Digital Governance

Corporate governance in a digital world

SKF’s bearings go digital

SKF has reached a point where digitalization brings both challenges and opportunities. The key question is how to maintain growth when ball bearings can be bought in bulk via e-retailers such as Amazon or Alibaba and competition from China is growing. At the same time, demand for components for the mechanical industry as a whole – and thus also the need for ball bearings – is expected to fall.

SKF’s vision is to be a knowledge-based company that leverages information, expertise and packaged solutions to achieve competitive advantage. The strategy is to shift from being a supplier, manufacturer and seller of ball bearings to, ultimately, a supplier of efficiency, performance and availability to its customers. This impacts the entire chain, from design and production to sales channels and the customer offer.

“Offering improved maintenance and predictive service is our way of maintaining and increasing profitability”, says Fredrik Larsson, Director Product Delivery and Support, “as we now see a reduced need for ball bearings in the longer term. Our customers benefit from improvements and we offer ‘performance contracts’, where we increase our customers’ efficiency and reduce their costs. We sell fewer bearings, but in return we receive a proportion of the customer’s efficiency gains.” 

SKF’s Innovation & Business Development division has two departments that work in parallel to develop value-creating services for SKF’s customers. Rotating Equipment Performance Product Development, which develops technical solutions, and Rotating Equipment Performance, Product Delivery and Support, whose role is to develop concepts and to create and deliver service solutions to SKF’s customers. The latter is where Fredrik Larsson works.

SKF’s external analysis in brief

Demand for bearings is falling due to electrification in general within industrial production, (e.g. the automotive sector, where it is estimated that there are 70% fewer bearings in an electric car).

New digital sales channels are changing the market logic. SKF already sells bearings through Amazon. The challenge is to make sure the customer chooses SKF products rather than just choosing those with the lowest price. Global competition, especially from suppliers in China, is adding to the price pressure on bearings

SKF’s strategy in brief

SKF sells ‘performance’ rather than ‘products’. Machines are equipped with sensors which collect information on how they behave, perform and fail, (e.g. temperature, friction, wear, speed – a little like an ECG works on people). It is important to package the information generated and make it into a basis for an enriched value-added customer offer.

“This is a service that guarantees mechanical performance at a fixed price”, says Larsson. “If performance improves, we want a share of the increased profitability, and vice versa if performance declines.” 

This development is in its infancy, but at a number of pulp mills, especially in Latin America, where interruptions in delivery are devastating and access to capital is sometimes scarce, there are already customers leasing equipment through performance-based contracts.

Fredrik Larsson’s main role is to develop new concepts and establish partnerships in the ecosystems that are emerging in manufacturing as a result of digitalization. “I work with establishing partnerships” he says. “Automation companies will be the platform, but we are in partnerships where we deliver services in the ecosystems together with others”.

Who should be the hub of an ecosystem?

“That depends on the customer. Small and medium-sized customers can benefit from SKF’s own cloud services system, but the manufacturing sector already has an IT platform into which we need to be able to integrate our offer.”

SKF’s strategy has been to build its own “industrial cloud”, based on Amazon Web Services, which exchanges information with other clouds, i.e. cloud to cloud.

For the process sector, SKF is probably not the hub for the end customer. It’s more likely to be classic automation companies such as Honeywell, Siemens, ABB and Rockwell; companies who traditionally supply automation systems to manufacturing. The smart, sensor-coated ball bearings/machines will be a crucial part of these ecosystems. For SKF, it will be a matter of coming up with new offers and packages.

Who are SKF’s end customers?

It might be a company like ABB, Siemens and so on, or it might be the pulp factory or the car manufacturer that is the end customer. “We provide complete flexibility, depending on the customer relationship. So the answer is both. The important thing is that SKF has access to data to create increased knowledge, offer new services and improve our offer.”

“We have a global network for support and analysis in our own Rotating Equipment Performance Centres, where we collect data to indicate the condition of equipment, store and analyse data to generate critical insights, solve problems with customers and optimize business outcomes. We also have examples where we are part of Honeywell’s remote centres as a subset of their service offer.”

What does the business look like today?

“Most of the business still comes through traditional channels, but we are monitoring the new ones closely.”

SKF measures how much of its income comes from REP (Rotating Equipment Performance). It is still a relatively small proportion, but they monitor it and compare with forecast figures. 

The exact proportion of ball bearings sales that are sold through e-commerce platforms today is not known, as they go through distributors. It is not yet a large amount, but it is expected to increase rapidly.

“We are piloting our own e-commerce/procurement platform to a limited market in our cloud, but we have no plans to compete with the distributors.”

How are customers dealing with digital transformation?

There is a great deal of interest among SKF’s customers. But the transformation is a maturation process, for all parties. Customers must be able to accept it. Change does not happen overnight. SKF must have the right processes and expertise in place to deliver and sell new performance concepts.

“Strategically, there is consensus. Everyone wants to go in this direction. But you have to make it work in the day-to-day and achieve buy-in at the operational level.”

A typical obstacle everyone struggles with is legacy issues – both organizational and technical, for both SKF and the customers, who have to have the courage to shift responsibility onto the supplier. Responsibility is one of the challenges of digitalizing in partnership. Whose fault is it if a bearing is damaged? What are the contracts to look like?

“If we are to package an offer together with Siemens, for example, our systems must work together. They may not be designed to do so from the beginning. Some pretty big changes may be needed, and that takes time and costs money. And at the same time, we have a traditional business model that is ongoing and requires resources of its own.”

The role of the board

CTO Victoria van Camp is the person who reports to the board of directors. Fredrik Larsson reports to van Camp and she keeps him updated. SKF’s board is relatively newly composed, and a new chair was appointed in spring 2019.

Business models are core issues that the board is interested in. Here, questions still remain as to what things should look like. The board wants to know where SKF stands in terms of maturity and what others are doing. Larsson’s impression is that they are up to speed and are interested in digitalization issues.

The transformation of the organization

The organization has changed from within. It has been flattened and attempts have been made to remove silos. SKF’s strategy is to try to introduce ‘digital thinking’ throughout the organization, in all aspects. They are therefore not building a parallel organization to work with the new approach, but trying to transform and integrate within the existing organization, all the way from production and design to sales and partnerships. They work actively with communication, training and incentives.

Has the day-to-day work at SKF changed as a result of digitalization? If so, how?

“Not so much in the day-to-day. But there is a big difference in how we make decisions and why, on what grounds. It’s a big difference. Now we look entirely at customer value.”

A lot of it is about changes in attitude. Thinking less in terms of ‘production’ and ‘products’ and more about how to create value for our end customers and partners.

For the sales organization, there is a huge difference when they focus on ‘performance-based business’, where we sell knowledge, information, performance and improvements for the customer rather than ‘ball bearings’. It brings completely new requirements with regard to communication and analysis. Larsson explains that you need to sit down with the customer and look at what is available, the customer’s wishes and life cycle costs when you write performance-based contracts.

“It’s important to understand what the customer actually needs so that we make the right products. In many cases, we’ve ‘over-engineered’ and focused too much on the development of bearings instead of looking at the customer’s needs. Customers can end up buying a Porsche when what they need is a Skoda. We can do better in this regard. It’s about being more focused on what is fit for purpose. Some bearings can be purchased at the touch of a button through Amazon, while in other cases, customers may want a performance-based solution where we guarantee service and performance levels.”

In terms of skills requirements, there is a shift towards the digital. Many new roles have been created. Right now, a lot of software developers are being recruited, and among the new positions is one where the person will be responsible for looking at new concepts instead of new products.

How far have you got?

“If the final vision is 10, we are at 5. The cloud platform and the organization are in place, as well as some of the concepts. It’s now time to roll it out across the company.”

Challenges and lessons learned

It is a challenge to go from selling a product to selling knowledge. It changes everything. You need to transform the organization – and at the same time maintain existing and ongoing business.

There are valuable positions to be taken and a lot of money to be made along the way if you don’t look too far ahead. “There is no digital strategy, just strategy in a digital world.”

“Technology sparks industrial revolutions; people make them happen.”

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