One of the main takeaways from Industry of Things world in Berlin, September 2015 was the importance of outcome based contracts. The most used example of what this mean is found in the airline industry. Manufacturers such as General Electric and Rolls Royce have stopped selling aircraft engines to the airliners. They sell «thrust» and «hours in the air».
Their value proposition to the airliners are to make sure that the aircrafts can fly, and to reduce the total cost of ownership related to engine maintenance and repair. In the old days airliners bought engines, and then bought the same engines once again through a service agreement. In addition they all needed a large staff of mechanics to look after engines. By leasing engines on outcome based contracts all the practicalities are left to the vendors.
In capital intensive industries moving toward leasing models reduces risk and the need for upfront investment before a dollar is earned. With an outcome based leasing model the payment of machinery follows the income stream generated from using the actual machine. In this environment the manufacturer can optimise their products according to functional needs, not technical specifications. Customers choose the vendor with the best price / performance for the needed function.
It is digitalisation that make outcome based contracts feasible for more and more industries. When the manufacturer can monitor equipment performance and integrity in real-time, they can take more responsibility for when to service it, or even replace it before it breaks. Through standardisation and operational insight manufacturers can improve products and reduce cost.
Even conservative industries like oil and gas will not be spared from these effects. One example is drilling rigs. Today these are rented on daily rates, the poorer they perform the more the owner earns. With enhanced digitalisation it become possible for the rig contractor to offer outcome based contracts, where they are paid according to end product quality, avoidance of rework (technical side tracks) and undesired events (kicks). Digitalisation makes rig operations transparent for all involved actors. The key question to ask is what competence is needed to provide drilling as an outcome based service, and who is the end customer for such service.
Another example is subsea production. Today these facilities are acquired and installed by operating companies. In the future the manufacturer might take the responsibility for installing and operating the facility. In the end the traditional oil company leases the machinery to drain the reservoir. Again, the emerging questions are what does this change do with the existing company. What is the value proposition and what are the competencies required?
We can go from sector to sector and find similar situations. Digitalisation will have a disruptive effects on how value chains are organised, and one of the main drivers or enablers is the move toward outcome based contracts, moving us from CAPEX to OPEX.