This is from a Rolls-Royce Press Release dated Oct. 30, 2012:
Rolls-Royce, the global power systems company, today celebrated the 50th anniversary of ‘Power-by-the-Hour’, its pioneering approach to engine maintenance management that forms the basis of the company’s market-leading CorporateCare® service.
Power-by-the-Hour’, a Rolls-Royce trademark, was invented in 1962 to support the Viper engine on the de Havilland/Hawker Siddeley 125 business jet. A complete engine and accessory replacement service were offered on a fixed-cost-per-flying-hour basis. This aligned the interests of the manufacturer and operator, who only paid for engines that performed well. Rolls-Royce CorporateCare®, launched in 2002, added a range of additional features. These include Engine Health Monitoring, which tracks on-wing performance using onboard sensors; lease engine access to replace an operator’s engine during off-wing maintenance, thereby minimizing downtime; and a global network of authorized maintenance centers to ensure that world-class support is readily available to customers whenever required.
Does this business model actually work? You bet! Here are the Rolls Royce financial results for FY 2008 to FY 2015:
The aftermarket services, which includes power-by-the-hour, generates more sales than the actual product does.
This is a very early example of Servitization, which Wiktionary defines as:
“The delivery of a service component as an added value when providing products.”
Another term frequently used when talking about combining products and services is Product as a Service. Here is Simplicable’s definition:
Product-as-a-Service is a business model that provides a service in areas that were traditionally sold as products. A service model provides ongoing interaction with customers including support. Services may also offer the ability to exchange a product on a regular basis for a different or newer model.
The producer gets a regular income stream as services may include monthly subscription fees or usage based charges. Customers may be attracted to service models due to flexibility, enhanced support, lower upfront costs, and reduced risk. For example, a customer who joins a car sharing service doesn’t have to worry about maintenance and has reduced upfront costs as compared with buying a car.
And we may as well define the Internet of Things (IoT). According to the Future Internet Report by UK Future Internet Strategy Group the IoT is:
“An evolving convergent Internet of things and services that are available anywhere, anytime as part of an all-pervasive omnipresent socio–economic fabric, made up of converged services, shared data and an advanced wireless and fixed infrastructure linking people and machines to provide advanced services to business and citizens.”
This means that products will include data collection sensors and computers and the data will be shared over the internet. The data may be combined with other data (e.g., GPS) to permit an understanding of operational status or micro-environmental activities. I will not write more about the IoT here because I have written about it here and also here.
Also, I think about Servitization and Product as a Service interchangeably.
Here are two graphics from an unknown, very creative, graphic artist. They each describe four different business models. The column labeled On-Premise is the model where the customer owns and maintains the item. SaaS is what I have identified as PaaS. Enjoy:
Do the numbers work?
We are talking about a change in business models from the current “sell product then fix it” model. Here is a table that shows the percent of total revenue derived from service for selected large, multinational companies that break out product and service revenues separately.
Two things worth noting; 1) the GE Industrial Systems segment of GE is investing very heavily in IoT and the results support and 2) at IBM, the two service business segments together account for almost 2/3 of IBM’s total revenue.
An example of GE’s experience
There are over 40 sensors on each GE jet engine. When a Boeing 787 jet flies from London to New York, the engines alone generate over 1TB of data! When the plane taxis to the gate, the data is uploaded to a GE facility where they do a quick analysis of the performance of each engine looking for any anomalies. If they find any issues, the airline’s maintenance department is notified and the decision is made about the urgency of any investigation or repairs. If all is good then GE, in the background, analyzes the performance of all engines of any model and compares each engine’s performance to all similar engines in the airline’s fleet and also to all similar engines flying. Imagine all the valuable data that GE collects!
Why is Servitization important?
It is extremely difficult for any company to create and maintain a differentiation factor over the long term. This is because of the Internet, Google, people connected into networks, and the general availability of competitive information. Even if someone patents an innovation, the current selection of available technology means that avoiding patent infringement for a good idea is usually possible. However, combining a product with unique sensors connected to a central monitoring computer over a proprietary software network is very difficult to copy. And you can charge more because this “system” provides new value to the customers.
Why should service people care?
Aside from the fact that PaaS will create jobs for service people, it also means that they will have to learn new skills and that their travel time will reduce. The new skills will now involve troubleshooting complex systems from a central location. The technician will be able to troubleshoot down to the FRU (Field Replaceable Unit) level and whoever is sent to the equipment location will know exactly what the job entails. The likelihood of a surprise is limited.
Another reason to care is that service will become responsible for a greater percent of total revenue than previously. Remember the GE Industrial Divisions results in the earlier table. The spotlight will now shine much brighter on the service team and there will be more accountability for financial results than previously. Along with accountability comes rewards for doing an outstanding job and there is a downside for a less than sterling performance.
I believe that all-in-all the service teams of the companies which adapt the PaaS model will enjoy their jobs better than they do today, will learn a lot of new things, and their individual and team performances will be broadly recognized. I look forward to seeing you on a TV, magazine, or Internet advertisement one day soon.