How Pharma can learn from Rolls-Royce

Healthcare is undergoing a revolution. Digital Health, the convergence of the digital and genetics revolutions is changing how healthcare is delivered. We are transitioning to an outcome driven model. Pharma and Med Tech companies face an urgent need to move away from a reliance on manufacturing and become service organisations. Old business models are looking outdated. Huge organisations are losing ground to tiny startups and healthcare budgets are under unprecedented pressure around the globe, while venture capital is pouring in.

What will the future look like? Where will all this transition lead us? No-one knows, but perhaps we can look at other industries where similar transformations have taken place. Perhaps the experiences of others will act as a guide to help us.

For this post, I’ve chosen to look at the transformation Rolls Royce underwent in the 2000s from a manufacturer to a service organisation. Facing the prospect of rising costs and diminishing revenues, Rolls Royce changed its business model. Instead of just selling jet engines and spares the company switched to selling a service. Under the brand name Total Care? Rolls Royce created new relationships with its customers, selling engine flying hours, rather than bits of metal.

Rolls Royce’s transformation

Firstly, let’s get one thing straight. Rolls Royce is a UK company which makes gas turbines for Civil and Defence aircraft, and for marine and energy applications. Put all thoughts of luxury cars to one side. The brand name Rolls-Royce applied to cars is owned by BMW.

So how did Rolls Royce transform themselves from a manufacturing to a service organisation? Let’s consider the five elements of this transition.

Mine the data

Aircraft engines contain parts which are safety critical. They spin ridiculously fast, contain absurd amounts of pressure and get really, really hot, so that’s not surprising Aircraft engines, like people, spew clouds of data. When an engine leaves the factory, newly minted and pristine, every component has been logged and recorded. Everything that happens to that engine is then recorded, each aircraft it is installed on, every time it goes into maintenance and every incident that happens. Rolls Royce literally know where each component of each engine under a service agreement is or was, at any given time.

On top of this, each engine is instrumented with sensors which record information about temperature, pressure, speed and vibration. This data is collected from the engines in service and transmitted, in flight, back to data centres where it can be reviewed and analysed. Using this data, Rolls Royce is able to detect emerging issues and react before they become real problems. The classic use case describes how an aircraft might take off from London Heathrow and engineers in Derby (Rolls Royce’s Headquarters) identify an emerging problem. By the time the aircraft lands at JFK a replacement engine has been sourced and the aircraft is able to fly its return sector uninterrupted.

Align to the customers Priorities

In the world of civil aviation safety is of paramount concern. But in order for an airline to operate profitably in this super competitive market it must also obsess over delays and cancellations, and fuel efficiency. Delays can happen for all sorts of reasons but the aircraft’s engines are probably the most complex components and the most likely to cause an aircraft to “go tech”. Rolls Royce aligns its business operations to ensure that, no matter where the aircraft is, or where it’s due to go, operational engines are available to power it. In this way, Rolls Royce doesn’t really sell engines, it sells power. Although no prediction algorithm is perfect, Rolls Royce is actively monitoring its fleet of engines to try and avoid delays for its customers.

In addition, all that performance data can be used to track fuel efficiency and make decisions about when to perform maintenance. Aircraft engines become less efficient over time. As their performance decays, although still well within safety margins, their fuel efficiency also declines. At some point the cost of maintenance is overtaken by the cost of continued operation with reduced efficiency. And this equation is affected by the price of fuel too. As we’ve seen in recent months this is a volatile entity in its own right. Rolls Royce provides services to its clients to help manage these judgements and balance fuel and maintenance costs to maximise cost efficiency.

Understand the Risk

Aircraft engines are expensive pieces of equipment and demand for flights is elastic. Airlines take care to match the price of your seat against the demand to try and maximise utilisation but there is always a risk that their expensive assets will be sat idle on the ground.

Through its service model Rolls Royce has the flexibility to spread that risk around. If there are fewer flights in one region, perhaps there’s more demand in another. Peak season on one route may be a slack period on another, and so on. By managing a very large fleet of engines across multiple operators, Rolls Royce is able to manage the demand for those engines to avoid having too many assets, or too few. By quantifying and managing these risks, Rolls Royce is able to be more efficient than any single airline can be and this allows it to be profitable while still taking cost out of the operations of its customers.

Create the right Business Model

In the end, none of this would work if the business model wasn’t right. By selling ‘power’ instead of engines Rolls Royce has been able to offer its customers a service they want, at a price which is compelling, but still makes margin over the period of the contract. Instead of selling its engines at the highest cost the market will bear, the company needs to design and build the engine to be as efficient as possible. Instead of selling as many spares as it can, they now have to try and keep their maintenance operation as lean as they can. The business model means that Rolls Royce is incentivised to provide the service its customers want. It is this alignment of incentives which has made the model so successful.

Change the culture

Ultimately however, the reason Rolls Royce has made a success of its transition to service is largely because it has managed the change in culture within its organisation. They have needed to create whole new structures and change people’s mind-sets. Success has become about creating and maintaining efficient engines, across a huge fleet, day in day out, without interruption.

So what does all this have to do with Pharma?

There is much talk of Pharma moving to a service model. How does a drug company run its business if it sells ‘healthy patients’ rather than pills? Let’s go back over the lessons from Rolls Royce and see how they apply.

Mine the Data

A Healthcare Service Organisation (let’s call them HSOs for short) would want to know where each drug went, how long it was stored and potentially in what conditions, when it was used, the patient who took the drug and the clinicians who prescribed it and administered it. They would want to know all about the patient and the outcome. With this information HSOs can do more to develop personalised and targeted treatments, ensuring that sufficient quantities of drugs are available at the right time and the right location to ensure that everyone gets the drugs they need, when they need them. They want to ensure that the person who gets their drug is the person most likely to benefit. This is shifting the relationship between the clinician and the HSO but the relationship with the patient might be even more important. HSOs might also have a role to play in helping patients recover through other factors; smoking cessation or dietary support for example.

Align to the Customer’s Priorities

There are several ‘customers’ of the services provided by an HSO. Firstly there are the clinical staff, who want to offer the best treatment possible to their patients in the most time efficient way. Clinical staff are busy people and they want treatments which are safe and easy to use, which minimise the risk of mistakes and side effects and which can be easily prescribed and taken by patients. Those involved in the management and administration of healthcare, or insurers or other payors want HSO to provide services which are cost effective and get patients into a self-care mode as quickly as possible, but they also want to avoid readmission.

Patient’s however can have a different perspective. Of course they want to be treated, but they want to understand what is happening to them, and they want to minimise the impact on their life and lifestyle. Some don’t want to be labelled as ‘sick’, some don’t want medicine at all. Some want a diagnosis and some just want someone to listen to them. Patient’s needs are complex and varied. For our HSOs to align to these priorities they need to understand more about the patient and then offer them the most appropriate service. That might be to intrude on their lives as little as possible or it might be to provide plentiful information and support.

Understand the Risk

For pharma, understand the risks involves understanding what might happen to patients who receive a given medication. For any drug, some patients who take that drug will get better, some will not receive any meaningful benefit and some will be adversely affected by side effects. If an HSO wants to manage that risk they need access to data, to own at least part of the patient journey, and the ability to repeat the process at scale.

Create the Right Business Model

A service based business model in healthcare has to be focused on outcomes. Just as Rolls-Royce moved to selling ‘power’ Pharma companies need to move to a model where they don’t sell drugs, they sell healthy patients. However this is a complex transition and it’s not clear what outcome exactly a pharma company should focus on. In the old, transactional model of healthcare, patients became ill, they received treatment and they got better. In today’s world that’s less and less the case. Now many patient’s become ill from chronic conditions from which they wont get better. They will need treatment, potentially for the rest of their lives. What is the ‘outcome’ in this case? Could the HSO sell ‘days without admission’, or define a fixed price for a number of ‘patient episodes’? Is there a new type of HSO emerging that sits somewhere between a Health Insurer and a Pharma company?

No one organisation is, or can be, entirely responsible for patient outcomes. For pharma to play a part in an outcome based system it must assume a role within an ecosystem of providers. Perhaps pharma is best placed to take a central role. As commercial entities with huge resources and a long history of evidence based medicine, it's possible that pharma is better placed than any other entity to take on the role of HSO.

We don’t yet know what the business model is that facilitates these new relationships. This is an area where the future is unclear. Many people across the industry are wrestling with the problem of how to create models which align customer and supplier objects in new ways to deliver improved outcomes.

Change the Culture

You can change the business model, share the risk, understand the customer and collect all the data you like. Unless you chance the culture of an organisation you will not affect any lasting change to its fortunes. As the saying goes “Culture eats Strategy for lunch”. Changing an organisation’s culture is one of the hardest things to do but without it, old thinking, old habits and old priorities drown out innovation and good ideas. Perhaps the biggest challenge facing Pharma and Med Tech companies is to get their organisations to think like service providers. To embrace alignment with the customer, to see the value of knowledge, to accept new risks and new business models.

In truth however, if our existing Pharma organisations don’t accept this challenge, others will. We already know that technology has the power to slay mighty organisations and raise up new giants in their place.

So the healthcare industry has much to learn from organisations that have already made the transition to service providers. As new Healthcare Service Organisations emerge and Outcome based reimbursement takes hold, Pharma will be forced to undergo a transformation. Technology will underpin that translation and enable it. Technology doesn’t stand still however and new disruptive innovations are appearing all the time. Consider, for instance, what it means to Rolls Royce when a 3D printer will create a jet engine for you.

This post originally appeared on the 500 More blog. 500 More are specialists in Digital Health and Wellbeing. If you're involved in the transformation of Pharma to a Healthcare Service Organisation please get in touch.