In a performance economy, object of the sale is not the product itself but rather the performance it provides, and the benefits offered to the user.
As a response to the environmental challenges of high waste volumes related to mass consumption, and in order to address the structural issues of rising public debt, persistent unemployment and slow economic growth, Walter Stahel – often labelled as the father of circular economy- challenged businesses to operate a shift from traditional manufacturing to what he calls the Functional Service Economy (Stahel, 2010). The objectives of this “performance” economy are to exploit science and knowledge as drivers to uncouple revenue and wealth creation from resource throughput, by focusing on smart materials, smart goods and smart solutions.
With Stahel contributions, the Functional Service Economy is translated into a set of innovative business models that integrate products and services into solutions to create wealth and jobs with considerably less resource consumption. Following the same line of thought than Cradle to cradle authors, Stahel’s approach departs from the traditional sustainable development of “doing things right” (i.e. looking at end-of-pipe recycling technologies) to ‘doing the right things’. In the “Doing things right” approach, the focus may be on clean tech processes, or eco-design solutions. The main aim is to reduce environmental impact such as the release of toxic substances or the waste generation. If this approach has led to the emergence of green economy principles and the improvement of recycling, Stahel states, it somewhat ignored the social potential of wealth and job creation. By widening the scope to systemic solutions, Stahel goes a step further and provides a roadmap to rethink resource efficiency at a system level. In contrast to conventional recycling, strategies for higher resource efficiency aim at reducing the volume and speed of resource flow through the economy (Stahel, 1997). According to Stahel, businesses should go beyond recycling and explore solutions that enable the use of remanufactured and upgraded components and goods, and develop commercial innovations to keep goods in use as long as possible. Among the strategies for a higher resource efficiency are those for a longer and more intensive use of goods, those for dematerialized goods, and those for innovative system solutions (Stahel, 1997). According to the author, the preference of sufficiency over efficiency and a focus on systems solution over product/manufacturing focus are key to the shift towards performance economy. As these two strategies can be seen as the core of the circular economy, they are explained below.
One key principle behind the performance economy is to adopt sufficiency strategies. “Sufficiency solutions can mean turning a problem into an opportunity or a virtuous loop, in the sense of finding solutions that do away with unwanted environmental and social effects but without renouncing or reducing needs” (Stahel 2010). In the Functional Service Economy, sufficiency solutions act as an economic driver, because the minimisation of resource inputs directly increases profits. Receiving the same amount of revenue for delivering the desired performance with fewer resources increases the competitiveness and profits of the supplier. Examples of this approach can be Zero Energy Homes (in which a combination of good insulation and structural design requires little or no energy to heat the building), or non-sticking cleaning surfaces in which cleaning products become unnecessary. In the gardening sector, sheep use to replace herbicide and mechanical mowers, or in the hygiene sector, waterless urinals are other examples following a “sufficiency” strategy.
One major contribution from Stahel is in the formalisation of what a performance economy would mean at business level. In a performance economy, object of the sale is not the product itself but rather the performance it provides, and the benefits offered to the user. It necessitates a major shift in the roles, tasks and responsibilities of the provider of the solution. The liability of the provider is related to how well the solution performs instead of its manufacturing quality only. Payment is due when performance is delivered instead of at the transfer of property rights. The goods at the origin of the services may also remain property of the solution provider, which bears strong consequences in terms of design and management: the provider has to care for its products. He is incentivized to produce long lasting and durable products with fewer resource inputs as compared to selling goods only.
Examples of business models selling performance are plenty: chemical management services and rent a molecule in the chemical industry, rental and operational leasing in the real estate business, selling indoor climate for energy companies, textile leasing in the hospitality and hospital industry, and all recent examples affiliated to collaborative consumption and sharing platforms (Airbnb, Uber, etc.). When the business model of selling goods as services started to be recognised as a general research topic, new terms were developed, such as “Product-Service-Systems” and “servicizing” in the late 1990s, early 2000s (Mont, 2002, Halme et al, 2007). These terms are synonyms for selling goods as services, which form a key strategy to meet the objectives of a circular economy.