ISG Imagine Your Future® Podcast – Episode 27: What Is Digital Engineering and Why Does It Matter?

In this episode, ISG hosts Steve Hall and Karen Collyer talk to Gaurav Gupta about some of the mega trends driving the engineering services industry in 2022 and beyond. Gupta describes how engineering services has been going through some major transformations of late. In recent times, the pandemic accelerated the adoption of digital engineering as companies strove to bridge the gap between information technology and operational technology.

“It’s not about building products anymore,” believes Gupta. “It's more about connecting and building an ecosystem of platforms, insights, data, and the capabilities to stay connected with your product beyond the point of sale.”

Tune in to hear more about how digital engineering has gone beyond the engineering department to enable new business models, deliver superior customer experiences and realize operational efficiencies.

Useful links:

The Arrival of Digital Engineering: Megatrends Driving Engineering Services | ISG (isg-one.com) Article by Gaurav Gupta and Vishnu Andhare

Digital Twin: A Foundation for a Secure, Intelligent and Connected Enterprise | ISG (isg-one.com) White paper by Gaurav Gupta and Vishnu Andhare

Transcript

Steve

Welcome to the Imagine Your Future podcast. Karen and I have a really great show lined up today. Our special guest is Gaurav Gupta who leads ISG’s digital engineering practice.

 

Karen

Let's jump right into today's episode. We are watching an explosion of spend right now in the digital engineering space. So, I'm excited to hear from Gaurav on the trends themselves and what's driving them. Gaurav you recently published an article on the key mega trends, and what intrigued me most of what you said is the notion of disruption. Like we design for experience and not products. Engineering is a continuous operation. It doesn't stop at the point of sale. We're capturing value with software, not the hardware, and we're moving to hyper connected versus secure and isolated supply chains. I suspect that Elon Musk would agree with your assessment, given his focus on software as well. But can you walk us through your thinking?

 

Gaurav

Hey, Karen! Thank you so much. Thanks, Steve. Great to be with you guys.

You're right Karen, engineering is a hot topic. And as I say, it's not going through a change, it's rather going through a transformation, because of the sheer pace and scale that is in play. Digital engineering, if you put together the words on a search basis will throw up more than 2 billion results. It just goes to show the amount of interest there is in people trying to define and understand, What is digital engineering? And we've seen that in the contracting activity ourselves, with exponential growth over the last few quarters, almost doubling on a year-on-year basis. So, the more important question as I would say right now is not trying to define it, but rather trying to understand and ask, What is the digital engineering strategy that enterprises have? And more importantly: What's their strategy to ensure there is value being delivered out of it? Because there are millions going into it: But is there a value realization definition that enterprises have? It's not about building products anymore, but it's more about connecting and building an ecosystem of platforms, of insights, of monetizing data, and ability to stay connected with your product beyond the point of sale. And we believe digital engineering is an envelope that helps accelerate that transformation towards a journey that an enterprise is moving, which is creating a secure, intelligent and a connected ecosystem or economy. And this clue that brings in the information technology piece that is IT or operations, which is traditionally the shop floor; engineering, which is typically the brain of an organization; and now the customer side or aftermarket, which we are calling customer deck; together with a view that, How do we maximize the value of transformation and bring in a converged element towards these various siloed environments that exist?

 

Steve

That is cool, Gaurav I love the secure, intelligent, connected economy. It's really interesting how you describe it, especially the integration of all the technologies as we go forward and what that means to the industry. And you know, if I kind of hark back to what Karen said, at the very beginning about Elon Musk and Tesla. I think it captures a lot of what you're saying, because I think it was just last week, maybe two weeks ago, Tesla had recall 500,000 cars. This was so cool, because the external speakers that were driven by their boombox system, which allows them to play anything; people were playing goat noises. So, you’re driving down the road, and you heard these goats. I don’t know is that a goat noise Karen? So, something like that. And what the official said essentially is, “Hey, you're messing with the traffic systems so, the roads are no longer safe, because your car's playing all these things. So, you got to recall.” Well, imagine a recall even just 10 years ago. 500,000 cars, a recall would be massive. Think about what Lexus and Toyota went through when they had recalled their airbag thing. It was it was massive disruption. Hundreds of billions of dollars were spent to recover from that through the whole supply chain. Tesla says, “Yep, no worries. We can do that.” They push out a software update. They stopped the boombox from playing goat noises when it’s in neutral, reverse or drive, and went on with their day. And it was just a simple software push on a vehicle. We never could have done that. What I also love about this story, and again, I want to kind of use Tesla as a great example, is they really disrupted the whole aftermarket. So, I wasn't a hot-rodder, but I did like my cars when I was in high school and I remember trying to replace, soup up my car. I would replace the carburettor, an old two barrel, you’d put on a Holley four-barrel carburettor. You’d soup it up a little bit, you’d get everything going. Now aftermarket, Tesla sells upgrades to the software to allow you to have more horsepower. I mean, it's ingenious, and I just really see so many disruptions happening in that space. Give me your sense of what you see here.

 

Gaurav

Great point Steve! As you said, we've come a long way. In terms of automotive I mean, I still remember having cars which had to be yanked up to come to life, and if that didn’t work then somebody had to push it through. So, forget aftermarket. There was no concept of software inside the car.

 

Steve

Oh, you mean when we’d push it downhill and pop the clutch to get it to go.

 

Gaurav

Absolutely. Those days, right.

 

Steve

I remember those.

 

Gaurav

What you described, Steve, is such a great example of what we define as retail and product strategy. And Tesla isn't the only one that's coming through with this. We're seeing similar disruption across the manufacturing value chain, across industry segment. With a simple agenda that manufacturers today have, is the ability to stay connected with their product. With a view to stay connected with their customers like they never did before. Now if you go back a few years, the rolling down the hill times, the car makers never knew you and I. They only knew the dealership. And that's who they sold the cars for, and who the dealership sold towards was nobody's interest. So, they were a purely B2B concept. With Tesla, and not only in automotive, with other industrial segments as well selling products, that B2B is now changing to B2C, which means that the OEM, the original equipment manufacturer, wants to know the consumer far more than he ever did, because he wants to retain control on that product, so that he can build services and bundle revenues on it.

Tesla is an example you gave; their ability to recall the car is purely down to them having control on the software, visibility on the software and ability to communicate through that software to the consumers. Schindler is another example where they’re not just selling mobility, vertical or horizontal mobility solutions, but more importantly selling hours of service or analytics on usage. Bosch is not just selling appliances and drills anymore. They want to leverage the data that the drill gives them on the user, and the application, and convert it into an IoT monitoring analytics setup. So, whatever the change in that aftermarket that we are imagining right now is opening up extensive revenue streams because of this software element. And that creates a point of realization, which is far longer than it ever was. And by that what I mean is, if we go back five or ten years, if an OEM sold a product, be it a car, or a mobile device, or a hand drill, that was the only point of realization to make money. Because after that, it was only AMCs or maintenance contracts, which typically the dealers did. But now that point of realization, because of the connect they have with the product long into the lifecycle, means that they have a larger canvas to realize profits on throughout the life of the product. And that's massive. And we hear all the time that the aftermarket revenue is now taking over the traditional product sales for leading equipment manufacturers.

It's easier said than done, Steve. Now, if you look at Tesla, though it's an automotive company, it's a digital native. But, if you look at Bosch, if you look at Schindler, if you look at Sulsa, they are not digital native. They are traditional product companies. So, the ability to focus on software requires them to break the silos of the way they operated and unbundle hardware and software in a manner that they can control software and hence, retain that product strategy. Which means that what they buy, who they buy it from and what they make inside completely changes and moves towards software driven applications and a platform environment. And that is reflected in the whole Uberization that we are seeing, in a manner that it's leaving Uber behind itself in terms of growth. So, software is the central piece driving that ability to provide customer experience with the product, so that we can bundle services and create that secure and intelligent economy that we talked about. And that to me is the real definition of digital engineering. How do we bring that element of services, product, customer services, and wrap it around in an envelopes of secure transaction platform? And that's deriving value out of it, Steve.

 

Karen

Those are all really great examples Gaurav of digital engineering. I think I want to switch gears a little bit. And one of the other mega trends that you discussed in your paper was the convergence of IT, OT and ET to help accelerate digital transformation programs. We talked a lot about digital transformation on this podcast and I want to know, What did you mean?

 

Gaurav

Great point! I know we can go on about creating a connected society, connected ecosystems. But it's very important to understand, What are we connecting? And why is it such a challenge? So, historically if you look at any enterprise; there was information technology, the IT guys, they ran through the CIOs office. There was Operations Technology, which was run through the Chief Operating Officer’s office. There was Engineering Technology, ET, which was traditionally a CTO stem. And aftermarket was left to sales and marketing guys. And all this was run in independent silos. And that reflected in individual planning, individual goal settings, individual value driver points, and numerous points, proof of concepts, that we have seen over the last three to four years. If you ask anyone, are they in the middle of a digital transformation, the answer is a resounding yes. Answer is that we have done 25 POCs over the last 12 months. If you ask them how many of those 25 have scaled up, they’ll be far and few. So, the ability to share data, platforms, analytics, has been extremely limited because of these siloed approaches.

Now companies are realizing that for them to bring the point of realization of benefits left on the strategy scale, they will have to talk a converged language. They'll have to converge environments. And strategy through execution will be the only element to reduce time to value. And not only time to value it helps them scale and achieve the success of transformation programs, which is still something for question mark. This means that the moment you create a converged setup, if you imagine this IT and the OT and the engineering part, you're essentially creating a singular data thread or a single source of data truth that connects the entire value chain of an enterprise, allowing various stakeholders to dip into it and take out data and maximize value for their own asset that they are responsible for. This might be manifesting in a digital twin, creating of aftermarket platforms, analytics platforms, using assets better through predictive monitoring, etc. And all these are great examples that can be achieved through a data threat concept. Which also means that the moment you have an integrated data thread, the enterprise operating model has to evolve from what it used to be for the last 25 - 30 years, and the one that circles around software being the core. The competency pyramid, as I just said on the previous point, will change with the software as your central theme. Your make by decisions will be different. The other element which is extremely critical when you start joining the dots in an organization and creating a converged enterprise, is your enterprise security wouldn't ever suffice. And shop floor as we all know is full of legacy infrastructure. And when you connect everything, they are highly susceptible to cyber threats, which drives the point of having a comprehensive cybersecurity solution integrated in your digital transformation strategy.

 

Karen

Right! Your last point there about security is something that I've been thinking about a lot lately. What are the implications on cybersecurity as the boundaries between IT and OT begin to crumble? I think that's a whole other podcast.

 

Gaurav

Absolutely! We could go on for hours on that the scale. Absolutely.

 

Karen

Yeah. But the convergence that you're describing is super exciting, but as always, it has to be done right.

Gaurav

Correct.

 

Steve

I love this whole concept, Gaurav, on the secure, intelligent, connected ecosystem and what that that could mean. What's so interesting, I think, and I loved how you described it, because it's not just the OEMs, it's not just the manufacturers, it truly is this whole ecosystem. So, I met a guy a couple of weeks ago, from a company called Mind Fuel, which is a small data company in Germany. But what was so neat about the conversation is, his expertise is really looking at not only genealogy, but biology and everything. And he was doing some experiments and said that “we've got 72 taste sensors on our tongue”. And you're probably thinking, okay, Where Steve's going? What does this have to do with manufacturing and engineering? But what he did is, he hooked up with a blender company in Germany, and they started saying, the blender isn't about, the steel, the plastic, the RPMs, the best speed, or any of those things. The blender in the kitchen is really about the experience. It's really about making a great experience, in this case, great food. So how could we connect the things that our blender does, with recipes, with organic ingredients, with fresh, healthy alternatives that specifically target the 72 different taste sensors on our tongue? And I was fascinated! I really started thinking that we're really opening the ecosystem in such new ways, on things that we didn't ever think about. I can just imagine a whole new vibrant economy generating. What's the best angle to drill a pilot hole in on my boss drill? And maybe the software automatically knows and beeps, or adjusts, or does things where I'm doing autonomous drilling. I may be holding it, but it's adjusting as aftermarket things. And the more intelligence we build into those devices, the absolute better our future is going to be. I think it's absolutely fascinating how you how you thought through it.

 

Gaurav

Absolutely Steve. On that point, if I was to just give you an example, Bosch has a very robust drilling and punching business unit. And if you if you look at an aircraft, like an Airbus A320, they have millions of rivets that go on a single aircraft. And until recently, most of these rivets were hand done individually. So, there would be 20 guys with their rivet guns going around the aircraft and riveting the entire shell. Now if you imagine that there are 20 guys trying to rivet a single aircraft, every operator has a different style to hold the drill. The amount of tightness for each rivet, for each operator would be different. And hence, if you tighten the thing beyond a certain level, it can crack the metal over the next 5 to 10 to 15 years. And that is a huge problem statement for an aircraft OEM. So, Bosch then came up with a smarter connected drill, which is adapted to the user itself and automatically cuts out at a certain torque or a PSI system that it’s set for. So thereby completely removing chance of an error, which means that the insurance guys on the aircraft could lower the underwriting that they had, hence impacting the price of the aircraft going out because they believe that there will be a lesser chance of a body shell cracking because it's a connected device which is drilling the holes. The other flipside, which is the more interesting bit, is that while you're doing that, you're also recording what each and every worker is talking about. And how are they performing, which again, opens a very different context in terms of monitoring employees, supervising employees and training employees.

 

Steve

Crazy

 

Gaurav

It's a completely different world.

 

Steve

Alright, now I'm not sort of depressed Gaurav, because now I can't play goat noises on my Tesla anymore. It starts automatically so I can't pop my clutch to go downhill anymore. Now you're telling me that I can't even use my wrench anymore to tighten everything, and I don't use my Holley four-barrel carburettor anymore. So, I guess we are in an autonomous world. A lot of our listeners know, so much of this was really driven by industry 4.0. And thinking about how we think about the world differently and the next industrial revolution if you will, How do you really see enterprises deriving value from industry 4.0 investments?

 

Gaurav

Steve, I look at industry 4 almost like a matter for digital engineering because you can put everything and nothing into industry 4. If you look at the definitions, there are so many of them, but in the context of manufacturing, simply put industry 4 is the digital transformation of companies, enabling revenue growth through enhanced outputs, cost optimization through operational efficiencies, and thereby creating a superior customer experience. This got a major push through during the pandemic because the hundreds of POCs that were done in isolation, people realized they weren't good enough because they did not provide resiliency, they did not provide connectivity, they did not provide security, until they all came together and achieved scale. And that's what we are seeing reflected in the contracting, in the deals that are coming through the pipe. The amount of potential that we are seeing on the buy-side mandate as well as on the sell-side in this sector. However, if you go beyond the operations of converging IT OT and realizing industry 4, it is very important for enterprises to define what they want out of it. And the biggest driver they are seeking is the change in maturity of the business model in this new age of building products and experiences for bespoke customer transactions. And a classic example there, from a very unrelated field; today if you look at an insurance company, like Munich Re, they are investing in an IoT platform which allows various machine manufacturers who sell machine uptime on a paper part, or equipment as a service basis, and allows the end customers to move away from a CapEx model to an OpEx model. That is such a huge shift in where the angle of a proposition comes from and from whom. You would never expect the insurance company getting into IoT business and trying to sell pump as a service, or compressor as a service, or rivets as a service. But that ability is there because these organizations were trying to build an industry 4 layer at an OEM level. But we're not able to underwrite downtime. And that is what Munich Re is monetizing by underwriting that availability, or machine uptime, for an OEM providing an IoT platform which they have invested in. And that's a great combination of finance, manufacturing, service, customer tech coming together. And that changes the entire business model on this.

 

Steve

Yeah, that's another great example of that whole ecosystem coming together, isn't it?

 

Gaurav

Absolutely Steve! We used to talk about application as a service, but never part as a service, or equipment as a service. We have always heard that braking system guys in aerospace started doing landings-based monetization, rather than selling brakes. They used to say brakes for landing, which is now taken mainstream and through such an ecosystem being created in a secure manner. The other thing which is important in the industry 4 journey is, What do you do with that data? Because the moment you start talking about industry 4, or convergence of IT OT, you've got billions of gigabytes of data, terabytes, sitting with you. And until you can leverage that data and get value out of that to derive decision making, it's of no use. And that's where the concept of a digital thread and digital twin comes in.

As machines, devices, equipments get connected, they have the capability to automatically transmit data on performance usage, customization, health, and break that system of systems. And digital twin, as I like to describe it in lighter terms, is almost like a time travel. But in a capsule that is so secure, so connected and you know exactly what are the hypothesis that you have built it for. So, it's a secure time travel that we have created ourselves and that can be applied in any scenario, any sector and any ecosystem play. If I were to give you an example for digital twin, typically people would talk about shop floors. Let's look at what the Singaporean Government is doing by creating a virtual Singapore 3d digital twin that is to be built for urban planning, policymaking, Citizens Advice. Sophisticated tools and applications are being put in place for services and decision making to be done. And research and technologies of emerging concepts can be done through that visualization of a digital time span that we can create. We are engaged ourselves in various Smart City programs in in Asia towards the same thing. How do you create that digital thread from various technology stacks on one side, all the way to social and citizen rights and citizen experience platforms? And that's a massive ecosystem, which is secure, intelligent connected economy basis.

Autonomous driving, which we have all heard for the last so many years coming to life now, is potentially creating scenarios that people have seen annotating data that OEMs like BMW, Audi and others are doing at the moment. But in this whole process, the potential scenarios can become infinite, and if you look at them annotating those infinite scenarios, you can only have so much modelling done. So, beyond the scenarios, How do we create an environment which creates synthetic data on vehicle driver and environments to test out what is going to be the likely time travel scenario there? And this is possible because of digital twinning applied on autonomous data sets that are coming in.

Supply chain is another example where digital twin is great in terms of managing availability, status, inventory and operational data coming together. Now people because of digital twins are not selling. If you look at big warehouses like Waitrose or Walmart, when they get deliveries of fresh produce, they are not just paying by container loads. They are paying for freshness. That was completely unthinkable. How do you how do you charge for freshness? So, they are being guaranteed by the logistics and warehouse providers of 95 - 97% freshness of the produce that is being delivered to their stores. And that is because of the data that they can track, extract and monitor.

Asset performance is another one which any asset-heavy industries; be it discrete industries like manufacturing, automotive, industrial, or on the process side with CPG, chemicals, oil and gas; require better performance of their assets, increase OEEs is on that. So, the power of data can move the entire organization towards a predictive mode, rather than just a time based one. So, industry 4, Steve to answer your point, is here to stay, but the point the enterprises have to figure out is, How do they derive specific value points around changing the business model, changing the customer satisfaction, or just creating new revenue streams and becoming more optimal?

 

Steve

Amazing Gaurav! Absolutely amazing stories. I'm sitting here imagining my future in a hyper connected world, with all the smart devices that we have. As I listen back on the on the podcast and I think through it, I'm almost visualizing myself stopping, rewind, stopping rewind, but I'm using a cassette player instead of a digital thing to do it in my mind right now. But you just had some brilliant examples. So absolutely awesome. Karen, you want to take us home?

 

Karen

I absolutely do! So, everybody if you liked what you heard today, you can hear more from the imagine your future team by accessing our website at https://isg-one.com/research/podcasts  or by just subscribing wherever you get your podcast content.

As always, thank you for lending us your ears and we can't wait until we meet again.