Chris La Fratta, Vice President & Head of Professional Services and Solutions Delivery at Philips, talks with Sarah about embracing a broader view of what outcomes-based service can mean for your business, how Philips is evolving its service offerings, and some of the key changes necessary in order to deliver.
Sarah Nicastro: Welcome to the Future of Field Service Podcast. I’m your host, Sarah Nicastro. Today, we are going to answer the question; is your view of outcomes-based service limiting your success? We talk a lot about outcomes-based service and delivering greater experiences and guaranteed results to our customers, but today we’re going to dive in a little bit more to what that really means and how you may be keeping your view too small of the opportunities for you with your customer base.
Sarah Nicastro: I am excited to welcome to the podcast today, Chris La Fratta, Vice President and Head of Professional Services and Solutions Delivery at Philips. Chris, welcome to the Future of Field Service Podcast.
Chris La Fratta: Hey, Sarah, thanks for having me. It’s so nice to virtually be with you here today. It’s everybody’s reality all day, every day.
Sarah Nicastro: I wish we were doing these on site in a studio. Maybe we’ll get there someday, but for now, virtual, yes, and happy to have you.
Sarah Nicastro: So, Chris, before we dig into the topic at hand, tell our listeners a bit about yourself, your background, and your role at Philips.
Chris La Fratta: Thanks, Sarah. First, let me tell you a little bit about Philips and I’ll dive into my role. Philips has been around for about 130 years, we’re 80,000 employees worldwide, and our purpose is to improve the lives and wellbeing of people through innovation and technology. We’re very specifically focused on healthcare. And that’s actually been a transformation from Philips. People who are familiar with the brand would know we’ve sold consumer electronics like flat TVs, and lighting, and things like that, but we’ve divested the portfolio and we’re 100% focused on healthcare, so it’s been a big shift for Philips. And also, part of our strategy, another big shift and what I want to talk to you about today is that we’re shifting from a company that primarily sold products to a company that sells solutions.
Chris La Fratta: And just to use a simple definition of a solution, for me, that means hardware, software, services, kind of bundled together, both Philips developed content as well as third parties, and that together, these things solve a customer’s problem and deliver an outcome better than a product will on a standalone basis. So, that’s kind of, in a nutshell, who Philips is.
Chris La Fratta: I’ve had a long career in healthcare. I’ve worked at HP, Hewlett Packard, back when they had a medical device product group, I’ve worked at a company called Elekta, which is an oncology focused medical technology company, but I’ve spent most of my career at Philips and most of my career in services. I’ve run call centers and technical support groups, I’ve run field service teams, both on the software and IT side as well as on the capital equipment side. And these days, my job is really, as you said in the title, it’s around solutions delivery. So, as we make the shift into solutions, how do I repurpose an organization that was designed to deliver break/fix into an organization that sort of consults upfront with our customers around how to design a solution, and takes them through an implementation, and then at the end, it’s really all about helping customers adopt the technology so they can achieve whatever it is that they want to achieve.
Chris La Fratta: So, a lot of words there, but that’s what my job is, is to run these teams. I have team members who are solution architects, I have team members that are project and program managers, technical consultants, which I’ve converted… and maybe we can talk about this, I’ve converted a lot of field service engineers and technicians into a role called technical consultant. Then for us, because we’re in healthcare, clinical application specialists who do training and consultation on the products and solutions.
Sarah Nicastro: Okay, excellent. So, there’s a lot we’re going to dive into and I’m very excited to do so. I said in the intro and you kind of mentioned in your introduction of yourself, the conversations I have with people across a variety of industries these days are in some way all tied back to this concept of solving customer problems instead of delivering a product, a service, right? So, this idea of, however you want to say it, for a product organization moving this way, often servitization, delivering more outcomes, that sort of thing. So, you already defined that for us, and I think it was a very simple but very good definition, which is putting together solutions that solve customer problems, right? So, that makes perfect sense. Let me ask you, why do you feel this is the path every company, in some form or another, is on right now?
Chris La Fratta: That’s a great question. I think about it, maybe what’s going on in the IT space where everything is as a service today, or maybe companies like Uber and Lyft, they’ve kind of set the world on fire with their business model. So, if you think about Uber, the car companies model was to build and sell you a car, and they make all their money, then they service it after and keep it running, but you as a consumer, do you really want a car or do you just want to get from A to B. And I think that’s kind of what it’s all about.
Chris La Fratta: So, I think that we have a demographic shift going on in society where people have grown up kind of around these business models, but if I think about my business space in healthcare specifically, hospitals are stretched. They don’t have the capital they used to have. A lot of them don’t make a huge operating margin. So, these innovative business models where you’re tied in as a supplier to the customers’ outcome and success, I mean, it just works well because of the economic model there. And I think we’ve seen it happen in other industries. I think IT was the first place it really happened. I think IBM started this revolution, whether they wanted to or meant to or not, when they kind of got out of the mainframe business and got into web services and things like that.
Chris La Fratta: So, I think those are some of the variables going into it. I think the digitization of everything enables it to happen. I think that’s also part of the reason why you see these shifts happening at the moment.
Sarah Nicastro: Yeah, that makes sense. So, in the headline, we said, “Are you limiting your view?” Okay? So, as an organization, whatever industry you’re in, if you’re thinking about how do we act more as a trusted adviser? How do we sell solutions instead of products? Oftentimes, the first thing people think of is, “Well, we need to guarantee uptime,” that must be the answer, uptime, right?
Sarah Nicastro: And our argument today is that there’s nothing wrong with guaranteeing uptime, but if that is where you sort of stop, in your thought process or in action, you achieve this, and then you just end there, you could really be limiting your potential to expand your service revenue, because if you can step outside of maybe your historical role in your customer’s landscape and think more about how you could potentially solve some of the problems they have, you may find different opportunities to contribute to the outcomes that they need to drive.
Sarah Nicastro: So, tell us a little bit about some of the different ways that Philips has expanded its portfolio to deliver more customer outcomes.
Chris La Fratta: Yeah. And it’s funny that you started off with the uptime comment, because as I told you, I’ve had a long career in service, and I think that traditionally it was about, keep my system up, and so it was about making it available. And I think over the past 10 years, at least in healthcare technology, it kind of shifted from, “I want it to be available, but I also want to integrate with the rest of everything else that’s going on.” So, in healthcare, it meant sending data from devices to an EMR, so it’s about integration. But now, I think it’s really about, “Help me adopt it so that I can be successful.”
Chris La Fratta: So, in healthcare, hospitals talk about a quadruple aim, their targets as healthcare providers is to achieve this quadruple aim, and its financial outcomes, clinical outcomes, patient satisfaction, and staff satisfaction. I’ll give you a couple of examples of where Philips plays in this space and why we’ve been successful. So, in an intensive care unit, you have a system of patient monitors, and they connect to a network, and nurses are able to centrally monitor the vital signs of patients and they respond when an alarm goes off. So, we’ve always sold that as a capital equipment with some services bolted in. And there’s uptime and bench repair and all these things that go on to make the monitors available. So, that’s the way we’ve always done it.
Chris La Fratta: Last year… actually, a couple of years ago now, we had a first of kind implementation in a big hospital in Florida where we actually offered this as a service. So, instead of getting paid for the monitors after we’ve implemented them and sold them and then going on a service contract, we actually get paid per patient day. And so, what is the customer is trying to do there? Let me talk about the outcomes that we’re looking for.
Chris La Fratta: We’re trying to make sure that they’re efficient. We don’t want patients to stay in an ICU any longer than they need to stay in an ICU. We’re trying to make sure that as they move around the hospital from the OR back into a post op recovery area and what have you, that we don’t lose any data. It’s really important that the data gets captured through the whole journey. Then of course, we don’t want them to be readmitted and things like that. And so, through this offer, we’re able to completely upgrade a hospital where they wouldn’t normally have the capital to do at all, every unit of the hospital is using the same technology, so a nurse can move from one place to another. They get software upgrades through the lifecycle of these things, because it’s Philips’s assets at the end, not the customers, and we’ll keep them up to the latest and greatest and things like that.
Chris La Fratta: And what we’re seeing, and last year was a great example because COVID happened, and when COVID happened, all of a sudden, it was a different subset of patients that needed really specific care. So, we were able to adapt and get monitors where they need to go in the hospital without the customer spending an extra penny, right? So, that’s one example of where we’ve done it. We’ve done some great studies at this customer, whereby we asked the staff, “Hey, how do you like the new technology?” And there was just off the charts positive. This hospital was literally at a place where a new patient would get admitted and they have to check to see if they could find a monitor that worked. If it was from brand X or brand Y, they wouldn’t necessarily know how to interact with that monitor. So, the patient, or the staff satisfaction went up really high.
Chris La Fratta: Obviously, the financial outcome was a big improvement for them. Instead of spending this huge amount of capital upfront, they moved their spend from CapEx to OPEX, so if they have a lot of customers, their bill goes up for the month, like our gas or electric bill, right? But if they don’t have a lot of customers, when they have a down a month, their fees go down accordingly.
Chris La Fratta: And then we saw some clinical outcomes too. So, specifically, because they had this hodgepodge of technology, it took a long time for them to transfer a patient from one unit to the other, which meant patients sitting around kind of in limbo. So, now that we have all the Philips equipment in-house, they’re able to transport patients quicker, the nurses are happy with that, and the patients spend less time kind of just waiting for something to happen. So, that’s one example.
Chris La Fratta: Another example that I would cite is that we have something called Managed Technology Services, it’s an offer that Philips has, where we actually go in with the hospital staff, assess their installed base of technology, and help them make a 10-year plan for replacement. So, Philips will finance that equipment, we will service it for them, regardless if it’s ours or a third party, but the key is that we really help them to adopt and utilize the equipment well. So, we have counters on all of our equipment, we can zoom in and see if an MRI is being 65% utilized in one unit and you have another unit that might be 120% utilized, maybe they run it on a second or third shift or what have you, we can take that information back to the customer and say, “Hey, look, you can utilize this one asset better, or maybe it’s time to retire it because the service costs are too high.”
Chris La Fratta: So, really, partnering with their capital asset planning, because let’s face it, what our customers, and my case with healthcare customers, are really good at is providing care to a patient, not capital planning for medical equipment. But at Philips, that’s what we do all day long, and so we’re able to kind of help and assist. And that’s an example of helping a customer drive a financial outcome. And we’ve had some really good success stories with that.
Chris La Fratta: It’s not an easy model to shift into, and it takes a little bit of courage, and it’s kind of risky, because a lot times that you move in, the model is not always perfect, but you go out, and you get your feet wet, and you start to learn from it, and then you hone the model. So, I think the real key, though, Sarah is, if you have shared goals with your customer, now, they’re partners and not customers, and when you win, they win, and vice versa.
Chris La Fratta: So, in the first example I gave, if we could increase the number of patient days that the customer is being monitored, because we’re consulting with the customer and helping them put these devices in the right places, then I get a higher patient per day price, but they also get better utilization of the asset. So, uptime is keeping the thing available, but what we’re talking about is making sure it’s used and used well, and used to deliver these quadruple aim outcomes. That’s probably a good way to state it and kind of summarize the points.
Sarah Nicastro: Yeah, that’s perfect. And I think it is interesting, and I’ve mentioned this on the podcast before, Chris, there is a great overlap there for companies that are willing to find it, of needs customers have, real needs, real value opportunities, not forced, not, “Hey, we need to increase our service revenue, so what can we try and sell them?” But real opportunities to help that can help your business build revenue. I mean, it really can be a mutually beneficial place that you can get to, and this is a good example of that.
Sarah Nicastro: Before we talk about some of the complexities, I did want to just go back to the examples you shared. So, obviously, there is a real thing of, for a lot of these hospitals and health systems, modernizing the equipment they have and the lift that can bring in patient care itself, right? But to your point, there’s a lot of planning that goes into that, there’s a lot of knowledge about what’s needed, and where it’s needed, and what the right patient flow is, and things like that, on top of this change in model that we’re going to talk a little bit more about to being OPEX versus CapEx. But the other thing, and we’re also going to talk more about this, but I want to clarify it before we dive in is, some of the opportunity from a services perspective to kind of expand the skills that you’re leveraging to bring value to your customers, and I know from one of our earlier conversations, there’s a couple we talked about that I’m hoping you can touch on.
Sarah Nicastro: One is, knowing that this equipment is part of a hospital’s bigger IT infrastructure, there’s some opportunity there, and then I think a really big one, because I think it covers a lot of different industries and a lot of needs people’s customers have is this idea of, “Hey, we see you’re only using your MRI machine at 65% capacity,” to your point, maybe they have an extra one they don’t need or something like that, but it could be maybe their staff is struggling because they’re not good at using it or they need some extra training. And so, I believe you’ve also kind of expanded into some more services there to help assist your customers in making sure that their staff as effective as well. So, can you speak to those two aspects?
Chris La Fratta: Well, yeah, I’ll take the first piece about how things have really shifted. When I first started my career, when we hired a field service engineer, we were looking for somebody who had a mechanical engineering or electrical engineering background, and then we taught them customer skills. Back then, most devices were standalone, they didn’t talk to themselves or each other, they didn’t connect to the hospital’s network and things like that, and if they ran software, it was proprietary, for the most part. Now, everything is on common platforms, Microsoft and things like that, everything is highly integrated and talking to each other.
Chris La Fratta: About five or six years ago, I was really involved in our patient monitoring solutions, and they were really highly networked. So, we started to realize that we needed to get network experts on the team, and so we kind of went down this path of, we think our guys are really smart, our guys and girls, and they can get Cisco trained and certified, so we provided them that opportunity to make the shift. At the same time, we were growing, so as we were hiring new people, we brought in Cisco trained and certified people that were really good with networks. And then there were people who were in the ranks that realized, “The way things are going, maybe this isn’t the job for me anymore.”
Chris La Fratta: So, we kind of went through a five-year journey where some of our internal folks stepped up and learned the skills, as we were hiring, we hired people with those skills. We hired a lot of people, actually, from the military who have been network trained, but also people from data centers and banks and things like that, and we had to teach them what healthcare was. And then we had some turnover. There’s kind of a demographic thing going on in terms of baby boomers retiring and things like that. So, it was about a third, a third, a third, if you know what I mean.
Chris La Fratta: So, that was a big shift we had to make, and now we’re seeing it again where networking is kind of not enough, we’re seeing a few specialties that we have to get really good at. So, cyber security is one. We’re starting to hire staff that has some experience and background around cyber security. Microsoft OS’s, Microsoft server and things like that. Virtualization is really a big things. So, all of those skills have been important for us to realize we needed them and then either acquire them or train people to get them. So, that’s kind of a little bit about the first question.
Chris La Fratta: I think the second question, I’ll give you a really good example. So, Philips has trusted advisor and consultative partners. If you’re in an ICU, there’s all these alarms going off all the time. It’s really, really a stressful place to be. If you’re visiting a loved one, it’s stressful, if you’re sick in the hospital, it’s really stressful too. It’s particularly stressful for nurses. They’re hearing these beeps, and the beep turns into a page on their phone, there’s a central monitor, there’s things going on all the time. And it turns out that a lot of them are false positives or alarms that don’t need to be responded to.
Chris La Fratta: So, what we are able to do is to go in and consult with the nursing staff and make decisions around their alarm policies. They can lower thresholds, they can silence alarms and things like that. It’s a really collaborative process. I mean, as Philips, we can’t go in and tell them what their alarm policy should be, they need to make those decisions on their own with information from us. So, we can say, for example, “At hospital X, we see a best practice whereby they set this alarm here.” And then they make those decisions, and we can implement them on the monitors.
Chris La Fratta: So, we’ve had to take our clinical educators, who are nurses, for the most part… well, almost every clinical educator in Philips has credibility and background as a nurse, but we had to teach them how to facilitate that discussion. So, they went away and learned how to run a Kaizen so they can get a group of nurses from a hospital site be open and have this conversation. And we just have great results from that as an offer.
Chris La Fratta: And it’s great because it’s done in conjunction, and you see the hospital nurses, sometimes, they start a conversation like this, and they just don’t want to hear it or know it, and it’s something outside of their day to day job that they don’t have time for, and six weeks later, they talk about it being a life changing experience, having participated in something like that. And now there are fewer inoperable false alarms, there’s less noise and they can focus on what’s really important. So, that’s a good example. And it took time not to build that skill on the team. Nurses tend to be really good at it, for whatever reason. I think they have right levels of empathy, but it’s a good example of where we do that.
Chris La Fratta: We do some cybersecurity consulting, helping hospital CIOs prepare a plan and a strategy for things that live outside a data center. So, we’re in a world where everything is a connected device, and IT people tend to be really good at connected devices than are computers, but when it’s an MRI machine, or patient logs, or an ultrasound, they don’t typically know how to apply an OS patch to a device like that. You can’t just say, “Hey, there’s going to be a maintenance window in the ICU at three o’clock on Sunday,” it doesn’t work like that, so it’s a different problem set. So, we advise and we help with things like that, I mentioned some of the capital planning, and of course, utilization of the devices. So yeah, it’s a special skillset. We’ve taught some of the staff how to do it, like the clinical educators.
Sarah Nicastro: Okay. So, there’s a couple things I want to touch on based on what you just said. The first is, going back to the title of our podcasts and not limiting your view of outcomes, right? So, what you just described to me is a perfect example of, you start with your core competency, and maybe you even servitize that well, right? So, instead of just offering products, now you’ve bundled that with services, so you are Philips, and you offer X equipment, and you can service it supremely, right? But now you start looking at what is your customer journey, right?
Sarah Nicastro: So, how much pain would it cause your customer if you show up and say, “Hey, great, I have this industry-leading piece of equipment, I can sell it to you, we’ll take great care of it, we’ll make sure it has uptime, but this network stuff, good luck. So, see you next time we talk,” right? And then they’re sitting there like, “Okay, now we have to interface with another person and bring them in? And do those people know the Philips equipment, etc.” Right?
Chris La Fratta: It’s the worst experience for our customer, right? When they say, “Hey, Philips, your system is slow.” And we say, “No, our system is working fine. It’s a problem on your network.” And they call Cisco, or they call their internal… and everybody’s pointing at each other right? And so we decided, you know what, we’re going to just help them solve the whole problem end to end, and if we have to be the middle person and work with Cisco or whoever it is, we’ll take that role and do it, because to your point, they can’t get what they want unless that problem is fixed. And for us in this example, the network infrastructure is such an important component of it all that it’s just absolutely fundamental to what we’re doing there. So yeah, I agree.
Sarah Nicastro: Absolutely. So, by eliminating that friction for your customers and improving their experience, you’re expanding your own value proposition and your revenue potential, right?
Chris La Fratta: Exactly.
Sarah Nicastro: So, it’s just a really good example of looking… I think sometimes companies get really… they’re kind of stuck in their history, and so when they start thinking about innovating, or servitizing, or delivering outcomes, they have really good intentions of innovating but they still kind of are on this lane, right? And so, just being able to kind of expand the view a bit and just think about, “Okay, what are these friction points? What do we hear? What do we see? Where do we know our products connect with other systems in our customer’s infrastructure, etc?” Because sometimes it’s a situation of not communicating enough with your customers to the point where you’re not asking the right questions for them to share their pain points, but sometimes they might not know to ask you, right? So, sometimes it’s observing instead and going to them with suggestions, right? So, that was just one thing that I thought was important to mention. And there was another one, but I forgot it now, so hopefully, it’ll come back to me.
Sarah Nicastro: But I think that those are fantastic examples of really being able to look at your customers’ journeys and look for those opportunities to really help them, and in turn, help yourself by creating more potential.
Chris La Fratta: Yeah. I’ve got a mentor of mine who always says, “Chris, we have two ears and one mouth, right, and you’ve got to use them in those proportions.” So, you said it a few times, but it is really listening. And I think sometimes it’s also… when you talk about that trusted advisor comment, sometimes it’s about being brave enough to tell a customer, “Hey, I know you want to do that. That’s not the best practice.” We had a customer who wanted to use Active Directory in a certain way. No other Philips customer does what they do, and we should have said to them, “Look, you’re taking a risk doing that and we’re not sure we can support that.” But I think a lot of times our tendency is, ” We want to close this deal, so let’s just give what the customer wants.”
Chris La Fratta: But I think one of the reasons why customers want to work with an industry leader is because of the experience you have as an industry leader, especially when implementing very complex things like this, they want to know what the best most successful customers have done and how they’ve done it. So, I think you got to kind of own that and bring it to the forefront.
Sarah Nicastro: And you just reminded me of my other point, so thank you, but it was exactly that, which is when you have a wealth of assets that are connected assets across a variety of customers, and you can look for those insights that your customer base is going to find value, and that in and of itself is another opportunity for that revenue, diversification and to differentiate yourself to build that relationship, to stop looking at it as a transactional product, sale, break/fix service to that partnership, because there’s so much value, in your case, to the hospitals, of you knowing, based on fact, based on data, “Hey, actually, the best practice other hospitals do is this. Let me show you a couple examples. A customer we have in this state does this, this state does this.”
Sarah Nicastro: They don’t have that information, so that information, that data is power you have that you can use to educate your customer base that no one else has, right? So, a lot of times, that data in and of itself, is an untapped opportunity to expand these relationships and diversify revenue, because companies might use it operationally internally, but they’re not looking at it from that perspective of what’s this telling us that is insights, best practices, information that our customers would potentially pay to know or that we can bundle into this overall thing?
Chris La Fratta: Yeah, no, it’s fascinating. Again, one of the customers that have bought into this as a service model with us around our patient monitoring, I was at a quarterly review with them not long ago, and we were reviewing their statistics. And so the monitoring gets broken into three segments, there’s high acuity, mid acuity, and low. So, the most sick patients are in high acuity, your sort of middle patients are mid, and then when you get checked into the ER or the general ward, they put you on these low acuity monitors. And so, by looking at their statistics over the last quarter, and we’re reviewing this from a billing point of view, like eight years, this is what your quarterly invoice is going to be, but they saw this huge spike in mid acuity, and they start to ask operational questions about why? “Why did it go up so much? I don’t understand.” Well, it was driven by COVID volume.
Chris La Fratta: But it’s to your point that, if you have this huge install base of information, not only can you help one hospital compare itself to the other and get some best practice, of course, the information is completely anonymized and de-identified and things like that, also, even within the hospital, they’re not always seeing operationally what’s going on. Everything from our equipment is being used, and I gave some of those examples earlier, to where is the equipment? I mean, we have a patient-worn device that allows people to walk around the hospital when they’re recovering while still being watched. Well, things get lost all the time. And I can tell the last time it made a network connection were in a hospital that it wasn’t. So, even as simple as, “I lost my keys. Help me find them,” sort of thing.
Sarah Nicastro: Yeah, for sure.
Chris La Fratta: So, it’s all about data. And I know there’s a question that we’ll talk about maybe at the end about my vision of what’s next, and it’s all about how do we better use all this data that’s being generated, whether it’s to deliver an economic or patient outcome. I think there are clinical outcomes that could potentially be better achieved if we can somehow… And Google, Apple, GE, Siemens, Philips, we’re all trying to get there, but nobody’s really cracked the code yet, but if you think about all the sick patients that go to a hospital, so much information about them, and their symptoms, and their treatments have been captured, that’s a place where we’ve got to start applying AI and machine learning and things like that so that we can get some better treatment plans, quicker diagnosis and things like that. That’s sort of a vision of the future that I have.
Sarah Nicastro: Okay. We’re going to get there.
Chris La Fratta: All right.
Sarah Nicastro: All right. So, everything we’ve talked about is really exciting. You guys are doing an amazing job of becoming that partner to your customers instead of a vendor or supplier, and really looking at modernizing the relationships you have with them. But this process and that shift, it’s a fundamental change in how you’re doing business, right? And that is, in no way do I want to touch on the good points and have people think like, “Oh, Philips is doing it, it must be easy,” because it isn’t. It’s really, really hard. And I think that the deeper and richer the history in developing, manufacturing, selling, servicing products, the harder this transformation can be and this shift can be.
Sarah Nicastro: So, you’re obviously doing an excellent job at it, but I want to talk about a couple of the major points, and you can maybe share a little bit the challenges and how you’ve either overcome them or are working to overcome them. And the first thing I want to talk about is just this idea of transitioning to the as a service model, right? So, for Philips, I understand the value to the customers loud and clear, but to you guys, you’re moving from these large influxes of revenue to more of a recurring model, and then you’re risk sharing. So, to your point, if the hospital doesn’t use as much one month as another month, that dips. So, explain how you kind of get on the same page about why and how that’s worth the risk and what that takes to migrate too.
Chris La Fratta: Well, there’s a lot in that question, so let me try to touch on some of the topics there. The first thing I would say is, as you start to make a transformation like this, think about Philips, as I said, it’s 130 year old company, when I introduced myself, and for 125 of those years or so, we sold a thing, we manufactured a thing, sold it, and then did some service on it, right? So, all of our processes, all of our back end systems are designed to do that thing.
Chris La Fratta: And so, a few years ago, we decided to get into the solution space, and all of a sudden, SAP doesn’t want to allow us to transact business that way, or our service system is really good at break/fix service, and dispatching engineers and doing things like that, but not so good with other things. So, there’s a lot about kind of tuning up your back office systems to allow these business models to work and things like that.
Chris La Fratta: Then you start having discussions with your CFOs and folks, because they used to get in the sort of episodic revenues, what I would call it, and install a huge capital deal, and there’s a little bit of services that go along with that, but that’s how we forecast revenue, but we’re basically getting all the revenue up front. So, let’s just say we’re going to do a million dollar deal, we get a million dollars up front, we get a $75,000 a year service contract, and that’s kind of the model. Now we’ve gone towards that million dollars that gets spread over five years, and oh, by the way, there’s some risk in it, because if the customer doesn’t achieve their outcomes, you’re going to make less money in that month. And we actually saw that.
Chris La Fratta: A lot of our solutions… we have a paper use solution for our picture archiving services, so when you get an image done on an MRI, or a CT, or whatever, it gets stored digitally and clinicians retrieve that and they work the images, and they read them and all that stuff. Well, during COVID, a lot of elective procedures were postponed. So, for the whole year, last year, people getting MRI scans or going in, in some cases, for things as serious as a bypass surgery, a lot of that was postponed for a long time, so the usage of those images went down and our revenue went down, and it’s a big hit. So, why would you still do it?
Chris La Fratta: I think why you would still do it, first and foremost, is this is the direction that industry is going, so if you don’t make the shift, you’re just going to become irrelevant in a few years. That’s one reason. But I think the second more compelling reason is, it deepens the partnership with your customer and it makes what you do really, really sticky. So, these customers that have been using your service as a service, it’s not easy to switch. It’s really, really difficult to migrate that data that might be in our systems, the competitor’s systems, or what have you, once you kind of make that shift, but I think you become sort of indispensable as a partner so the long term is worth it.
Chris La Fratta: The other thing I’d say is, if you go from that episodic revenue, and all of my peers who are listening to this podcast will tell you, you’ve got these huge fourth quarter hockey sticks. You got to make that Q4 number, everything’s being discounted, there’s so much pressure to make that revenue number. I mean, somebody has to sell it, supply chain has to deliver, I have to go out and install it, and all that stuff needs to happen. But if it’s recurring revenue, that recurring revenue just builds on itself, and builds on itself, and builds on itself, and builds on itself, you still have to renew it, and hopefully over the lifecycle, you’re expanding it, but it’s a lot more predictable, and it just makes running your quarterly business that much more sustainable. It’s a little bit easier.
Sarah Nicastro: Yeah. It’s just that initial transition. It’s this big hurdle and then you can start to see how it can be an improvement.
Chris La Fratta: I’m jealous, so jealous of the companies who started this way, like salesforce.com, because they didn’t have to make the shift. And then there are companies like IBM who said, “We’re not going to be in mainframes anymore, we’re going to shift totally to services,” and they kind of like made a bold decision. At Philips, we still do both, so it’s sometimes hard to kind of run both-
Sarah Nicastro: Straddle, yeah.
Chris La Fratta: … but there’s good reasons to do it. And I’ll tell you, the number one reason to do it is not every customer is ready to consume this way either. There’s still quite a few big customers that just aren’t interested. They want to buy capital and depreciate it over 10 years because that suits their operating model better. So, for us, it works being in both worlds at the same time. Sometimes I wish it wasn’t the case, because I think we can move faster, but we’re balancing it as well as we can.
Sarah Nicastro: Yeah. Okay. So, that’s a big one. The other one I’m wondering if we can just touch on quickly before we get to the other big one. And I say quickly, because I know that service is your world, not necessarily sales overall, but obviously, this is a complete shift for sales too, right? I mean, it’s a different value proposition, it’s expanding, really, the stakeholders within a customer organization that you need to be selling to, when you get into these adjacent services and all of that.
Sarah Nicastro: So, what have you seen in relation to what it takes to transition to selling that as a service model?
Chris La Fratta: Yeah, a few things there, I think. First of all, it’s not a department level sale anymore. You can’t go to the head of biomed, or the chief nurse of a unit, or the chief radiologist, it’s a C suite sell. So, that means the salespeople have to really up their game and learn how to talk to and sell to the C suite, because these tend to be longer term, and they tend to be enterprise wide. They are big bets on both sides of the equation.
Chris La Fratta: Second of all, the incentive schemes have to be taken into account. So, we have a really good sales executive within Philips who came over from Microsoft, and at Microsoft, remember, you used to buy Windows and Office and pay $300 for it, and you got the CDs, and Microsoft shifted from that model towards 360, which everything is online and downloadable. They had to change the comm plans for their people because of that. It means they weren’t getting the one time episodic hit any more. And so now you need to comp on total contract value over time and things like that, and that’s very different.
Chris La Fratta: And I think the last piece is, and I alluded to this a little bit in my last answer, but the renewal becomes a really important conversation, and expansion becomes a really important conversation. So, out in industry, you’ll hear people talk about success managers, customer success managers, which we’re still figuring out what that means for us in Philips, but part of it is making sure that when the renewal conversation comes up, that customer is so happy with the value that you’ve added that it’s not even a conversation. But it’s also things like, “Hey, you’re doing really well in these units of your hospital with the solution. Why don’t we go to the west building now, or why don’t we go to your children’s clinic, or whatever it is?” And so, it should provide you with a base to do that stuff. So, if you’re doing it well, you’re not hunting business as much, but it’s a different art form or different science, or however my sales colleagues would describe it. It’s just a new methodology.
Chris La Fratta: So, those are some of the thoughts around sales. I can’t emphasize that first point enough. Upping your game to be able to talk to the C suite. At Philips, we’ve sort of developed playbooks around how to do that. We have account executives who are identified as those people who should go in and have that conversation. And yeah, I mean, we’re on our journey. I can’t say we’ve solved it all yet, but we’ve had some success there. And even identifying the right customers. So, in the US, there’s a lot of consolidation going on around healthcare and stuff, lots of small hospitals, now you have these big integrated delivery networks, and some of them are kind of taking this journey and making this leap of faith with us. But like I said earlier, someone who just aren’t ready yet, they’ll be ready on their own time, so I think timing is really important as well.
Sarah Nicastro: Yeah. I would imagine it forces a closer relationship between service and sales too, right, because it’s just kind of a continuous cycle of that. Like you said, you don’t want to get to a point where it’s, they’re sold, they’re serviced, and then they need to be sold again, right? You want it to just be cohesive.
Chris La Fratta: Yeah. So, my sales counterpart, “Hey, I sold the equipment,” and he gets all that order intake and all that revenue, and I get the service. And so in a way, we kind of had our own P&L. There’s a dependency, of course. And that was just one thing. The solution is the equipment and services integrated as one thing. So, we can’t split it up anymore, we have to be side by side, and it forces that, and that’s actually a really good thing.
Sarah Nicastro: Yeah. And that’s probably a whole separate podcast on its own, right? Because I think the companies that are trying to do this with to P&Ls are the companies that are trying to innovate this way without the top level commitment to taking the business in that direction. I mean, it’s really tough to make this transition if everybody isn’t working in the same vein. But we’ll tackle that another time.
Sarah Nicastro: I want to get into one more big thing before we finish for today, which is, the thing we’ve alluded to but haven’t really discussed in detail yet is the fact that this requires a real significant shift in skillset, mindset of your technicians. And so, you touched on the fact that you gave them a choice, empowered them to decide, do they want to kind of expand their skillset and all of that, but I know you’ve also increased your use of contingent workers to be able to eliminate some of the, we’ll say, more traditional break/fix non value add work so that your technicians, you can focus on upskilling them, re-skilling them, expanding their skills, to have those consultative relationships and to do these different things. So, talk a little bit about that and what you’ve learned in making that work for Philips.
Chris La Fratta: Yeah. It’s a good topic. I mean, at the end of the day, you can only focus on so much, so you define what your core competencies are. And our core competencies have shifted from people who are really good mechanically and electrically to people more IT oriented, as I said, or people more consultative, which I think is even more kind of a unique skill.
Chris La Fratta: So, what we’ve determined over time is that that’s where we want to focus and develop folks. But guess why, at some point, when we ship product, there’s a loading dock where there’s tons of boxes of our stuff. And so, we used to pay our staff whatever their hourly rates are to unbox things, and to stage things, and to prep them so that they can go into the hospital. So, that’s a really easy example of where we’ve used third parties to kind of supplement. It’s not a skill that’s highly specialized, it’s not something that we want to develop a core competency in, and there’s some variability around demand. So, if we have a really big fourth quarter, I don’t want to hire 100 people and have them part of my fixed costs as we enter the next fiscal year, I want to be able to ramp them up and down as needed. So, it’s really helped there.
Chris La Fratta: But even if I say, “Okay, that’s some basic stuff. I’ll take it one step further,” we do a lot of staging of servers and equipment like that, and that’s pretty standard and can even be done remotely. So, there, even in the IT space, when it’s something fairly basic like loading an image onto a server or doing some configuration of a server, we start to work with third parties as well. If I have a third party that shows up on site, they are part of the Philips team, they get treated as if they were a Philips employee, they get the same training, in many cases, that our employees would get. We really do a lot to ensure the quality is there. It’s a little bit more difficult to control, if I’m honest with you. I mean, probably the worst story I can tell you is one of our third party guys fell asleep on a patient bed or stole a dessert off the lunch tray. I mean, these things kind of happen from time to time, so you do need a process to check in and make sure that the quality is there.
Chris La Fratta: But for us, I think the main benefit is being able to focus on what’s core, and it offsets some costs, of course, that’s part of the reason why we do it, and it allows for a lot more flexibility. So, it’s a tricky road to go down, but I think it’s important. Like I said, the approach we’ve taken is we’re allowing and promoting the development opportunities for our internal folks, so as we shift, we want them to come with us, but at the same time, where it doesn’t make sense for us to unbox equipment and to do basic configurations, we’re just going to use the contingent help. I mean, I think it’s happening everywhere.
Chris La Fratta: And it’s kind of interesting, people talk a lot about the gig economy, and I don’t know if a guy who works for Philips can change his field service engineer jacket and go in and work for Siemens, and on the next call, go in and work for GE. I don’t know if we’ll get there in healthcare because we’re a little bit specialized, but definitely, I see it as an increasing trend that any activity that’s not core, you’re working with a partner, and they are partners, and you’re giving them the training and you enable them to work on your behalf.
Sarah Nicastro: Yeah. And I think what you said at the beginning is spot on. You can’t do everything, right? So, if you’re going to work toward this world of creating more value, then you need to focus on fueling the skills to do that value added stuff instead of unboxing things, right? I mean, you’re not going to want to pay W2 employees to do all of those things, and this gives you that opportunity to unburden them with some of the things that you can leverage these other resources for so that they have the time, bandwidth, energy to commit to where you’re going and build their skills, right? So, I think it’s a really good point. I actually think that’s another area we could do a podcast on, because I agree it’s a direction we’re going in, but at least based on my conversations, I still have more people asking me, “So, what do you hear around contingent workers, and how, and how do you make sure they don’t fall asleep onsite? And how do you train them? And how do you control them?” All of those things.
Sarah Nicastro: So, I think it’s an area that will grow, but there’s a lot of people trying to sort out how to make it work, and I think that’s a different conversation. But the premise of incorporating that into your labor mix to free up your resources to progress and build skills in the direction of those solutions I think is very, very smart. So, we’ll have to hopefully have you back sometime.
Sarah Nicastro: Okay. So, last question, Chris, and you touched on this earlier, the future is data, right? That’s where we’re going, right? So, tell me a little bit more about that.
Chris La Fratta: Yeah. I mean, my vision of the future starts with Philips being an indispensable partner and helping hospitals achieve these outcomes that we’ve been talking about. So, we’ll become trusted advisors, bringing to bear all the experience and everything that we’ve learned by being a leader in healthcare, and pretty much present in every hospital and every health system in the world, but especially in North America.
Chris La Fratta: And so, I think about it this way. In certain segments, we have like 50, 50 plus percent market share, and that means for patients being treated with those devices, one out of every two, we’re collecting their data, and it’s all being saved now, right? Everything’s being saved, it all gets dumped into the data warehouses and all that. So, I think, like we were talking earlier, being able to harvest that data, I think it starts out with simple things like dashboards, like, I want to watch the patient flow through the hospital. I want to have a sort of command center where I can see everything happening. And we have that, in some senses. There are central organizations where they can monitor all the cardiac monitoring of the hospital in one place, and there are people behind all these LCDs, it’s kind of like a NOC but for healthcare.
Chris La Fratta: I think it starts with things simple like that, but then it gets into more advanced like, “How can we really harvest this information and use it to drive a better outcome? Is it machine learning and AI?” I’m actually not smart enough to tell you whether that stuff works because there’s a lot of hype about it, but there aren’t really good examples. But I certainly think that you can say, if a patient came in and he had these symptoms, and he was a man, and 50 years old, and whatever else his demographic information was, if you’ve seen 1,000 of those cases, how were they treated and which one had the best outcome? In my simple mind, those are ways that you can really provide a valuable service, that not only helps my customers, it helps mankind, it helps us stay in the hospital less, get diagnosed more precisely, and get back to our healthy lives.
Chris La Fratta: Philips actually is a big player right now for monitoring people at home. So, when you’re chronically ill, you don’t want to be in the hospital, doctors don’t want you in the hospital, so let’s figure out better ways to deliver telehealth, and that’s a big play for us. And I think data enables that and enables better outcomes there as well. So, if I were in school right now, I’d be becoming a data scientist because I think that’s where it’s at. And for companies like Philips, I think it’s yet another area where we can develop services and solutions and continue on this journey that we’ve started.
Sarah Nicastro: Absolutely, yeah. I have two sons, and my five year old son has type 1 diabetes, so I’ve never cared so much about medical data as I do now. But I mean, he has a continuous glucose monitor, and he has an insulin pump, and those two things don’t yet, at least the type he has, work together, right? But the advancements that you’re seeing in being able to leverage that data, to, if not find a cure, which hopefully is coming, be able to have the, they call it the artificial pancreas, right, it’s really cool.
Chris La Fratta: Yeah. And COVID, I think, last year forced a lot of that. There’s a healthcare provider out in the Midwest somewhere, huge, huge system, and I think they were doing like 4,000 telehealth visits a month before COVID, and now it’s like 80,000 telehealth visits a month. And it’s something that nobody wanted before the pandemic, now, docs like it better, patients like it better. I mean, they don’t have to leave the house and travel if it’s not that serious of an issue.
Chris La Fratta: I myself, I think it’s great. I’d rather call my doctor on the phone and say, “I think I have a rash,” and answer a couple of questions and get a prescription than interrupt my day and go into the hospital or in the doctor’s office where there are other sick people. So, I think it’s inevitable and technology will certainly enable it., and it’s just now even a bigger pool of data to pull from. So, yeah, I think that’s definitely a big part of what we’ll see in the next five to 10 years.
Sarah Nicastro: Cool. Well, Chris, thank you so much for coming and sharing. I love the vision. What Philips has accomplished is fantastic, and I appreciate you sharing that with us. I think it’ll be really helpful for our audience, and I’d love to have you back sometime.
Chris La Fratta: Sarah, thanks so much. It was really fun to talk about all this stuff with you, and yeah, I’d love to come back any time.
Sarah Nicastro: Awesome. You can check out more of our content by visiting us at futureoffieldservice.com. You can also find us on LinkedIn as well as Twitter @thefutureofFS. The Future of Field Service Podcast is published in partnership with IFS. You can learn more at ifs.com. As always, thanks for listening.