Unit 1 chap2 it service management

3 Service strategy principles
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3.1 Value creation
• 3.1.1 Mind the gap
• 3.1.2 Marketing mindset
• 3.1.3 Framing the value of services
• 3.1.4 Communicating utility
• 3.1.5 Communicating warranty
• 3.1.6 Combined effect of utility and warranty
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3.1.1 Mind the gap
• Value is defined not only strictly in terms of the customer’s
business outcomes: it is also highly dependent on
customer’s perceptions.
• Perceptions are influenced by attributes of a service that
are indications of value, present or prior experiences with
similar attributes, and relative endowment of competitors
and other peers.
• The value of a service takes on many forms, and customers
have preferences influenced by their perceptions.
• Perceptions of value are influenced by expectations.
Customers have reference values on which they base their
perceptions of added value from a service.
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• The reference value may be vaguely defined or based
on hard facts.
• What matters is that it is important for the service
provider to understand and get a sense of what this
reference value is.
• This may be obtained through extensive dialogue with
the customer, prior experience with the same or a
similar customer, or through research and analysis
available in the market.
• The economic value of the service is the sum of this
reference value and the net difference in value the
customer associates with the offered service.
• Positive difference comes from the utility and warranty
of the service. Negative difference comes from losses
suffered by the customer from utilizing the service due
to poor quality or hidden costs.
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3.1.2 Marketing mindset
• What are the outcomes that matter?
• How are they identified and ranked in terms of
customer perceptions and preferences?
• Effectiveness in answering such questions requires a
marketing mindset, which is quite different from
engineering and operations mindsets.
• Rather than focusing inward on the production of
services, there is a need to look from the outside in,
from the customer’s perspective. A marketing mindset
begins with simple questions:
– What is our business?
– Who is our customer?
– What does the customer value?
– Who depends on our services?
– How do they use our services?
– Why are they valuable to them?
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• With a marketing mindset it is possible to
understand the components of value from the
customer’s perspective.
• Value consists of two components: utility or
fitness for purpose and warranty or fitness for
use.
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• Fitness for purpose comes from the attributes
of the service that have a positive effect on
the performance of activities, objects, and
tasks associated with desired outcomes.
Removal or relaxation of constraints on
performance is also perceived as a positive
effect.
• Fitness for use comes from the positive effect
being available when needed, in sufficient
capacity or magnitude, and dependably in
terms of continuity and security.
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3.1.3 Framing the value of services
• There is scepticism about the value realized from
services when there is uncertainty in the service
output.
• It is not good for the customer that there is certainty in
costs and uncertainty in utility from one unit of output
to another.
• When the utility of a service is not backed up by
warranty, customers worry about possible losses due
to poor service quality more than the possible gains
from receiving the promised utility.
• To allay such concerns and influence customer
perceptions of possible gains and losses, it is important
that the value of a service is fully described in terms of
utility and warranty.
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• The utility effect of a service is explained as
the increase in possible gains from the
performance of customer assets, leading to an
increase in the probability of achieving
outcomes (Figure 3.3).
• Warranty of services is explained as the
decrease in possible losses for the customer
from variation in performance (Figure 3.4).
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• This approach can change customer
perceptions of uncertainty in the promised
• benefits of a service. Customers expect to see
a strong link between the
• utilization of a service and the positive effect
on the performance of their own
• assets, leading to higher return on assets
(Figure 3.5).
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3.1.4 Communicating utility
• 3.1.4.1 In terms of outcomes supported
• Take the example of a bank that earns profit from lending money to
credit-worthy customers who pay fees and interest on loans.
• The bank would like to disburse as many good loans as possible
within a time period (desired outcome).
• The bank has a lending process that includes the activity of
determining the credit rating of loan applicants.
• The bank uses a commercial credit reporting service, which is
available over the phone and internet.
• The service provider undertakes to supply accurate, comprehensive,
and current information on loan applicants in under a minute.
• The utility of a credit reporting service is from the high quality of
information it provides to the lending process (customer asset) to
determine the credit-worthiness of borrowers, so that loan
applications may be approved in a timely manner after calculating
all the risks for the applicant.
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• 3.1.4.2 In terms of ownership costs and risks
avoided
• Value of the credit-reporting service also
comes from the lending division being
• able to avoid certain costs and risks it would
incur from operating a credit inquiry
• system on its own instead of using the
reporting service.
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• By using a credit reporting service rather than
operating a credit reporting system, the lending
division is deliberately avoiding specific risks and
costs.
• In effect, the lending division frees itself from
certain business constraints.
• Such trade-offs are made by the senior leadership
of customers who are in the best position to
decide.
• The senior leadership of service providers
become business partners when they are able to
support their counterparts in managing
constraints on business strategies.
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3.1.5 Communicating warranty
• Warranty ensures the utility of the service is available
as needed with sufficient capacity, continuity and
security.
• Customers cannot realize the promised value of a
service that is fit for purpose when it is not fit for use.
Warranties in general are part of the value proposition
that influences customers to buy.
• For customers to realize the expected benefits of
manufactured goods utility is necessary but not
sufficient.
• Defects and malfunctions make a product either
unavailable for use or diminish its functional capacity.
Warranties assure the products will retain form and
function for a specified period under certain specified
conditions of use and maintenance.
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3.1.5.1 Availability
• Availability is the most elementary aspect of
assuring value to customers.
• It assures the customer that services will be
available for use under agreed terms and
conditions.
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3.1.5.2 Capacity
• Capacity is an assurance that the service will
support a specified level of business activity or
demand at a specified level of quality.
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3.1.5.3 Continuity
• Continuity assures the service will continue to
support the business through major failures or
disruptive events.
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3.1.5.4 Security
• Security assures that the utilization of services
by customers will be secure.
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3.1.6 Combined effect of utility and warranty
• Value creation is the combined effect of utility
and warranty. Value for customers can be
increased by either of the two factors.
• Both are necessary: neither is sufficient by
itself.
• Each should be considered a separate factor of
value creation (Figure 3.7).
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Case example 2 (solution): Warranty and utility.
• The slogan ‘Can you hear me now?’
differentiates value based on a customer’s
desire for warranty: service availability
regardless of location.
• The slogan ‘Fair and Flexible’ differentiates
value based on a customer’s desire for utility:
fair pricing under a variety of service usage
scenarios
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3.2 Service assets
• 3.2.1 Resources and capabilities
• 3.2.2 Business units and service units
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3.2.1 Resources and capabilities
• Resources and capabilities are types of assets (Figure
3.8).
• Organizations use them to create value in the form of
goods and services. Resources are direct inputs for
production.
• Management, organization, people, and knowledge are
used to transform resources.
• Capabilities represent an organization’s ability to
coordinate, control, and deploy resources to produce
value.
• They are typically experience-driven, knowledge-
intensive, information-based, and firmly embedded
within an organization’s people, systems, processes
and technologies.
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3.2.2 Business units and service units
• 3.2.2.1 The business unit
• A business unit is simply a bundle of assets meant to
create value for customers in the form of goods and
services (Figure 3.9).
• Customers pay for the value they receive, which
ensures that the business unit maintains an adequate
return on assets.
• The relationship is good as long as the customer
receives value and the business unit recovers costs and
receives some form of compensation or profit.
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• 3.2.2.2 The service unit
• Service units are like business units, a bundle of
service assets that specializes in creating value in
the form of services (Figure 3.10).
• Services define the relationship between business
units and service units. In many instances,
business units (customers) and service units are
part of the same organization.
• In other instances service units are separate legal
entities.
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3.3 Service provider types
• 3.3.1 Type I (internal service provider)
• 3.3.2 Type II (shared services unit)
• 3.3.3 Type III (external service provider)
• 3.3.4 How do customers choose between
types?
• 3.3.5 The relative advantage of incumbency
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3.3.1 Type I (internal service provider)
• Type I providers are typically business functions
embedded within the business units they serve.
• The business units themselves may be part of a
larger enterprise or parent organization. Business
functions such as finance, administration,
logistics, human resources, and IT provide
services required by various parts of the business.
• They are funded by overheads and are required
to operate strictly within the mandates of the
business.
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• Type I providers operate within internal market
spaces.
• Their growth is limited by the growth of the
business unit they belong to.
• Each business unit (BU) may have its own Type I
provider (Figure 3.12).
• The success of Type I providers is not measured in
terms of revenues or profits because they tend to
operate on a cost recovery basis with internal
funding.
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3.3.2 Type II (shared services unit)
• Functions such as finance, IT, human resources, and
logistics are not always at the core of an organization’s
competitive advantage.
• Instead, the services of such shared functions are
consolidated into an autonomous special unit called a
shared services unit (SSU) (Figure 3.13).
• Like corporate business functions, they can leverage
opportunities across the enterprise and spread their costs
and risks across a wider base.
• Customers of Type II are business units under a corporate
parent, common stakeholders, and an enterprise-level
strategy.
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3.3.3 Type III (external service provider)
• The business strategies of customers sometimes require capabilities
readily available from a Type III provider.
• Type III providers can offer competitive prices and drive down unit
costs by consolidating demand.
• Certain business strategies are not adequately served by internal
service providers such as Type I and Type II.
• Customers may pursue sourcing strategies requiring services from
external providers.
• The motivation may be access to knowledge, experience, scale,
scope, capabilities, and resources that are either beyond the reach
of the organization or outside the scope of a carefully considered
investment portfolio.
• For such customers, Type III is the best choice for a given set of
services (Figure 3.14).
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3.3.4 How do customers choose
between types?
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3.3.5 The relative advantage of
incumbency
• Lasting relationships with customers allow
organizations to learn and improve.
• Fewer errors are made, investments are
recovered, and the resulting cost advantage
can be leveraged to increase the gap with
competition.
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• Customers find it less attractive to turn away
from well-performing incumbents because of
switching costs.
• Experience can be used to improve assets
such as processes, knowledge, and the
competencies that are strategic in nature.
• Service providers must therefore focus on
providing the basis for a lasting relationship
with customers.
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3.4 Service structures
• 3.4.1 From value chains to value networks
• 3.4.2 Service systems
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3.4.1 From value chains to value networks
• Business executives have long described the
process of creating value as links in a value chain.
• This model is based on the industrial age
production line: a series of value-adding activities
connecting an organization’s supply side with its
demand side.
• Each service provides value through a sequence
of events leading to the delivery, consumption
and maintenance of that particular service.
• By analysing each stage in the chain, we can find
opportunities for improvements.
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• Much of the value of service management,
however, is intangible and complex.
• It includes knowledge and benefits such as
technical expertise, strategic information,
process knowledge and collaborative design.
• Often the value lies in how these intangibles
are combined, packaged, and exchanged.
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• Value chains is an important tool. They provide a
strategy for vertically integrating and coordinating the
dedicated assets required for product development.
• If there was a problem or delay, it was because of a
weak or missing link in the chain.
• In this traditional service model, there are three roles:
the business, the service provider and the supplier.
• The service provider acquires goods and services from
its suppliers and assembles them to produce new
services to meet the needs of the business. The
business, or customer, is the last link in the chain.
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• It is important to understand the most
powerful force to disrupt conventional value
chains: the low cost of information.
Information was the glue that held the vertical
integration.
• Getting the necessary information to suppliers
and service providers has historically been
expensive, requiring dedicated assets and
proprietary systems.
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Value network
• A value network is a web of relationships that
generates tangible and intangible value through
complex dynamic exchanges through two or more
organizations.
• From a systems thinking perspective it is more
useful to think of service management as a value
network or net.
• Any group of organizations engaged in both
tangible and intangible exchanges is viewed as a
value network (Figures 3.17 and 3.18), whether
or not they are in the same self-contained
enterprise, whether private industry or public
sector.
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3.4.2 Service systems
• Services are often characterized by complex
networks of value flows and forms of value,
often involving many parties that influence
each other in many ways.
• Value nets serve to communicate the model in
a clear and simple way.
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• The core enterprise is the central point of
execution, rather than one actor in a chain,
and is responsible for the whole value
network.
• This includes the infrastructure by which other
business partners can collaborate to deliver
goods and services.
• Intangible exchanges are not just activities
that support the service; they are the service.
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• First consider customer expectation. Only then
consider the resources and capabilities
required to deliver services.
• This model requires high-performance
information flows, not rigid supply chains.
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• The pervasive examples of banking ATMs, airport
kiosks, and online reservation systems illustrate
this is no longer the case.
• Collaborative services such as Wikipedia, YouTube
and Second Life suggest increasing levels of
sophistication in customer interactions.
• As customers and suppliers become the direct
users of IT Services, the expectations and
requirements become more demanding –
requiring a value net approach.
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3.5 Service strategy fundamentals
• 3.5.1 Fundamental aspects of strategy
• 3.5.2 The Four Ps of strategy
• 3.5.3 Strategy as a perspective
• 3.5.4 Strategy as a position
• 3.5.5 Strategy as a plan
• 3.5.6 Strategy as a pattern
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3.5.1 Fundamental aspects of strategy
Strategic thought and action are difficult for the following
reasons:
• • A level of comfort is necessary in dealing with
complexity, uncertainty and conflict beyond the
comfort zones of experience and codes of practice.
• • It is necessary to discern patterns, to project trends,
and to estimate probabilities.
• • One must consider all factors including the
interactions between them.
• • It is important to delve into underlying principles and
when all else fails, it is often necessary to fall back on
basic theory.
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• A good business model describes the means of
fulfilling an organization’s objectives.
• However, without a strategy that in some way
makes a service provider uniquely valuable to the
customer, there is little to prevent alternatives
from displacing the organization, degrading its
mission or entering its market space.
• A service strategy therefore defines a unique
approach for delivering better value.
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• Customers continually seek to improve their business
models and strategies.
• They want solutions that break through performance
barriers – and achieve higher quality of outcomes in
business processes with little or no increase in cost, as
in Figure 3.23.
• Such solutions are usually made available through
innovative products and services.
• If such solutions are not available within a customer’s
existing span of control, service contracts, or value
network, they are compelled to look elsewhere.
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• First, acknowledge that there exist other
organizations whose aims are to compete with
yours.
• Even government agencies are subject to
competitive forces.
• Second, decide on an objective or end-state
that differentiates the value of what you do,
or how you do it, so that customers believe
there is no true alternative.
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• The basic premise of service strategy is that
service providers must meet objectives
defined in terms of their customers’ business
outcomes while subject to a system of
constraints.
• A service strategy is sometimes thought of as
a future course of action.
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• But there are shortcomings with this definition of
service strategy.
• The first problem is conditions change. The pace
of business change is quickening, no matter how
large or small your organization or in what
industry you compete. Opportunities arise while
others disappear.
• The second problem is the constant focus on
improving operational effectiveness. Operational
effectiveness is absolutely necessary, but is not
enough. A service strategy explains how a service
provider will do better.
• The third problem is ‘value capture’. Plans are not
well suited to provide the ongoing insight needed
to maintain a value capture capability.
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3.5.2 The Four Ps of strategy
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• Perspective – describes a vision and direction.
A strategic perspective articulates the
business philosophy of interacting with the
customer or the manner in which services are
provided.
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• Position – describes the decision to adopt a
well-defined stance. Should the provider
compete on the basis of value or low cost?
Specialized or broad sets of services? Should
value be biased towards utility or warranty?
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• Plan – describes the means of transitioning
from ‘as is’ to ‘to be’.
• Pattern – describes a series of consistent
decisions and actions over time. A service
provider who continually offers specific
services with deep expertise is adopting a
‘high-value’ or ‘high-end’ service strategy.
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3.5.3 Strategy as a perspective
• Strategy as a perspective defines the
governing set of beliefs, values, and a sense of
purpose shared by the entire organization.
• It sets the overall direction in which the
service provider moves to fulfil its purpose
and construct its performance anatomy.
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• Perspective is attained with the help of
clarifying questions asked within the context
of the service provider’s stakeholders, which
includes primarily its owners, its customers,
and its employees.
• Conversely, well-defined perspective serves as
a reference for subsequent positions, plans, or
patterns of action the service provider may
adopt and enact.
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3.5.4 Strategy as a position
• Strategy as a position is expressed as
distinctiveness in the minds of customers.
• This often means competing in the same space as
others but with a differentiated value proposition
that is attractive to the customer.
• Whether it is about offering a wide range of
services to a particular type of customer, or being
the lowest-cost option, it is a strategic position.
• Three broad types of positions are variety-based
positions, needs-based positions, and access-
based positions.
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3.5.4.1 Variety-based positioning
• Variety-based positioning focuses on a
particular variety of customers’ needs and
aims to meet them in distinctive fashion.
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3.5.4.2 Needs-based positioning
• In needs-based positioning, service providers
choose to provide most or all of the needs of a
particular type of customer (Figure 3.27).
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3.5.4.3 Access-based positioning
• In access-based positioning, service providers
distinguish themselves through their ability to
serve customers with particular needs with
respect to location, scale, or structures (Figure
3.28).
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3.5.5 Strategy as a plan
• Strategy as a plan is a course of action from
one point to another within a competitive
scenario. Often referred to as an intended
strategy, it is the deliberate course of action
charting a path towards strategic objectives.
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3.5.6 Strategy as a pattern
• Strategy as a pattern is an organization’s
fundamental way of doing things. They are the
basis of what are called emergent strategies,
distinctive patterns in action reinforced over
time by repeated success.
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• Service management can be viewed as an
adaptive network of patterns through which
strategic objectives are realized. Some
patterns in action are shown in Table 3.1.
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Unit 1 chap2 it service management

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Unit 1 chap2 it service management