Breaking With Convention, Creating New Ideas

Building Efficiency
Breaking With Convention, Creating New Ideas

Andrew (Drew) McInnes

12/8/2010 Confidential outsmartinc.com 1

Outline of Discussion

The Innovation Challenge (Challenge)

What Problem to Solve (Process)

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”

• 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

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 Supplied Energy Energy Wasted
Converted to Work
(100%) (Building Operations) (65%)
(35%)

Balancing
Feedback

Energy
Actually Converted to Work
(Discrepancy of 0%)

Discovered most energy intensive component
in commercial buildings is HVAC system …

Digging Deeper
… and HVAC systems degrade over time and often fail to work properly

Stock of Energy in Building Operations (Simplified Version of My Original Model)

Energy Supplied Energy Energy Wasted
Converted to Work
(100%) (HVAC Operation) (80%)
(35%)

Balancing
Feedback

Energy
HVAC System Actually Converted to Work
Degradation (Discrepancy of -15%)
and Failure

Wreaking havoc on overall energy efficiency
of commercial buildings across the United States

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
2 2 2
(1,000 ft - 200,000 ft ) (> 200,000 ft )
% of Market 90% 10%

√ √
Building
1
Manager

√ √
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)

My thinking was that improving HVAC performance was the most
actionable way to increase energy efficiency in commercial buildings

Next Asking
What are the “rules of the game”

(1,000 ft2 - 200,000 ft2) (> 200,000 ft2)
1. Building manager purchases a service 1. Building manager invests in a building
agreement from the mechanical contractor controls system to monitor and optimize the
performance of the HVAC system
2. Mechanical contractor then inspects
HVAC system 1x / month to try to identify 2. Building manager then purchases service
and prevent potential system failures agreement from the building controls
manufacturer because only the
3. When a HVAC system failure occurs manufacturer can reprogram the controls
(e.g. boiler bursts and floods a room), the
mechanical contractor must respond to the 3. Building controls manufacture must
failure within 4 hours of the occurrence reprogram controls 4 x / year to optimize
against degradation of HVAC system
4. After the 5th HVAC system failure that
the mechanical contractor fails to respond 4. Mechanical contractors perform repairs
to within 4 hours of occurrence, the on the HVAC system that the building
mechanical contractor becomes liable for all manager's site facility team cannot perform,
damages brought about by the failure and install the building controls system

By looking beyond the players to the rules, I thought I would
understand how this subsystem behaves, and I did

Before Finally Asking
What are each player’s objectives in this game

(1,000 ft2 - 200,000 ft2) (> 200,000 ft2)
Building Have the mechanical contractor sit in the Protect the significant investment made in
Manager building "24/7" to make sure nothing ever HVAC systems for buildings of this size by
goes wrong with the HVAC system making sure there are "eyes and ears" on
the system at all times
Because this is not physically possible for
the mechanical contractor to do, make sure Maximize the ROI realized on this
the service agreement with the mechanical investment by also having the "eyes and
contractor favors the building manager ears" continually optimizing the HVAC's
performance given real-time conditions

Mechanical Build a relationship with the building manager in order to become the "first call" a
Contractor 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
Building Capture a larger share of the "economics" in
Controls --- commercial buildings beyond those
Manufacturer available from only selling control boxes

This was most critical part of my thinking that revealed how the
system behaves over time, leading me to see what problem to solve

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”

• 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”

Verified Findings

• Qualitative and quantitative methods
subsequently helped me to verify these findings

‒ e.g. surveys, regression, etc.

… greater TRANSPARENCY and ACCOUNTABILITY is
what they would most value in their HVAC interactions

How Much They Would Value This
Was what we sought to understand next

Hidden Aspirations (ZMET Photos) Predictability

• Managers and contractors would like to be able
to predict HVAC system problems ahead of time

Scalability

• 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

When we probed for hidden aspirations that
greater transparency and accountability could subsequently enable

Bringing Us to Our First Trade-Off Decisions
For framing the experience we would need to deliver upon

Data
OR
Cat5 Cable
Recommendations
OR
Power Line

Monitoring
OR
Controls

In order for our solution to give managers
and contractors what they most valued

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
• 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

Using experimental protocols and conjoint analysis


Getting Us to the Right Idea …
Unlock highest levels of transparency and accountability in interactions

Monitoring HVAC System Performance

Repair and Maintenance Safety and Equipment
Monitoring & Management Diagnostics Tracking

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

Actionable
Utility Data Server
Information

Internet Monitoring and Management

Performance Optimization
HVAC
Monitor
Safety/Diagnostics

Service / Maintenance Predictability

ROI/Payback Analysis
System Equipment

Offering actionable information
as powerful motivator towards implementation

Simultaneously Enabling
Human aspirations of predictable performance and business scalability

Reframing Interactions in Small Buildings Current Alternatives
(Conceptual Roadmap) • Cannot transmit data to network
• Too expensive and complicated to install and use
• Introduce unwanted 3rd party into relationship
New Company
• “Lock in” buildings to system

Our Proposed Solution
Manufacturing Customer Customer • Bridges communication gap by virtually placing
Mechanical Building Manager
and contractor in building 24/7 (simply and cheaply)
Contractor
Distribution • 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
Hardware Data 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

• 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
• 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 Activities Value Customer Customer
Propositions Relationships Segments

Key Channels
Resources

Cost Structure Revenue Streams

Adding pictures too it for quickly developing conceptual prototypes


Mapping Out Different Business Models
Before selecting a subscription based revenue model for customer testing

1. SaaS with hardware - standardize NewCo as the Premise Network INITIAL
FOCUS
2. Transactions - connect 3rd party ecosystem with qualified customers

3. Informatics – aggregate/sell information to manufacturers, utilities and others

Demand Response
Commercial
Utilities

Education: 3rd Party Service
Labs/Dorms

Manufacturers

Multi-unit New Company Wholesalers
Residential
(NewCo)
Energy Service Co.
Government


Subscription Based Revenue Model
Offered shortest time to revenue, and more importantly …

Why I Selected this Model How I Organized My Thinking

• Excellent first stepping stone towards achieving • What is always important to me in designing new
higher levels of customer and business resonance businesses is applying systems thinking

• By first delivering proprietary access to high value • Applying systems thinking allows me to map out
data that cannot be collected effectively today several alternative business models

• Subsequently enabling higher-margin businesses • Each model gives me ideas about how a business
(transactions and informatics) could behave over time and in different scenarios

• That provide managers and contractors with more • Plotting this behavior enables me to map path to
actionable information beyond HVAC system higher levels of customer and business resonance

• Bridging communication gaps in other human • Defining and prioritize relevant criteria about
interactions within the built environment 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

Question Then Became
What is best way to execute on model to achieve profitability in business

ACTIONABLE
INFORMATION
SERVICES
DATA
COLLECTION Require Advance Payment
EQUIPMENT OR
Bill as We Go
Give It Away
OR
Charge For It

Answer depended upon outcomes of next trade-off analysis
and testing of two critical assumptions about the business

Results of Trade Off Analysis
Medium-size buildings is where to first strike resonance in the business

Data Collection Equipment
Charge For

Medium

Small Small to
Medium
Give Away

Super Small

Bill as We Go Charge %Upfront Payment

Actionable Information Services

Meeting criteria for business profitability
(LTV > 3x CAC and months to recover CAC < 12 Months)

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

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

… customers would accept value based pricing terms


How We Tested My Assumptions
Created customer advisory board to test and refine these assumptions

VALID ASSUMPTION NOT SO MUCH SO

< 6 Month Sales Cycle Value Based Pricing
• Learned mechanical contractors are gatekeepers • Initiated, structured, and performed financial
to managers even in medium-size buildings analysis to create value based pricing model

• Meaning contractors are our customers, and • Achieving buy in for my modeling from potential
partners in selling to building managers customers at each and every step along the way

• Contractors typically take 2-4 months to gain • Shrewdness of contractors as business people will
comfort with new solutions like ours’ make value based pricing terms a difficult sell

• Before buying from people like us and turning • Only few are willing to consider pricing
around and helping us to also sell to manager structures based on value solution delivers

• 25+ interviews validated this advisory board • Leading me to tweak strategy for getting us
thinking and a 3-5 month sales cycle
3- to transactions/informatics business sooner

Giving us free access to leading thought leaders in
building-management and mechanical-contracting worlds

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
• 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
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
andrew.mcinnes@alum.mit.edu
1 (857) 288 8760 (Google Voice)


Breaking With Convention, Creating New Ideas

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