Podcast #158 The Outcome Economy

Ken: Good day, and welcome to Episode 158 of our Momenta Digital Thread Podcast Series. Today, it is a pleasure to welcome back Roberto Siagri, the founder and recent CEO of Eurotech, a pioneer in delivering building blocks for full Internet of Things solutions. Roberto founded Eurotech in 1992, leading the business as CEO through its public listing in 2015, and recently handed over the reins to the next level of leadership. Today, however, we're going to feature him in a new role as author of the book "Servitization: for a Sustainable Future Without Limits to Growth." Roberto, welcome back to our Digital Thread podcast.

[00:01:17]

Roberto: Thank you, Ken, for having me here in your podcast again for a second time.

[00:01:22]

Ken: Yeah, so we got a lot of good feedback after the first one. You truly are viewed as a visionary in the space and, really, a role model within Europe in that matter. Everybody who listened to the podcast was also looking forward to the book we knew would become. As I mentioned, we featured you in that podcast number 143 back in June. And of course, at that point, you discussed your pioneering work in pervasive computing, founding Eurotech in 1992. You also talked about your vision for the next wave of digital transformation. The cliff, if you will, or the hook- with- now, your book "Servitization" soon ready to be released, I thought it'd be a great time to reconnect. How about we start with the obvious question, what inspired you to write this book?

[00:02:04]

Roberto: The inspiration came from a reflection about the real meaning of the fourth industrial revolution. In other words, if it is a revolution, it has to be something more than just a technological improvement. And in the beginning, I was intrigued about how the digitization of things, how the Internet of Things if you like, was changing the business models. But very soon, I figured out that this change in business models had an impact on the production model too. And this is summarized in the title "Servitization". Servitization, in reality, is a relatively new word by which we mean the change that is taking place today in the economy. And the change is that the old product economy is slowly transforming into a service economy. The model of purchasing and owning goods is giving way to the new model of using goods. This shift is also mandatory if we want to create a sustainable future. And this sustainability can be achieved through digital technologies.

[00:03:11]

Ken: In the book, you've effectively subtitled it as the 'outcome economy,' which is a term that I love and kind of define as the third phase of industrial transformation after what we consider phase one- operational efficiency, and phase two- new products and services. Tell us a bit about it, what is the outcome economy?

[00:03:31]

Roberto: Yes. As I have said, the assumption is that the fourth industrial revolution must be something more than a technological improvement of past methodologies, of the way we produce and consume stuff. And as you mentioned, the low-hanging fruits, the incremental process.  can say it is this gradual improvement, thanks to the IoT, big data analytics, and robotics, that we refer to as Industry 4.0. This improves the operational efficiency and also the quality of products, with connected services. These are the first and second phases. But what is interesting to me is the medium and long-term transformation. That's the most intriguing one because, in the third and fourth phases, the business model will change dramatically. The transition from selling products to selling the outcome from products or the product's performance is called the outcome economy. The outcome economy is what digital technologies can bring to the table as a sustainable economic model. We all know that the traditional product economy dating back to the seventies is no longer sustainable. That is because the growth in terms of world population does not allow us to continue to sell stuff, and the economy will be much more sustainable if we start to use the product, in some way, in terms of the result of the product and of the performance of the product. And we can achieve this objective only if we change the business model, and if we move on to servitization: that's what the outcome economy is in the end.

[00:05:19]

Ken: We've talked with some of our OEM clients about those three phases in slightly different words. But you know, efficiency is always first, in terms of the impact of digitization, the second is the ability to create new products and services around those you have. You think Rolls Royce Power-by-the-Hour, in some sense, or predictive analytics. The third phase truly is that as a service, so you guys talked about servitization. What I think is interesting about the outcome economy and how you word it here is that you talk about its impact on production models, not necessarily just the outcome of products, per se. You set the tone for servitization that, in essence, is a paradigm shift from industrial production to digital production. Can you give us an example of the digital output and how we would see industrial production migrating to this new future?

[00:06:08]

Roberto: Yes, I have called it digital production. This new methodology of selling outcomes instead of goods does not mean that we do not have to manufacture goods. As a matter of fact, with servitization in place, the assumption is that we will need to manufacture more goods than before. It is just a matter of differentiating the new methodology from the traditional way we are used to selling products, which I call industrial production. Digital production is- as we have said, built around digital technologies like the IoT, Big Data, AI in collaborative robots, and all these things can help us create digital replicas of things in cyberspace. And then, when you have all these digital replicas in cyberspace, and you can act on the digital image in real-time, you can start to change the model. For instance, very soon we will have the autonomous car, and what do you think will be the business model of the autonomous car?

I'm sure that there is no sense in selling an autonomous car. It is much better to sell the service of the autonomous car. All the products that you can control in real-time can help us make more money, save the planet and allow for customers, to access the product at a lower cost if, instead of selling products, you sell the service. There are products- maybe not fully servitized yet but already smart, like for instance a thermostat: it is connected to the cloud, and you are using only services from this product, but still, you are buying it. Think of a scale: do you really want, today, to buy a scale that is not Bluetooth connected to your smartphone and the cloud? What you need is the data from the scale. You do not need the scale. The essence is that what you need is not the product per se. You need the function of the product. We are now in the first and second phases, as we have said. We are slowly attaching connected digital services to our products. We do not yet have a complete digital infrastructure to servitize the product- but very soon, with the 5G in place, we will see the emergence of this model. In my opinion, the autonomous car will be a catalyzer of servitization.

[00:08:39]

Ken: You spoke about infrastructure. The EU has been referring to similar concepts in their initiative, among which the term Industry 5.0. You've been active in this initiative. For our audience's sake, what is Industry 5.0, and how does it differ from Industry 4.0?

[00:08:56]

Roberto: Well, you know, we talk about these four phases divided into two steps- short term, long term. I've tried to figure out how to differentiate the terms Industry 4.0 and Industry 5.0. To me, they are both parts of the fourth industrial revolution. The first and second phases are the early days of the fourth industrial revolution, and we can say this is Industry 4.0. It is a more incremental phase. We will continue to use the traditional production methodology more efficiently, with slightly better products with some connected services. The third and fourth phases are the more disruptive ones, where we will really change the production system and enter digital production. We can call this Industry 5.0. Also, we need to show that this transformation is not against people. It need not mean removing jobs. We can have job creation if we activate digital production. If we just stay in that first and second phase and use this as a way to intensify traditional industrial production, we may lose jobs. We may have concerns about interaction and supremacy between humans and machines. But if we move into the service economy, it can change our minds. It is an altogether new paradigm with much more potential for every one of us. We can have a new industrial system closer to people, closer to companies, and closer to the environment. And that's the essence, the idea behind the word Industry 5.0. This is not simply another technological advance. Technology enters the economy, changing and reshaping the economy with new business models and new production models.

[00:10:53]

Ken: Having read through the documents the EU has produced on industry 5.0, I'd recommend for any of our listening audience, just go up to the EU site, and you can download some great white papers on the concept. But you're going to see a lot of focus on sustainability, you know, the word Roberto used earlier on, and also the term circular economy. It's interesting, we're 4.0, and your point might be more of an evolution in terms of technology-enabled efficiencies if you will. Industry 5.0 truly seems to be a paradigm shift or transformation of production as we know it, right? As you say, building toward outcomes. And of course, I'm sure from the EU perspective, and certain other large geographic regions, a chance to maybe reassert one's position in terms of those value chains, especially where you have a strong industry basis already. I'm certainly proud to have the EU take an early stance on this topic to understand the interest there. Let's go back to your book because you laid out a couple of exciting things. You mentioned specifically this idea for technology catalysts that are leading us to servitization. You mentioned IoT, cloud edge, data gravity, software-defined machines, and when you couple it with the concept of data twins. How do you see these technology enablers enabling the outcome economy and the servitization of products that go with that?

[00:12:14]

Roberto: I've mentioned the IoT, big data, AI robotics, and of course, the cloud. And all this technology is helping us create the digital replica of the real world, in real-time and in cyberspace. And because we have a lot of data, we need better instruments for interpreting data. That's why also AI is coming into the equation. And when we have this cyberspace and fill it with digital twins of the real things, we can start to change the methodology.

For instance, I was referring to the autonomous car. If we do not have real-time data coming from the car, we cannot implement a servitization of the car. Because we do not know where the car is, we do not know how to allocate the car to other users. And we can extend this idea to other products: only by knowing in real-time the status of a product can we think about how to sell the outcome. So, as soon as you have available the data from the product in use, your mind starts to think about a new methodology in terms of business model, a new method. But the point is another one. We are talking about the digital stuff, but because the service economy requires a long-lasting product, we have to start thinking about redesigning the product. Since the product is no longer sold, and we are now selling the outcome of the product, how we design this product becomes critical. It is not just a digital transformation. It is also a matter of redesigning products.

[00:14:01]

Ken: Where we listed technologies- and of course, I've got my venture capital hat on naturally, we'd be looking at individual companies that are providing these technologies, but what I hear from you is, in some sense, it is that ability to design those into your own end product OEM if you will. I could see professional services, design firms, things like that, becoming quite interesting in that evolution, right, to help accelerate, if you will, the adoption of digital. You recently did what I considered an excellent presentation at IoT week on Industry 5.0, and what I thought was interesting, the slides- you grouped Industry 4.0 and software-defined machines into one topic that you summarized as system thinking, which I thought was an exciting way to think about that space. Can you say more about these catalysts in that term system thinking, to you?

[00:14:48]

Roberto: Yes, the fourth industrial revolution- to me, is based around software standardization and componentization. Let me say that in essence- in its essence, it is a software revolution. And the product, in some way, is more built around the software. And as with all, the software is eating everything, including matter. More software also means more powerful computers, and more powerful computers mean more embedded intelligence. And the machines are becoming software-defined. And with the progress of digital communications, like the 5G, they will always be connected. When you have this new machine that embeds a computer, an edge computer- with all this intelligence, they become context-aware. This means that the machine will begin to relate to the environment around it, to other machines, and to the network to which these machines are connected. The approach will become systemic, not just closed around the machine. When you design an embedded computer, you have only to think about the machine. But nowadays, because you're connected and not just with the sensors of the machine, but also with other machines, and with all the environment in which you are- which machines are placed in, you have to start to think in a more significant way, and that's what I call system thinking or system approach. It is not just a matter of the machine. It's a matter of the machine and of its environment.

We can also say that maybe, in the first and second phase of the transition, system thinking is more in the designer's head, it is about how to design these machines to have them cooperate and work with others. But think about cobots. The collaborative robots are called collective. You need to have system thinking if you build these cobots. In the third and fourth phase, when AI becomes more prominent, AI will be pervasive, and system thinking will be part of the machine. So, we are no longer disconnected from one another. The digital world is, in principle, in some way, a social thing. Everyone is part of it- we are figuring out that more and more every day: we are all part of the same system. If you think about the environmental consciousness that we have now, it's a systemic approach. And digital technologies are enabling this systemic approach.

[00:17:11]

Ken: You know, it's interesting when you think about that system thinking taking place, probably at the designer of that end product that will be the service in some sense, because they're usually making the tradeoffs between a sustainability cost, functionality, timing to market, things like that. But when I think about the companies that supply those, let's say the traditional technology vendors- whether they're software or like your background at Eurotech, how do you think it changes those companies as well? Or how do those companies go to market?

[00:17:40]

Roberto: That is going to be a big cultural change. There were many expectations about the IoT, which we have not seen yet as we expected. It's still in the hype, not yet in production in the volumes that we expected, just because of what you have said. This cultural change is not immediate. It is not easy. We need a new generation of people who have more systemic thinking. But it will come because every one of us has more planetary consciousness than in the past. Yeah, it's the difficulties that we are facing in this culture of change. Service, by definition, is a systemic approach. Services are a continuous quality delivery. It's not quality delivery when you sell the product. You are measured continuously during the deployment of the service. So that's why you have to start systemically thinking more than in the past.

[00:18:47]

Ken: Since you talk about outcome economy, perhaps transformation is- I'll call it the outcome back versus the technology forward because technology vendors often push technologies as solutions. Then we'll figure out what the actual use cases are for those once we push them out. In this case, you're starting from that outcome working back, which is undoubtedly transformational. You use the term "data gravity". Tell us a bit of that term and why you see that as one of the key catalysts.

[00:19:16]

Roberto: Well, the idea is derived from the traditional Newtonian gravity: mass has gravity. In other words, masses attract masses, and the bigger the mass, the bigger the attraction force- that's the gravity force. In the same way, data has gravity, and data attracts data, and the bigger the database, the bigger the attraction. And the idea, in reality, was originated with the diffusion of the cloud. In the cloud, we have attracted- and we're still attracting, a lot of data. And these data are attracting applications and services. Everything was in some way close to the cloud. But nowadays, with edge computing, we have seen this computational power not only in the cloud but also at the edge- and the more computational power we have at the edge, the more data we are generating at the edge. Let's go back, for instance, again, to the example of the autonomous car. To me, it's a paradigm shift, the autonomous car. I like to continue to use this. And it is round the corner, by the way. . An autonomous car is expected to generate a Terabyte of data per hour, up to 10 Terabytes of data per hour. You can guess that's about it- it's impossible to transfer all this data to the cloud. And because you have all these data produced at the edge, the edge is starting to attract other things like applications and services. In the end, data gravity, which is a concept initiated with the cloud, now is not only appliable to the cloud, but you can apply it also at the edge. And that's the other big revolution that we are facing about edge computers, because of this data gravity.

[00:20:59]

Ken: Probably along with that, as I'll call it a bit of a crossover topic, you discuss digital twins. So, what is the digital twin in your perspective?

[00:21:07]

Roberto: As I said previously, the digital twin is a digital replica. To me, real time's the real thing in cyberspace. The more accurate this replica is, the faster the replica's update frequency is, the closer the digital replica is to reality. And the closer to reality it is, the better we can adapt or design the business model. Well, we can expect that this replica will be indistinguishable from reality, like in the Matrix movie. As Gordon Bell said, everything that is cyberizable will be in cyberspace. And we know that everything is cyberizable thanks to the miniaturization of computers and to the low power requirement that a computer has today. So to me- what this digital twin, in reality, is- in mathematics, an isomorphism between the natural world and the digital world. And thanks to digital twins, we can activate a new production methodology, a new business model.

[00:22:11]

Ken: And if we do that, according to - again, I'll refer to the IoT presentation- you mentioned, in essence, this digital transformation is curving the linear production model, maybe say a bit of that, and what the implications are of that.

[00:22:26]

Roberto: I like this feature, you know, data gravity, because of the linear model- we know that we have to move from a linear model, the linear production model, to a circular production model. The digital transformation is, in essence, leading the way to the change in the production system. And you know, the exciting thing is that we are going to change not because we love the planet, or because we love our customers, it's because these technologies tell you that if you love your customer and if you love the planet, you will make more money. And that's the interesting thing. In a traditional industrial system, you can't make money if you love your customer and the environment at the same time. Someone has to lose in order to have at least one winner or a maximum of two winners out of three. So, here we say all three, the economy, the environment, and people and customers. This is what digital production allows you to do. This is an intelligent production that forces us to have all three players, as we know. And so, in a way, that's why I say curving. You have this linear model; the moment that you digitally transform your company you do not know that digital transformation is forcing you to rethink your model. And if you move on to services and servitization, the best way is to adopt a circular model. So circular economy, which is not for everyone nowadays- which is a luxury in some way, for some companies, will become the natural methodology if you embrace digital transformation.

[00:24:05]

Ken: We are often used to say that industrial IoT, or perhaps even Industry 4.0, one of the outcomes of it, was the breaking down of traditional value chain barriers. I'm a supplier. You're a client or a broker, right? The minute I put a connected device into that value chain, the data from that device goes back to its manufacturer. You transcend a whole lot of other intermediaries if you will. And indeed, we see that with smart industrial pumps, intelligent transformers, smart automobiles, right? In that regard, but it's interesting because I think you've overlaid on top of that idea. is that there's a consciousness and tradeoff among all those value chain players to this idea of system thinking you said earlier, right? And what are the tradeoffs? And how do I make those tradeoffs collectively versus individually as one member of the value chain? It's a fascinating concept.

[00:24:55]

Roberto: It's the magic of digital production. It's like entering a dark room and finding the button that turns on the light. And when you push that button, the world changes completely, you start to think differently, you have to have a systemic approach. And that's the magic of digital transformation.

[00:25:12]

Ken: So perhaps I've kind of saved the cliffhanger question for last, you've heard us refer to four phases throughout this conversation, but we've only named three. And this last stage or phase of industrial transformation is something you're calling autonomous pull production. Perhaps you can tell us a bit about that, and maybe when you see this coming.

[00:25:32]

Roberto: That's the last phase because you need to have the servitization in place, and you need to have a lot of data coming from the product, from the supply chain, and from the customer. Nowadays, we are used to doing production in a push methodology. In other words, we try to forecast the volumes required by the market or by the customer, then manufacture them and put them in stock. And then, through marketing and different methodologies, we force some targets to buy the product. So that's why we say 'push'. In the future, if we have all the data, we will know our customers, and we will have a 3D manufacturing model. We will have other agile methodologies in manufacturing. We can just have the product ready to be pulled by the customer. And more than products, pool services. In this way, if we have a real-time manufacturing capability that is very in tune, we can adapt the production to the needs of our targets. Now, we are pushing the product onto customers, but in the future we will let them pull the product out. And this is much more sustainable because you do not have products in excess, you do not have to throw away products because you have made more goods than the ones that are required. You are designing or releasing products or services just around the customer's needs—so you are more customer-centric. And in a way, that's the last piece that creates this circularity and this systemic approach to the system.

[00:27:11]

Ken: Applicable as you- you just were apropos, I should say, as you just closed loop on the whole conversation. And that is the idea that as you move forward into this, you create a circular economy. And I think that is probably the quintessential point of a lot of the Industry 4.0 or 5.0 work and indeed what you're leading in this book. For listeners, when can we expect to see this book available?

[00:27:33]

Roberto: Well, the first release in Italian will be in October, and the English version will be available before the end of the year or early next year. 

[00:27:57]

Ken: Perfect. Either we need to brush up on our Italian skills or plan for our first Christmas gifts. So Roberto, thank you for sharing these deep insights with us today.

[00:28:09]

Roberto: Oh, it has been a pleasure to talk with you today about my new book. We are still in the early days of this giant transformation that can change our world, and I'm sure that digital technology will help us to change this planet for the better.

[00:28:26]

Ken: Well, so this has been Roberto Siagri, the founder and recent CEO of Eurotech and author of the book "Servitization for a Sustainable Future Without Limits to Growth."

Thank you for listening, and please join us next week for the next episode of our Digital Thread podcast series.  

Thank you, and have a great day.

[The End]