Realising productivity gains from the tremendous technological advances in recent years will require redesigned processes and changed mindsets. There will be a need to think big to win big.
That's according to Dr. Thomas L. Hager, who runs IBM's Banking and Financial Services industry segment in Europe. Johan Trocmé from Nordea Thematics interviewed Hager for the latest Nordea On Your Mind about Industry 4.0.
We note in macroeconomic data that productivity growth seems to have stalled in advanced economies since the global financial crisis in 2008-09. Do you have any thoughts on why this is the case, and do you think the manufacturing industry is a key part of the problem?
TH: It is interesting, because I see a big potential for productivity gains just about everywhere from today's starting point, as we are entering a completely new phase of digitalisation. The question is, will we realise and be able to monetise those productivity gains? If you do an internal business case and see most productivity gains stemming from simplifying, automating and standardising, you might face the question of what to do with the 20 people left over when you can run a process with ten people instead of the 30 it used to require. Freeing up 20 people is of course a cost saving, but that is often only half of the benefit. If we make use of the experience and skills these 20 people have, perhaps re-train and re-tool them, we may be able to redeploy them in areas which contribute much more to our value creation for our clients.
The full benefits from productivity growth initiatives are only realised when people, processes and technology come together. But it starts with people. You need to think about what skillsets, qualifications and abilities your people have, how they can be enhanced and how your people can be re-purposed for what you are trying to do. Technology will not only make things faster; it will also change the process.
We have done a study across banking in Europe, and we estimated that the industry's IT costs could easily be reduced by 10-15%. That is pure cost cuts in existing structures. But we see a potential for a 50-60% cost reduction if we look at the process! It will now allow us to create a new end-to-end digitalised process. This goes beyond incremental change, changes the whole playing field, and is what we really need to look at. Process and technology obviously go hand in hand, but if we do not take the people along, we will not be able to realise the full potential from productivity gains. If you are serious about it, it is tough transformational work. People being freed up need to be convinced there are new opportunities out there, and that if they are not able to see them, they will ultimately need to seek professional opportunities elsewhere, in other departments or even in other companies. This is a difficult task, which takes time.
In short: Technology has advanced rapidly in recent years and people and processes now need to catch up. You have probably heard economics professor and Nobel prize winner Robert Solow's quote "You can see the computer age everywhere but in the productivity statistics". It is as if we can see all this productivity potential, but it does not materialise. I think it does not materialise because it is not realised. But another part of the explanation is that we do not measure it. Today, we have goods and services produced in the economy for free. Platforms like Google can keep track of our location - we give them free data. This data is not monetised, it is not part of anyone's production cost. And yet it is there to use.
There has arguably been a lack of investment in productivity in some countries. You could say that the US has outsourced much of its productivity development in manufacturing by importing goods from China. With today's pressures for reduced trade, the US will have an opportunity to upgrade technology and processes, and re-train and re-tool their people. Wal-Mart is an example of a company that has used a lot of technology from the computer and communications industries to optimise its supply chains, often sourcing at low cost from China. It is now considering if it should onshore more sourcing going forward, and if technology could allow this to be done cost-efficiently. New technology includes concepts like digital twins, a virtual version of a product we make, which we can manipulate and test. I admire architects, because they are able to envision things. They can anticipate appearances and properties of rooms or buildings before they have been made. Digital twins give room for significant productivity gains by making it possible for different people, perhaps in different locations, to give input on designs, appearances and other characteristics before a physical product even exists. Much of evaluation and testing, trial and error, can be carried out prior to any actual manufacturing taking place. You can see evidence of this in the car industry, where the life cycle of a car model has been shortened significantly. More virtual design, testing and evaluation lets you bring a new car model much faster to the market.
How do you see Industry 4.0? Revolution or evolution? Is it about technology or business practices and processes, or both?
TH: I can understand how some people would describe it as a revolution when seeing a vast productivity potential from their particular starting point, but I see it more as an evolution. In a revolution, you throw everything out and replace it with something new. I can see few, if any, businesses today which could afford to throw everything out. On my home turf, the banking industry, the major players have core banking systems with code written 20 or 30 years ago. And they still work. It therefore makes no sense to just throw them away. Find the core value and continue to use it as it creates value going forward.
I can also understand how people choose to describe Industry 4.0 as a revolution when pointing to the radical new opportunities unlocked by technologies like cloud computing, open source code, cyber-physical systems, the internet of things (IoT), artificial intelligence, 5G communication networks, edge computing and real-time processing and execution everywhere. And I should, as IBM provides all those services. So much new technology coming together can appear like a revolution. But if you look at it from the business side, we still have business models with revenues and costs generating profits or losses. And you need to stay within that equation, which dominates everything. It is an evolution, but an evolution that is happening at a greater speed than historical ones.
What do you think will be required for widespread adoption and implementation of Industry 4.0? What are the greatest obstacles?
TH: As we touched upon earlier, I think the greatest obstacle to implementing and realising the full productivity benefits will lie in getting people on board and taking them along. Consider the example of a broken furnace. A technician coming to fix it will do mostly basic, mechanical work, and will probably not even need analytical tools, just measure the temperature and perhaps replace a part. But modern heating systems are digitalised and optimised for output and energy consumption. And suddenly you need your service technicians to know how to read and write high-level, no-code and low-code software code. That is not a trivial thing to put into a three-year apprenticeship or vocational training programme. It is knowledge of an entire heating system – not just the mechanical parts but how all the pieces work together. Inter-operability, the ability to dock in new things to connect with what is already installed, will be key going forward. And getting people on board for the journey will be a challenge for rolling out all this new, sophisticated automation and optimisation. They will need the skillset and expertise required to deal with its complexity and to ensure its maintainability and inter-operability. If we simplify a bit, it requires a change in mindset and competencies as if changing from a simple technician to a systems engineer. And to some extent this goes for the users of the technology as well. They must be sufficiently comfortable and familiar with the new technology to want and be able to make use of it. And this also includes privacy and security. Installing an internet router at home has become much easier than it used to be, but I know people who bring a technician home to do it for them and give out their password. And they are doing this not knowing the complexity of the system and what risks they expose themselves to.
The whole bringing people along aspect will represent the social costs of implementing industry 4.0, and there are high economic costs as well. Major investments in technology and solutions are needed. Privacy is not limited to individual consumers. Do corporates want connected devices to feed continuous data on output and performance to third parties? Data is the new gold of the 21st century. Apart from companies perhaps not willing to share operational data with outsiders, they may wish to monetise the data themselves as well, rather than letting others do it. And let us not forget that regulation can be a major factor, especially in highly regulated industries like banking and healthcare.
At IBM, we have created a partnership with Mastercard called Truata. It is a platform business which keeps consumer data private and GDPR-compliant. It allows analysis of anonymised data. Our individual data is protected, but businesses can access big datasets, allowing them to see patterns and behaviours which can help them optimise their businesses and customer experiences. It is a way to make data analytics and deep insights possible without violating card users' privacy.
Manufacturers typically operate with the traditional business model: procure materials-produce-deliver-invoice-wait for payment.
Do you think we will see the introduction of more usage-based business models, in which manufacturers charge customers for uptime from products instead of selling the products as such? What are the benefits of such business models for OEMs and customers?
TH: A usage-based business model re-calibrates the risk of a business. I have physical assets, like a factory or a machine. I produce goods. And then I sell them. All the control is with me. But it is capital-intensive. I have the equipment and the working capital on my balance sheet. With a pay-as-you-go approach, I have a partner beside me. This can be very appealing, as I no longer need the capital up front to buy my machine. Instead, I will be charged for the use of the machine as my business flows. My business risk is shared with the machine supplier, who will not get paid as much if I produce less. The machine supplier becomes part of my business. This is a different kind of relationship, which creates issues that need to be solved. But they are solvable, and there are opportunities for the supplier in this kind of relationship as well. It is a much closer relationship than the traditional one.
I am privately a user of pay-as-you-go business models. I use an inkjet printer from HP at home, and the device is really just a platform for getting access to ink. The machine captures the value for me through sales of ink cartridges. I pay five dollars per month and I can print up to 100 pages. If I print more, I have to pay more. If I print less, I can save some pages for next month. I think it is a fair model, and it is very convenient for me. I do not need to order cartridges – they are sent automatically to me when the machine flags that they are about to run out. The way I share the business risk with HP is that my subscription commits to a minimum charge per month. I will always be charged for at least 100 pages per month, even if I print less. But it is a good example of how you can build a model like this from being linked to your customer, and by creating a better service.
This is interesting also for banks, who are highly interested in the health and wealth of their clients. IBM has written some software which can be used to link the bank to any connected machine. This could, for example, make it possible to charge the client more when machines are used more – and the business accordingly should be performing strongly – and less when machines are more idle. In times like the COVID-19 pandemic, you would charge your client less during under-utilisation of machines, and then you would recover that, and then some, during a recovery. You are much more linked together in terms of business performance. And like in the leasing industry, if an asset has been well maintained and serviced, its residual value is greater. This is even more true if you also have the data showing it.
I think in the long run that usage-based business models ultimately may generate more revenues for lenders like banks. But it will require that you are more ingrained into your client's business.
You need to think much more broadly about how to make your clients' businesses more successful. You cannot do 'sell-and-run' transactions, it will be more about 'sell-and-stay'. This is what Amazon and other platform businesses have done by design in their new operating models. If you sign in, you are part of it. Nordea and other banks have elements of this, through networks of relationships where clients can get funding, advice or other services. But in the platform businesses, it is more clear cut. You sign up and get access.
In software, we have seen the emergence of the successful model of selling a base offering and then charging separately for additional features. We are starting to see this model being introduced in the manufacturing industry as well. Machine vendors have put massive efforts into performance measuring and management. Machines need to be of high quality, 'good enough', but the real game-changer for the user of the machine is the information and systems to optimise its performance. And this is something that the machine manufacturer can offer and charge for. We are seeing manufacturing giants like Bosch and Siemens shift resources from hardware to software for machine management, which is the heart, the mind and the data of the machines in use out there. iRobot makes autonomous vacuum cleaners, and I think it is more interested in the data than in the machines themselves. The machines are fitted with cameras, and the company will have vast data on floorplans, the layouts of people's homes. From that, it may be able to monetise data on how people in different categories, like geographies or demographics, live, what their homes need, have room for or lack.
Do you see digitalisation changing business models in banking as well? If so, how?
TH: Like most industries, banking is at a juncture – what do you do now? New business models are emerging. As you know, banks have been dealing with digital products all along, and with the introduction of the first smartphone, Apple's iPhone, 13 years ago, Pandora's box was opened for the consumers and banking customers who expect easy-to-use access and self-service portals to do banking. Apple's ease-of-use applications in essence made everyone a digital operator. It allowed remote digital interaction and empowered the consumer. That changed everything for all of us in banking. Technology became much more accessible for everyone, and the pace of technological development increased.
For banking, a key question now is how to remain part of the process. You want your banking service to be inside a customer's process. When I buy something, I do not think about my bank. I just buy something and use the bank as a service. Banks need to consider what services to offer and how to make their services non-intrusive and part of the customer's process being completed.
In addition to enabling transactions, banks store value. In the future, those will be digital values, like crypto currencies or crypto assets. These require you to trust somebody. And here banks have a great opportunity to be the trusted agent of their customers. Banks need to re-think what they are, see what they have been, and figure out how to get back into the game of creating unique customer experiences and value. The transfer of value, also of digital value, needs to be convenient and secure. There are thousands of highly innovative fintechs out there. I remember IBM used to do all its development in-house. We have changed completely. Today, almost everything is going open-source as long as it makes sense. And the open banking movement, for example, which focuses on opening up banking accounts so that third parties can build around existing banking application via standardised APIs, is accelerating this open and participatory innovation. The partner ecosystem is rapidly expanding within the banking industry and across other industries. But the question remains: how do you monetise this innovation so that the innovator benefits and you as a distributor or an integrator benefit as well? We think a platform approach is the best way, and we have developed market platforms as well as business process platforms and technology platforms to pursue and exploit mutual benefits with our partners.
What is IBM currently doing in this field?
TH: We are involved in many areas, many of them are platforms built on blockchain technology. A good example of this is in ethical sourcing, where we have partnered with Wal-Mart in IBM Food Trust, which is a platform that vets the origin of vegetables. Trade Lens is another example. We have services for smart factories, including software to maximise uptime and increase efficiencies. We offer software and advisory for inventory management. Within AI, we help our clients with our Watson technology to analyse and make use of their data. Our data and analytics team creates a lot of value for clients in many different industries.