Identifying and Evaluating Winning IT Services
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This document discusses the importance of evaluating IT services to ensure business success, emphasizing that superior services are crucial alongside products. It outlines a framework for identifying and assessing winning IT services, highlighting the complexities involved in evaluating services due to their intangible nature and differing attributes like search, experience, and credence. The paper suggests that organizations develop a structured approach to evaluate perceived benefits and costs to identify suitable service providers that deliver value exceeding costs.
Identifying and Evaluating Winning IT Services
- 1. Identifying and Evaluating Winning IT ServicesWith services playing an increasingly vital role in the IT ecosystem, companies can use this framework, based on actual benefits and costs, to identify winning IT services attributes. Executive SummaryOver the last few decades, companies have come to understand that products alone are not suf- ficient to make them successful. Every brilliant product needs to have an equally brilliant wrapper of service to make it and the business success- ful. Many of the top product companies — such as Microsoft and SAP in software, or Mercedes- Benz and Audi in automotive — boast of superior services blended with their products. It is quite apparent that without a brilliantly designed service around a product, it is very difficult to be successful in business. So as enterprises design new services using a variety of models, a million dollar question arises — how to identi- fy and evaluate these services. This white paper proposes an approach focused on IT services to make things simpler. Given how IT services are designed today, span- ning multiple models and technologies, it has become highly difficult for enterprises to identify those offerings that can help them advance their businesses. Various models are presented, from staff augmentation to complex transformation engagements where the success of the program is related to the business outcome and, in some cases, revenue as well. There are cloud-based models such as software as a service (SaaS), plat- form as a service (PaaS) and infrastructure as a service (IaaS) which essentially could be complete black boxes where the customer only receives the services according to the business SLA and is not aware of any other details. Amid the explosion of service forms and flavors, it is essential for customers to develop a frame- work to identify and evaluate the right services for their needs. Moreover, since service offerings differ by vendor, it is nearly impossible for user companies to follow the standard routes of the L1 and T1 model, where contracts are awarded to the best technical solution or the lowest bidder (or both). This model was effective 20 years ago for standard defined services such as hiring secu- rity guards or for finding a plumber. However, with services growing in complexity and ambiguity, this model fails utterly. This white paper examines how to create a frame- work that can help identify winning service models. Like viral marketing, it is extremely dif- ficult to guarantee the success of any one model, • Cognizant 20-20 Insightscognizant 20-20 insights | october 2014
- 2. c 2 ognizant 20-20 insights but we believe that if service identification and evaluation is designed around a fundamen-tal framework, the odds of success are much higher. We think that by following this framework, companies buying IT services can consistently identify and evaluate winning services. We also have found that the same framework and model, with some minor alterations, could be adopted for purchasing other services as well. Welcome to the World of Services To appreciate why it is difficult to evaluate ser-vices, let us first examine services in detail. In the world of product homogeneity, services play a key role in differentiation. Since services are generated and consumed at the same time, cus-tomers are continuously involved in providing performance requirements and feedback. Where products with equivalent or similar functionality are available in the mass market, customer buying decisions heavily depend on services associated with those products. Most product companies try to create services around their products to make them more attractive to existing and new custom-ers. Services have now become a strong route for leading companies to grow their revenues. Why It Is Hard to Evaluate Service Alternatives Before making a purchase decision, end cus-tomers compare and evaluate the alternatives. Unfortunately, in the world of services this is often difficult to do. Three attribute types emerge as differentiators: • Search attributes: The tangible characteristics or features that could be easily seen or tried. Examples include the color or fabric of a shirt, or the processor speed of a PC. For any product or service that has “high” search attributes, it is usually easy to evaluate (e.g., an 8 megapixel camera is better than a 4 megapixel unit). • Experience attributes: These are the attributes that can only be experienced after the end customer’s purchase. A software vendor’s customer service, restaurant service, live entertainment performances, vacations and watching movies are some of the typical examples where the service/product needs to be experienced before it can be evaluated. Services usually have high experience attributes and hence are usually more difficult to evaluate. • Credence attributes: To make things even more difficult, these are characteristics or attributes that customers find difficult to evaluate even after immediate consumption. High-end services, such as a medical procedure, business process reengineering engagement and education services are very difficult to evaluate immediately after consumption. It usually takes months — and sometimes years — to accurately evaluate and judge the service. And due to the time lapse, the alternatives could have changed drastically. All these attributes add complexity to the nature of services; hence, dealing with services is more complex than dealing with products. Typically, services can be characterized by five “I”s:1 • Intangibility: Services are intangible and insubstantial. That makes it very difficult for customers to appreciate the value of services. • Inventory: Services cannot be stored for future use; they are often simultaneously generated and consumed. Since customers are “always right” from the inception to the consumption of services, services can be modified to meet customer-specific, dynamic requirements. They cannot be mass produced and forgotten. • Inseparability: Services have a great dependency on the service provider throughout their lifecycles, from inception to delivery to consumption. • Inconsistency: Each and every service is unique, and addresses the needs of a specific target audience. It cannot be exactly replicated at any later time for any customer. • Involvement: Customer participation is crucial in service delivery; as such, services can be modified based on their changing requirements. Understanding the IT Services Lifecycle Based on our finding that traditional IT services companies progress along the above five incre-mental levels of value creation over time, and after examining the offerings of various compa-nies throughout the last 20 years pre-cloud, we have come to the conclusion that IT services are identified, procured and implemented uniformly over time (see Figure 1 on the following page).
- 3. cognizant 20-20 insights 3 We call this the IT services continuum, comprising the following levels: • Cost/labor arbitrage. • Infrastructure arbitrage. • Consulting. • Transformation. • Innovation. We believe that as IT services companies mature, they start to move gradually from the left side of the curve to the right side of the curve, offering more complex services along the way. The Challenge in Identifying and Evaluating IT Services According to our study, as time progresses and IT services mature, organizations move slowly but surely to the right and follow a path toward higher value creation. It is similar for end-user compa-nies as well. Companies that are new to global IT services usually start with the first or second level of services. With more experience, these companies move on to procuring higher levels. This progressive journey typically begins with cost or labor arbitrage. Depending on the loca-tion of delivery and the location of resources, the company sees IT service delivery by a third party as a less expensive option. Using just two factors makes it easier for organizations to iden-tify and evaluate a partner of choice — though the quality and cost of delivery still need to come in at an acceptable level. However, with similar prices offered by multiple service providers and similar quality of resources, it became difficult for the customers to differentiate. And it became difficult for IT services companies to sell their offerings primarily on the basis of cost. Hence, many players moved into the next level by using infrastructure arbitrage. To achieve the benefits of infrastructure arbi-trage, service providers relied on locational diversity and scalability. As a result, additional evaluation points were added for issues such as capacity, lead time, number of delivery centers, etc. The concepts of near-shore, far-shore and follow-the-sun were then introduced as ways for providers to differentiate themselves. Over time, however, these factors also became common-place and were imitated by all competitors. This again posed a problem for both user companies and providers to evaluate and differentiate the competitive space. To remain relevant, providers developed 2.0 versions that focused primarily on consulting engagements. Over time, IT services companies understood that while the consulting piece of large engagements generated only 20% of revenues, they had the potential to control the remaining 80% of downstream revenue. Most IT service companies then built consulting skills to differ-entiate themselves. The industry then reached a tipping point where standard RFP parameters of T1 and L1 began failing. The reason: Consulting cannot be evaluated easily. The results of most pure consulting engagements can be measured only over the long term, typically with a minimum time frame of 18 to 24 months. So how could enterprises evaluate the services that only lasted for three months while the results were expected in the future? The final two levels of transformational services and innovation are still evolving so it is hard to draw any meaningful conclusions. IT services companies are now engaging in enter-prise transformation using IT and non-IT services, with success measured by the business outcome. As explained above, these kinds of services are very high in credence attributes. Business process reengineering projects, for example, can typically take two to three years after the service is pro-cured for benefits to be fully realized. Hence, it is next to impossible to identify and evaluate the right partner through a traditional RFP process. The IT Service Continuum Cost/Labor Arbitrage Infrastructure Arbitrage Consulting Transformation Innovation Value Creation Time Cost Control > Focus on Core Competencies > Business Transformation Figure 1
- 4. cognizant 20-20 insights 4 Last but not least is the level of innovation ser-vices, where the end-user company and provider cocreate intellectual properties. This is usually in the form of disruptive processes and technolo-gies, such as ERP systems designed for specific industry sectors or cloud solutions for particular sets of customers. Our Solution To help enterprises identify and evaluate the right service partners along the right parameters, we have developed a simple but logical framework (see Figure 2). Every service type/level is evalu-ated across levels of complexity varying from “easy to evaluate” to “difficult to evaluate,” and will not be evaluated on the same scale or with the same parameters. The position that a service would occupy in the continuum is based on the attributes, or features, compared — search, expe-rience and credence. For instance, a cell phone purchase decision is product-oriented and is characterized by a set of well-defined attributes in terms of performance, size, weight and several other easily searchable attributes. As we move from immediate product- consumption-based services to actual services consumption such as high-touch consulting ser-vices, many intangible elements come into play to form a cohesive customer experience that is realized over a long period of time. To explain this concept in an easy way, we have created what we call a “service measurement continuum.” While different strategies work for services at different levels of the service continuum, one common concept holds true across all types of services we have discussed. The single binding thread that holds all of these things together — and forms the fulcrum of our framework — is value. As long as services/products are designed properly to satisfy the value element, and have a proper mechanism for exhibiting or conveying that value to customers, enterprises will perceive value in them. In short, as long as the value deliv-ered by a service and service provider exceeds or equals the perceived cost, end-user companies should be interested in considering it. The follow-ing equation2 captures our thinking: Net Value = Perceived Benefits — Perceived Cost (Equation 1) This equation simplifies the evaluation parame-ters considerably. End customers need only check to see if the net value is >0, which means if the perceived benefit is greater than the perceived cost. So, in simple terms, the customer needs to check if he/she is deriving more value or bene-fit than what he/she is paying for the service. If so, then the partner that provides the maximum value is the right partner for providing the win-ning services. Now to use this model to evaluate partners, end customers need to see the mone-tary value of the perceived benefits and costs of each provider. Perceiving Benefits and Costs It is important to capture the details of each of the items mentioned in the previous equation. Perceived Benefit Perceived benefit could be defined as below: • Perceived Benefit = Monetary Benefit + Non-monetary Benefit (Equation 1a) • Characterized by defined search attributes. • Immediate outcome. • E.g., Mobile phone. • Prepurchase evaluation possible. • Characterized by experience. • Intermediate outcome. • E.g., Movie. • Evaluation based on actual experience. • Characterized by credentials. • Long-term outcome that is experienced over a tenure. • Greater scope for ambiguity. • E.g., Medical treatment for a critical disease. 1 2 3 4 5 EASY TO EVALUATE DIFFICULT TO EVALUATE Service Measurement Continuum Figure 2
- 5. cognizant 20-20 insights 5 In other simple words, the benefit perceived by the customer is always a sum of tangible and non-tangible results. • Monetary Benefit: While it is usually easy to define or calculate the tangible results, it is usually difficult to obtain the quantifi-able number for the non-monetary value. We believe using standard RFP parameters as well as established metrics it is possible to evaluate the first part of the equation easily. The most used model of evaluation covers the ROI calculations that highlight the over-all business benefits achieved. Evaluating the TCO calculations over a period of time also is an important tool for end-user companies to capture a detailed understanding of the over-all cost. • Non-monetary Benefit: However, it is not easy for all customers to calculate non-monetary value. Hence, it becomes difficult to arrive at the total value of the perceived benefit. While this varies per company, based on our extensive experience we are providing organi-zations with a list of a few elements that could be considered when calculating the overall per-ceived benefit resulting from services provided by the service provider. > > Increased end-user satisfaction resulting from the service provided is usually mea-sured by customer satisfaction surveys: Satisfied, or happy, users are usually more productive in an organization. > > Increases in end-user productivity result-ing from the service (e.g., anywhere access, bring your own device, etc.). > > Increase in business efficiency and effective-ness (e.g., use of cloud computing and doing more for less). > > Reduction of risks associated with business (e.g., reducing downtime or unplanned shut-down of business). > > Increase in overall brand value, as measured by a rise in the net promoter score. > > Creation of unique points of difference (PODs) or unique selling points. While the list above is not complete or compre-hensive, it could help organizations understand the different areas that should be considered while calculating non-monetary benefits. Perceived Cost After assessing perceived benefits, the only thing that remains is to identify a model to evaluate the perceived cost of service delivery. We suggest the following equation:3 Perceived Cost = Price + Related and Unrelated Non-monetary Costs (Equation 1b) Both parts of the equation are equally important. However, they need to be handled in different ways. • Price: There are normally three ways in which prices are determined for any service: > > Cost-plus model. > > Competition-based model. > > Value-based pricing. Our model takes a unique approach, one that presents the entire pricing strategy as a contin-uum. The five services highlit in Figure 1 can be plotted on this continuum (see Figure 3). Figure 3 IT Service Pricing Continuum 1 2 3 4 5 COST PLUS MODEL COMPETITION-BASED MODEL VALUE-BASED PRICING Cost/Labor Arbitrage Infrastructure Arbitrage Consulting Transformation Innovation
- 6. cognizant 20-20 insights 6 With low-end services that use the cost/labor arbitrage or infrastructure arbitrage model, end- user companies should ask for the lowest possible price and expect a cost-plus model. However, for services that are difficult to evaluate and are highly experiential, it is important to ask service providers for value-based pricing. Our view is that a company buying the complete range of services should not accept the same pricing models for all services. In our experi-ence, most companies look for a cost-plus pricing model as the standard. However, we suggest that they examine the price continuum and the posi-tion of the service offered, and then decide the most appropriate pricing strategy. For high-end or complex services, the lowest price may not always be suitable. Organizations should look at the overall value and benefit that can be derived from the services offered by the provider. Related and Unrelated Nonmonetary Costs For end-user companies, it is also important to make sure that nonmonetary costs are also calcu-lated as part of the overall cost evaluation. Major nonmonetary costs include: • Related: > > Transaction cost for entering the contract. > > Resource required to manage the contract. > > Resource required to verify the service de-liverables. > > Space and asset allocations. > > Increased risk and its monetary value. > > Increased cost in communication and col-laboration tools. > > Transactions for terminating the contract. Unrelated: > > Impact of the sourcing contract on the mo-rale of the IT team. > > Lack of innovation and new ideas from the service provider as it is primarily focused on the contract deliverables. > > Change of end-user perception. > > Risks associated to work with resources not present in the location. > > Overall change of the IT strategy. > > Impact of the loss of control. As mentioned above, end-user companies should spend enough time to find ways and means of evaluating nonmonetary costs because they have a significant impact on perceived costs. While it is relatively easy to evaluate the price, it is very dif-ficult to ascertain the exact nonmonetary costs as there are multiple levers of influence and drivers. Looking Ahead Our model for identifying and evaluating servic-es is based on two continuums and the equation of perceived net value. As mentioned throughout this white paper, it is important to differentiate the types of services and decide which parame-ters to evaluate. It is impossible to identify and evaluate all the different types of services using the same parameters. Therefore, whenever an IT services company plans to offer a new service it is important to understand where it is situated in the service measurement continuum. The end-user compa-ny should learn if the service offered is high on search attributes, experience or credence. Once the position in the continuum is identified, end- user companies should have a proper framework and parameter for evaluating and comparing those services, as discussed above. While cost and quality could be the only factors of evaluation for the primary levels of IT servic-es (e.g., labor arbitrage/infrastructure arbitrage), they would be insufficient measures to evaluate the higher levels of service. For higher levels of IT services, companies must examine the value equation and make assessments based on the values provided and the perceived benefits. However, if the service is new — and thus lacking industry standards — then the end-user company needs to assess the values in the service that will resonate with their users.
- 7. Footnotes 1 http://en.wikipedia.org/wiki/Service_(economics). 2 Adapted from “Service Marketing,” by Christopher Lovelock, Jochen Wirtz and Jayanta Chatterjee, p. 141. 3 Adapted from “Service Marketing,” by Christopher Lovelock, Jochen Wirtz and Jayanta Chatterjee, p. 142. About the Authors Duswanta Roy is a Director within Cognizant’s IT IS Business Unit. He has worked in the areas of service marketing for the last 10 years, specializing in creating new service offerings. Duswanta has worked in leading consulting and services organizations across the globe and holds a master’s degree in electronics and an M.B.A. from the Indian Institute of Management. He also has a diploma in advanced marketing from Wharton School, University of Pennsylvania. Duswanta can be reached at Duswanta.Roy@cognizant.com. Litisa Senapati is a Senior Consultant within Cognizant’s IT IS Business Unit, where she helps customers recognize tangible benefits by implementing transformation themes and initiatives. She holds a post- graduate diploma in business management and a bachelor’s degree in engineering from Birla Institute of Technology. Litisa can be reached at Litisa.Senapati@cognizant.com. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 178,600 employees as of March 31, 2014, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 20 7297 7600 Fax: +44 (0) 20 7121 0102 Email: infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: inquiryindia@cognizant.com © Copyright 2014, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.