Use Case: Optimising Rolls-Royce’s ‘Product-Service’ business

This is a ‘Use Case’ taken from our 2-Sided Business Models report, which is out now. We have chosen Rolls-Royce as an example of both the type of target business model (mixing services with products) and a specific B2B VAS (Value Added Service) opportunity – field service – for telcos to sell into.

A major trend of the times is the blurring of the distinction between service industries and manufacturing, creating product-service systems — in our own technology field, we can already see plenty of examples. Is IBM a manufacturer or a service provider? Ever since its early 90s crisis, it’s put a lot of effort into its services businesses (consulting, systems integration, hosted/managed service operations), but not only does it still make computers, it carries out fundamental R&D on topics like semiconductors, lasers, batteries and magnetic materials — even more hardware than the chip makers.

Similarly, everyone would agree that Ericsson manufactures telecoms equipment, but one-third of its profits come from Ericsson Professional Services. On the other hand, Google would seem to be a quintessential services company, but it actually makes its own servers. Further, some functions that are typical of tech manufacturers – R&D, design and engineering – are found in companies that outsource all their manufacturing, but whose output is still recognisably a physical product, like ARM Holdings.

But this trend is even more pronounced outside the IT/telecoms world. Many, many companies turned to integrating their products with services as a way of fighting commoditisation over the last 30 years – and it’s often cited as a way of making industry more sustainable (pdf). We’ve picked one example which offers insights into where telcos might take their business.

Our example, Rolls-Royce plc, is the British turbine engine maker. Since its bankruptcy and nationalisation in 1971, the company has gone from holding 8% of the world market for civil turbofans at privatisation in 1987 to being the second-biggest producer with market share of 40%. A big part of this success has come from integrating services into its products. In fact, services now account for 55% of RR’s revenues.

An eye-catching example is that today, aero-engines for which Rolls has a long-term maintenance contract all send back live telemetry data by satellite to the Rolls service centre in Derby. So not only can their engineers use this information to understand how the engines behave, they can also control each engine’s service schedule in real time.

The other half of this is a complex infrastructure of service centres, workshops and teams of technicians distributed around the world, so as far as possible engines can be serviced as a flow process rather than job-by-job. Engines can even be provided as a service, like software-as-a-service — they are replaced from a pool when they are brought in for major inspection and overhaul.

The commercial upshot is that Rolls has been able to offer very keen upfront prices in order to win new business, while making up the difference on maintenance – about 70 per cent of the Rolls-Royce engines in service around the world are covered by a Rolls TotalCare maintenance contract. Long-term service contracts also help them embed the relationship with Rolls-Royce into the organisations they deal with, which helps win repeat orders. And the hoard of data from servicing the engines throughout their design life is an asset to Rolls engineers working on new products.

But field service is famously a business process that goes wrong. Even if you’re not going all the way to becoming a product-service system, almost any business has service staff in the field. It’s crucial to delivering a good product, and the closeness to customers means that anything going wrong is painful. And there are so many things that can go wrong.

In the report, we characterised some of them – here are some examples taken from the report.

Why does field service fail
These are all problems of information, and it follows that an informational fix is the easiest solution. But most of the time, the answer is either to overbook and accept that customers will be disappointed, or else to throw money at the problem and accept waste. It would be great if you could implement lean production here, especially as more and more of your customers may be doing so themselves, which will increase their expectations of their suppliers.

Looking at these factors together — product-service systems, lean production, and don’t forget rising fuel costs — we can see that the ability to schedule production and service interactions dynamically, responding to signals from upstream and downstream, is becoming increasingly important. Location, identity, presence-and-availability, and secure messaging are key functions in any IT system designed to fulfil this, as is high availability and reliability. All of these are challenging and expensive to implement with standard IT tools — but they are core capabilities for telcos.

IT stops at the warehouse door

Interestingly, bandwidth is only marginally relevant. Most of this activity involves messaging, voice, or signalling/context data interactions. It’s a question of communication-enabled business processes – CEBPs – which are precisely what friends of Telco 2.0 like Thomas Howe and VoiceSage do. Telco 2.0’s content-distribution side is all about providing logistics services for data – CEBPs are all about providing data services for logistics. The content distribution side is about providing logistics services for data, to move it from source to destination. Meanwhile, CEBPs that underpin many of those VAS are provide data services for the world of physical logistics, using telco assets to help burn less fuel and labour.

It is therefore one of the major opportunity zones for Telco 2.0, where the divergence between the socioeconomic value of data and its quantity, and hence cost, is greatest. Integrating product-service systems for the vast numbers of SMBs in the world, who are least likely to develop them in their own IT departments, could be the next SMS.

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