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Risks involved
Policy constraints.
4.4.8 Alignment with customer needs
Understand the mutual relationship between customers and market spaces. Customers can contain one or more market spaces. Market spaces can contain one or more customers (Figure 4.27).
The market spaces of Type I service providers are internal to the organizational unit within which they are embedded.
The market spaces of Type II providers are internal to the enterprise but distributed across the constituent business units and the corporate functions.
The market spaces of Type III providers are typically distributed across more than one enterprise customer.
Figure 4.27 Customers and market spaces
The business strategy of a service provider usually determines the placement of market spaces. However, the placement of market spaces also influences the type of strategies to be pursued. This mutual influence will lead to adjustments and changes over any given planning horizon (Figure 4.28). Since market spaces are defined based on outcomes desired by customers, the changes and adjustments are ultimately based on the dynamics of the customer’s business environment. Over time there will be cohesiveness between strategies and market spaces from mutual alignment and reinforcement.
Figure 4.28 Strategies and market spaces
Since market spaces are defined in terms of the business needs of customers, service provider strategies are therefore aligned to customers. This is the most important reason why service providers must think in terms of market spaces and not simply industry sectors, geographies, or technology platforms. This is intuitive to the senior leadership of Type I providers because they are accustomed to being driven more by the outcomes expected by their business units than by the traditional segmentation of markets.
4.4.9 Expansion and growth
Once service strategies are linked to market spaces, it is easier to make decisions on Service Portfolios, designs, operations, and long-term improvements. Investments in service assets such as skills sets, knowledge, processes, and infrastructure are driven by the critical success factors for a given market space. The growth and expansion of any business is less risky when anchored by core capabilities and demonstrated performance. Successful expansion strategies are often based on leveraging existing service assets (Figure 4.29) and Customer Portfolios to drive new growth and profitability.
Figure 4.29 Expansion into adjacent market spaces
The resultant exposure to costs and risks is far lower in this approach compared to ad hoc expansions, which are purely opportunistic in nature. This is because expanding into adjacent market spaces leverages service assets that are common across market spaces. This means that additional investments are hedged across new and existing market spaces. If for any reason the expansion fails or business opportunities do not materialize, there will be a greater salvage value for the new investments made. To further reduce the risks of expansion strategies, it is best to leverage the presence in market spaces that have achieved sufficient growth. Growth and maturity could mean either improving results in existing market spaces or expanding the portfolio to other market spaces with a high potential for success.
Contracts represent combinations of customers and services. Contracts exist where there are commitments to a customer with respect to a service. Service agreements are types of contracts. It follows that Contract Portfolios are based on the interaction of the Customer Portfolio and the Service Portfolio. Changes to the Contract Portfolio are driven by changes to either the Customer Portfolio or the Service Portfolio (Figure 4.30). Growth in a market space is achieved by:
Extensions to existing contracts (same service/same customer)
Increases in demand (greater share of customer’s wallet)
Providing complementary services.
Figure 4.30 Growth in a market space
Strategicplanning and review includes examining opportunities for growth within current customers and services. Growth in a market space is dependent on demonstrated ability to deliver value and a strong record with existing customers. Chapter 5 provides further guidance to senior managers on how to prioritize investments and allocate resources in a manner that reduces risks of failure.
4.4.10 Differentiation in market spaces
In a given market space, services provide utility to customers by delivering benefit with a level of certainty (i.e. warranty). Market spaces can be defined anywhere an opportunity exists to improve the performance of customer assets. Service strategy is about how to provide distinctive value in each market space. Service providers should analyse every market space they support and determine their position with respect to the options that customers have with other service providers.
In any given market space there are critical success factors that determine whether or not a service provider is competitive in offering services. These factors are defined in terms of the relative importance of a set of outcomes or benefits as perceived by customers. Examples are affordability, number of service channels or delivery platforms, lead times to activate new accounts, and the availability of services in areas where customers have business operations (Figure 4.31).
Figure 4.31 Differentiation in the market space
Appropriate indices or scales are necessary. A value curve can then be plotted by linking the performance on each scale or index corresponding to a critical success factor.25 Market research can determine the value curve that represents the average industry performance or one that represents key competitors. Feedback obtained from customers through periodic reviews or satisfaction surveys are used to plot your own value curve in a given market space or for your Customer Portfolio.
Service strategies should then seek to create a separation between the value curves, which are nothing but differentiation in the market space. The greater the differentiation, the more distinctive the value proposition offered in your services as perceived by customers. The differentiation is normally created through better a better mix of services, superior service designs, and operationaleffectiveness that allows for efficiency and effectiveness in the delivery and support of services. Through various combinations of factors there are many ways in which to create differentiation. Service management is about making decisions on the service design, transition, operation, and improvement that lead to differentiation in every supported market space.
Again, this is just as applicable to Type I providers. It is a good practice to periodically review the competitive position of every service in the corresponding market space. This is particularly important in relation to shifts in business trends or major changes in the business environment that may alter the economics behind the customer’s decision to source a service
5 Service economics
‘Economy does not lie in sparing money, but in spending it wisely.’
Thomas Henry Huxley
5.1 Financial Management
Operational visibility, insight and superior decision making are the core capabilities brought to the enterprise through the rigorous application of Financial Management. Just as business units accrue benefits through the analysis of product mix and margin data, or customer profiles and product behaviour, a similar utility of financial data continues to increase the importance of Financial Management for IT and the business as well.
Financial Management as a strategic tool is equally applicable to all three service provider types. Internal service providers are increasingly asked to operate with the same levels of financial visibility and accountability as their business unit and external counterparts. Moreover, technology and innovation have become the core revenue-generating capabilities of many companies.
Financial Management provides the business and IT with the quantification, in financial terms, of the value of IT Services, the value of the assets underlying the provisioning of those services, and the qualification of operational forecasting. Talking about IT in terms of services is the crux of changing the perception of IT and its value to the business. Therefore, a significant portion of Financial Management is working in tandem with IT and the business to help identify, document and agree on the value of the services being received, and the enablement of service demand modelling and management.
5.1.1 Enterprise value and benefits of Financial Management
The landscape of IT is changing as strategic business and delivery models evolve rapidly, product development cycles shrink, and disposable designer products become ubiquitous. These dynamics create what often appears to IT professionals as a dichotomy of priorities: increasing demands on performance and strategic business alignment, combined with greater demand for superior operational visibility and control. Much like their business counterparts, IT organizations are increasingly incorporating Financial Management in the pursuit of:
Enhanced decision making
Speed of change
Service portfolio management
Financial compliance and control
Operational control
Value capture and creation.
IT organizations are conceding they are quite similar to market-facing companies. They share the need to analyse, package, market and deliver services just as any other business. They also share a common and increasing need to understand and control factors of demand and supply, and to provision services as cost-effectively as possible while maximizing visibility into related cost structures. This commonality is of great value to the business as IT seeks to drive down cost while improving its service offerings. The framework below illustrates the commonality of interests and benefits between the business and IT (Figure 5.1).
Figure 5.1 Shared imperatives framework: business and IT
Service and strategydesign both benefit greatly from the operational decision-making data that Financial Management aggregates, refines and distributes as part of the Financial Management process. Rigorously applied, Financial Management generates meaningful critical performance data used to answer important questions for an organization:
Is our differentiation strategy resulting in higher profits or revenues, lower costs, or greater service adoption?
Which services cost us the most, and why?
What are our volumes and types of consumed services, and what is the correlating budgetrequirement?
How efficient are our service provisioning models in relation to alternatives?