Service Innovation at Rollys Royce : Engine as a Service

February 6th, 2009

Traditional manufacturing industries are having hard times, selling goods in our current economic environment is not sufficient. The shift from a goods to service is strategic. Rolls-Royce knows that. In a airline industry in trouble they already had to cut some jobs, but because of the way in which it has melded technology and service they will be able to weather an economic downturn better than its rivals.

Fig 1. Rolls Royce civil-aircraft engines

“Rolls-Royce’s biggest business is the civil-aircraft engines (Fig.1.) that once felled the company in 1971, became its salvation two decades later. The turbine blades that make up the heart of the giant engines slung beneath the wings of the world’s biggest planes. These are not the huge fan blades you see when boarding, but are buried deep in the engines. Each turbine blade can fit in the hand like an oversized steak knife. At first glance it may not seem much more difficult to make, they cost about $10,000 each.Turbine blades are difficult to make because they have to survive high temperatures and huge stresses. Each blade is grown from a single crystal of alloy for strength and then coated with tough ceramics.Making the blades is merely the entry ticket to the market. Both Rolls-Royce’s main rivals have also mastered the art. In such a competitive field an incremental advance by one manufacturer is usually matched by the others within a couple of years” (The Economist*)

Rolls Royce “prospered by pursuing technical advances and by keeping close to its airline customers. The big pay-off from getting engines under more wings comes from selling spares and servicing them” (The Economist*). Like the Razor and Blades business model, the concept of either giving away a sellable item for nothing or charging an extremely low price in order to generate a continual market for another, generally disposable, item. The concept was pioneered by King C. Gillette inventor of the disposable safety razor and founder of Gillette Safety Razor Company.

“This is because selling aircraft engines is like selling razors. The razor and engine make little if any profit; that comes later, from blades or spare parts and servicing (Fig 2). Gross margins from rebuilding engines are thought to be about 35%; analysts at Credit Suisse, an investment bank, estimate that some makers of jet engines get about seven times as much revenue from servicing and selling spare parts as they do from selling engines. Many analysts suspect that Rolls-Royce (and others) sell engines at a loss. Judging this is hard, though, because of the way Rolls-Royce accounts for long-term contracts, often by booking a profit on the sale for income that will be received only over many years. Rolls-Royce says that, on average, engines are sold at a profit”. (The Economist*)

Fig 2. Rolls Royce turbine blades service

“The modern Rolls-Royce earns its keep not just by making world-class engines, but by selling power by the hour—a complex of services and manufacturing that keeps its customers’ engines burning. If it did not sell services, Rolls-Royce could not earn enough money from selling engines. As you can see in the figure 3, the revenue that sustains Rolls Royce comes after the sale.” (The Economist*)

Fig.3 Rolls Royce revenue growth driven by Service (by The Economist)

“This is where Rolls-Royce has melded its technology with service to make it more difficult for competitors to pinch its business. Rather than simply giving away razors to sell razor blades it has, if you will, offered to shave its clients every morning. Instead of selling airlines first engines and then parts and service, Rolls-Royce has convinced its customers to pay a fee for every hour that an engine runs. Rolls-Royce in turn promises to maintain it and replace it if it breaks down. “They aren’t selling engines, they are selling hot air out the back of an engine,” says an investment analyst. The idea is not unique to Rolls-Royce; the other big makers of aircraft engines do much the same. But Rolls-Royce has adopted it with greater gusto. It has been offering the service for more than a decade; more than half of its engines in service are covered by such contracts, as are about 80% of those it is now selling”. (The Economist*)

“Rolls-Royce’s global operations room in Derby, with 24-hour news channels, banks of computer screens and clocks showing the time around the world, looks and feels like a currency-trading floor. It seems far away from the grubby manufacturing that Derby has pioneered since the dawn of the industrial revolution. In fact, a few hundred yards down the road, furnaces roar, cutting tools whine and giant workhorses of the air take shape. The operations room is the heart of a vast industrial enterprise”. (The Economist*)

“The operations room in Derby, for instance, continuously assesses the performance of 3,500 jet engines around the world, raising an almost insurmountable barrier to any rival that hopes to grab the work of servicing them. A torrent of data is beamed from the aircraft to Derby. Numbers dance across screens, graphs are drawn and technicians scratch their heads. Before the plane lands, word comes that the engine is running smoothly. The aircraft can take off on time.The data collected can be invaluable to airlines: it enables Rolls-Royce to predict when engines are more likely to fail, letting customers schedule engine changes efficiently. That means fewer emergency repairs and fewer unhappy passengers , helping to make a great consumer experience. The data are equally valuable to Rolls-Royce. Spotting problems early helps it to design and build more reliable engines or to modify existing ones. The resulting evolution of its engines has steadily improved fuel efficiency and over the past 30 years has extended the operating life of engines tenfold (to about ten years between major rebuilds). “You could only get closer to the customer by being on the plane,” says Mike Terrett, the company’s chief operating officer”. (The Economist*)

*This article contains extracts from : “Britain’s lonely high-flier” at The Economist. (link)

The rise of service industry and the need of T-shaped professionals in the 21st century

January 25th, 2009

We are living in a service-driven world. Services are central to economic activity, infrastructure services such as transportation and communications are essential for any society. The service sector represent 80% of the GDP of the United States and the 70.5% of the European Union. In South America, the service sector represent 54.7% of the GDP of Argentina, 54% of Brazilian GDP and the 44.7% of the Chilean GDP (GDPs are from January 2008).

Fig.1.Shows the GDP participation in the Services, Industrial and Agriculture sectors.

Since the service sector is growing fast around the world, great percentage of new jobs are comes from services. These jobs, are no only from restaurant and call centers, many require a good level of education. A great piece if the growth in services comes from the industrial services. Some of the fastest growth is in knowledge-based industries like professional and business services, education and heath care.

In fact, manufacturing firms are shifting from just bundling supplementary services to their products, to offer stand-alone services. IBM, previously know as manufacture of computers and business machines transformed itself into a service and consulting firm thanks to the purchase of Price Waterhouse Coopers consulting arm in 2002 and the selling of their PC division to Lenovo in 2004. By 2007, it’s Global Services division represented the 55.3% of the group revenues (more tha 54 billon dollars).

IBM’s successful transformation into a professional service firm came from it’s emphasis in service innovation. “This shift to focusing on services has created a skills gap, especially in the area of high value services, which requires people who are knowledgeable about business and information technology, as well as the human factors that go into a successful services operation. Many leading universities have begun exploring and investing in this area, working in tandem with thought leaders in the business world. In May 2004, this group suggested that an entirely new academic discipline may be called for – first roughly described as Services Science at a summit held at IBM” (IBM Research).

“Services science would merge technology with an understanding of business processes and organization, a combination of recognizing a company’s pain points and the tools that can be applied to correct them. To thrive in this environment, an IT-services expert will need to understand how that capability can be delivered in an efficient and profitable way, how the services should be designed, and how to measure their effectiveness”.”This new academic discipline would bring together ongoing work in the more established fields of computer science, operations research, industrial engineering, management sciences, and social and legal sciences, in order to develop the skills required in a services-led economy”(Businessweek).

When professionals are so specialized (I-shape), a change in technology or market conditions devalues their knowledge. In the other hand, T-shape people are professionals who are both deep and broad and who can learn and adapt rapidly to change. T-shape people are adaptive innovators who will drive the technological innovation –the transformation of knowledge into products, processes, and services– that is key to competitiveness, long-term productivity growth, and the generation of wealth in our global, knowledge-based economy of the 21st century.

Fig.2. T-Shaped Professionals are capable to apply their functional skills across situations .

T-shaped professionals are “deep problem solvers in their home discipline but also capable of interacting with and understanding specialists from a wide range of disciplines and functional areas”(fM and IBM).

caminando a casa escuchando a Röyksopp

October 16th, 2008

Santiago’s Weather quote :

“Con el cambio de hora es mucho más agradable caminar a casa. Las nubes se ven espectaculares con la luz del sol. Para qué decir la vista de la cordillera iluminada. Esto acompañado de una agradable música relajante. En fin la caminata a casa ahora la disfruto mucho más”.

Eduardo Navarro @ m100

April 15th, 2008

Me encanta el arte moderno. Y por eso es que me gusta Eduardo Navarro y sus impresionantes esculturas de tubos fluorescentes. El Domingo fui especialmente a ver su famosa mesa “Joy Division I” a m100, realmente fascinante. Me encantan los colores que irradia, quedan muy bien plasmados en las fotos. Ojalá siga exponiendo obras en nuestro pais. Y no solo en los grandes museos de arte moderno del mundo.

Nine Inch Nails is Music 2.0

March 14th, 2008

Trent Reznor is an entrepreneur and tech savy guy. He is trying to take the jump from the traditional record business model to the Digital music market where the artist take the control. His first try was a record of Saul Williams. The users were able to download the album free or pay for higher quality of the digital copies of the album. This only was a test to know the behavior of the consumers.

With Ghost, the Trent Reznor’s approach is different. He only gives free one pice of the album as MP3 file. Then he charges for the complete album with many format options. But the real deal comes with the premium versions. Trent sold out (the first day on line) the 2500 copies of the deluxe version at 300 dollars each . Making 1.6 Million dollars (donwloads and orders) within a week.

Now he is releasing an interesting proyect at youtube with user generated content that eventually will be used as visuals for a (one time) live performance of the ghost album (I expect that later will be released as bluray).