Digitalisation- Outcome based services

Digitalisation- Outcome based services

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.

Digitalisation – Building the needed capabilities

Some 20 years ago was I called to help two researchers, a physicist and a medical doctor with a poorly written C++ computer program at their hands. As the three of us sat and peered on the code the medic said: «You know, what happens now is rare phenomena here in Norway. Here we are, three professions working on a common problem as a team of equals».

That day I learnt a few things about tumours and magnetic tomography, they a few things on how to write faster and better C++ programs, but all of us learnt that solving a difficult problem benefits from a multi disciplined team.

Yesterday I wrote that digitalisation requires organisations to adopt Internet thinking and begin developing their digital capabilities and asset. The first capability they need to leverage is multi disciplined teams. In a true multi disciplined team all participants acknowledge the other disciplines and respect their uniqueness. It´s not about a customer / vendor or master / servant relationships,  its about peers working to solve a common problem.

Creating multi disciplined teams is hard, because most businesses are built around what is perceived as the most valuable discipline. Within healthcare and hospitals the medical doctor is at the top of the food chain. In oil companies geologists and geophysicists are the ones that rules the exploration department. Drillers and drilling engineers the drilling department and so on. In these type of cultures the final decision power is allocated to the what is perceived as the «leading» discipline. To succeed with digitalisation this kind of culture must come to and end.

Why must it come to and end, you now might ask? The answer to that is that digitalisation implies that the function or role of disciplines are changed. Digitalisation forces disciplines to create tools or services that make their skills and insights available in new ways. The geophysicist is not interpreting seismic images any more, their skills are needed to create software that interpret images. The same happens with any other discipline, it be medical doctor or a civil engineer.

With the multi disciplined team in place, whats next? Sustainable funding, as teams and digital assets eat money for breakfast. Compared with physical assets, that have a lifespan measured in years, a digital asset (in terms of software) need continuous investments to stay healthy and competitive. You are very much in a climate where «Who dares win» to quote David Sterling, the founder of the British SAS forces.

The practical consequence of this is less upfront work on formal business cases, but an adaptive learning approach where we want to fail early to make sure that good ideas are separated from the bad ones before the cost of failure skyrockets.

The third ingredient needed is adequate digital (software engineering) competence. You need software developers and software engineers. Here most companies faces another challenge, the good ones are rare. The one you need are the ones who can envision new capabilities and put in place the process, tools and team to make it fly.

Finally, what does Internet thinking mean? It boils down to a culture of sharing. Open source software. Create a community to solve the problem. This is how you scale the multi disciplinary team globally. The Internet is built on the simple belief that sharing is the fastest and most efficient way to create business. In this respect open source software does not mean free software, it mean that monetisation is done by other means than sale of licenses.

So summarised digitalisation depends on three things, multi disciplined teams, adequate funding, software engineering skills all wrapped into a sharing culture in line with the spirit of the Internet.

Good luck with your digitalisation journey.

Digitalisation – The value of digital capabilities and assets

During the last year have I been involved in many discussions on digitalisation, particularly on its possible effects on the oil and gas industry. There is no doubt that digitalisation will impact all industry, the hard part is guess how.

Most of the discussions have been on how digital technology will impact industrial value chains and the production and consumption of goods, including oil & gas. Basically, how to do the things we already to more effectively. What has been less visible is how digital capabilities can be used to create new revenue streams. How can we use digitalisation to redefine industrial borders.

My favourite example of what this might mean is Amazon. They started out as an online retail book store. To build the store they needed a data centre, which they built and learnt to operate. Then they discovered that others also might need a data centre, and they developed AWS (Amazon Web Services). Today AWS represents a business in its own right targeting a different market than the original retail book store. This is the effects of digitalisation.

What can we learn from Amazon? The main lesson is to understand that digital skills can have value outside your primary line of business and that the introduction of digital capabilities blurs the boundary between supplier and consumer. Digital capabilities will change the power balance within industrial value chains and avoiding becoming the easiest replaceable middle man become a race in its own right.

The second thing to grasp is that within digital being a first mover has value in itself. For a competitor to catch up with Amazon on cloud services today is not easy. The third thing is that digital capabilities require continuous development with high frequent deliveries. This is very different from the business models used within long term CAPEX based industries.

A totally different effect of digitalisation is that actionable data has a value in its own right and that data enables new business models within existing industries. A good example is seen within the aircraft engine industry where actors as Rolls Royce and General Electric do not sell engines anymore, but they lease engines to the airliners on outcome based contracts.

What has made this possible is the real time monitoring of the engines, combined with condition based maintenance and the ability to optimise spare engines across airliners. A Boing 737 is a Boing 737 independent of airline.

The same model is applicable for other industries as well. Move sales from physical products and time and material services to outcome based services that includes leasing of physical machinery. The effect is reduced upfront capital expenditure and payment as fraction of produced value from the asset.

To take advantage from these opportunities requires that industrial enterprises adopt´s Internet thinking, and starts to develop and exploit their digital capabilities and assets.