models will only work if there is a strong business case backing them up “Be sure you can achieve economic efficiencies and are able to offer value to consumers that is better than the alternative,” says Zopa’s Mr Andrews “The success of businesses in this economy are tied to 16 © The Economist Intelligence Unit Limited 2013 delivering incredible economic value.” l Consider cash flow In a temporary access delivery model, companies rely on future revenue streams rather than lump sum payments, so they have to be certain they can bankroll the transition “When you move to a leasing model from a sales model,” says Carbon Trust’s Mr Smith-Gillespie, “you need to make sure that it’s cost-side up or it won’t work.” l Make sure your interface is fast and easy to use Consumers will only support these businesses if they offer quick and seamless access to goods and services “You might think you have the best solution,” warns Mr Smith-Gillespie, “but if the customer doesn’t see it as convenient, they are not going to adopt it.” l Work with regulators to shape policy In industries where regulations are still in flux, business owners such as Mr Andrews are working with lawmakers “You want enough structure to keep out scammers and incompetents, without so many rules that it blocks efficiency and profitability”, advises Mr Andrews “Working with regulators can help you achieve that.” l It had better be good Social media have made it possible for consumers across the globe to instantly share their opinions—good or bad—with a huge audience That can work in companies’ favour, or it can harm them “Consumers today are hyper-connected, and when you give them a great product experience, they can’t wait to tell their friends,” Crowdtilt’s Mr Beshara says “But if it’s a bad experience, or even lukewarm, they will tell that story too, and it doesn’t take long for a few bad reviews to ruin a business.” Supply on demand Adapting to change in consumption and delivery models Appendix: survey results Q1 Please state whether you agree or disagree with the following statements: (% respondents) Strongly agree Agree Disagree Strongly disagree Don’t know/ Not applicable Our company is seeing changes in how consumers in general prefer to obtain access to goods and services 26 56 10 Our company is seeing changes in how our own customers prefer to obtain access to our goods and services 24 56 12 7 The impact of behavioural changes among consumers in how they obtain access to goods and services is underestimated by our company 10 34 41 Q2 Of the following which would you say is the single most important driver of changes described in Question 1? (% respondents) Technology advances (eg cloud computing) 37 Economic factors (eg, cost pressures, demand for greater value for money) 27 Demand for greater convenience 25 Policy or regulatory changes Environmental concerns Other 17 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q3 How, if at all, are your personal preferences changing for how you obtain access to goods and services? Select all that apply (% respondents) I increasingly prefer to access goods and services on a subscription basis (eg software licenses, news media or music) rather than purchase 38 I increasingly prefer to rent goods and services (eg apartments or camping spaces) rather than purchase them outright 26 I increasingly prefer to share ownership of goods and services (eg car-sharing services) rather than purchase them outright 13 I increasingly prefer to access goods and services through exchange (barter) arrangements (eg clothes) rather than purchase for money Other My personal preferences are not changing 34 Don’t know Q4 How, if at all, are your business unit’s preferences changing for how it obtains access to goods and services? Select all that apply (% respondents) My business unit increasingly prefers to rent goods and services rather than purchase them outright 37 My business unit increasingly prefers to access goods and services on a subscription basis rather than purchase 35 My business unit increasingly prefers to share ownership of goods and services rather than purchase them outright 16 My business unit increasingly prefers to access goods and services through exchange (barter) arrangements rather than purchase for money Other My business unit’s preferences are not changing 31 Don’t know Q5 What you see as the main benefits to consumers from the types of shifts described in Questions and 3? Select up to two (% respondents) Reduced transaction costs 36 More convenient use of goods and services 34 Easier to upgrade or downgrade products and services 33 Reduced amount of waste from underused assets 27 More convenient payment for goods and services 20 Greater personalisation of products and services 16 Ability of consumers to act as product and service providers themselves Ability to connect with a like-minded community of users Other Don’t know 18 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q6 What categories of goods and services you think will see the biggest shifts in the aforementioned models of consumption and delivery of goods and services in the next three years? Select up to two (% respondents) Software 29 News media 25 Consumer electronics and devices 23 Music and entertainment 23 Education 22 Healthcare services 17 Finance and peer-to-peer lending 15 Automotive 12 Accommodation 10 Household appliances and durable goods Fashion Other Don’t know Q7A Is your company changing how it prices and delivers goods and services? (% respondents) Yes, we have changed how we price and deliver goods and services 20 We are in the process of changing how we price and deliver goods and services 31 No, we don’t intend to change how we price and deliver goods and services 45 Don’t know Q7B How is your company primarily changing, or how does it intend to change, the way it prices and delivers goods and services? (% respondents) We are integrating subscription goods and services to our business model 40 We are integrating shared goods and services to our business model 27 We are integrating leasing/rental goods and services to our business model 17 We are integrating exchange (barter) of goods and services to our business model Other 14 19 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q8A What approximate share of your company’s revenue does the delivery model of goods and services you selected in Q7b represent today? (% respondents) Less than 5% 25 5-10% 28 11-25% 21 26-50% More than 50% 12 Don’t know Q8B How, if at all, you expect that share to change over the next two years? (% respondents) Increase significantly 28 Somewhat increase 56 Stay the same 13 Somewhat decrease Decrease significantly Don’t know Q9 What are the key business benefits you would associate with implementing new delivery models? Select up to two (% respondents) Opening up new revenue opportunities 37 Differentiation from competitors 27 Accessing new customer segments 27 Increasing customer loyalty 25 Reducing waste from underused assets 21 Strengthening our brand 19 Accessing new product markets 17 Improving our environmental footprint Other Don’t know 20 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q10 What are the key risks or difficulties you would associate with implementing new delivery models? Select up to two (% respondents) Organisational (lack of internal co-ordination) 33 Technical (too complex to integrate) 30 Compliance (data privacy and protection issues) 27 Financial (deferring up-front cash and revenue) 26 Regulatory (industry-specific regulations) 22 Talent (skills shortage) 18 Lack of management commitment 14 Other Don’t know In which country are you personally based? What is your primary industry? (% respondents) (% respondents) United States 39 United Kingdom Financial services 19 Professional services 31 16 Australia IT and technology 30 11 Healthcare, pharmaceuticals and biotechnology Education Whom does your organisation sell to? (% respondents) Manufacturing Businesses 48 Consumers Energy and natural resources Entertainment, media and publishing 11 Both Transportation, travel and tourism 41 Construction and real estate Consumer goods What are your organisation’s global annual revenues in US dollars? Chemicals (% respondents) Government/Public sector Less than $50m 28 $50 to $100m Retailing $100m to $500m 14 Telecoms $500m to $1bn Agriculture and agribusiness $1bn to $5bn 23 $5bn to $10bn Automotive $10bn or more 17 21 Logistics and distribution © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models What are your main functional roles? Which of the following best describes your title? Select all that apply (% respondents) (% respondents) Board member General management 46 CEO/President/Managing director 41 CFO/Treasurer/Comptroller Strategy and business development 35 Finance 23 CIO/Technology director Marketing and sales 23 Other C-level executive Operations and production 18 SVP/VP/Director 16 Head of business unit Customer service 13 IT 11 Head of department Risk 11 Manager 15 Information and research R&D Legal Human resources Procurement Supply-chain management Other 22 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in the report 23 © The Economist Intelligence Unit Limited 2013 London 20 Cabot Square London E14 4QW United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com New York 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: newyork@eiu.com Hong Kong 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com Geneva Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...]... Ability to connect with a like-minded community of users 7 Other 3 Don’t know 1 18 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q6 What categories of goods and services do you think will see the biggest shifts in the aforementioned models of consumption and delivery of goods and services in the next three years? Select up to two... our business model 40 We are integrating shared goods and services to our business model 27 We are integrating leasing/rental goods and services to our business model 17 We are integrating exchange (barter) of goods and services to our business model 2 Other 14 19 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q8A What approximate.. .Supply on demand Adapting to change in consumption and delivery models Harnessing small players ❛❛ It is logical that these acquisitions will continue in other sectors as companies demonstrate that they can produce sustainable business models with proven profitability ❜❜ Ed Lee, mayor, San Francisco 10 In the meantime, the market to accommodate consumers’ demand for subscription, rental and sharing... The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q10 What are the key risks or difficulties you would associate with implementing new delivery models? Select up to two (% respondents) Organisational (lack of internal co-ordination) 33 Technical (too complex to integrate) 30 Compliance (data privacy and protection issues) 27 Financial... sector Less than $50m 28 $50 to $100m 2 4 Retailing $100m to $500m 2 14 Telecoms $500m to $1bn 1 8 Agriculture and agribusiness $1bn to $5bn 23 $5bn to $10bn 1 Automotive 1 6 $10bn or more 17 21 3 Logistics and distribution © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models What are your main functional roles? Which of the following... can increase the validity of the industry and the chance that the right regulations will be enacted, he says “If executives don’t participate in the process, they face a greater risk that regulators will overreact and try to implement rules that get in the way of their business growth.” Supply on demand Adapting to change in consumption and delivery models 5 Conclusion Shifting cultural norms, lingering... credited with coining the term “sharing economy” to identify entrepreneurs using the Internet to connect services and products with buyers “It makes sense that [these companies] will become attractive for purchase or imitation by already established businesses in the marketplace,” he says Supply on demand Adapting to change in consumption and delivery models 3 ❛❛ You can connect with people in a way you... changes 5 Environmental concerns 2 Other 3 17 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Q3 How, if at all, are your personal preferences changing for how you obtain access to goods and services? Select all that apply (% respondents) I increasingly prefer to access goods and services on a subscription basis (eg software licenses,... 2013 Supply on demand Adapting to change in consumption and delivery models firms While the Internet makes it possible to reach clients all over the world, delivery models for these goods have to support that reach with fast, efficient and cost-effective options That can be tricky for smaller companies with limited budgets, says Mr Amos “You’ve got to be able to ramp up, and match supply with demand. ”... Procurement 4 Supply- chain management 4 Other 2 22 © The Economist Intelligence Unit Limited 2013 Supply on demand Adapting to change in consumption and delivery models Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report ... regulators and monitoring corporate reputation are some of the specific areas which new delivery models need to encompass Supply on demand Adapting to change in consumption and delivery models Consumers... that get in the way of their business growth.” Supply on demand Adapting to change in consumption and delivery models Conclusion Shifting cultural norms, lingering economic challenges and steady... report Supply on demand: Adapting to change in consumption and delivery models is an Economist Intelligence Unit (EIU) report sponsored by Zuora It delves into the shifting attitudes among business