Royal Philips is a 140-year-old legacy company currently undergoing a massive tech transformation to standardize the end-to-end processes across all of its healthcare, lighting and consumer lifestyle businesses. In an interview with John Furrier and Dave Vellante at the Hewlett-Packard (HP) Big Data Conference last week week, Philips’ VP of Technology, Alan Nance, visited theCUBE to discuss the company’s revolutionary consumption-based IT model that could well be the benchmark of how business may be done in the near future.

• Solving the 85% Non-Differentiating IT Spend Issue

Philips is a diverse organization of stand-alone profit and loss (P&L) companies, each of which creates its own technology solutions. Three years ago, Philips’ CEO stated that 85 percent of the company’s IT spend was non-differentiating to Philips in the marketplace. It didn’t make any sense to have these highly customized systems. So Philips is now replacing all those systems with standard solutions, such as those from Salesforce.com and SAP SE.

Beneath that, the company is creating a cloud-based common infrastructure and operating platform that supports both the commercial and enterprise. Nance explained that this is a combination of seven consumption-based cloud services consisting of data analytics, connected devices and the Internet of Things, as well as the more traditional storage, compute, security and high-volume transport network, all controlled using one panel.

Pay for What You Use

When Furrier asked Nance to describe the consumption-based infrastructure, Nance began his response with a story of how Philips defines it. The company put all of its primary suppliers together in a room for four separate, day-long sessions and asked them what they believed consumption-based was. Everyone wrote it down, and then they all voted on them. When the voting was completed, Philips had a list of 12 things.

Although Nance didn’t specify what those 12 things were, he stated that consumption-based means there are no start-up, launching or termination charges, and that you pay for what you use.

“It’s really quite revolutionary in that respect because it’s the end of the ELA as we know it,” said Nance. There are 16 companies so far who have signed what Nance called “the consumption-based charter,” including HP, Amazon.com Inc., Rackspace Inc. and Dimension Data Holdings. He also noted that although Philips isn’t saying that this is the only way to do business with the company, if there’s no consumption-based arrangement, you will not be primarily considered.

The Challenges

The biggest challenge Philips has faced with its consumption-based model has been in procurement, legal and compliance. There are no requests for proposals (RFPs) because everything is pre-contracted and there isn’t a commitment. So for procurement, the RFP process goes out the window. In terms of finance, Philips used this for approvals that stated the investment, Capex or depreciation. Now, Nance sends out forms that read 0000. So, consumption-based does require a mindset change.

Security presents another issue because many of Philips’ Cloud suppliers haven’t looked at security or compliance from a global perspective.

• Improving Agility

The consumer lifestyle and healthcare sectors move extremely fast, so getting products out to the marketplace and having fast product turnover is incredibly essential for Philips. “Agility is the big thing. This is not a cost-saving exercise. This is about time-to-revenue,” Nance said in reference to the consumption-based model.

Another benefit of this agility is that Philips is now able to add new companies that are now critical in some of its value propositions, and then take them away in the same manner without long-term termination causes.

• Synchronicity with the Revenue

Nance stated that the biggest outcomes for Philips from this consumption-based model would be “synchronicity with the revenue.” He believes if the releases, upgrades and costs are in line with the revenue and are timed right, they will see great results. “The idea is that we get closer to the business, so that the ebb and flow of products, the ebb and flow of cost, mirrors the revenue of the company,” said Nance.

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