# 3: Triple S: The Three Core Capabilities of Digital Sustainability
Welcome back. If you missed my first two articles, I warmly encourage you to read through them (1 and 2). Whereas those two articles focused on digital technologies, climate change and the existential dangers we face as humans, this article is much more focused on business models and capabilities we see emerging in the digital sustainability space. I’m done with the, in my eyes righteous, scaremongering. Now I want to focus on solutions.
In 2018, Ryan Merrill —co-founder of the Global Mangrove Trust and the GREEEN Company — and I were commissioned by UN Environment, DBS Bank and the Green Digital Finance Alliance to write a report on sustainable digital finance in Asia (available here). We conducted over 30 interviews with innovative start-ups that were using digital technologies like blockchain, AI/ML, IOT, mobile, satellites, drones and so on to work towards meeting the Sustainable Development Goals, specifically 7 (energy), 13 (climate change), and 12 (sustainable consumption and production). Throughout the iterative process of writing, interviewing, and sensemaking, we educed a simple framework that would become crucial in our own entrepreneurial activities. This article introduces this simple framework.
At the foundation of every digital sustainability business model (DSBM), we found one, two, or sometimes three complementary capabilities, as depicted in the figure. Ever since Ryan and I educed this framework, we spoke with many other start-ups and analyzed lots of other business models. I still have to find the first company that is doing something that cannot be explained by a combination of those three capabilities. So, I consider it a powerful framework in which to anchor thinking about business models in the digital sustainability space. Let’s start with the business model. There are 100s of definitions of business models. Some are very academic, others are representations, such as the famous Business Model Canvas from Alex Osterwalder and Yves Pigneur or the alternative Lean Canvas by Ash Maurya (see a quick intro to it here on Medium). I will use the following definition. An organization’s business model is an interpretation of how an organization designs, forms, and markets a product or service that creates value for a group of stakeholders (e.g. customers) and an explanation of how the organization generates revenue by appropriating part of that value for its own idiosyncratic purpose. For most start-ups value appropriation comes in the form of profit but for NGOs or even for governments that need not be the case. It depends on the organization’s purpose.
Organizations need resources and capabilities to design (R&D + product/platform/service design), make (manufacture, produce, bring into existence), and market (transport, sales flow, marketing) a product or service. A key decision firms make when crafting their business model is what activities they will do themselves and what they will outsource to other companies. Apple for instance designs and markets its products, but does not manufacture (a type of make) them. Foxcon, one of Apple’s key suppliers manufactures many of Apple’s products but does little design nor marketing. Amazon is quite similar to Apple. It designs and maintains a platform and markets it, but it does not make the products that are sold on its platform. That’s the basis of a business model. Most entrepreneurial ventures try to build a moat around some of the capabilities that allow them to design, form, or market their product/platform/service. A sizeable moat makes it harder for incumbents or other start-ups to imitate what they are doing. In a forthcoming article, I will take a closer look at the practice of entrepreneurial moats so if you’re interested, stay tuned.
Let’s return to the objective of the day. We define digital sustainability as “the organizational activities that seek to advance the Sustainable Development Goals through creative deployment of technologies that create, use, transmit, or source electronic data” (George, Merrill, & Schillebeeckx, 2020). DSBMs require at least one of three crucial capabilities: sensing, structuring, or sculpting (Merrill, Schillebeeckx & Blakstad, 2019).
1.Sensing refers to an organization’s ability to absorb environmental, climate, and social stimuli and inputs and turn them into intelligible data. Organizations can use IOT devices, drones, or even just human observation that can be shared via a mobile app to engage in sensing. Sensing basically comes down to capturing some part of the world in digital form. However, simply digitizing part of the world is rarely good enough to make a business work. You also need to make your data accessible and comparable to other sources. This relies on the sensing’s sister capability, instrumentation. Instrumentation is the ability to turn sensory data into information, indicators, and instruments for which other organizations are willing to pay. Once a start-up has succeeded in this, it can start generating revenues.
A beautiful example of a company that developed unique sensing capabilities is Saildrone. Their slogan is “redefining ocean data collection” and that is exactly what they are doing. They have built drones that are like small solar-powered boats that can collect heaps of information about the ocean, even in those very choppy waters where big scientific expeditions often fail to go.
2.Structuring is an organizational capability that enables firms to organize, transfer, or share new types of data in familiar ways or familiar types of information in novel ways to serve clients in existing markets. Structuring can be metaphorically understood as improving the railroads that connect existing market participants by enabling other types of vehicles to run on them. By layering additional information in existing transactions, structuring can boost transparency, improve efficiency, and reduce frictions in internal and external market exchanges. Structuring in digital sustainability typically relies on AI/ML, Big Data, or blockchain. An analogue example of structuring is for instance when companies start an internal improvement process to obtain some kind of certificate like ISO14001. To achieve this, companies need to analyze loads of different processes and enhance documentation, to ensure that minimum standards are being met. This comes down to adding additional — some will say bureaucratic — layers of information into existing internal and external transactions.
When a company obtains that certificate, it has successfully structured its processes and is able to integrate the result (i.e. the logo and certificate) in its marketing and sales process. This integration creates value as firms with ISO 14001 certification are considered more reliable and more environmentally friendly, and hence have a competitive edge. For a digital example, consider a bank starting to analyze all the unstructured data it has about its customers in order to provide better loan advice, or a group of organizations starting to share documents via a blockchain in order to ensure they all have access at the same time to the latest version. Finally, a company like DocuSign is a great example of company built on a structuring capability. DocuSign took what was a pen and paper model of signatures that needed to be sent via snailmail and transformed it into a digital model that runs on the internet. The key challenge for a company like DocuSign is not developing the technical structuring capability (digital signatures are not that difficult) but succeeding in integrating it within the regulatory system. Structuring and integration need to go together to be create a successful DSBM.
3.Sculpting is the final and most creative capability with the most transformative potential. This also makes it the most difficult one to build a business model around and thus the most likely to fail. Sculpting organizations use new data and often new structures to create new networks that connect people or organizations that previously were disconnected. If structuring is about changing the existing railroads to make them more efficient or richer, sculpting is about building entirely new transport systems. The sculpting organization creates value through network expansion and through facilitating exchange between individuals, communities, companies, regions, or even countries that were previously disconnected. The same digital technologies that underpin structuring are typically used in sculpting. Although, because sculpting is about connecting previously disconnected parties, it does not require the same level of technical complexity. A good example of a successful sculpting organization is Medium. Medium managed to connect a group of writers that previously had no outlet with a group of potential readers. Medium sculpted a two-sided marketplace by connecting previously disconnected individuals.
The next step requires inspiration, which is necessary to turn your sculpting capability into a revenue generator. Medium is monetizing its platform by having tiered memberships and is rewarding writers with the possibility to earn some money for popular articles. This advances the interests of Medium, the writers, as well as the readers as it commits the writers to the platform and incentivizes them to produce quality articles as these may have a broader readership and thus earn them more money. Facebook had a different idea and became a multi-sided market place where advertisers get access to customers. Linked In sculpted a professional social network and uses a Freemium revenue system including expensive premium membership and advertising.
Disruptive DSBMs often combine two or three of these capabilities in order to achieve their goals. Consider the Global Mangrove Trust (GMT), a non-profit I co-founded with Ryan Merrill. GMT tackles three issues that plague the reforestation market:
- A lack of supply. A key reason for this is that the primary funding sources for reforestation projects come from the carbon credit markets, and accessing those markets is very difficult and costly for small scale projects. There is also a lack of knowledge and coordination capabilities in many local communities to navigate the complexities of international donor markets
- A lack of demand. A key reason for this is that few companies see direct value in supporting reforestation and that individuals have no access to this market. Creating more value for companies is what my other start-up the Greeen Company is doing.
- High exchange costs. To get access to the carbon credit market, you need to go via incumbent certification agencies like Verra, Gold Standard (for the voluntary market) or your projects need be recognized by the Clean Development Mechanism (for the mandatory market). This creates massive barriers to entry. Certification, validation, and reselling costs can be up to 80% of the price paid by companies for carbon credits. That means only 20% is going to local communities and planting trees.
GMT is tackling these three issues with the three explained capabilities intertwined. We have created a peer-2-peer funding platform that is linked to a public blockchain (Zilliqa). This P2P platform gives direct access to individuals (new demand), SMEs (new demand), and bigger companies (existing demand) to fund reforestation projects. That’s the sculpting part of the model. We are building remote sensing capabilities (using satellites) and AI algorithms to transform images into estimates of forest growth state change (biomass evolution) and estimates of how much carbon is being absorbed. That is the sensing and instrumentation part. Our blockchain architecture also enables complete financial transparency such that each individual donor knows perfectly what percentage of their donation is going to the local community, what percentage GMT keeps (10% for operating costs and 5% for transaction costs), and what is going elsewhere. By integrating our blockchain architecture with the output of our remote sensing tools, we also provide fully automated sustainability reporting, creating value for companies. Every donor receives a number of GRO (Global Restoration Objective) tokens that represent “shares” in the forest. These tokens accrue “natural capital dividends”, primarily carbon tokens or CATOs on a regular basis. As the sensing + instrumentation capability creates the necessary data, the structuring capability enables us to share this data in a transparent way with all the donors (including companies).
We believe this financial transparency + automatic reporting will also boost willingness to donate. Moreover, our system is significantly cheaper (> factor 100) than existing certification systems. It may not be as accurate yet, but our algorithms are learning all the time, so over time the accuracy will improve. The key challenge is integrating our system — which disrupts incumbent operations — into both voluntary and regulatory markets. This requires us to inspire pioneering companies to take a chance and step out of the existing carbon credit market and support a more unproven, disruptive approach. As made famous by Clayton Christensen in his work on disruptive innovation, disruptive technologies tend to start out inferior to existing technologies but have an intrinsically higher potential for future development. This is why they tend to be ignored by incumbents in the beginning, and more peripheral players start using them first. Yet over time, they become more performant and then become accepted by core players. Walking this tight rope between working with incumbents while remaining disruptive will be the topic of a future article.
In summary, Digital Sustainability Business Models typically rely on one of three capabilities: sensing (turning socio-ecological observation into data), structuring (layering additional information onto or improving efficiency of existing exchanges), and sculpting (connecting previously disconnected parties through the use of digital technologies). These capabilities will influence how a company designs, makes, and markets its core value proposition (a product, platform, or service). When the three S’s can be paired with the three I’s (instrumentation, integration, or inspiration), a successful revenue model can be created.
