Technology and the provision of goods and services

Traditionally, the application of tech to industry is considered in regard to the production of goods and services.
But that is only half of the picture.
The other half is their provision. Provision affects customer satisfaction, or the click-through rate to data analysts, and the running costs of the company.
I take a look at some industries that are undergoing transition into appreciating this new aspect of technology and data, and some that have for a long time.
I also hope to highlight some factors that effect how adaptive businesses can be with regard to this, and whether they will be likely to accept these adaptations in the short to medium term.

The introduction of technology into a new sphere of production is nothing new. Looms used to reduce the value of skilled labour is a historic reminder of the folly of the printers, so heavily involved in the newspaper life-cycle that they could barely believe that they were not needed any longer. This is the same ghost with clanking chains that faces fast food workers- both cooks and servers alike- in western cities.

Traditionally, low skill jobs are at risk of this very problem. However a range of professions, including very skilled labour, are being caught up in a cyclone of circuitry. One of the industries facing the most change at the moment is law. The use of data management has now made it possible to do in a couple of seconds what would otherwise take 360,000 hours of intensive labour for entry-level legal aides. /
All of these are examples of the ways in which tech can revolutionise the production of goods and services. The legal documents scrolled over and filled by a bot effects the running costs of the provision of that service. A similar concept to introducing robots to flip burgers to cut down on wage-costs.

But what about the provision of those goods and services, and how can tech revolutionise the way in which we compare effective provision against expediency. The flip-side of fast food work, and for any service industry jobs is that it requires high levels of customer satisfaction to give the company an edge over other sectors.
The legal sector is set to break ground in this provision too, speeding up services provided for the end-game of increased customer satisfaction.

There are some examples of current tech being used to improve services given, or at least keep the quality the same but require lower running costs. Chat-bots in conjunction with live-support are revolutionising trade in traditionally high-street shops. They manage to provide medium-quality information, without the depth or originality that a human would provide, but at a fraction of a fraction of the cost.* This is a good example of how tech can relieve many of boring and repetitive tasks that require no follow-up – what about more labour-dependent tasks.

Rolls Royce has managed to monetise the delivery of an essential service that they offer- ongoing repairs. By selling air miles to companies, they have been able to monetise a previously shared responsibility. Before, an airline would report technical faults to Rolls, and then request a time slot for repairs when the engine is close to the repair hanger at Heathrow, for example. This system is widely used, but can lead to faults not being detected by the airline in time for effective repairs to prolong the product life of the engine.
By monitoring data that the engine collects itself, Rolls Royce can determine when an engine requires repairs and replacements within an effective time-span due to their specialised and centralised knowledge. This allows them to intelligently allocate repairs and maintenance, saving airlines over 100,000 tonnes of fuel since its implementation and has been able to identify 97% of issues faced automatically.

Rolls Royce is an outlier in the aerospace industry. PwC recently assessed major industries within America and found that Aeronatics and Defence only earmarked 4.1% of profits for R&D- one of the lowest cash-spending amounts in manufacturing, and far below software and internet development at 14%. Rolls Royce, in comparison, spent roughly 24% of their civil aerospace net revenue in 2017 on capitalising current R&D projects, indicting how much value this sector has to those who can see the wood for the trees.
But the increase in this capitalisation from £85m in 2016 to £328m in 2017 also reveals what their end-of-year report also concluded: that the rate at which this tech is coming to maturity is rapidly advancing.

This R&D has potentially paid off, though at the short-term sting of a temporary headwind projected due to implementation costs. These are projected to drop off by £70m over the course of one year, due to increased use of the service reducing the impact of overheads substantially.

So will other A&D sector companies take note of these developments? This success story will hardly go unnoticed, and if it is, I think that it will be to the market’s own detriment. If others fail to invest, only time will tell if Rolls Royce will become the new Hoover- a towering household monolith, or Dyson- high quality and with a price that reflects it. I believe that due to the necessity of airlines transport, it will most likely be the latter. Airlines acting as rational actors, they will not invest in high-quality engines like these until the projected savings on repairs and fuel waste out-weigh the cost of the ongoing service.
An analysis by the EU in 2016 shows that (for at least 2004-14) the operating margin of airlines is reactive to the change in the value of Brent-crude. OPEC is currently so worried about the price of crude oil that it is trying to calculate alternate strategies to control supply through economic cooperation with non-OPEC countries. This is mostly down to a projected global slow-down in the economy come 2019, which could have a direct knock-on effect to airline companies.
If the efficiency savings to all parties are significant, Rolls might see a sharp uptake in orders on their books in order for companies to regain competitiveness through efficiency savings. If not, then they might see themselves relying on more profitable items to boost their civil aeronautics revenue- their largest single source for the last 10 years.
I believe that with an increase in global awareness and confidence in climate science, the long term outlook for efficiency-improving developments such as these is good. All that is required for other companies to follow suite is for the market to redress itself against existential-cum-pressing issues, perhaps by government intervention as is already being done.

Another industry is being faced with a completely different set of problems that might lead to similar innovations in the delivery of services.
High-street banking is as different an industry from an aeronautic parts provider as can be conceived.
The products they produce are quite similar, however.

To be able to run a bank (ignoring capital and land requirements such as local branches and ATM’s), high overheads present themselves in terms of security and regulation compliance. Additionally, while the running costs of maintaining security are quite high, the quantity of use means these services can be provided for practically free.
Aeronautics companies incur huge overheads in terms of land, capital, development and education. Most importantly, banks can easily access and analyse data on customers to tailor-make a range of options for service provision- a meaningful comparison with Rolls because of its unique business model approach.

Additionally, civil aeronautics is faced by increasingly demanding government regulation (such as the EU regulations linked above), and the market has an oligopolic structure that combine to create a perfect storm of stunted R&D. Retail banking is of a similar nature. There is one piece of legislation that has the potential to blow-up the market, though- PSD2.

This new legislative tool opens up the payment-transfers market to new third party providers, as well as regulating them effectively.
The implications are many and varied.
It opens the market to payment services such as apple pay, as well as account information requests and automatic subscription providers. In the retail-banking insights catalogue for 2020, PwC set the scene perfectly. Accounting made easy and accessible, micro-payments for provisions of services such as investments and risk-analysis in the foreground of future retail banking.
It is an opening that reflects the hopes of the banking sector, to cover up the immediate fears presented later on.

The flip side of this legislation is the increase in incurred risk for the retail banks, caused by the removal of the necessity for a contract between ASPSP’s and the PISP in addition to require the ASPSP to pay for fraudulent transactions. This requires traditional retail banks to take a lot of risk with little reward. The same report concluded that there will probably be an end to free-banking as result.

The product then offered will be comparable to Rolls Royce’s pay for mileage scheme, where a subscription is necessary to keep the account.
In considering the two, one must take note of the interchangeability of the services, however. Because Rolls Royce is the current sole provider of this scheme so far (though maybe not for long, as noted in their R&D capitalisation progression) since it is a service that is not a necessity for A&D to provide to stay afloat there will be little competition. The new PSD2 will reward only banks that take steps to develop their new products on a tailor made basis and with a basic surcharge in the form of subscription or interest rates.

High risk customers will need to ensure more security to banks in accordance with the potential losses they could incur. Accurate profiles of spending and income will be more and more necessary in determining fees and interest for customers. While the damage a couple of failures did to Concorde was irreparable, the cost to reputation of miscalculating risk might be even more huge if applied to the scale open to the most prolific retail banks. And this is a key concern for most banking heads. Therefore the tools developed would have to be very precise, presenting a significant barrier to entry in the market in terms of experience.

In other words, the provision of the service will need to be monetised far more effectively through the use of data. This is of great import, and is the most interesting way in which the economy is being shaped. The way in which tech is shaping industry is no longer just in production, but also in delivery.

So what industries are at risk of a renovation?

The industries with the most to gain from these processes are those that have high running costs/risk, and have a market-share based heavily on consumer confidence (or engagement) with the product, this is all taking into consideration the market-landscape. The industries that will adapt first are the ones with either; significant savings/profit to be made in the short to medium term (this is weighted against the time taken to gather sufficient data to make meaningful insights of the degree of precision that is seen as valuable), the ones with a low necessary investment to profit ratio (such as retail chat-bots), or ones in which there is legislation coming forward to deliver these systems to consumers.

An interesting case study of the full evolution of an industry under these forces is gaming. Evolving from the simple provision of add-ons, the market for micro-transactions for services rendered in game was noticed to be far more profitable than the actual games themselves. The platforms developed became better and the marginal cost of a game became smaller. With this change, companies were able to charge more for less- the in-game features became randomised loot boxes that are now considered on par with gambling, and games were split up and repackaged to maximise profits.
The short term gain of each step due to the changing landscape of the market, overall increase in the production value of games, and the intelligent usage of analytics to determine the optimal randomisation for loot-items has fundamentally changed the gaming ecology. In 2017, the revenue from full-purchases of games was $8bn. The micro-transactions revenue was $22bn.
The use of tech in segmenting, supplementing, and correctly stratifying the provision of services to the benefit of the customer and provider has great potential.

This potential has been best realised by gaming companies who developed these features, mostly by accident. It has been realised in the worst (but not by any stretch bad) way by headstrong retailers wanting to save a quick buck instead of require proper quality assurance. Rolls Royce may have successfully built a model that applies it to high-end goods such as civil aviation products- only time will tell.

*an interesting study would be to find what the effective investment into chat-bots and implementation ratio for chat-bots to people is by measuring: profit difference from implementation, number of chats weighted by length of the conversation by chat-bots divided by the number of chats with human staff, and the interchange-ability of the market, or how many like-for-like retailers there are on the market.