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Market space or customer
Service unique to segment
Customer service
Buyer strength
Rapid customer service
Geography
On-site services
Proximity to customer for delivery and support
Organization perceived as local
Process
Need to minimize process cycle times
Process excellence
Table 6.1 Basic organizational structures
6.3 Organizational design
The starting point for organizational design is strategy (Figure 6.10). It sets the direction and guides the criteria for each step of the design process.
Figure 6.10 Matching strategic forces with organizational development
It is recommended to decide on a departmentalization structure prior to designing key processes. For example, if the provider’s organization will be structured by geography or aligned by customers, the process design will be guided by this criterion. Once key processes are understood, it is appropriate to begin organizational design (Figure 6.11).
Figure 6.11 Organizational design steps
The flow depends on clearly articulated strategic criteria. Processes can be thought of as organizational software – configurable to the requirements of a service strategy. Organizational designers should see each step as an iterative cycle: create basic processes and structures, learn about current and new conditions, and adjust as learning evolves.
6.4 Organizational culture
Organizational culture is the set of shared values and norms that control the IT organization’s interactions with each other and customers. Just as an organizational structure can improve performance, so, too, can an organization’s culture increase organizational effectiveness.
There are two types of organizational values: terminal and instrumental.
Terminal values are desired outcomes or end states. IT organizations can adopt any of the following as terminal values: quality, excellence, reliability, innovativeness or profitability. Terminal values are often reflected in the organization’s strategic perspective.
Instrumental values are desired modes of behaviour. IT organizations can adopt any of the following as instrumental values: high standards, respecting tradition and authority, acting cautiously and conservatively, or being frugal.
Terminal and instrumental values are key shapers of behaviour and can therefore produce very different responses in an IT organization. Many mergers and acquisitions fail because of these differences. Culture is transmitted to staff through socialization, training programmes, stories, ceremonies and language.
A service management organizational culture can be analysed through the following steps:
Identify the terminal and instrumental values of the organization.
Determine whether the goals, norms and rules of the organization are properly transmitting the value of the organizational culture to staff members. Are there areas for improvement?
Assess the methods the IT organization uses to introduce new staff. Do these practices help newcomers learn the organization’s culture? (Van Maanen34 identified 12 socialization tactics that are useful in orienting newcomers to an organization's culture.)
6.5 Sourcing strategy
‘The next layers of value creation – whether in technology, marketing, biomedicine or manufacturing – are becoming so complex that no single firm or department is going to be able to master them alone.’
Thomas L. Friedman, The World is Flat
Outsourcing is the moving of a value-creating activity that was performed inside the organization to outside the organization where it is performed by another company. What prompts an organization to outsource an activity is the same logic that determines whether an organization makes or buys inputs. Namely, does the extra value generated from performing an activity inside the organization outweigh the costs of managing it? This decision can change over time.
A service strategy should enhance an organization’s special strengths and core competencies. Each component should reinforce the other. Change any one and you have a different model. As organizations seek to improve their performance, they should consider which competencies are essential and know when to extend their capabilities by partnering in areas both inside and outside their enterprise. Service sourcing is another example of the Separation of Concerns (SoC) principle. This time it is a separation of the ‘what’ from the ‘who’.
Case example 13: Service Strategy
During the early 2000s, companies rushed to implement a service strategy based on labour arbitrage: service providers decrease labour costs by making use of less expensive off-shoreresources. The strategic intent is to make a provider’s value proposition more compelling through lower cost structures.
While costs did indeed decrease for customers, providers were unable to make long-term gains to their financial bottom line.
Why?
(Answer in Section 6.5.1)
IT and business services are increasingly delivered by service providers outside the enterprise, and by the internal organization. Making an informed service sourcing decision requires finding a balance between thorough qualitative and quantitative considerations. Historically, the financial business case is the primary basis for most sourcing decisions. These analyses include pure cost savings, lower capital investments, investment redirections and long-term cost containment. Unfortunately, most financial analyses do not include all the costs related to sourcing, leading to difficult sourcing relationships with unexpected costs and service issues. If costs are a primary driver for a sourcing decision, include financials for service transition, relationship management, legal support, incentives, training, tools licensing implications and process rationalization, among others.
6.5.1 Deciding what to source
A business’s strategy formulation is the search for competitive differentiation through the redeployment of resources and capabilities. When a business decides to source services it is in essence deciding to source resources and capabilities. If candidates are only peripherally related to the business’s strategic themes and are available in competitive markets then they should be considered. Once candidates for sourcing are identified, the following questions are intended to clarify matters:
Do the candidate services improve the business’s resources and capabilities?
How closely are the candidate services connected to the business’s competitive and strategic resources and capabilities?
Do the candidate services require extensive interactions between the service providers and the business’s competitive and strategic resources and capabilities?
Case example 13 (solution): The inability to capture value
Early adopters of a labour arbitrage strategy made great gains because, for a while, the costs of services they offered were lower than any competing alternatives. But as more and more service providers made use of off-shore resources, the cost of services was lowered for everyone. This was great for customers but bad for providers – this distinctiveness was eventually eliminated. Value was created for customers but service providers were not able to keep any of it. This ability of a service provider to keep a portion of any value created is known as ‘value capture’.
The sourcing strategy was vitally important for fending off competing alternatives. However, service providers who focused solely on this strategy, at the expense of other distinctive capabilities, soon encountered strategic failure in the form ‘mediocre performance versus competing alternatives’.
If the responses uncover minimal dependencies and infrequent interactions between the sourced services and the business’s competitive and strategic positioning, then the candidates are strong contenders.
If candidates for sourcing are closely related to the business’s competitive or strategic positioning, then care must be taken. Such sourcing structures are particularly vulnerable to:
Substitution – ‘Why do I need the service provider when its supplier can offer the same services?’ The sourced vendor develops competing capabilities and replaces the sourcing organization.
Disruption – The sourced vendor has a direct impact on quality or reputation of the sourcing organization.