I have long been a skeptic when it comes to the prospect of
persuading companies to take responsibility for protecting the
environment and public health. Yet now a revolutionary new way of doing
business called "shared savings" is changing the basic rules of commerce
and, in the process, making environmental protection and public health
synonymous with the bottom line. The implications are profound.
Many companies are making a shift away from profit-driven
transactions--the hallmark of traditional capitalism--to shared savings.
In the new scheme of things, minimizing rather than maximizing the
materials and energy needed for production is increasingly the measure of
commercial success. It's all part of the great transformation taking
place from a market to a "network" economy. In the latter, servers
provide clients access to services and experiences over a defined period
Here's some examples of how the new commerce works:
* Carrier, the largest manufacturer of air-conditioning equipment, now
offers cooling services rather than just selling air conditioners.
Carrier installs its equipment on a client's premises and charges a
service fee for maintaining an agreed-upon level of comfort.
This is very different than traditional product-based sales, in which
a company attempts to sell the largest capacity piece of equipment it
can, i.e. one that uses more energy than necessary. In a service
relationship, the idea is to minimize the use of energy in order to save
on the cost of the service. That's why Carrier provides free energy
savings services, including lighting retrofits and special windows, so
that its clients will use less energy.
* Companies in the chemical supply industry have taken an even more
innovative approach to doing business called "gain sharing." For example,
chemical supply companies traditionally have sold chemicals on a per-drum
basis to automobile manufacturers for various production processes.
Because the chemical supplier is not responsible for the environmental
costs associated with the final use and disposal of its products, it has
little or no incentive to invest in costly research to develop less toxic
chemical compounds. Its primary incentive is to sell as much of its
chemicals as possible while minimizing its up-front costs of production,
handling and transport.
In a gain-sharing arrangement, however, the chemicals remain the
property of the chemical supplier, which enters into a performance
contract in which it is responsible for both the management and the
application of the chemicals at the site where automobiles are
manufactured. In other words, the seller-buyer relationship is
transformed into a server-client one. This entirely transforms the
incentives of each party.
If, for example, the supplier can introduce innovations that reduce
hazardous waste generation, the automobile company, which is responsible
for controlling and cleaning up these wastes, agrees to share the cost
savings with the supplier. In one such situation, PPG/Chemfil and Ford
Motor Co.'s gain-sharing arrangement at Ford's Taurus assembly plant in
Chicago has resulted in significant environmental remediation and
cost-savings, which was shared by the auto company with its paint
This new approach to doing business, based on access to services
rather than the sale of products, has the potential to make environmental
savings an intimate part of the commercial mix in many industries.
Gain-sharing is becoming popular in a wide number of fields for the
simple reason that in some industries there is little or no money to be
made any longer in pure sales. The problem is compounded by there being
too many suppliers in a given industry competing for a limited number of
customers, further depressing prices and profit margins.
How, then, does a company win market share? The answer, say a growing
number of companies, is to let go of the idea of selling goods or
services, as radical as that might seem and, instead, to lend their
know-how and expertise to help run the customer's business.
One good example of this phenomenon is the health care industry, in
which several drug companies have entered into "disease management"
arrangements with HMOs. The drug companies agree to take responsibility
for the total treatment of a patient, including disease prevention,
patient care and the administration of drugs. Eli Lilly, for instance,
has singled out five major diseases--diabetes, heart disease, central
nervous system disorders, cancer and infectious diseases--for disease
management. The new mission is to get the patients well and keep them
By shifting focus from only selling drugs to also servicing patients,
companies like Eli Lilly help reduce HMO and hospital costs and share in
This has the potential of revolutionizing the health care field by
focusing increasingly on managing prevention rather than administering
In these kinds of shared-savings or gain-sharing networks, then, the
logic of the marketplace is turned on its head. The more successful the
pharmaceutical companies are at reducing the cost of health care, the
more savings available to be shared by the HMOs. Some health industry
analysts are considering taking the process a step further by also
including productivity gains resulting from less absenteeism and improved
worker health as part of the gain-sharing agreements with pharmaceutical
companies, insurance companies and HMOs.
The transformation from profit-based transactions between sellers and
buyers to shared-savings and gain-sharing agreements between servers and
clients is quickly spreading to other industries, changing many of the
fundamental assumptions upon which business is conducted.
We could be witnessing the early stages of a fundamentally new kind of
capitalism. In an age increasingly dominated by memberships,
subscriptions, retainer agreements, service contracts, leases and other
forms of commodified relationships between servers and clients operating
inside vast commercial networks, shared-saving and gain-sharing
agreements could become as important as profits derived from product
sales were in the market economy.
If that were to happen, our world would change forever.