Jonas Bulach: in product as a service model, it's not certain how much of the profits will materialize. However with our product quality in mind, we want to take this risk because the risk is always associated with responsibility. And we want to take on more responsibility over our products and the built in resources also from a sustainability perspective.
Jingle: My name is Patrick Hypscher and this is Circularity FM, the podcast about understanding, building and managing circular business models. Patrick Hypscher: Welcome to the 10th episode of PaaS Decoded, 16 conversations about the fine details of product as a service. In the last episode, Nora Sophie Griefhahn highlighted the importance of a high quality product design. In today's episode, we look at how a PaaS model can be mapped in a company's reporting and accounting.
Patrick Hypscher: He studied business administration, accounting, and finance, and was looking for a company that takes a holistic approach to circularity. The title of his thesis was Slowing the Loop in the Household Appliance Industry. He joined V-Zug, premium manufacturer of home appliances, starting his career as a business controller before being the project manager of product as a service. Welcome Jonas. Jonas Bulach: Hi Patrick, thanks for the invitation and kind introduction.
Patrick Hypscher: Jonas, you wrote your master thesis about The influence of slowed down loops on V-Zug. What is one of the things that sounds super easy in theory, but it's super hard in practice Jonas Bulach: Well, I would say that reusing appliances is from a mechanical point of view easy. However, in practice, it's not that easy because there are a lot of electronic components in it. And that's a little bit those are the vulnerable parts of an appliance, so that's, that's really a challenge.
Patrick Hypscher: when we talk about appliances and V-Zug, what, what is the appliance range V-Zug is offering Jonas Bulach: So basically it's all the household appliances that starts with washing machines and dryers. And then we move on in the kitchen so the refrigerators, oven steamers, dishwashers, hobs and hoods. So basically you can furnish a whole apartment with V-Zug appliances. Patrick Hypscher: and what kind of appliances are available as a service.
Jonas Bulach: Well, we started with washing machines and dryers, but right now we are also in the pilot phase of kitchen appliances. So you can have the whole range of products that we have at V-Zug as a service. Patrick Hypscher: Can I, as a private customer, rent out appliances?
Jonas Bulach: No, right now, not because we are right now just with B2B clients. So for example, real estate investors or housing cooperatives that have properties that are built to rent. So that's our focus group right now. So we're not yet in a B2C setting. Patrick Hypscher: Okay. So as a customer, I can only be lucky if I move into one of the apartments that is provided by one of your partners. Jonas Bulach: Yes, yes, exactly.
Patrick Hypscher: Okay. So we want to talk a bit about the financial accounting side. Let's start with, uh, reporting. What are the main KPI you watch at?
Jonas Bulach: Well, I think from a sales perspective if we look at the sales funnel from the top, we look at the number of B2B clients that we informed about PaaS. So that's, that's the start and how many of them were interested in in product as a service, because we've learned that if we just focus on projects already in execution then that's not the best time to present product as a service because budgets are already made and the willingness to change the system from buying appliances to renting appliances is rather low. So we have to inform our clients a little bit more in general, and maybe product as a service is not considered in the current project, but hopefully in the next one. And if you move further down the sales funnel, then we look at a little bit more specific KPIs like the number of offers or quotes that we made, and the number of accepted offers and appliances under contract. And from a little bit more financial perspective, we track the the product as a service associated financial flows separately from the conventional business. So that's a really important thing to do. And we are at the stage where we are right now in the development of product as a service, the focus is primarily on capital expenditure and the validation of the business case in terms of can we realize the planned price on the market and does the risk that the risk of, of service interventions that we included in the pricing correspond to reality. So that's really about validating the business case.
Patrick Hypscher: One key performance indicator is usually also the customer lifetime of these contracts. Is this fixed in your B2B contracts or is it is it also, uh, somehow flexible because this KPI ultimately also decides whether it's profitable.
Jonas Bulach: Yeah, it's basically it's fixed. So we, we rent them, I would say 90 percent of all our contracts are 12 years. And nevertheless, our clients have a so called exit strategy. After three years minimum of, of contracts term, they can get out of the contract, but normally it's, it's 12 years, so it's, it's fixed and that's also important for, for our business case there. Yeah.
Patrick Hypscher: Yeah. Yeah. Beautiful. So 12 years sounds really good. When you inform internal stakeholders about these KPIs, you probably have a similar situation like with clients that you first have to explain a bit the concept and what these KPIs mean, what they are, the implications of these KPIs. So who in V-Zug is familiar with the meaning of these product as a service specific KPIs.
Jonas Bulach: I would say that the KPIs are known to many stakeholders in our organization, but with a different focus. So for example, at the level of the board of directors, an important KPI is the number of appliances under contract because it's a rather new and growing business model. For the CFO, it's important to know the, the capex for, for the cash planning and for example, for the service organization, it's important to know the number of service interventions per contract. So I would say that we are not yet at a point where all stakeholders in the organization understand every single implication that has, has PaaS on our, on our daily business, but we're working to move in this direction.
Patrick Hypscher: And how do you prevent that sometimes unfamiliar stakeholders make judgments about the model, especially when it comes to revenue. Yeah. I mean, the revenue is sliced in many small pieces and looks pretty tiny compared to the sales organization. Um, so, and if you don't understand the structure is pretty easy to make uh, a misjudgment. So how do you prevent that? Or maybe it also happens, I guess. I
Jonas Bulach: Yeah, I'm sure that it happens. But we try to proactively inform, inform all the stakeholders, even those who are not in contact with product as a service on an everyday basis. And there it's very important or helpful to, to show also the associated product as a service business case. However, we see that the business case for people who are not or don't have a financial background, it's not that easy to understand. What really helps us is also just to look at one appliance. So a direct comparison between the conventional sale of a product and product as a service. And then you can see and show and explain the, the differences between the, the revenue and cash flows. So that's, that's really helpful for, for those who are not familiar with with financial figures yeah, on a daily basis one could say.
Patrick Hypscher: Okay. Nice. And I guess you also have like company reportings. Is your current product as a service model already part of the normal standard reporting? And do you need to adapt that standard reporting?
Jonas Bulach: So yes it's part of the standard reporting format that we use for all the other financial figures in V-Zug. And when it comes to those financial figures that are consolidated and presented in our financial report. However, as I mentioned, we have other PaaS specific metrics that we track. But those are right now only for internal purposes. So no, we are not yet changing our financial reporting format just for PaaS but PaaS has to adapt to, to, to the standard right now.
Patrick Hypscher: Looking forward to the day when this will be a data way around that linear model has to adapt to the circular one. Let's move on and look at accounting. How do you determine the depreciation time of the products? Because this is also really important when calculating the profitability, the pricing and many things related to that.
Jonas Bulach: Yeah, so currently the depreciation period is set at 12 years and I would say that's our best guess right now. So if you would have asked me, I don't know, 40 years ago, the same questions or the same question, I would have rather said 15 or even more years. However, due to the electrification, and that's important, that led to a massive resource and energy efficiency gains during the use phase, and this also made them a little bit more vulnerable to malfunction. So right now we are at 12 years. That's also the, the rental period that we set. And that's the depreciation period and our best guess right now.
Patrick Hypscher: And is it. Somehow consistent with other, let's say, lifetime values you communicate or does it have to be consistent across the company? Jonas Bulach: Well, right now we are selling our products primarily so that we don't, so we don't capitalize them on our own balance sheet. And I think if you ask someone in the field or some, an investor in the property or in the real estate sector, and 12, 10 to 12 years say that that's a good range.
Patrick Hypscher: I think, like with 12 years, you're already probably above average, which is also in line with the lasting quality of V-Zug's appliances. Nevertheless, I can imagine that even after 12 years the appliances still are in good shape and that you rather have a conservative approach here. And at the same time, the standard depreciation methods assume this linear decrease of value over time. And I feel sometimes that puts a product as service model in a weaker position. Because in the first 12 years, we carry the burden, which makes it look less attractive. At the same time, it might last 20 years. Yeah. Do you adjust the depreciation curve in your appliances?
Jonas Bulach: I really think that the, the current depreciation standards are not ideal for product as a service models. However we do not yet change our, our, our system because so right now we are depreciating our product on a, on a, on a straight line basis over the mentioned 12 years. And we also don't take into account the fact that we try to refurbish the appliance after the rental period in our circular factory or at least reuse parts or components of these appliances. So one could say that we are a little bit cautious and not on the most advantageous side from a financial perspective. However, this approach also matches the conservatism principle of the fundamental accounting guidelines. And that's where we are right now.
Patrick Hypscher: Already curious when Jonas will listen to this episode in 10 years from now and review what we are saying today. Jonas Bulach: Yeah, me too.
Patrick Hypscher: Yeah, it's, it's just like, so such a long time span. Yeah. If we reflect on what happened 10 years from now and now we make assumptions about the next 10 to 15 years. The yearly margins of your single subscription are influenced by the choices you make when it comes to posting various cost types. So like repair or delivery you can either post them at the beginning as costs. You can make them part of the product value and depreciate them over time or realize them at the end of the contract. Uh, how do you post expected costs like repair, replacement and customer service?
Jonas Bulach: Well we have calculated these expenses or, or these expected costs during the rental period and record now on a monthly basis, a provision with the expected monthly cost per appliance, and as soon as the costs actually are incurred, incurred. The provision is settled or adjusted by these actual costs. And in this way we can match the expenses over the rental period with the revenues that uh, or at least to a certain extent um, similar to the capitalization of the product value and its depreciation, so basically the same concept.
Patrick Hypscher: So you do it then actually on a device, um, level and not on an average. Jonas Bulach: Yeah, right now we started on a device level. We have to, to validate those figures on a yearly basis to show if the risk is in the right place or not, and yeah, maybe in the future it's just an average and not on an every appliance, but right now we started with each appliance, yes.
Patrick Hypscher: Okay. Okay, cool. And. Then let's talk also about CapEx. You mentioned it already at the beginning when it comes to KPIs. Um, because with product as a service, V-Zug remains the owner of the products and the assets have to be shown in your balance sheet. At the same time, I assume that your current accounting system doesn't support subscriptions. So how do you update the CapEx value in your books on a monthly or day to day basis.
Jonas Bulach: Yes. That's, that's really a challenge that we are. Currently still managing relatively manually or at least the, the, the financial recognition in our books. However, we are currently looking into how we could automate the PaaS associated processes. Like for example, capitalisation of the assets, their depreciation, the, the revenue and cost recognition, and so on. But yeah, if, if you have some insights from your old occupations of how it could be done we will be grateful if you could share them with us.
Patrick Hypscher: Yeah. Yeah. I think in general, this is a challenge in a sense that most financial systems are built on, on yeah, linear sales models. Yeah. Of course you do have assets that are part of your CAPEX nevertheless not so much from the sales side. So what I see mostly is that you do have product as a service a specific systems to manage the contracts and assets there. And then you have the interfaces to link that to your core core system. Um, and yeah, sometimes you, you always start with the manual process, then you start to automate it somehow. And if you at some point have a system that has an interface then you can connect it with your core system. At the same time, sometimes the core system is a bit older as the new subscription management system. So the, the, the challenge is mostly more on the core system side. But yeah, also like, I think, take it as an invitation to people who listen in right now. And so if you have experiences here please, please reach out to Jonas. He's happy to learn from your experiences when it comes to that. let's move on to profitability which is a key yeah, area, of requirement and goal. And for product as a service, it's, it's a curse and a blessing. It has opportunities, but also challenges. Yeah. So you mentioned the 12 years and it's another, let's say indicator that contracts of long lasting products like home appliances, then also have a late break in for you as a provider. And it's not sure how much of it will materialize if, customers follow the early exit strategies as you mentioned, or if they stay around longer. How do you justify the profitability of the model to your management?
Jonas Bulach: At first, I think it's important to note that we at V-Zug believe in our product quality. So yes, in product as a service model, it's not certain how much of the profits will materialize because of, for example, also the number of service interventions for that you have those are unknown to you when starting with product as a service. However with our product quality in mind, we feel that we can take this risk, or I would go even further that we want to take this risk because the risk is always associated with responsibility. And we want to take on more responsibility over our products and the built in resources also from a sustainability perspective. So since in product as a service ownership. of these products remains with us and we can take them back and reuse or refurbish them and by doing so get more circular. So that's a little bit the background at V-Zug. And to justify profitability in terms of financial figures. I think I must, again, mention the business case. So that's why it's important to keep it always updated and validated with every new information and the aspect of consistent revenues over a longer period of time is definitely an interesting one. Nevertheless, we can show that in the business case. So yeah I'll have always to refer to the business case also to justify the profitability of the model.
Patrick Hypscher: Yeah, sure. And then I guess you had like initial strategic discussions with your directors, walked them through the business case, the strategic opportunities, the integrated approach, and then the board committed to follow that route. Jonas Bulach: Yes, exactly. But as I said, it's, it's not just the, the, the financial part of product as a service, but it's, it's the, the, the bigger picture. So also the strategic aspects were considered in this decision.
Patrick Hypscher: In order to be profitable here, customers also have to pay their bills. You mentioned you're, you're, you're doing mostly B2B. And it might be different, but do you need methods, um, to make sure that customers pay the bills Jonas Bulach: No, right now, not. We are in a good position in Switzerland. The B2B market is really reliable. So we don't have any issues there right now. Or, or somehow methods in place to, to reduce the risk.
Patrick Hypscher: and curious question on the devices. So we had a episode with HP instant ink where we also talked about, let's say the IOT capabilities of devices. So here HP is able to deactivate cartridges if customers don't pay their bills. Is it something you have on your radar as well, or to connect their, let's say, the product as a service model with IOT capabilities.
Jonas Bulach: Yes, we have that on our radar, but not to shut the appliance down if someone doesn't pay, but rather from the perspective let's say from a predictive maintenance point of view to reduce our service costs. And so that would be a little bit, the approach that we want to, to to move towards but not from a profitability side of IOT.
Patrick Hypscher: Okay. Clear. We talked a lot about the lasting quality and your main market, Switzerland. Do you see any drivers that put V-Zug in a better position to offer a commercially successful product as a service compared to other retailers or manufacturers?
Jonas Bulach: Yes. I clearly see some drivers that put V-Zug in a better position. And the first one that I want to mention is. That we can look back at a 111 year old, um, successful company history. So that allowed us to pre finance a product as a service on our own. And therefore we were able to start with product as a service in the first place. So that would be another story. If we are a small startup. Then it's really important to me that product as a service is in the best case offered by the manufacturer of the products, or at least by a provider that has some connection to a manufacturer, because I think it's, it's very important for a successful product as a service model because it depends on the product and it's in, in the best case, the product is designed and optimized for the corresponding business model. So. As a Swiss household appliance manufacturer, we are therefore in a good position because we can adapt our products to be, for example, easier to disassemble and therefore we can make refurbishment or reuse of these appliances more efficient for us. If we would just be the provider of third products as a service, then we would have the interest in getting durable, easy to maintain and reusable products. However, since we still buy the appliances from the original manufacturer, they do not have the same incentive to build the products in an ideal way for product as a service, as it would have been in the case of a product as a service model operated by the manufacturer. In the same context, it's also important to note that we are working on the solution for used appliances to get back to us. So we had here a pilot project to build a so called circular factory where we take back appliances, try to refurbish them. Or if that's not possible, at least we use parts or components of these appliances. And right now we are in just industrialization phase of our circular factory. So we really believe that this is an important approach towards a more circular household appliance industry. And the knowledge and resources to reuse appliances helps us also from a product as a service standpoint, because we can recover more value out of reuse or out of used appliances. And I think the last one or the last aspect that I want to mention is more from the, the market perspective because the Swiss market is is really yeah it's, it's special compared to other countries, let's, let's put it in that way because we are right now offering product as a service to B2B clients. And normally it's the standard in Switzerland that household appliances are already in place when you move into a rental apartment. And it's important to note that also that in Switzerland, roundabout 60 percent of the population are tenants. So, as a tenant, you are not allowed to Call the service organization if the appliance doesn't work anymore because you're not the owner of these appliances and you have to go via the the the investor or the facility management. And as a tenant, you also don't have always access to new appliances. So it could be that those appliances were used from the tenant before you. And we think that the perception of used appliances among tenants in Switzerland is therefore not bad. And that we have market conditions that are perfect for a pure as a service model where it doesn't matter if the appliance that delivers the service is new or refurbished and sanitized. So all in all, from my point of view, there are many aspects that who play into our hands if V-ZUG is moving towards product as a service, and I didn't mention the service organization. So we are also have our own service fleet and in product as a service to product plays an important role. However. The service is also an important aspect, especially when I'm talking about household appliances the probability that service technician has to take care of your appliance somewhere in the, in the rental period is rather high. So that's also an important factor that we at V-ZUG have to deliver a successful product as a service model.
Patrick Hypscher: Nice. That sounds pretty promising. And maybe just to add two thoughts on, on that one, based on my own experience. I also see with your focus on B2B you minimize the number of times you have to transport an appliance. And because transportation, I guess it's also a substantial cost point in your calculation. the washing machines don't fit in an envelope. Yeah. You need some people to carry that around. And with pretty long lasting contracts the share of these costs are rather low, this is a advantage in comparison to B2C, where you might not expect so long customer contract duration. The other thing if I'm listening correctly is also with your circular factory that you bring down refurbishment costs, probably with some kind of semi automization or so, because if you need to repair and refurbish or re manufacture the appliances manual labor, which is rather expensive compared to material. So you're also working on that cost position to drive that down
Jonas Bulach: exactly. Yeah. Yeah. It's, it's a, it's a big challenge because well, we are manufacturing in Switzerland and. We are also now trying to reuse appliances and refurbish appliances in Switzerland. So labor costs I think there are a lot of countries that that are cheaper in terms of labor costs than Switzerland. Yes.
Patrick Hypscher: yeah. Nice. Jonas, I have three last generic questions. I feel the first one is perfectly suitable for you. What's the main thing you need to make sure as a brand or manufacturer before you start a circular product as a service.
Jonas Bulach: Well, I would say you should have a suitable product, then you should have a service organization to be able to deliver always the promised service. And it's also not bad if you have some financial resource fund to prefinance product as a service. Patrick Hypscher: Second one, what are significant trends you see when it comes to circular renting for the next five years?
Jonas Bulach: Well, I hope that more and more manufacturers incorporate circular design principles like refurbishment, reuse, disassembly. In the design of their products and that they also build the knowledge and the physical foundations to actually reuse those products after a rental period, like we do with our circular factory. So basically I hope that yeah, the, the industry or the economy in general combines product as a service in the future with other, other Principles of the circular economy in a more holistic way. So I hope that that is a significant trend in the next five years.
Patrick Hypscher: At least you're leading the way there and facilitate that trend. Jonas Bulach: Yeah, we'll try. Patrick Hypscher: Yeah. And my last question is about people again because Circularity FM is about sharing knowledge and connecting people. Who should get in contact with you right now.
Jonas Bulach: Yes. We mentioned the challenge of Automatization of processes. So if someone has, there are some insights to share, please get in touch with me. And I'm also convinced that a circular economy can only be achieved with an ecosystem approach. So we at V-Zug are trying to get more circular and have already laid the foundations for it in various areas, but there is still a long way to go. And if you have any ideas that help us or would like to exchange experiences with us, then feel free to reach out.
Patrick Hypscher: Nice. Wonderful, Jonas. Thanks a lot. Jonas Bulach: Thank you, Patrick.
Patrick Hypscher: This was another episode of PaaS Decoded. 16 conversations about the fine details of product as a service. If you liked it, share this episode with colleagues or on social media. If you missed a question or topic, please send me an email so I can improve the conversations for you. If you learned something from this episode, please provide a review via Spotify or Apple Podcasts. That helps others to discover the podcast. And don't forget, the most abundant renewable resource. This is your imagination.
Jingle: My name is Patrick Hypscher and this is Circularity FM, the podcast about understanding, building and managing circular business models.