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)


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”


• 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

Converted to Work

(Building Operations)

(35%)

Energy WastedEnergy Supplied

(65%)(100%)


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)


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 √ √


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”


(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


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


(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


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”


• 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”


… 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)


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


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


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


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


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


• 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


• 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


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


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


• 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


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


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


… 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


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


• 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


• 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

[email protected]

1 (857) 288 8760 (Google Voice)


breaking with convention, creating new ideas

Design

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