The challenges of transforming a business from asset-rich towards a service -powered business based on a digital platform was recently highlighted by analyst company Forrester.
The report, “It’s not easy for an industrial product company to build a software platform business”, published as part of a series focusing on digital transformation in industrial companies looked at the challenges GE has faced as it attempts to establish a new operating model based on Predix, its IoT platform.
In 2017, its Q4 2017 results showed that revenue in its power business declined 25% year-on-year, compared to 2016.
As Computer Weekly has previously reported, GE’s vision is to become a major software company and set out its action plan at the start of its Minds + Machines conference in San Francisco.
GE’s former CEO, Jeff Immelt had a vision to transform GE through Predix, an industrial IoT platform for the industrial internet.
In the Forrester report, analyst Nigel Fenwick wrote: “With no good news on the horizon, activist shareholders forced Immelt out and elevated John Flannery to CEO. Significant budget cuts followed as GE cut its dividend for just the second time since the great depression.”
Understand the challenge
The analyst firm warned that building platforms is even more challenging than building software since platforms must work for a broad range of solutions that have not even been designed yet.
As Fenwick explains: “Industrial IOT technology is a rapidly evolving yet still very young industry. Companies like GE and Siemens are pioneers, applying these technologies within their own businesses first so they can learn how to apply them to help their customers. The good news is that the majority of industrial companies can leverage the lessons companies like GE and Siemens heave learned by selecting the right strategic IOT platform partner. For companies looking to build their own platform, they should focus first on the application capabilities."
There is general consensus that platforms are the foundation on which successful digital-first businesses like Uber and AirBnB have thrived. Business leaders regard platforms as strategic assets that can accelerate software revenue.
Given that Immelt’s original vision was to build Predix as a viable industrial IoT platform, Forrester’s report points out that platforms are only as good as the applications they run.
GE Digital built up its portfolio by acquiring two software-as-a-service (SaaS) application providers Meridium, to extend existing asset performance management capabilities, and ServiceMax, for field service management in 2016.
Fenwick says: “These acquisitions brought GE Digital important new software business capabilities as well as application functionality lacking in Predix at the time. However, as neither application suites were built on Predix, it has taken GE Digital some time to integrate the technologies. For ServiceMax, since it is built on the Salesforce platform, it offers complementary capabilities to GE digital customers, even though ServiceMax applications are not running on Predix. While integrating acquisitions is hard, it’s often the fastest way for companies to build application capability. GE Digital competitor, Siemens, has also been acquiring firms, arguably at a faster rate than GE.
Be ready to change direction
Forrester notes that although GE originally began to build Predix as a cloud service on its own infrastructure, it shifted towards the public cloud in 2016. By early 2017, GE Digital had cancelled plans to become a cloud platform provider. Instead it opted for Amazon and Microsoft as its primary cloud platform providers. According to Forrester, this change in direction was the right move, but it required a workforce realignment away from cloud infrastructure and towards cloud-native software skills, the report stated.
In the report Fenwick wrote: ”You cannot scale better than public cloud providers. Big industrials tend to do things themselves so it’s natural for technology managers to think they can build software better than public cloud providers. Hyperscale cloud providers are investing billions to meet the demand for scalable, robust, secure software development in the cloud. Where do you want to spend your firm’s money – managing infrastructure or building out solutions that meet customer needs?
“What is needed is the ability to shake up your financial structure. You also need to consider whether to change your profit and loss structure and accounting practices. Perhaps the single biggest leadership challenge in establishing a software business inside an existing company is how to structure the profit and loss.”
Another of the issues Forrester identified is that internal startups struggle to compete against existing business units for resources, both human and financial. “As a standalone profit and loss, the software business may also compete with existing business units for customer revenue. Restructuring business unit profit and loss reporting may be essential to give your software business the visibility it needs to stimulate investor support,” Forrester advised.
Change your culture
Culture change is among the major challenges often discussed in conversations about digital transformation. From the research conducted by Forrester, digital disruptors are lean, nimble and flat and there are challenges in growing digital teams without a change in culture, which leads to frustration.
“The challenge facing digital teams becomes apparent when you create these agile teams and they run up against the old decision-making culture. Because they are not fully empowered, they cannot push change. As a result, executives have to simultaneously change the enterprise culture or else the teams get frustrated and staff leave for greener pastures. Shifting the culture isn’t easy, especially in a firm as historically successful as GE because there are always execs who can point to past success; they use it to argue their case for business-as-usual. Unfortunately, past success is no longer a recipe for future success in a world transformed by emerging technologies,” Fenwick warns.
Since it is largely accepted that developing a software platform business is hard, especially for a big industrial company with a culture built around strong physical product innovation. Forrester recommends that CIOs and CTOs building a software business inside an industrial company must anticipate these challenges.
Read more about digital platforms
GE’s stated policy is to become a top 10 software company by 2020. The company set out its action plan at the start of its Minds + Machines conference in San Francisco.
Experts advise attendees to focus on data stewardship and orchestration to make the most of digital transformation strategies at JavaOne and Oracle OpenWorld.
As Forrester points out in the report, the wrong culture will derail even the best strategy. “Legacy culture will always get in the way of digital transformation. In a product company that prides itself on building machines that can’t fail – think jet engines and artificial lungs – the culture leans towards perfecting design before production, the Forrester report stated.
Looking at modern software businesses, the analyst firm notes that they thrive by deploying minimum viable products and rapidly evolving them through a process of continuous iteration.
“You must be ready to brush aside your legacy decision-making process to create a more customer-responsive culture,” Fenwick adds
Prepare to adapt quickly
For Forrester, the key takeaways from GE Digital are that it will continue to bring value to existing GE customers through new software applications built on Predix. But Predix’s role will change as GE Digital focuses on building Predix-enabled solutions for the internet of things, which will increase its value as an industrial IoT platform with measurable business outcome improvements.
For other businesses, Forrester warns that a software business cannot be run in the same way as a product business. Despite being respected the world over for its management expertise, GE’s leaders have struggled to grow a software business, which requires a fundamentally different set of skills.