Download - Breaking With Convention, Creating New Ideas
Building Efficiency
12/8/2010 Confidential outsmartinc.com 1
Breaking With Convention, Creating New Ideas
Building Efficiency
Andrew (Drew) McInnes
Outline of Discussion
The Innovation Challenge (Challenge)
What Problem to Solve (Process)
Getting to the Right Solution (Solution)
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Getting to the Right Solution (Solution)
Designing the Right Business (Result)
Innovation and Design Challenge
Increase the energy efficiency of existing commercial buildings in US
Challenge
• Break with convention and create solution that
actually increases energy efficiency of existing
commercial buildings in United states
Conventional Approaches
• Force IT solutions upon users through “C-level”
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• Force IT solutions upon users through “C-level”
• None of these solutions meet customer expectations
however, leading to minimal impact on efficiency
Facts
• 5 million buildings (>1,000 ft2)
• Account for 15% of total US energy consumption
How We Got Started
First up was determining what problem we needed to solve
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Put my “systems cap” on and saw we needed to solve
a human problem more than a technical one to fulfill our intention
Let Me Explain
After modeling the flow of energy through a commercial building
Stock of Energy in Building Operations (Simplified Version of My Original Model)
Energy
Converted to Work
(Building Operations)
(35%)
Energy WastedEnergy Supplied
(65%)(100%)
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Discovered most energy intensive component
in commercial buildings is HVAC system …
Energy
Actually Converted to Work
(Discrepancy of 0%)
Balancing
Feedback
Digging Deeper
… and HVAC systems degrade over time and often fail to work properly
Energy
Converted to Work
(HVAC Operation)
(35%)
Energy WastedEnergy Supplied
(80%)(100%)
Stock of Energy in Building Operations (Simplified Version of My Original Model)
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HVAC System
Degradation
and Failure
Energy
Actually Converted to Work
(Discrepancy of -15%)
Wreaking havoc on overall energy efficiency
of commercial buildings across the United States
Balancing
Feedback
Leading Us to Ask
Who are the players in the HVAC service and maintenance game
Two Sets of Players, Two Versions of the Game
Small Buildings Big Buildings
(1,000 ft2 - 200,000 ft
2) (> 200,000 ft
2)
% of Market 90% 10%
Building
Manager 1 √ √
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My thinking was that improving HVAC performance was the most
actionable way to increase energy efficiency in commercial buildings
Mechanical
Contractor 2 √ √
Building
Controls
Manufacturer 3
--- √
NOTES:
1. Manages the overall operation of a building and is usually employed by the building's owners
2. Specializes in working on HVAC systems and is hired by building manager to perform HVAC service and maintenance
3. Manufactures building-control systems to govern the performance of HVAC systems (e.g. Siemens, Johnson Contrls, Honeywell)
Next Asking
What are the “rules of the game”
Small Buildings Big Buildings
(1,000 ft2 - 200,000 ft2) (> 200,000 ft2)
1. Building manager purchases a service
agreement from the mechanical contractor
2. Mechanical contractor then inspects
HVAC system 1x / month to try to identify
and prevent potential system failures
1. Building manager invests in a building
controls system to monitor and optimize the
performance of the HVAC system
2. Building manager then purchases service
agreement from the building controls
manufacturer because only the
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By looking beyond the players to the rules, I thought I would
understand how this subsystem behaves, and I did
3. When a HVAC system failure occurs
(e.g. boiler bursts and floods a room), the
mechanical contractor must respond to the
failure within 4 hours of the occurrence
4. After the 5th HVAC system failure that
the mechanical contractor fails to respond
to within 4 hours of occurrence, the
mechanical contractor becomes liable for all
damages brought about by the failure
manufacturer because only the
manufacturer can reprogram the controls
3. Building controls manufacture must
reprogram controls 4 x / year to optimize
against degradation of HVAC system
4. Mechanical contractors perform repairs
on the HVAC system that the building
manager's site facility team cannot perform,
and install the building controls system
Before Finally Asking
What are each player’s objectives in this game
Small Buildings Big Buildings
(1,000 ft2 - 200,000 ft2) (> 200,000 ft2)
Building
Manager
Have the mechanical contractor sit in the
building "24/7" to make sure nothing ever
goes wrong with the HVAC system
Because this is not physically possible for
the mechanical contractor to do, make sure
the service agreement with the mechanical
contractor favors the building manager
Protect the significant investment made in
HVAC systems for buildings of this size by
making sure there are "eyes and ears" on
the system at all times
Maximize the ROI realized on this
investment by also having the "eyes and
ears" continually optimizing the HVAC's
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This was most critical part of my thinking that revealed how the
system behaves over time, leading me to see what problem to solve
contractor favors the building manager ears" continually optimizing the HVAC's
performance given real-time conditions
Mechanical
Contractor
Building
Controls
Manufacturer
---
Capture a larger share of the "economics" in
commercial buildings beyond those
available from only selling control boxes
Build a relationship with the building manager in order to become the "first call" a
building manager makes whenever he or she needs something done to HVAC system
Profit from the relationship down the line when the building manager needs a new HVAC
system installed or one refurbished
Problem We Needed to Solve
Reframe how managers and contractors interact in “small buildings”
My Rationale
• 75% of building managers lack resources to keep their HVAC systems running properly themselves
• So these managers hire contractors to watch over their systems in order to achieve “peace of mind”
• “Peace of mind” that someone knowledgeable is always watching over the HVAC system “24/7”
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• BUT, contractors can only meet this intangible need with an intangible solution
• One called “trust based” contracting where managers must trust contractors will perform to
expectations
• Approach gives rise to communication gaps leading to poor HVAC performance in 75% of buildings
In order to improve HVAC performance and in turn the overall energy
efficiency of many commercial buildings in the United States
Charted Our Course, Getting Us Underway
Helping 45 managers and contractors discover that …
Unmet Needs (ZMET Photos) Uncovered and Translated Unmet Needs
• Observation and interview led me to uncover
and translate the unmet needs of both sides
• Topping each side’s list was greater
“transparency” and “accountability”
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… greater TRANSPARENCY and ACCOUNTABILITY is
what they would most value in their HVAC interactions
“transparency” and “accountability”
Verified Findings
• Qualitative and quantitative methods
subsequently helped me to verify these findings
‒ e.g. surveys, regression, etc.
How Much They Would Value This
Was what we sought to understand next
Predictability
• Managers and contractors would like to be able
to predict HVAC system problems ahead of time
Scalability
Hidden Aspirations (ZMET Photos)
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When we probed for hidden aspirations that
greater transparency and accountability could subsequently enable
• Contractors would like take back relationship
with manager from contractor’s own technician
• This would allow contractors to scale and
tangibly value their business for first time ever
Bringing Us to Our First Trade-Off Decisions
For framing the experience we would need to deliver upon
Data
OR
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In order for our solution to give managers
and contractors what they most valued
Monitoring
OR
Controls
Cat5 Cable
OR
Power Line
OR
Recommendations
Why Team Accepted Trade-Offs Recommendations
Not-so-obvious conclusions we reached
Monitoring Only
• Both sides only needed HVAC monitoring solution to reframe their interactions in most positive light
• Monitoring is all managers needed as “checks and balances” on system / contractor performance
• Contractors said controls solution would be unwanted 3rd party in customer relationship
Power Line Communications, Not Cat5
• Monitoring HVAC system would require pushing and pulling IP packets down to HVAC device level
• Laying wire in buildings to do so costs $500/hour, making laying Cat5 cable an unattractive solution
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Using experimental protocols and conjoint analysis
• Laying wire in buildings to do so costs $500/hour, making laying Cat5 cable an unattractive solution
• When compared to one that communicates with devices over existing electrical wires in building
• Achieving this design outcome, however, requires overcoming a not so trivial engineering challenge
Data and Alerts, Not Recommendations Too
• Real time HVAC data fed on continuous basis is what contractors said they need to “do a better job”
• Many managers on the other hand said it would be nice to also have recommendations too
• Recommendations about what needs to be fixed to verify contractor is “telling them the truth”
• Both sides agreed simple alerts about what needs to be fixed would be excellent middle ground
Getting Us to the Right Idea …
Unlock highest levels of transparency and accountability in interactions
Comprehensively and Down to Device Level
Safety and Diagnostics
Repair and Maintenance Monitoring & Management
Monitoring HVAC System Performance
Equipment Tracking
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Comprehensively and Down to Device Level
By bridging last mile of communication between managers and
contractors through breakthrough HVAC monitoring system
… and Right Solution
Breakthrough HVAC monitoring system
Internet
UtilityActionableActionableInformation
Data Server
� Monitoring and Management
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System Equipment
HVACMonitor
� Performance Optimization
� Safety/Diagnostics
� Service / Maintenance Predictability
� ROI/Payback Analysis
Offering actionable information
as powerful motivator towards implementation
Simultaneously Enabling
Human aspirations of predictable performance and business scalability
New Company
Current Alternatives
• Cannot transmit data to network
• Too expensive and complicated to install and use
• Introduce unwanted 3rd party into relationship
• “Lock in” buildings to system
Reframing Interactions in Small Buildings
(Conceptual Roadmap)
12/8/2010 Confidential outsmartinc.com 17Hardware Data
Manufacturing
and
Distribution
CustomerMechanicalContractor
CustomerBuilding Manager
Our Proposed Solution
• Bridges communication gap by virtually placing
contractor in building 24/7 (simply and cheaply)
• Returns control of customer relationship to
contractor to enable business scaling & valuation
• Delivers superior user experience by providing
ease of use and ease of installation
• Provides operators with avenue to get away
from “locked-in” attributes of alternatives
• Allows operators to predict when repairs need to
be made as well as the ROI of those repairs
Brining Us to This Stage in Our Thinking
What should the business look like for taking our solution to market
• It was one thing to design and develop a solution that would be meaningful to people
• But another thing entirely if we could not deliver the solution in a profitable way
• This was why I focused first on helping managers and contractors uncover “what they would value”
• From these values, I could surface “how much they would value this” through rapid prototyping
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• Getting people to make visual connections between their values and aspirations is how I think
through “how much they would value this,” and my approach in this project was no different
• Contractors especially could not help themselves, but to quantify “how much they would value” our
monitoring solution’s ability to scale and tangibly value their businesses for the first time ever
• I now had evidence that there was a business opportunity to lay claim to, but at what cost
Developing Our Go To Market Strategy
Using our idea and context as my starting point …
Power Network for Comprehensive Monitoring of HVAC System
• Transforms commercial building’s existing electrical wires into new intelligent network
• Tracks and reports HVAC performance and impact of all human actions on this performance
Delivering Actionable Information in Real Time and on Continuous Basis
• Automatically creates and updates service and maintenance logs quickly and accurately
• Sends alerts about system problems as well as data for predicting future problems
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• Sends alerts about system problems as well as data for predicting future problems
• Documents date and time when system problems occur and contractors respond to problems
Leading to More Certain Outcomes and More Scalable Businesses
• Facilitates greater resource-planning efficiencies through more certain outcomes
• Allows contractors to take back customer relationship from their service technicians
• Resulting in more scalable businesses and ability to tangibly value customer lists for first time ever
Easy to Install, Safe to Use
• Requires minimal time and effort to install by leveraging existing power lines in building
• Will not disrupt power distribution in building if monitoring system fails
First Designed a Starting Business Model
… threw up a business canvas on my wall like this one
Key Partners
Key Resources
Customer Segments
Channels
Customer Relationships
Key Activities Value Propositions
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Adding pictures too it for quickly developing conceptual prototypes
Cost Structure Revenue Streams
Mapping Out Different Business Models
Before selecting a subscription based revenue model for customer testing
Demand Response
1. SaaS with hardware - standardize NewCo as the Premise Network
2. Transactions - connect 3rd party ecosystem with qualified customers
3. Informatics – aggregate/sell information to manufacturers, utilities and others
INITIAL FOCUS
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Education: Labs/Dorms
Government
Multi-unit Residential
Commercial
3rd Party Service
Demand Response
Utilities
Wholesalers
Energy Service Co.
Manufacturers
New Company(NewCo)
Subscription Based Revenue Model
Offered shortest time to revenue, and more importantly …
• What is always important to me in designing new
businesses is applying systems thinking
• Applying systems thinking allows me to map out
several alternative business models
• Each model gives me ideas about how a business
How I Organized My Thinking
• Excellent first stepping stone towards achieving
higher levels of customer and business resonance
• By first delivering proprietary access to high value
data that cannot be collected effectively today
• Subsequently enabling higher-margin businesses
Why I Selected this Model
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• Each model gives me ideas about how a business
could behave over time and in different scenarios
• Plotting this behavior enables me to map path to
higher levels of customer and business resonance
• Defining and prioritize relevant criteria about
which model to test first through customer contact
… pathway to achieving high levels of resonance between
what is meaningful for customers and what is profitable for business
• Subsequently enabling higher-margin businesses
(transactions and informatics)
• That provide managers and contractors with more
actionable information beyond HVAC system
• Bridging communication gaps in other human
interactions within the built environment
Question Then Became
What is best way to execute on model to achieve profitability in business
ACTIONABLE
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Answer depended upon outcomes of next trade-off analysis
and testing of two critical assumptions about the business
DATA
COLLECTION
EQUIPMENT
Give It Away
OR
Charge For It
ACTIONABLE
INFORMATION
SERVICES
Require Advance Payment
OR
Bill as We Go
Results of Trade Off Analysis
Medium-size buildings is where to first strike resonance in the business
Small
Data Collection Equipment
Charg
e F
or
Giv
e A
way
Small to Medium
Medium
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Meeting criteria for business profitability
(LTV > 3x CAC and months to recover CAC < 12 Months)
Actionable Information Services
Super Small
Data Collection Equipment
Giv
e A
way
Charge %Upfront PaymentBill as We Go
Assuming We Were Right
We could acquire customers in 6 months or less and …
< 6 Month Sales Cycle
• Underpinning all of my financial analysis of the business was how fast we could acquire customers
• Customers that took more than 6 months to acquire would become financial drags on the business
• In that it would be difficult to recover customer acquisition costs (CAC) in 12 months or less
• No matter how I “sliced and diced” the numbers, I could not get around this 12 month constraint
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… customers would accept value based pricing terms
• No matter how I “sliced and diced” the numbers, I could not get around this 12 month constraint
Value Based Pricing, Not Cost Plus Margin
• Bookending this challenge in my design was another one called long term customer value (LTV)
• We would need to achieve a multiple of LTV in excess of 3x CAC to achieve acceptable margins
• Value based pricing would allow us to do so, but cost plus margin pricing not so much so
• Cost plus margin is what managers and contractors know – so would they accept value pricing
How We Tested My Assumptions
Created customer advisory board to test and refine these assumptions
• Initiated, structured, and performed financial
analysis to create value based pricing model
• Achieving buy in for my modeling from potential
customers at each and every step along the way
NOT SO MUCH SO
Value Based Pricing
• Learned mechanical contractors are gatekeepers
to managers even in medium-size buildings
• Meaning contractors are our customers, and
partners in selling to building managers
VALID ASSUMPTION
< 6 Month Sales Cycle
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Giving us free access to leading thought leaders in
building-management and mechanical-contracting worlds
customers at each and every step along the way
• Shrewdness of contractors as business people will
make value based pricing terms a difficult sell
•• Only few are willing to consider pricing Only few are willing to consider pricing
structures based on value solution deliversstructures based on value solution delivers
•• Leading me to tweak strategy for getting us Leading me to tweak strategy for getting us
to transactions/informatics business soonerto transactions/informatics business sooner
partners in selling to building managers
• Contractors typically take 2-4 months to gain
comfort with new solutions like ours’
• Before buying from people like us and turning
around and helping us to also sell to manager
•• 25+ interviews validated this advisory board 25+ interviews validated this advisory board
thinking and a 3thinking and a 3--5 month sales cycle5 month sales cycle
Resulting Business
Now building product and signing up beta users
1. Focused on Retrofit Market (Medium-Size Buildings)
• Fewer decision makers (VP Ops, COO, facilities manager)
• Existing pain (managers writing checks with no ability to manage costs)
• Leverage existing electrical channels for installation
2. Targeting Indirect Sales Model Initially (Vertically Integrated)
• Target contractors/ESCOs with multiple buildings
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• Target contractors/ESCOs with multiple buildings
• Coordinate all electrical installation work
• Supply and charge for hardware directly (bypass distribution)
3. Seeking to Build Revenue and Transition to Distribution Model
• Leverage hardware partners (device, building automation, panel)
• Begin adding new construction (market to engineers, architects, builders)
Focus for Future
Always control the data
1. Reduce Hardware Cost to Enter Small Buildings
• Get down manufacturing cost curve
• Graduated pricing based on customer needs (complete coverage vs. critical loads)
• Sell hardware at low markup (60% Hardware, 30% Labor)
2. Focus on Subscription Services
• Create ongoing revenue stream associated with software
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• Create ongoing revenue stream associated with software and services
• Packaged pricing based on customer needs and value
• Up-sell into higher value/margin contracts/services
3. Always Control Data
• Leverage opportunities for monetizing data with building owners, utilities, and manufacturers
• Share partial data with building automation systems
• Sell aggregated data to 3rd party ecosystem
Essential to reframing other high-value relationships
that resonate with managers, contractors, and profitability alike
Contact
Andrew (Drew) McInnes
1 (857) 288 8760 (Google Voice)
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