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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. For example, the costs of maintaining capabilities and
resources required to
operate a credit reporting system would be borne entirely by the lending division. The
cost per credit report would become prohibitive within the
scope of the loan approval process, and would have to be passed on to the cost of the loan or be absorbed elsewhere within the banking system. Under prevailing conditions, buying the service turns out to be a good decision for the bank. It increases gains and reduces losses.
An alternative strategy is for the lending division to convince other divisions within the same bank, financial services group, or industry to use its credit reporting system. This may be a viable option in which the lending division would now offer a credit reporting service to lenders along with its core service to borrowers. This is a strategic choice that has to be made by the senior managers of the lending division and their leadership at the bank. The risks of such a choice include the lending division straying from its core capabilities, inability to convince others of its competence, and attracting too little demand to make the credit reporting service economically viable.
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. Sets of constraints are often traded for others provided the overall performance of the business is not lessened. 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.
From the business perspective in the example above, service providers support the business strategies of their customers by removing or relaxing certain types of constraints on business models and strategies. The constraints are of the type that imposes specific costs and risks that customers wish to avoid, as follows:
Maintaining non-core and under-utilized assets: customers would like to avoid ownership and control of assets which drain financial resources from core assets, and those used rarely or sporadically. In such cases the return on assets is typically low or uncertain, making the investments risky.
Opportunity costs due to limited capacity and overloaded assets: assets that are overloaded are unable to serve additional units of demand or accommodate unexpected surges in demand. Insufficient capacity also means that new opportunities cannot be pursued with high probability of success.
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. Warranties are void outside such conditions. Normal wear and tear is not covered. Most importantly, customers are owners and operators of purchased goods.
In the case of services, the customers are neither the owners nor the operators of service assets that provide utility. That responsibility is with service providers along with maintenance and improvements. Customers simply utilize the service. There is no wear and tear, misuse, neglect, and damage of service assets limiting the validity of warranty.
Service providers communicate the value of warranty in terms of levels of certainty. Their ability to manage service assets instils confidence in the customer about the support for business outcomes. Warranty is stated in terms of the availability, capacity, continuity and security of the utilization of services.
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. The availability of a service is its most readily perceived attribute from a user’s perspective. A service is available only if users can access it in an agreed manner. Perceptions and preferences vary by customer and by business context. The customer is responsible for managing the expectations and needs of its users. Within specified conditions, such as area of coverage, periods, and delivery channels, services are expected to be available to users that the customer authorizes.
Availability of a service is more subtle than a binary evaluation of available and unavailable. The customer’s tolerance for graceful degradation of availability should be determined and factored into service design. For example, if a subset of users is responsible for a vital businessfunction, service instances for these users can be hosted on dedicated resources with fault tolerance so that the customer retains some critical capability to operate.
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. Customers drive business activity with the assurance of adequate capacity. Variations in demand are accommodated within an agreed range. Service providers undertake to maintain resources to give customers freedom from capacity shortfalls and underutilized assets. Capacity is of particular importance where the utility of the service arises from access to shared resources. Service providers help customers with shortages during periods of peak-demand.
Guaranteed capacity during particular periods or at particular locations is also valuable to customers who need to start up new or expanded operations with time-to-market as a critical success factor. Such business plans require low set-up costs and lead times. Additionally, due to the high-risks of new or expanded operations, customers may prefer not to make the investments required to own and operate business assets. Businesses that face highly uncertain demand from their own customers also find value in services on demand with little or no latency. Opportunity costs are high in terms of lost customers.
Without effective management of capacity, service providers will not be able to deliver the utility of most services. Capacity Management is a critical aspect of service management because it has a direct impact on the availability of services. The capacity available to support services also has an impact on the level of service continuity committed or delivered. Effective management of service capacity can therefore have first-order and second-order effects on service warranty.
3.1.5.3 Continuity
Continuity assures the service will continue to support the business through major failures or disruptive events. The service provider undertakes to maintain service assets that will provide a sufficient level of contingency and recovery. Specialized systems and processes will kick in to ensure that the service levels received by the customer’s assets do not fall below a predefined level. Assurance also includes the restoration or normalcy in a predefined time to limit the overall impact of a failure or event. Continuity is assured primarily through redundancy and dedicated resources isolated from ripple effects.
3.1.5.4 Security
Security assures that the utilization of services by customers will be secure. This means that customer assets within the scope of service delivery and support will not be exposed to certain risks. Service providers undertake to implement general and service-level controls that will ensure that the value provided to customers is complete and not eroded by any avoidable costs and risks. Service security covers the following aspects of reducing risks:
Authorized and accountable usage of services as specified by customer
Protection of customers’ assets from unauthorized or malicious access
Security zones between customer assets and service assets.
Service security plays a supporting role to the other three aspects of service warranty. Effectiveness in security has a positive impact on those aspects.
Service security inherits all the general properties of the security of physical and human assets, and intangibles such as data, information, coordination, and communication. Service security has challenges imposed by the following characteristics of service management:
Service assets are typically shared by more than one customer entity
Value is delivered just-in-time through the orchestration of several service assets
Customer action or inaction is a source of security risks.
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).
The ability to deliver a certain level of warranty to customers by itself is a basis of competitive advantage for service providers. This is particularly true where services are commoditized or standardized. In such cases, it is hard to differentiate value largely in terms of utility for customers. When customers have a choice between service providers whose services provide more or less the same utility but different levels of warranty, then they prefer the greater certainty in the support of business outcomes.
Figure 3.7 Combined effects of utility and warranty on customer assets
‘Fewest calls dropped on average’ is the value proposition of one major provider of mobile communication services expressed in its advertisements. An equally large competitor counteracts with the value proposition of best available coverage in the majority of urban areas. The other perpetual basis of differentiation is the number of calls made for a flat fee within peak hours of usage. This is an indirect measure of the capacity of over-subscribed service assets that service providers are assuring for the exclusive use of their customers. Of course, when competitive action leads to reduced differentiation based on warranty, service providers respond with service packages that offer additional utility, such the GPS navigation or wireless email on mobile phones.
Certain parcel delivery firms and retailers are market leaders in highly commoditized businesses simply because they offer a level of certainty unsurpassed by their peers. Their services guarantee delivery of goods on time regardless of location, time zone, or size of shipments. They are able to offer such warranties because they have developed certain service management capabilities and resources that instil a level of confidence in their operations.
Service providers should be able to develop such levels of confidence so they are able to support the business strategies of their customers. They add value to their customers by injecting this level of confidence in those strategies. Service providers emulate each other, leading to situations where providers offer similar levels of utility or warranty. Service providers must continually improve their value propositions to break away from the pack. The improvements can drive through one or more of the service management processes.
The guidance provided in the Service design, Service transition, and Service operation processes is useful in this strategic context. Service Design processes provide new and improved designs delivering better utility or better warranty. Service Transition processes ensure design improvements are directed into Service Operation while minimizing costs and risks. Service Operation processes inject the new value propositions into the customer’s business by delivering higher levels of utility and warranty. The processes of Continual Service Improvement coordinate the flow of knowledge between the processes and provide feedback throughout the lifecycle.
Case example 2 (solution): Warranty and utility
A casual observer may quip that both provide identical services: mobile communication services. However, by adopting a marketing mindset, each provider focuses on different aspects of customer outcomes or value creation.
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
3.2 Service assets
‘A basic code of good business behaviour is a bit like oxygen: We take an interest in its presence only when it is absent.’
Amartya Sen, Nobel Laureate in Economics
Case example 3: Financial services
Some time in the late 1990s, a leading financial services company launched a direct banking service. The service offered an internet-based savings and loans service.
After eight days, the company received almost 2 million website hits and over 100,000 enquiries. After five weeks, demand was so high that the company warned customers of delays of up to 28 days.
As CIO, what do you suspect is the problem?
(Answer given in Section 3.2.1)
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. It is relatively easy to acquire resources compared to capabilities. Supplementary guidance on capabilities and resources is presented in Appendix B, Section B.1.
Case example 3 (solution): Chokepoints in staff (overlooking customer assets)
The constraint, it turns out, was not infrastructure capacity or availability, but a customer asset shortcoming in the form of 250 staff members. Once this chokepoint was resolved (250 hires), the company went on to win over 500,000 new customers and £5B in deposits in less than six months.
The performance or growth of services will ultimately be limited either by limits in a resource or capability, or its own potential. Attempts to push a service beyond a resource or capability limit can have strong consequences – often negating any benefits achieved.
The constraint, in this case, did not appear to be technology-related. They were account processors. The CIO missed it because he only considered service assets, overlooking the constraining effect of customer assets on the performance of his organization’s services. The CIO’s customer, in this case, includes the processing department.