6 September 2016

Looking at the future of business models for global manufacturing companies as they make the switch to services in an age of digital disruption

September 2016

Professor Andy Neely answers some key questions about the Cambridge Service Alliance business partners and its recent research. [PODCAST interview available here]

  • Who are your partners in industry and how have you been working with them on that all important ‘shift to services’ for manufacturing industries?

We have a variety of partners in industry. Our two founding partners are BAE systems and IBM and we also work with Caterpillar, Rolls-Royce, Pearson and Zoetis. Zoetis is an animal health company which used to be part of Pfizer. It is interested in services because it wants to build links with its end customers. Caterpillar is a big construction and mining Equipment Company and it is interested in services because it wants to maintain links with its customers over the 30 year life of the product. It is important for its business model.

  • What kind of changes are manufacturing firms making to ensure they are in tune with their customers’ needs in what is an increasingly technologically driven global market place?

The changes manufacturing firms are making are really varied. Caterpillar has traditionally made most of its money on spare parts and servicing equipment but increasingly its customers are saying ‘we want to work with you to contract for outcome or capability’. It is no longer about just making sure the equipment works, its customers want help to minimize the cost per ton of earth extracted in a quarry.  These days the manufacturing firm is helping its customers to deliver the outcome the customer wants. In some cases, it is helping the customer deliver the outcome the customer’s customer wants. It is all about helping your customer do a better job.

  •  How is technology changing how manufacturing firms operate?

Technology is fundamentally changing how manufacturing firms operate. What you see is more and more devices getting connected to the internet. The data coming back from those devices and machines is then being used to work out what is going on.

For example if Caterpillar has the GPS position of a truck, and you know the weight of the material and the weight of the bed of the truck, then you can tell when the truck has been filled at the rock face. If the truck doesn’t start to move straight away you are losing production time, and if it sits at the rock face for a minute once it has been filled, that would be a minute of lost production and in a quarry and it is a big deal. If you can use the data to improve the efficiency of the operation, you can in turn minimize the cost per ton.

  • The Cambridge Service Alliance puts emphasis on knowing what your end customers’ needs are. Why is that and can you give us an example?

We talk a lot about getting inside the minds of your customer, or the customer’s customer. The reason we use that language is because most organizations have to think about how to provide for their customers. You can use the equipment to allow your customer to do a better job to service their customer. If you understand what the customer’s customer wants then you can think about changing the design of your equipment or service to help ensure your immediate customer does a better job. If they are more successful and their business grows then yours does too, it is in your interest.  Technology helps this relationship in all sorts of ways by monitoring the equipment so you can now see remotely what is happening and you can track where assets are in the world.

We have also been doing some work on customer analytics. We are looking at both quantitative and qualitative data, things like customers’ comments, to understand what those comments actually mean and say. You can then see what advice they are giving you about improving your organization. Lots of firms use a Net Promoters Score as a measure of customer loyalty, and that is really the difference between the number of customers who say they would promote your business and recommend it to friends versus the numbers who say they wouldn’t. But that is just a numerical number. If you look at the customer survey forms, often you get statements from customers where they might say there is something wrong, like the technician turned up late in scruffy overalls. We have been working on a methodology of taking those sentences, deconstructing them and understanding the statements in them to better inform firms about how they can deliver a better quality of service to their customers.

  • Your CSA members are some of the largest companies operating in the world today, how do they begin to make change happen?

We believe that detail matters when it comes to making change in a large global company. We have a research project which is looking at unmasking the important hidden detail in making services work. You have to understand the detail but you also have to understand the bigger picture about how to make that change and make that shift to services.

In another research project we have completed recently we have looked at the Seven Critical Success Factors or CSFs for making the shift to services. Number one in that list is the readiness of the organization. Is it ready and are its customers ready to make that change? Unless you get both sides in place there is no way you will make the shift to services.

  • How important is this interface of academics and managers working together in the CSA?

The Cambridge Service Alliance really does three things for our partners:
  1. We provide an environment where there is an interface between academics and industry managers. We have deliberately chosen non-competing firms as partners, and we have very open and honest conversations about the way you might design your organization, the business model you use, how you design contracts for services and so on. The reality is that firms learn an enormous amount from each other.
  2. We also hold events and forums where we can communicate ideas to the partners and the wider public. This year we are running a Service Week conference on how you successfully grow your service business in the digital economy.
  3.  As well as the broader knowledge exchange we also carry out individual research projects that are designed to unpack and explore topics that matter to the partners in the Service Alliance. Caterpillar has been very involved in a programme called: ‘Across the Table’. A major part of it was about looking at the future of its customer service needs and how Caterpillar might meet them. We had direct input into the change programme in that organization. We are keen for our partners to pick up and adopt these results.  With BAE Systems we have been talking a lot about eco-systems in order to understand the Defense eco-system and how that is changing. For each individual firm in the Service Alliance there are specific projects we are working on with topics that are of general interest and also producing results that are directly relevant to that firm.
  • Is the CSA helping to map the future out for others too in the manufacturing sector?

Yes. If I go back five years or so and I talked about servitization people would say they had never heard of that, it was relatively small scale. Now more and more organizations are talking about the importance of servitization and what it might mean for the future of their business and how they have to change their business model and what role technology might play. There is a general take up of the ideas to try and influence the way manufacturing firms think.   

  • Is the link between products, services, technology and the need to innovate creating better products and services? 

One of the changes you see is a shift from supply chains to network partners. Increasingly it is not a question of how to configure the supply chain but these days firms need to think about who they want to partner with and what skills and capabilities they bring together to deliver a particular outcome. Often you can find that people are collaborating on one contract but competing on another. BAE systems in Portsmouth works very closely with Babcock to run the naval base but just down the road they compete on other contracts. You end up with very complicated organizational relationships. Learning when and how to partner and also when and how you are going to compete is crucial if you want to get the balance right.    

  •  Are new collaborations and partnerships developing?

We see a lot of new collaborations and partnerships amongst all sorts of organizations, not just old rivals. One of the interesting things is the way that barriers between different sectors of the economy are changing. If you look at the IOT (Internet of Things) we can see that more and more devices are getting connected to the internet, and that the data that comes off those is giving real insight into how your products and services operate. New technology is playing a key part in this shift to services.

You then have to ask who else to involve? AT&T and GE have said they want to work together; Siemens is working with Atos; IBM is also working in this area. You have equipment manufacturers a software consultancy firm, a broader consultancy firm, and a telephone company all competing for the IOT space. Some of these organizations are coming together and building new capability, and some are finding they have new competitors too, like Google or Amazon. The small start-up Trackunit, which monitors the stress and strain put on assets, has been taken over by Goldman Sachs, an investment bank now working in asset management. There are some interesting dynamics at work.  

  • How helpful has it been to identify seven Critical Success Factors or CSFs in the switch to services. You have called it a road map?

We looked at Pearson, Zoetis, and Greer, and we mapped out the steps they had gone on as they changed their business models in the switch to services. We then built a framework with these Seven Critical Success Factors, CSFs. The full report is on our website http://cambridgeservicealliance.eng.cam.ac.uk/news/SevenCSFBriefing

We mentioned the readiness of an organization and how outcome focused it is. There are issues around how you get the right mindset in an organization, and it is also about people and how you get them ready, not just technology and data. There are issues about processes and design, but sometimes there is not enough focus on designing services. The CSFs really do outline a road map for thinking about the steps you need to go through if you are going to transform your business.

  • When others talk about manufacturing they wistfully harp back to the past and production lines but are the criteria by which we measure the success of firms and the sector changing? 

It is still important to optimize what goes on inside a factory.  People get quite excited about the digital economy and they say it is all going to be virtual but you still need your iPhone to access your laptop, so we are still going to make things. You still have to optimize the factory but that is a relatively small part of the overall ecosystem you are operating in. We are now looking beyond the boundary of the factory to optimize the end to end enterprise. Productivity still matters and organizations need to make sure the things they are doing are as efficient as possible to ensure they are not wasting resources, whether that is material or the time of people.

The data allows you to identify where you might improve productivity. It is still a valid measure for part of the agenda but you also have to think about the outcomes that you are delivering for the customer. Productivity can be more an efficiency type measure, to see if you are using your assets well, but you also have to think about effectiveness, and if you are doing the right things with those assets. Balancing both efficiency and effectiveness is central in manufacturing these days.

  • In today’s fast moving world what is your ultimate goal at the Cambridge Service Alliance? 

People always say the pace of change is fast, if you go back to when there were buggy whips it still probably felt quite fast in those days so I think that at any point in time there is lots of change going on in the World. One of the challenges for leaders of organizations is to understand what change is both happening today and what change is coming in the future. You then have to think of the best way to respond and configure your organization to respond to that change. The boundary of your organization is undoubtedly changing; it is much more about networks and collaborations. People get too excited about some of these changes; things like the IOT or Industry 4.0 are not going to change the World in the next six months. These things take a long time to do. Undoubtedly the direction of travel is more connected devices, more data coming off them, and making smarter decisions. You do need to think about how you optimize systems rather than individual machines or individual supply chains so undoubtedly that is the way the World is going but there is a lot of work to do to get there.

Firms are spending a lot of time trying to get data from different devices, and they then have to try to reconcile that data, so there is an enormous amount of effort that needs to go into some of these things. I think it is a fascinating time to be involved in this because in many ways the foundations of what some have termed a new fourth industrial revolution are being laid now and being involved in that is just a wonderful privilege.    

  • Is it best to be the first or the last in the sector to make a new innovation or change, presumably you can learn a lot from the success and failures of others? 

Organisations have to take different views and think about where they want to position themselves. It is rarely about being the first or the last to make a change or innovation because incremental change in all sorts of organization is going on at the same time. As one organisation pushes forward with one type of innovation another organization will be pushing forward with a slightly different kind of innovation. You can’t afford to fall too far behind because if you do you will end up losing your place in the market, However, organizations can’t afford to stay still, they have to constantly think about how to adapt to the changing World and the changing circumstances. You need that continuous process of innovation going on, it is not about first or last it is about what is the right innovation for us in the evolution of our organisation at this point in time.

If you look at Uber in the taxi business, or some of the low cost airlines, or if you think about what is happening in newspapers with all of the online content, or with Google and Amazon and Facebook, these are organisations that are babies really but they have grown up incredibly rapidly and changed the way organisations work. It would be very dangerous to sit there and say ‘it’s OK we will be safe and immune from these changes’, because you have to watch what is going on.

In October our Alliance conference is discussing: Growing your Service Business in an age of digital disruption. Uber is going to speak about the way they are growing and how they expand. Trackunit which is now part of Goldman Sachs is going to talk about developing technology and why they are getting involved in the asset monitoring business. Siemens is going to discuss the digital factory, and the whole industrial internet Industry 4.0 and how that is changing the Siemens business model. These are all themes around platforms, services, data and the way the World is changing.

In research you need to be a specialist but as you drill down into a specific area you find there is enormous breath to that area and a lot of the changes that are going on in the world influence the way we think about things.

On Tuesday 11 October the Alliance will be holding its Industry conference on ‘Growing your service business in an age ofdigital disruption’ at the Moller Centre, Cambridge, UK. 

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