How can manufacturers invest in the core components of a digital future – and generate cash-positive savings?
At Digital Talks 2019, I chatted to science and technology journalist, Katherine Templar-Lewis, about how Siemens helps manufacturers benefit from technology advancements that are the key components to a digital future, whilst generating cash-positive savings.
Could you explain what your team at Siemens is currently doing for customers?
Siemens is currently going through a digital revolution. For my team, this means that we have had to reshape our business model and enhance our digital offering to enrich the value-add between Siemens and our customers.
This sounds complicated, and I will be the first to say it has been a challenge. However, rather than ripping and replacing infrastructure we are looking at how we bridge the gap that exists between traditional industry and the tech-focussed manufacturing world.
One solution we have found which has real business benefits is outcome-based servitisation.
How are outcome-based models being applied in industry, and what benefits are you seeing?
We initially looked at this concept because it has proven successful in other sectors. For instance, Rolls Royce has been successfully selling their power-by-the-hour model into the airline industry for more than 50 years. For the manufacturing world, however, it is a revolutionary concept and very few have dipped their toe into this new way of working.
The tradition in our industry is that the partner contracts on the product, the solution, or the service. With an outcome-based servitisation model they contract on the outcome. Siemens collaborates to identify and create the business case together with the customer and then provides a service to deliver an outcome the end user wants from the equipment through a period of time.
As for the benefits, we have already seen revenues increase and costs go down by 30% when this model is used to tackle strategic challenges, such as time to market, energy efficiency or waste.
We are also saving up to four times more for our customers by building managed service funding and pay-per-use into our managed service contracts. Those savings are also being unlocked up to 50% faster than with traditional models. Simply put, this has been game-changing in terms of the value that it delivers to our customers.
A lot of people are nervous about starting this digital journey because they believe the risk is too high. What do you say to that?
For those in the boardrooms of UK manufacturing, there is certainly a confidence factor when it comes to digital investment. However, they never really know how to de-risk their entrance into the market, and this prevents companies from investing in digital resources.
At the same time, around 65% of companies are making investments on gut feelings and spreadsheets alone – and it is costing them dearly, so there is clearly a cause for change.
We are a manufacturing business too, and understand the financial pressures that come with investing in tackling strategic challenges and future-proofing our business.
We took the same approach within our own business as we do for our customers and worked diligently to understand where investments could address strategic challenges, as well as lay the foundations for a digital future – and construct a finance model that met our return on investment.
What have you found in terms of cost and Return on Investment (ROI)?
With Siemens’ in-house financing strength, there isn’t the need to pay CapEx upfront. The project is self-funded once the agreed equipment and systems are installed, commissioned and generating the pre-agreed savings. Ongoing data monitoring and analysis is at the heart of any outcome-based project to ensure performance metrics are met and savings are on target.
What’s your advice to manufacturing peers thinking about the role of digital technology to tackle strategic business challenges?
I would say that digital is not a choice; you either join the party or you get left behind.
In other words, digital needs to become a main feature of your business model if you are going to grow as a company. Even if you just think about the guaranteed savings for your customers – the potential is huge. The outcome-based approach isn’t just accelerating such potential cost reductions, it is also embedding a big data infrastructure and the key components to a digital future – all underpinned by a tailored commercial model to meet the customer’s Return on Investment.
The challenge is getting people to understand these long-term benefits, and the contemporary, cash-friendly ways of doing it, so that they can join the digital journey.
To find out more about outcome-based servitisation, click here