Challenges and Issues of Engineering Asset Management

Asset Management is the coordinated activities of an organisation to realise value from the physical assets it owns and uses. While Asset Management is not new, new approaches to, and the new profession of, Asset Management, are required to meet the demands of operators, shareholders and customers.

Owners are demanding greater value, for less overall cost, from their assets. New technologies enable higher performance and greater safety, but at a price. Initial purchase costs are rising, leading to longer periods in service. Maintenance requires a more highly skilled, and so more expensive, workforce.

New Approaches
Asset operators are adopting new approaches to Asset Management. Increasingly they are owning, and maintaining, fewer assets and increasingly relying on complex organisational structures to provide them. Much greater coordination and sharing of data and resources, across multiple organisations is required, to make decisions to the benefit of all those involved in owning, using and benefiting from the assets.

In September 2012 the Cambridge Service Alliance brought together leading industry practitioners to discuss the challenges and opportunities that Asset Management must face over the next five to ten years. These experts identified the barriers and enablers to efficient Asset Management, and discussed the challenges that must be overcome to make better use of scarce and expensive assets.

Improving Asset Management practice
The group identified four key areas that must be adopted or utilized more effectively to improve Asset Management practice:

1. Effective decision making. Improving decision making across the organisation, through better use of longer term financial, and non-financial, metrics to deliver value for all involved in managing assets.
2. Organisational changes. Organisations must evolve to enable better decision making and share knowledge and skills, breaking down silos and boundaries resulting from functional specialism and multiple cost centres.
3. Data capture, sharing and standards. Improving the quality and availability of the information available for decision making.
4. Predictive analytics. New information technologies are available to improve Asset Management, but several barriers prevent their effective use.

This text is an extract from the recently published 'Engineering Asset Management - Issues and Challenges' Executive Briefing released by the Cambridge Service Alliance.  The full Executive Briefing is available here.

'Tech is destroying the line between Manufacturing and Services' Fortune Article - Response from Andy Neely

Saul Kaplan’s article Tech is destroying the line between manufacturing and services makes interesting reading, but it rather misses the point. He says: “It’s hard to tell the difference between a manufacturer and a service provider and the distinction is limiting.” But the key consideration here is not whether you are a manufacturer or a service provider. It’s about how you create and capture value. Manufacturing firms across the world are embracing this challenge - innovating their business models towards services, powered by the latest technologies. They are doing it by focusing on four key issues:

1. Innovating the value proposition by concentrating on the outcomes customers actually want. The old Theodore Levitt quote encapsulates this well – customers don’t want ¼ inch drills, they want ¼ holes.
2. Innovating the value delivery system. Focusing on what they should do themselves, what they should ask others to do, who they should partner with and how they should pool capabilities to deliver outcomes.
3.  Managing inherent risks. Taking responsibility for outcomes involves risk which must be recognised, accepted and carefully managed.
4.  Taking account of the ecosystem – that is all the organisations able to influence the service provider’s ability to create and appropriate value. For example, by managing the ecosystem Apple retains far more of the sales price of its products than its competitors do.

The article mentions 3D printing, but this is only part of the story. Fantastic opportunities are emerging across diverse sectors, enabled by innovative technologies such as remote product monitoring, geo-positioning and big data. And it’s not just in new media organisations such as Google and Apple. BAE Systems, one of the world’s largest defence and aerospace companies, has steadily geared up the service side of its business, and today 50 per cent of revenue comes from service and support, maintaining assets and equipment with a lifetime of 30-years or more.

Recent weeks have seen big name brands Dell and Xerox announce a move from making products to providing services. This shift is inevitable in the face of falling product sales and margins. What’s needed is a clear understanding of the boundaries of your business, less focus on the enabling technologies and greater emphasis on the outcomes customers value.

  

Professor Andy Neely, Cambridge Service Alliance

Professor Andy Neely is director of the Cambridge Service Alliance, a leading partnership between global business and academics focused on understanding and developing service systems.

http://www.cambridgeservicealliance.org/

Why servitise: Alternative rationales

I have often thought about the reasons why firms servitize (sell services as well as products). Usually I categorise these under three broad headings - economic, strategic and environmental. The economic reasons for servitization include:

1. The challenge of competing on cost - in many developed countries firms find it difficult, if not impossible, to compete on cost alone. The reality is that their underlying costs bases are too high in comparison to lower cost economies and so they have to compete through innovation and differentiation - services valued by customers are one route of differentiation.

2. The installed base argument - in capital goods industries, where products have long-life cycles, the installed base can be significant. In 2010, for example, Boeing had 19,410 commercial planes in operation and delivered 462 new planes, giving a ratio of 42 operational planes for every new plane delivered. Providing service and support for the installed base is a significant market opportunity.

3. Stability of revenues - particularly important in recent years, in many capital goods industries product revenues can be lumpy. Significant revenue is gained when products are sold and delivered, but this doesn't happen every day. Ongoing service and support revenues provide a more stable income stream, smoothing the effect of lumpy product sale revenues.

In strategic terms there are four key reasons for servitization.

1. Locking in customers - a traditional business model that has been used for years. Products are sold at or slightly above cost, money is made on the provision of spares and consumables. Think razors and razor blades; printers and ink cartridges.

2. Locking out competitors - especially important in industries with a high installed base. As demand for high margin service and support grows, new entrants are attracted to the services market. Many original equipment manufacturers make strategic moves to partner with their customers and in doing so seek to lock out potential new entrants to the services market.

3. Increasing differentiation - some customers value the stability that service and support contracts offer. A fixed price can mean predictable maintenance costs and a transfer of risk from the customer to the service provider. These benefits provide a differentiation advantage to original equipment manufacturers.

4. Customer demand - the final strategic reason I often talk about is customer demand, in the sense that customers demand that their providers offer service based contracts. In public procurement, particularly the defence sector, this is becoming an increasingly important trend. Government Departments are asking to contract for capability, by the right to use the assets (ships, ground vehicles and planes), rather than taking ownership of the assets.

A final, and potentially increasingly important, rationale for servitization is the environmental rationale. Here the idea is to question whether transfer of asset ownership is neccessary. Think of car sharing schemes, such as StreetCar and ZipCar, or DVD sharing schemes, such as Netflicks. Do consumers really need to take physical ownership of assets or can we share access to them, thereby reducing the environmental impact of production.

While these three rationales have stood the test of time, the reasons for this blog is I came across a new strategic rationale at a recent conference - the idea of service as a pre-sale opportunity. Volvo Cars run an active programme with their dealers where they seek to persuade them that every service encounter is also an opportunity to build customer loyalty and hence secure a repeat purchase - hence service as a pre-sale. The data that Volvo presented are illuminating. They clearly show that, at least for Volvo Cars, repeat business is a function both of product quality and service quality. How many of your service staff see service as a pre-sale opportunity?

Andy Neely

Director, Cambridge Service Alliance

Five predictions for the future of services

What does the future hold for services? I was recently invited to give a talk on this topic and gazing into a crystal ball produced five predictions...

1. Services will become more automated, but automation will brings risk...
Clearly technology will play an increasingly important role in services. RFID tags and barcodes on installed products will store service and parts histories - no need to search for those old service records anymore. Social media and unstructured data will be used to guide service interventions. The city of Chicago, for example, is seeking to harvest Twitter data to identify potential problems with public infrastructure. Weblogs, loyalty cards, smart phones - coupled with position location trackers - provide valuable data that can be used to tailor and customise services.

Yet this increasingly interconnected world also brings new risks, particularly as organisation join data up across domains. Think of your local convenience store and the loyalty card data they collect. How happy would you be if they started selling data on your shopping habits to your health insurance providers? The automation of services will increase their efficiency, but firms will have to consider very carefully the ethical and morale implications of how they use data they can access.

2. Services will become more localised and personalised...
Technology is already enabling the localisation and personalisation of services. Couple these developments with environmental drivers, such as the cost of carbon, and we'll see an even great shift towards localisation and personalisation. Take 3-D printing – in the future we’ll have printers in our homes that can create incredibly complex products (things that can’t currently be manufactured). 3-D printing will revolutionise manufacturing, but it will also revolutionise the spares market – what will you do do when customers can 3-D print their own spares to order?

3. Health services will be massive...
The demographic changes that are afoot will have profound implications for healthcare – already pharmaceutical firms are redefining themselves as healthcare businesses. As their drugs come off patent, they are realising that they have to change their business model, reinventing themselves as healthcare solutions providers. A much more customer focussed approach - most of us don't want to take medicines, we want to be healthy in the first place. So if you can be the healthcare solutions provider that stops people getting ill you are in a powerful position. In healthcare, its not just the changing nature of the economic environment that matters. The ageing population will also stress the medical system – many countries won’t have enough capacity (beds) in hospitals for the potential demand and it is too costly to keep people in hospitals anyway. So Governments will look for alternative forms of healthcare provision, e.g. assisted living, where people remain at home and are remotely monitored, perhaps using biometric monitoring devices built into their clothing.

Then there’s the question of healthcare diagnostics – IBM's Watson, the software solution that won Jeopardy, is now being put to use in healthcare, supporting doctors in patient diagnosis. And the potential for new healthcare services does not end their. Will we see organ farms – farms where people grow replacement body organs that are sold on the open market?

4. Everything that can be digitised will be...
Digitisation is already a significant trend in some sectors - take books, music, films… When will we stop producing physical version of products that can be made available as electronic services? Will we stop producing cash – we can use electronic credits on our mobile phones – indeed M-Pesa already does! When will virtual holidays become the norm – augmented reality means we can take a Carribean cruise without leaving our house – we certainly won’t need to fly miles in an aeroplane…

5. We'll stop being consumers...
The growing pressure on the earth’s resources will make “consumers” outlaws… We won’t be pleased to be called a consumer – instead we’ll look for ways of sharing resources and physical assets. We won’t all own our car, our own washing machine, our own lawn mower… Instead we’ll share resources across neighbourhoods. Do we really need watches? Our digital devices (whatever comes after the iPhone) can tell the time, double as a TV, etc, etc.

The Servitization of Manufacturing: Where Does Value Lie and When Is Value Realised?

One way of conceptualizing the servitization of manufacturing is to think about the two questions: (i) where does value lie, and (ii) when is value realised. In traditional manufacturing environments the value lies in products & parts – the physical assets – and value is realised at the point of sale – when the customer pays for the product. Many manufacturing businesses, particularly those with long life cycle products, have recognized that value can also be realized throughout the life of product, especially when products need repair and overhaul. Such firms have a strong focus on the aftermarket and capture significant value through the sales of spares and repairs.

An alternative perspective is to think about value lying in “solutions” rather than “products & parts”. This paradigm puts the emphasis on the outcomes the customer wants, rather than the physical product. The old Theodore Levitt quote “customers don’t want quarter inch drills, they want quarter inch holes” illustrates the point. Many customers don’t want to own the physical products that many manufacturers provide, instead they just want the end result – or the outcome – that the product delivers. When manufacturing firms switch to an outcome focus they often contract for capability, guaranteeing uptime and/or availability of their equipment through life. Rolls-Royce, in its aero-engine business, now contracts for Power by Hour, selling the thrust the engines deliver rather than the engines themselves. A significant advantage of contracting for capability is that the incentives of the customers and the original equipment manufacturers are aligned. In an aftermarket focused model, it is actually in the original equipment manufacturers interest for their equipment to break down, as they realise value when they repair their products and provide spare parts. When contracting for capability or outcomes, however, the original equipment manufacturer only gets paid when their equipment is working, so it is in the original equipment manufacturer’s interest to maximize equipment reliability, something that customers also care about.

One of the challenges of contracting for capability is the issue of risk. If original equipment manufacturers take responsibility for the outcomes their products deliver, effectively guaranteeing results for their customers, they inevitably take on significant risk. The original equipment manufacturer is now responsible for delivering outcomes, not just the product. Some servitizing manufacturers have decided that the risk involved in outcome based contracting is too great and some customers have decided they are not willing to cede control over the outcomes, so they are unwilling to enter into contracting for capability. In such situations there is an alternative approach to offering services - selling knowledge and insight – recognizing that value lies in the solution the original equipment manufacturer offers. Think here of manufacturers that also offer design and development or installation advice. Think of those that have moved into training and consultancy services. They no longer simply sell products. They also sell knowledge and/or insight. Figure 1 brings these four perspectives on servitization together into a single representation, which illustrates the strategic choices manufacturers can consider when exploring how to servitize. These choices are not mutually exclusive. Manufacturers can decide both to be aftermarket and advisory focused, although clearly the different positions require different organizational capabilities.

Figure 1: Conceptualising the Servitization of Manufacturing

Andy Neely

Director, Cambridge Service Alliance

The Challenges of Selling Services During a Global Recession

Professor Andy Neely, Cambridge Service Alliance

A global recession need not mean firms have to contract.  Instead, they might like to consider what we at the Cambridge Service Alliance call ‘the challenges of selling services’. We know that in a global recession there is more demand for firms to be innovative. People are asking themselves: ‘How do we deliver the outcomes we want?’ They are not just going to continue carrying on with business as usual.  What we advise firms to do is to ask the question: ‘What is the outcome the client is trying to achieve and how can we innovate the service delivery model to achieve that outcome?’

The shift to services is about the tendency of firms not just to sell products, but instead to sell outcomes - the outcomes that are related to services. For instance, a train manufacturer might in the past have sold trains, and then decided to provide the through life service to look after that train for its entire life.  But today they are now going further.  They are saying that customers don’t even need to buy the train, as they will guarantee the availability of the train. They will maintain it and they will look after its upkeep, so that customers can just use the train. Ultimately customers often don’t want to own products, they want the service the product delivers for them.

There is little doubt that the shift to services does open up the market place; it creates new opportunities to grow revenue. But we do understand that it’s also not a straightforward change for firms - some of the changes are around changing mind-sets, and changing the culture inside the organisation, particularly for manufacturing firms. If you have been really good at making products and then you decide to move into servicing products as well, throughout their life, then clearly you are going to need people with different skill sets. You will need closer relationships with customers. You will have to help the organisation evolve and start to change the culture so that your firm becomes much more service oriented.

We have devised a seven-point scale of ‘challenges for sales’, leading in turn to seven ‘opportunities for sales’. These are: ‘appetite’, ‘outcomes’, ‘delivering what you sell’, ‘identifying and managing risk’, ‘sealing the deal’, ‘killing your business’ and ‘the hidden service’.

‘Appetite’ is about making sure your customers pull for your services, and that the demand is in the market, making it a pull rather than a push sale. In terms of ‘outcomes’, it is all about being really clear what it is the customer wants to buy.  It’s not the product – for example it’s not the drill or even the quarter inch hole, but it is about the ability to hang the picture.  It is also about building your capabilities, which is what Vestas has done with its business model. Vestas are no longer just selling wind turbines, instead they are now advising customers where to put them, utilising their knowledge of wind flows around the World, finding much more effective solutions for its customers.  This is how ‘delivering what you sell’ becomes essential.

You need to ‘manage the risk’ in the short and long term so that you really understand the dynamics of the risk.  What risk are you taking on, and so therefore how do you price the risk? You need to ‘seal the deal’ to avoid giving away the service and this means ensuring the customer really understands the value in the service. Then you have to ensure complementarity, so that you don’t ‘kill the business’, ensuring that both product and sales work together. Finally, ‘the hidden service’ is about putting the ‘sizzle’ in the service. Where are you going to draw a line of visibility and what are you going to make visible to your customers so they understand the value of your service? 

For instance, a restaurant like Benihana cooks the meal at the table, so that you see the chef tossing ingredients around, like a theatre show they make a real experience for you. We have to help customers understand what is going on behind the scenes, so they can see the value of the service they are buying. Another example is Rolls Royce, who take their customers into their control centres, and the customers see what they are buying when they sign the service contract. It allows customers to see what they are paying for and what the ‘sizzle’ behind the service is.

The thing that people find most difficult is to change the mind-set of an organisation.  You need to get your sales teams to recognise the value of the service, focus on the outcomes and then to make sure the customer actually understands the value of the service, and is therefore willing to pay an appropriate price for it. Customers also need to understand the risk transfer that is taking place and that this is priced into the deal – to appreciate the value of the entire package.

At the Cambridge Service Alliance we can try to help prevent mistakes being made in this shift to services, by turning those seven challenges into seven opportunities. We find that the issues firms face are often about complementarities. For example, if there are two separate business units, one for services, one for products and they just look after themselves then it’s not as good as if they can be encouraged to work together and make both of them ‘hum’. I want the product part to design for service, and I want the service part to go back to the product part of the business and give them new opportunities to sell additional products.

By making this shift to services product based firms can take advantage of the opportunities that present themselves even in a global downturn like today. In a difficult market there is an appetite for change, there is an appetite for saying - ‘We can’t carry on delivering things as we have done in the past’.  For instance, public policy makers may be scratching their heads and admitting: ‘We can’t deliver healthcare and education as we have done in the past, we can’t afford to’. There is a need for the service delivery model to change and that is where the innovation comes.

Listen to Podcast on "The Challenges of Selling Services" by Professor Andy Neely

Beyond Co-Creation: Think About Co-Evolution

In the world of service many people talk about the co-creation of value - the idea that customers and providers work together to create value in service. Take, for example, a restaurant. As a patron you and your companions (assuming you are not eating alone) help create the experience. You engage in conversation. You banter with the waiters. You compare and often share your food. In a more complex business-to-business setting, the provider of the service is often dependent on customer inputs. When maintaining complex engineered equipment, for example, customer feedback - what's working, what's not - is an essential input to the maintenance diagnosis process.

I have spent the last couple of days at the launch meeting of the NEMODE - New Economic Models in the Digital Economy - network. One of the most interesting themes to emerge for me was the idea of the co-evolution of business models, rather than the co-creation of value. An apposite example is provided by eBay. When eBay was first launched it was created as a market place for selling cheap, second-hand goods. The idea was that you could go to your garage, find an old set of tools, put them on eBay - a form of electronic car boot sale - and sell them, rather than trash them.

Over the years eBay has evolved - it has become a virtual market place. People use it to sell everything - from second hand garage items to new cars. Some use eBay as virtual store, selling their goods online. What has happened over the years is the users of eBay have found ways of using the platform that were never originally envisaged. As the users have innovated their use of the platform, eBay has responded and innovated its business model.

Co-evolution doesn't rest there - it is not just the interaction of customers and providers. You also have to consider the broader eco-system. Take, for example, Apple. Through the Apps store and through Apps themselves, Apple have created a platform that allows others to offer services (Apps) to customers. The three parties involved - Apps developers, Apple and the customers - are jointly co-evolving the business model. This raises an interesting question - how good are you are co-evolving your business model with your customers? Have you created a platform that allows the customers to find new ways of creating value? And if so, are you capable of spotting these customer innovations and incorporating them into your business model to allow the next round of co-evolution?