Digitalization, Digital Twins and the Transformation from Products to Services

What may the first steps be that manufacturers need to take to move from selling physical products to selling services? Why is that even relevant for competitiveness and customer relationships? Why do companies need to seriously consider this transformation RIGHT NOW?

This podcast is run by BaseN, global digital twin platform. (www.basen.net)

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SONJA

Hello everyone, and welcome to our very first podcast. My name is Sonja Pöyry and I'm the Comms Officer at BaseN. Today I sit down with our CEO Mr. Pasi Hurri and walk him through some frequently asked questions around digitalization, digital twins, and the transformation from products to services which is paving the way to the future for many companies across industries right now. So, Pasi, let's start right away with the first question. My perception is that the interpretation of the term digitalization varies quite a bit. Different businesses and different people have different ideas what it entails. So, your point of view: What does digitalization mean for businesses?

PASI

So, digitalization by itself means that you have more digital services for your customers who you are interacting with the means of different digital communications with the customer either automatically or manually, but it means that you enrich your services or your products with some kind of automatic data processing. So, this is not a new concept. If we take, for instance, cars, we've had digital technologies in cars for the last 50 years. They have been just simpler and now they become more and more complex and many of the functions that were earlier done with hardware, are now done in software. And digitalization is one of the ways to virtualize and make the physical things simpler and replace the kind of higher-level functions with software which is easier to maintain and update. So that might give a short answer on what digitalization is but as you say it can mean different things for different businesses.

SONJA

What does digital transformation then mean for businesses? That is also a term that is used a lot right now.

PASI 

So, from our perspective, the transformation is something that you re-invent your business. You either move your existing physical product into traditional domain completely or then significantly change your business model. So, in order to earn the term ‘transformation’ I think that it's not just something I did or not but it's a new product or new service that you create with digital technologies. 

SONJA 

Is there actually a difference between the two concepts?

PASI 

I think that transformation is the method for a company to undergo in order to re-invent and create more sustainable products and services. Companies many times fail in their digital projects even though they have hired Chief Digital Officers and creative teams to add more digital features to existing products and services.

SONJA

Do you think it's common for companies to misunderstand these two concepts?

PASI

They many times misunderstand that the digital transformation means that you don't just add some digital gadgets and fun to your existing thing. You need to rethink your existing models also.

SONJA

Now let's talk a bit about digital twins. Digital twins are not a new thing, but the broader adoption has only happened in the recent past. Could you elaborate some of the history of digital twins and where the industry is currently at what comes to utilizing digital twins?

PASI

So, the digital twin actually comes from the physical twin and the earliest mention that I have seen comes from NASA. When they were designing these space probes in the 60s, they needed to have a kind of a test environment for all the equipment. So, they built a complete physical replica of any space probe that was sent to explore foreign planets and even interstellar space. But that was really expensive. So, at some point when computers became more powerful, going towards the 70s, NASA decided to create digital twins. So, replacing some of the simple physical starts with just algorithms which could be used for training people on the ground so that all the eventualities that happen in space, when the rocket has been sent there, could be analyzed. It was primarily a simulation tool and also kind of helping the evolution of the whole solution. But right now, many companies are looking at digital twins as simulation tools and then kind of support systems for existing physical products. And one of the notable examples is also the defense industry where digital twin was extensively used by building the new fighter planes and, for instance, the Mirage 2000 fighter plane is known as the first modern fighter plane, but it was designed almost completely digitally and there was a digital twin which was running locally on large computer and then all the test results and the simulations were done with the kind of a defense budget type. However, it took a long time before the digital twin thinking reached actually smaller and smaller products and kind of affordable products because these early examples had almost unlimited budgets because even a fighter plane costs tens of millions each. So, the digital infrastructure wasn't a cost issue.

SONJA

So, now in 2021 what would you say, that the most common understanding of digital twins?

PASI

I think that the most common understanding is some kind of a 3D model and data repository of an  existing physical machine or a production line. So, most of the industrial players, they think that digital twin is a kind of database or data collection sink or simulation environments.

SONJA

When we now look at spimes the next generation digital twins, what exactly makes them so next generation?

PASI

So, our spime approach has always emphasized that the spime is the primary object. So, it's not a twin and that the physical side is the twin. So, in the spime environment the design and production and the product itself starts from the spime, and then physical components are built around when needed. So, the biggest difference is what is actually the product that is sold to the customer. In the spime environment it is the spime and then all the necessary add-ons are all the physical components.

SONJA

As a follow up question to ties into the building of our conversation. How do spimes, the next generation digital twins, relate to digitalization and digital transformation? 

PASI

So, the spime - which is the next generation digital twin - it is the foundation of any kind of product and service which starts from the digital domain and then include some required physical components. It's a kind of a new paradigm of design because you design the spime before actually adding too much of physical aspects to your product. Many customers are so ingrained in their existing physical products and market share and service models and supply chains then they think that they cannot make this kind of drastic change to their design processes. But they actually can. They should start from the new R&D and new kind of products that can be sold to the existing trusted customers who are trusting the company. This way, they can at the same time leverage new design solutions and at the same time build the product also to new customers by recreating the company in a way into the digital domain. And this requires quite new kind of thinking. That's why we have separated spimes from digital twins because the spime is kind of the soul of anything that is being sold or transacted.

SONJA

Could you actually walk us through an example comparing digital twins with spimes?

PASI

If we take an example, for instance, with a simple product like a surveillance camera today. So, many people buy surveillance cameras for their homes, for their industries, for their cottages and usually those are very cumbersome to configure and customers just buy the product and then there is a level of support from the manufacturer to get it up and running. But I haven't met anyone too pleased with the lifecycle of the surveillance camera because they become obsolete pretty quickly because the protocols and the mobile applications and things like that they become outdated in a few years. And then it requires again to set up and configuration when someone buys a new camera. And there is no migration path usually from the old repository to the new repository of the surveillance pictures. If we turn this completely around and the camera manufacturer would sell secure digital surveillance service which would first be established as only the digital entity and then the next step would be to define what kind of physical cameras are required for that kind of service. And then they would be embedded to the service in a kind of lifecycle thinking. They could be rented or sold to the customer, but the company would take the responsibility for making sure that the surveillance system always works and that images and videos are accessible to the people that the customer has defined. And it always has latest security updates in all the physical hardware that's delivered then eventually the customer would pay by month or by half a year or whatever term for the undergoing service and then it could be reduced or expanded based on the needs of the customers. So, the key thing there is to maintain the customer's information reliably and securely so that the customer can be sure that that who has accessed the video feeds at what point and that's the latest tools that can be used. So, it evolves together with the customers and your requirements and at all times.

SONJA 

That was a really interesting example. As a follow-up I'd like to ask you what may be the first steps that manufacturers need to take to move from selling physical surveillance camera to selling surveillance camera services?

PASI

The first and foremost thing is about leadership. The manufacturer must create a new product that is taken seriously. So, it's not just kind of a testing add-on to the existing physical cameras that are being sold. So, this requires training for the product management or sales or customer support and most importantly it requires executive sponsorship that this really is done. So that it is not just kind of tried out in a small scale because then there will be always resistance from the existing physical product-based sales, then there will be internal competition. So, we see this as mostly a leadership issue and the first step is to kind of communicate to the whole company that you know that from now on we are also selling surveillance camera services and surveillance services and gradually move away from being hardware-centric and kind of just moving just boxes to the customer. Some companies never achieve this and they will be merged to other companies who are more versatile but the companies who do, they will have a brighter future and kind of a sustainable income for the years to come.

SONJA

Now I think this would be a question that many executives have when pondering a drastic digital transformation. How difficult is it for a company to venture into having spimes for their products or services and also how costly?

PASI

So, the biggest challenge for any company venturing in to having spime products or even digital twins is the attitude and culture change because you need to get rid of the fire-and-forget ideology and you need to be in constant contact with all of your customers all the time. And most production and manufacturing companies are not used to that. So, they have their existing lifecycles and guarantee and warranty times and when those run out, they gotta restart the sales cycle and they are at the mercy of the competition at that point. But that's kind of accepted state of the affairs right now. But actually it doesn't have to be. Because if you really change your sales strategy and customer support strategy and analytics strategy on how much you really care and analyze your customers’ requirements and how securely and privately you can do that, then you can move to complete spime service products. And it doesn't have to be costly you can start by just introducing some digital components for utilizing your existing products and just change the domain service into, let's say, what could I think as a good example…selling a dishwasher. So, you could change that into the selling of a lifecycle service for dishwashing. And then, you can gradually add all the detergents and cleaning services and even on-site visits. They don't have to be too digital or, let's say, gadget type of things that are added but you can use existing service products that you have service call order diagnostics and things like that, but the key thing is that you build all these new features around the spime, the next generation digital twin, which is the product for the customer, and which then evolves according to the customer requirements.

SONJA 

Do you have any examples of existing businesses that are moving away from the so-called fire-and-forget model towards being constantly in contact with their customers? And why do companies need to seriously consider this transformation right now?

PASI

The easiest example is, for instance, Amazon which started just from a web shop selling books to individual customers in a fire-and-forget model. You order a book, and you got the book and that's it. However, the kind of a difference in Amazon is that they started to analyze the information and the customer profiles. So, they quickly came up with a recommendation model. They started showing different content to customers based on their purchases and based on their search history. So, in a way, whenever you access the Amazon website, they are in intricate contact with you. They analyze you and they try to serve you better and then try to sell you different products based on the vast amount of information they collect. And technically any bookstore could have done this, but Amazon just had the leadership to make it happen. There are some other examples who are partly successful. We have seen, for instance, the elevator manufacturer Kone. More than 50% of their revenue is already coming from service contracts for maintaining the elevators, indefinitely sometimes, at their customers. However, there is still a struggle going on in many manufacturing companies because the manufacturing side is always well established and the sales channels also are established, it's not so easy to bring completely new models to this sales roaster. There are other type of companies like Uber or Airbnb. Those are extreme examples because they don't have any physical product. They have only the virtual product, but many lessons can be taken from the likes of Uber. Especially with Uber it is interesting that even though they had all the capability and they have all the funding, they really didn't utilize the information as much as, for instance, Amazon has done. Even though they could. And I believe that that's because they grew so fast that they actually hired the earlier generation people who we just couldn't get their head around the new kind of fire-and-remember business model.

SONJA

With the Internet of Things, digital twins and digitalization, you do read a lot about privacy and security concerns, and I think that's well understandable. What would be your number one advice for companies what they should do to ensure the privacy and security of their customers data?

PASI

Well, naturally wherever the customer spime and customer data is stored, it has to be continuously maintained and monitored. So, the processes are not enough. So, there needs to be also proactive monitoring and the penetration testing to the solutions. This is also something that many customers don't think as a production problem but they think it as an IT support problem. But it's about production. As we have seen, even oil pipelines have been shut down from cyberattacks. Most of the companies producing classical products right now, they are at risk but they haven't just been very high on the hackers’ list and hence they have been able to continue fairly vulnerable business. But eventually hacking also becomes cheaper and they will have to get their acts together. And what comes to privacy, the European Union GDPR laws are a fairly good framework for ensuring that where the data is stored and how it's used and what are the obligations for answering customers’ requests when they ask about how their data is being processed and who is processing it and in which country. And companies should definitely make themselves aware of these obligations because they take a lot of time if you don't have the processes in place to actually provide the information that is mandated by law.

SONJA

Last but not least, I'd also like to venture a bit into BaseN’s history with spimes. How did BaseN start out with spimes? Where does the term come from and what exactly is it that we do with spimes or enable our customers to do with spimes?

PASI 

In about 2003 we started designing the platform or redesigning all platform little bit so that it could host different processes from our customer environments. So that the platform would be the repository of algorithms and which would be evolving all the time based on the measurement data that was collected at the time. And we realized that most of the IoT and machine-to-machine talk was, kind of, just about the communication and kind of data storage. So, we thought that the algorithmic wisdom would be more important. So, we started to think what to call this repository of permanent digital entities and then we ran into Bruce Sterling who is a Science Fiction author who had written a book about digitalization and the future ownership of things and he called this virtual thing a spime which comes from the words ‘space’ and ‘time’. It is a soul of anything physical. So, in one of the IEEE conferences we called the spime ‘the ephemeral soul of all things computing’ and that can also be virtual things. So, you could think of it as a virtual brain of any inanimate material. So, in our company, BaseN, we have very talented engineers who originally were building defense networks and radars and large the communication systems. And then we have a unique combination of talents for distributed computing and all kinds of remote management solutions. And therefore, we started building our own platform for managing massive amounts of data and also managing customers algorithms and programs within our infrastructure. So even in 2001, when BaseN was established, we were already a cloud provider which was very new at the time. However, we have evolved into a spime platform provider where customers can actually rely on us when they deploy their next generation products which are spimes, and we guarantee that those assets are as well maintained and cared for as any physical products. So we take the digital environment very seriously and we don't treat it as kind of fun, just an IT add-on which can be done every now and then. For us it's mission-critical and BaseN, for the last six years, we have developed our platform where customers can deploy billions of these digital entities and design their own product on top of our platforms and then expand them based on their business requirements. And we see that this is clearly the next evolution from digital twins, from IoT, from M2M. And this is one of the areas where this proliferated telecommunications and connectivity opportunity is, where the costs are reducing all the time, that they are finally bringing the market into fruition where you can really transform even traditional company into a digital service provider and maximize the capabilities that you have almost dormant in the company. There are many customers we have who we think that utilize only a small fraction of the their own capabilities and especially the capabilities of their customers and their customer relationships because they're following the old models. And also the mission-critical aspect of BaseN. It's present in all of our services so that's why we have always redundant data centers, we have our own network, we have our own operating systems. So, the buck stops at BaseN when someone builds a product on BaseN. We take that really seriously and maintain that and we aim to have very long term customer relationships. So, we have been here for 20 years and we're not going to go away or end any of our services very quickly like some of the existing cloud providers are doing. So, we are very much a bridge between the real business and digital twins and spimes. 

SONJA 

Alright, thank you, Pasi, for the insights. And this concludes our first podcast and I hope to see you all soon with the next episode.