Servitization with Ramachandran S

Jeff Kavanaugh: Welcome to the Knowledge Institute Podcast, where we talk with experts on business trends, deconstruct main ideas and share their insights. I'm Jeff Kavanaugh, head of the Infosys Knowledge Institute, and today we're here with Ramachandran S, lead for manufacturing and engineering at the Knowledge Institute.

Jeff Kavanaugh: Ram, thanks for joining us today.

Ramachandran S: Great to be here, Jeff. Thank you for having me on the show. It is my pleasure.

Jeff Kavanaugh: Ram, prior to joining the Knowledge Institute team, you managed technology implementations and manufacturing, quite a few of them looks like, tell us a bit about your career before joining Infosys.

Ramachandran S: Sure, Jeff. I started my career in manufacturing in an earth mowing equipment division, which Caterpillar has taken over now. That was a solid foundation for my career. I spent time on the shop floor. Then I moved on to the application of digital technologies specifically for manufacturing. I spent close to a decade in General Electric as part of digitization programs, like product life cycle management or PLM and supply chain management. Before Infosys, my journey as an analyst or a consultant took off in IDC manufacturing insights, where I discovered my passion in writing. Right now, I've been with IKI from the start as a lead for engineering and manufacturing, where we keep learning and we are happy to keep sharing.

Jeff Kavanaugh: Great. Well, we could probably talk for hours about just your experiences alone. I think in the time for today, we're going to focus your expertise on the topic of servitization. In fact, I believe you co-authored a chapter on servitization for an upcoming book on advanced manufacturing. Today's conversation covers a servitization trend in manufacturing and how organizations can effectively adopt it. Let's dive right in. I'm sure many of our listeners are familiar with the topic of servitization. If we communicate through the lens of subscriptions, Netflix or Spotify, how can you provide us with a working definition, especially for manufacturing?

Ramachandran S: Servitization is basically the bundling of product and the necessary services that includes support and the knowledge to operate a product into one consolidated offering. For example, as a consumer, instead of purchasing a car as a product, I can get into a mobility as a service arrangement with a car maker. I'm not interested in ownership of the car. I want only use it to drive to office and back home. So I pay a monthly subscription fee, whatever be the usage. The car maker is responsible for its maintenance, repair and insurance. Sometimes I get additional flexibility like a car swap if I don't like the color or the model of a car. It is the equivalent of what is called SaaS or software as a service in the IT world. Instead of developing an application and deploying it on my own server, I consume it as a service on a central cloud. Servitization is similar to that in manufacturing.

Jeff Kavanaugh: Well that's a lot. It's hard to imagine subscribing to a car, especially the whole stereotype of the purchase you go through, maintenance and then holding onto it for a long time. I suppose it's the logical next step from a lease. And certainly we're seeing this a lot more in manufacturing. Be more specific about your upcoming book on the chapter you authored on servitization. Can you tell us about who's publishing it, how it came about and what you hope to accomplish with it?

Ramachandran S: This book is on advances in digital manufacturing systems. It is jointly published by the University of Nottingham and IIT Madras. Springer is the publisher. Multiple experts from both the industry and the academy have contributed chapters on upcoming trends in manufacturing. Servitization is definitely one such happening trend. From IKI we had earlier published some articles and points of view on servitization. The professors had read them and approached us. I'm happy that Infosys is contributing a chapter on servitization. We are expecting the book to be ready sometime in September. Most of the contributors have already submitted their chapters. The editorial process should be fast going forward.

Jeff Kavanaugh: Ram, we talked about automotive. What other industries have adopted servitization? And can you share an example?

Ramachandran S: Sure, Jeff. Asset intensive industries are the early movers in adopting servitization. They have complex bulky products that are difficult to operate and maintain, like aircraft engines, turbines and locomotives. Therefore, in case of servitization, the risk of operation of these products is shifted to the equipment maker who knows the product the best. It is not easy to operate and maintain a turbine or an aircraft engine, for that matter.

Ramachandran S: Rolls Royce is one such example for the aircraft engines. Their Power by the Hour initiative is more than half a century old. That's a long time. Rolls Royce earns close to half its revenue from the program. This is even before technologies like the internet of things or IOT became popular. Airlines pay Rolls Royce on a pay per use or hourly basis for the actual hours an engine has flown on an aircraft. Rolls Royce is responsible for maintenance and uptime of the engine. This is an example where servitization has been successfully deployed as a business model on a large scale. It is a mutually beneficial arrangement, both for Rolls Royce and the airlines. For customers, which is the airlines in this case, the spend changes from a large investment or a CAPEX to a monthly operating expense or an OPEX.

Jeff Kavanaugh: The auto industry has not been as successful adopting servitization as some other industries, at least not in a large scale. What are the barriers that's holding automotive back?

Ramachandran S: Almost every major vehicle maker today has an ongoing program for servitization, or they have tried pilots for specific models in specific cities in the US or in Europe. There were some initial hiccups. Dealers were worried that they would get left out of this business model. The insurance rate, for example, varied from state to state. So a one size fits all approach did not work for auto EMs. They had some lessons learned, some have relaunched the program.

Ramachandran S: I think what is lacking is a scale of operations. We have called it the escape velocity in the book chapter. We did a quick back of the envelope calculation specifically for the auto industry. Companies need to invest upfront for the technology and be ready for a monthly cash flow in case of servitization. This is instead of a lumpy one time revenue at that time of sale, traditionally. In such a situation for servitization to be profitable, it has to cross a minimum threshold.

Ramachandran S: And what is this threshold that I'm talking about? This threshold is in terms of the percentage of vehicles sold, approximately 30%, or one third of the vehicles manufactured, should be sold on a subscription model for it to be sustainable and profitable in the long run. The actual number can vary depending on the model of the car and the features in the plan. But today car makers earn a very small revenue share, a single digit percentage of their total revenue. So there is still a long way to go but everybody's talking about it.

Jeff Kavanaugh: Servitization seems to cover this broad spectrum, many aspects of a product. And of course with a product life cycle all the way from conceptualization to end of life. Can you comment on how servitization impacts these different stages?

Ramachandran S: Servitization as a business model impacts the aftermarket or the post sales stage significantly. In a traditional sale model once a car is sold, there is no guarantee that the post sales revenue from the sale of spare parts and services would come to the original car maker. I can take my car to anyone for service. But servitization ensures the post sales revenue. It bakes this revenue into the subscription fee that customers pay. Servitization, therefore, changes the automotive business from a transactional business to one of ongoing engagement with customers. Having said that, other stages should also be transformed.

Ramachandran S: Servitization impacts every stage in a product lifecycle from conceptualization of a product to its end of life or environmentally safe waste of handling and disposing it. For example, in the design and manufacturing stage, products should be built for reliability because the manufacturers are not responsible for the performance of a product. Supply chain should be more responsive to deliver spare parts on time. But the biggest impact of servitization on the life cycle of a product is in the after market segment.

Jeff Kavanaugh: We talked about automotive and after market piece, let's take a step back. What are the different flavors or varieties of servitization that you see in business today?

Ramachandran S: There are different flavors of servitization. The simplest one is a flat subscription based model with a monthly fee, irrespective of the product usage. It is different from rentals, which is used for shorter time periods. There are other models, like paper use or paper page printer, in case of printers. Xerox was a pioneer with such a business model. There are outcome based business models in industries like power generation for turbines. GE power has had such arrangements with its customers. GE guarantees a specific uptime of turbines and efficiencies, which directly impact the customer's top line and bottom line. There are penalties and incentives that are tied to this outcome if the outcomes are not achieved.

Jeff Kavanaugh: Let's talk about tech for a moment. How do digital technologies enable the adoption of servitization?

Ramachandran S: Digital technologies are a key enabler for servitization starting from the internet of things or IOT to make products close loop or connected. Once a product becomes connected, it enables remote monitoring and management. Manufacturers can know about the product usage and its condition by measuring vital parameters and patterns of behavior. Analytics and machine learning can be used. Products are getting mechatronic in nature or a combination of mechanical and electronic systems. Most of them have a chip onboard and a significant amount of code. The amount of code is going up day by day as we speak. So that way products are getting smarter. They take some decisions locally without contacting a central computer or a human expert. That way digital technologies are becoming a key enabler for servitization.

Jeff Kavanaugh: What do you think is the biggest barrier once you get past the technology with process or people or financials?

Ramachandran S: I think the technology is proven and already available, Jeff. It is the people part that needs change. On the finance part, one barrier is a change management and cash flow. In case of the sale of products, there is a large cash flow at time of sale. But in case of servitization, there is no such lump sum cash, but there'll be small, but regular continuous flows of cash throughout the life of a product. It can be a CFO's delight if implemented on a large scale. The aftermarket segment is assured for the equipment maker. Revenue from sale of spare parts and post sales are baked into the subscription rate. Organizations should get used to this. Asset financing companies, either captive or third party, can act as intermediaries to cushion this and take care of the finance part. That way product makers can focus on the product and not worry about the finance part.

Jeff Kavanaugh: As we bring this to a close, it's important to take away some actionable items and what are some recommendations, two or three things, that leaders can do to make servitization successful for their company?

Ramachandran S: One recommendation is to not stop with technology implementations. Instead, business leaders need to take a close look at technologies to fully benefit from them in the form of new business models like servitization. Servitization itself is an opportunity for ongoing deep customer engagement across the life of a product and not just stop with the one time sale of products. I think change management and agility are key ingredients too. There is change happening from all directions. Customer preferences are changing. Products are getting complex. Therefore, there is inflation in the price and they become unaffordable for many customer segments. So that's where business models like servitization will play a key role for manufacturers in the near future, if not already. Organizations that are agile and adopting chain will find servitization to be beneficial.

Jeff Kavanaugh: Great. Well, as we mentioned at the beginning, this is an important concept, topic. It is a full chapter in the upcoming book. Can you mention one more time the name of the book and when it's due to release and how people can find a copy?

Ramachandran S: The book should be ready for release towards the end of September, Jeff. The name of the book is Advances in Digital Manufacturing, published by Springer. The best place to know the latest status and pick up a copy is to follow IKI on social media specifically on LinkedIn. We will make sure to keep our followers and business leaders who share their valuable inputs with us updated on the status. We look forward to feedback from the readers after they get a chance to read it. Professor Thorsten from West Virginia University, Kishore Jayaraman, who's the Rolls Royce president for India and South Asia, Professor Kulwant Pawar from the University of Nottingham, Professor RK Amit from IIT Madras, Professor Vinit Parida from Lulea University in Sweden, and many more business leaders have been supportive of this book chapter. I wanted to take this opportunity to thank them for their valuable inputs. We will continue to collaborate with them on servitization as a topic.

Jeff Kavanaugh: You can find details on our show notes and transcripts at Infosys.com/IKI in our podcast section. Ram, thank you so much for your time and sharing your perspective on servitization.

Ramachandran S: It was a pleasure, Jeff. Thank you so much for having me on the show.

Jeff Kavanaugh: Everyone, you've been listening to the Knowledge Institute podcast. Enjoyed this conversation. We hope you'll subscribe or follow us. Thanks to our producers. Catherine Burdette, Christine Calhoun, Dode Bigley and Dylan Cosper. Until next time, keep learning and keep sharing.