A cardinal rule of sales is never to guarantee results. But General Electric Co. is defying that conventional wisdom with a new approach to engaging industrial customers that earns GE a premium when it can demonstrably save customers money.

The “outcome as a service” initiative, as GE calls it, is part of the company’s broader move to derive more business from digital sources. The program is being used most actively in the GE Power division, which serves utilities, independent power producers and power distributors. But other operations within GE are quickly adopting it.

The basic concept is simple. GE already manages infrastructure for many power companies on an as-a-service basis. Where appropriate, GE will offer guaranteed improvements in efficiency or output according to key performance indicators provided by the customer. If GE hits the target, it earns more revenue. If it misses, the customer pays nothing. And GE rarely misses.

GE’s push is one example of how brick-and-mortar companies are rethinking strategies in the drive to become digital businesses. GE Chief Executive Jeffrey Immelt is credited with pushing the company well down the path toward digital services, but revenue growth hasn’t yet followed that progress, leading to the announcement last week that he would retire as CEO in August. GE’s continuing journey holds lessons for just about all global businesses as they navigate the digital transformation driving the world economy.

Shifting to an outcomes-based business model requires rethinking the value a company brings to the market, which requires a culture shift that many organizations will struggle with. “We are holding onto tangibles as our point of value and not understanding the real power of intangibles,” said Paul Hobcraft, an independent innovation consultant. New business models are being built around “specialized experience, advice, information, assurance, infrastructure and leasing with far less reliance on the traditional need of owning physical goods,” he said.

GE is by no means the only industrial company that’s partnering with customers on outcomes. For example, Michelin Corp. has a risk-free program for truck fleet owners that includes a contractual agreement for the company to meet pre-defined fuel consumption targets or issue refunds in proportion to expenses incurred.

Analytics drives the deal

What’s different about GE’s approach is the depth of analytical precision that its guarantees involve. Underlying the strategy is the company’s Predix industrial analytics platform and a sophisticated set of more than 150,000 templates covering the characteristics of all manner of industrial equipment.

These “digital twins,” as GE calls them, are virtual replicas of physical machines created in software. Digital twins emulate the operating characteristics of turbines, generators and other large and complex machines. They can be used to simulate and test conditions that might give an early clue of equipment failure or opportunities to improve performance.

For example, digital twin models can reveal hidden causations that would cause a piece of equipment to fail during a specified period of time, said Ravi Malladi, vice president of data science and analytics at GE Power Digital Solutions. That gives GE or the customer a chance to fix the problem during scheduled downtime rather than incur a costly failure. “We can turn an unscheduled event into a scheduled event,” Malladi said. GE’s industrial customers operate at such scale that a 1 percent improvement in efficiency can yield tens of millions of dollars in savings.

OaaS isn’t right for every customer. Some don’t have a clear enough fix on their own KPIs to know where they have the most leverage. Others are simply more comfortable with a traditional software licensing model.

But more and more power customers are adopting OaaS, as are other GE operations such as imaging and locomotives. “Once one utilities customer starts to move, there are a lot of fast followers,” said Craig Jones, vice president and chief sales officer for GE Digital’s energy practice. “We’re now seeing almost a 100 percent adoption of the idea of outcomes.”

Risky proposition

Outcomes-based contracting remains rare for a variety of reasons. For one thing, results depend upon customers implementing the advice they’re given, which isn’t a given. Providers also need the means to verify results and both parties need a mechanism to resolve disputes.

The arrangements are also inherently more complex than standard sales deals because multiple stakeholders are involved in defining key performance indicators and writing service guarantees. Operations that aren’t accustomed to dealing directly with customers may be put in the awkward position of participating in contract negotiations. Incentive plans need to be revised and contingencies put in place when guarantees are met. All that requires a strong partnership between vendor and customer, as well as a cultural shift that focuses every part of the organization on outcomes.

GE Power has been able to avoid these minefields in part because its software directly manages the customer’s equipment, enabling the company to monitor progress. Its more than 1,500 data scientists and predictive analytics experts work mainly behind the scenes to validate scenarios. “We don’t get involved in the commercial outcomes,” Malladi said.

The company is also undergoing a cultural shift as the result of a top-down mandate to grow the company’s digital business revenues to $15 billion by 2020. “This marriage of digital and industrial is essential,” Malladi said.

Innovation expert Hobcraft agreed that sticking with old asset-based sales models isn’t an option in the long term. “The players moving toward an outcome-based revenue model are likely to pull customers in their direction, away from the more traditional players,” he said, citing the example of Rolls-Royce Holdings PLC, which has shifted from selling engines to charging for outcomes. Its aircraft manufacturing customer now pay for flying hours rather than for hardware. “Rolls-Royce now has a competitive edge over companies still selling engines as products,” Hobcraft said.

Digital mandate

New models such as OaaS will be essential as organizations move closer to the goal of becoming digital businesses. International Data Corp. has forecast that half of global 2000 companies “will see the majority of their business depend on their ability to create digitally enhanced products, services, and experiences by 2020.”

“Becoming an outcome-centric organization is arguably one of the most important strategic decisions your company can make,” wrote Michael Connerty, a managing director at management consulting firm L.E.K. Consulting LLC, in a recent Harvard Business Review article. “Embracing this major undertaking and maintaining the discipline to follow through will likely mean the difference between future success and stagnant survival.”

Having struggled for a decade to find new avenues of growth, GE doesn’t want to be left behind in the shift to digital services. It’s finding that outcome-based relationships not only generate more revenue per customer but improve customer longevity. “The relationship depth with these customers is truly at a trusted adviser [level],” Jones said.

Which just shows that in the unknown world of digital business, conventional wisdom doesn’t necessarily apply.

Image: GE Power