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Necessity Is the Mother of Innovation: Evolving Business Models of the Nondestructive Testing Industry


Apr 25, 2016

bcfcb7dd49ec3789f036daea828e165a.jpgWhile Alfred North Whitehead, a prominent English mathematician and philosopher would argue that “Necessity is the mother of futile dodges”, there is undoubtedly enough historical evidence to support the often quoted proverb: “Necessity is the mother of invention”. The Oxford dictionary defines this proverb as; “when the need for something becomes imperative, you are forced to find ways of getting or achieving it.” In the current macroeconomic environment where many industries and businesses are being threatened by multiple factors, none more so than the dramatic drop in oil prices, the need to find newer ways of doing business is imperative to success. Hence, borrowing from this age old proverb, within the business context, it would appear that “Necessity is the mother of innovation”.

Why Is this Relevant to the Nondestructive Testing (NDT) Industry?

Since June 2014, global oil prices as defined by the two most used indexes to benchmark oil price, Brent Crude and West Texas Intermediate (WTI), have fallen by over 60% to record a 12-year low. As oil and gas is the single largest contributor to the $11 Billion NDT industry, this dramatic fall in oil price has had a significant impact on this industry. Large scale capital expenditure (CAPEX) in building new infrastructure or refurbishing existing infrastructure has either been postponed or cancelled. Maintenance budgets from which major purchases are made for NDT equipment or NDT inspection services have been slashed between 25% and 50% across the industry. Research shows that this downward spiral in spending from the oil and gas industry is expected to contract the NDT industry over the next 2-3 years. Its impact on the NDT inspection services market is expected to be anywhere between 3% and 5%, which is considerable as this is an $8 Billion market. To remain profitable and continue on the path for growth, innovation becomes the differentiator.

But, What Sort of Innovation?

Research by Frost & Sullivan’s Visionary Innovation Group (VIG) finds that innovation can exist across four broad categories: Strategy, Process, Product, and Delivery, encompassing 10 innovation tracks. Very often companies focus all their innovation efforts on a new technology or enhancing their products. However, it is strategy innovation that provides a higher rate of return and enables differentiation on a sustained basis. This is the premise based on which we propose that companies in the NDT industry look at business model innovation rather than technology or any other kind of innovation.

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What Are Examples of Some New Business Models?

Having established the need for business model innovation rather than technology, product, or process innovation, the next question that arises is what are these potential business models that can enhance value creation?

Research shows that the future business models that are evolving across industries can be categorized into three broad categories, such as:

  1. Service-based models—some of the emerging ideas under this category are Product as a Service (PaaS), Data as a Service (DaaS), and Platform as a Service.
  2. Fee-based Models—under this category the typical ideas are pay-per-use or renting/leasing and subscription model.
  3. eCommerce Models—while this model is being used increasingly in the consumer markets, its applicability may increase in the industrial landscape. However, within the construct of the NDT industry, this may not be relevant.

In the NDT industry, there is huge potential for service based models, especially PaaS and DaaS. Applus RTD has utilized the PaaS model to great effect over the past few decades. Even though the company participates in the NDT inspection services market, Applus RTD has a full-fledged research and development (R&D) wing where it participates in joint industry projects to come up with innovative advanced technologies and products that are then sold as a service. There has been mixed success for Applus RTD with this model; however, the reason is more to do with execution than the model itself. Recently, TCS Inspection Systems has progressed from a company selling its novel technology alternating current field measurement (ACFM) as a product to selling it as service. Based on these findings, it can be concluded that PaaS can only work when there is a novel technology that is being sold rather than a mainstream one.

DaaS is an interesting model which has not been exploited by the NDT industry yet. It is surprising that an industry that collects data on a large scale has never experimented with this idea. Frost & Sullivan proposed a new model for NDT inspection service companies called “NDT Services 2.0” that encapsulates this idea.

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This idea, born out of the challenges around a lack of skilled technicians as well as need for incremental value generation for the end users, is the next generation business model for NDT inspection service companies. Functionally, we propose that the NDT inspection service companies move from just providing inspection services to providing inspection and engineering services. It is imperative to not only find flaws in assets, but the service companies should also start providing actionable insights such as whether the asset needs to be replaced or whether it can remain operational for another year without a major accident, whether the full asset such as a pipe needs to be replaced or whether a patch work would do. All of these are based on the fact that data are being collected and analysed on a large scale which then provide opportunities for NDT inspection service companies to monetize it further. We also propose that NDT inspection services will move from being a field service to remote service and ecosystems such as permanent monitoring or technologies such as remote collaboration as provided by Librestream Technologies will be critical in enabling this. To visualize this, consider two tiers of workforce, namely:

  1. Operators
  2. The “Engineers” and not just NDT technicians

The operators will operate the equipment and take measurements as directed by the engineer and the measurement or the test data will be transmitted in real time to an engineer sitting in a remote location. The engineer will then crunch data to come up with actionable insights. If we think of a further refinement of this, maybe we could replace the operators with robots. Albeit that is too far in the future as robots can still not operate autonomously, but it is still not outside the realm of possibility.

While the fee-based models have been around for many years, especially leasing/renting, they have not been implemented on a large scale by mainstream NDT companies. However, recently Zetec has implemented the leasing model across all its product lines. This has been driven by the need to provide purchasing flexibility for end users who are tightening their budgets. Hence, instead of a CAPEX up front, the customer gains flexibility of a monthly fee. The company has put in place a three-year contract where the end user pays the monthly fee and is then offered the equipment at the end of the contract for its depreciated value. However, it is assumed that the end user will return the equipment instead of keeping it so they can move to the next generation. While this seems like a well-thought out strategy, adding recurring revenue, it would be interesting to note whether this impacts the company’s top-line in the short term.

Eddyfi, another company to experiment with the fee-based model, has introduced the subscription model that was never seen before in the NDT industry. While there is an initial CAPEX for the system, there is an annual renewable fee (no binding multi-year contract) charged to the customer for licensing the software, securing complete maintenance and for technology evolution. The idea is that thanks to the technology both hardware and software behind the equipment are incrementally evolving; the customer is not charged an additional amount to upgrade their hardware or the software. At the outset, it may seem that this model may not benefit the customer but on closer analysis, it is clear that the cost of innovation is high and for customers who want state-of-the-art equipment with leading edge technology capable of solving new applications, the annual fee is a steal. In addition, compared to the traditional alternative of purchasing a new generation of equipment every 3 to 5 years, there is cost saving for the customers while at the same time increasing productivity.

Conclusion

Leaning on the idea that necessity drives invention, it can be argued that necessity also drives innovation, especially in challenging business environment. Innovation can be spread across four broad categories encompassing 10 innovation tracks. However, research shows that business model innovation creates maximum value. There are three broad categories of future business models that can exist, but research shows that services-based models and fee-based models have the most traction within the NDT industry. While PaaS has been explored by Applus RTD, a leading NDT inspection service provider, this model was not explored by NDT equipment vendors until TSC Inspection Systems decided to implement this. DaaS is a new model that can open new avenues for revenue generation and growth for companies across the value chain in the NDT industry and should be explored through NDT Services 2.0. Eddyfi and Zetec have shown commendable nuance in recognizing the challenges stemming from low oil prices and their fee-based models will most certainly be a step in the right direction. Only time will tell whether these are successful, but early signs show that these could be a game changer.

This article is part of Frost & Sullivan’s on-going visionary research on Future of Nondestructive Testing industry. This also contains excerpts from research carried out by Frost & Sullivan’s Visionary Innovation Group on “New Business Models of the Future”. For detailed analysis of future business models please follow the link provided.

Frost & Sullivan also conducts extensive research in the areas of nondestructive testing, material testing, condition monitoring, and NVH testing among others. For further information or any comments, suggestions or queries, please contact the author at NikhilJ@frost.com



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