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Analysis of
variance,
design of experiments, etc.
These methods can be applied to solve a variety of problems such as:
Allocation of resources between services and contracts
Analysis of demand patterns and segmentation of users
Compression, correlation and filtering (Table 8.2)
Scheduling of jobs, tasks and staff
Location and layout of facilities and infrastructure elements
Capital budgeting, pricing and purchase decisions
Portfolio optimization
Contingency planning and redundancy (coverage problems).
Figure 8.7 Simple LP model
Figure 8.8 Simple network model
There is depth and diversity in analytical models, some of which have been in use for decades and have been instrumental to the maturity of disciplines such as operations management, project management and financial analysis. Service sectors such as telecommunications, transportation, logistics and financial services have achieved high levels of performance from the application of systems and industrial engineering concepts, methodologies and qualitycontrol processes to service functions and processes.41
There is a range of automation tools available for analytical modelling. The simplest tool available is a computer spreadsheet such as Microsoft Excel with its built-in solver function. Models with a fair amount of sophistication can be built using spreadsheets. More sophisticated models can be constructed using tools, special purpose optimization programming languages (OPL) and optimization engines. Several commercial solutions for automation in service management include functions and modules for analytical modelling and visualization.
Service Strategy and other functions and processes in the Service Lifecycle can benefit similarly from such knowledge to improve performance in the presence of technical, financial and time constraints. Six Sigma™, PMBOK® and PRINCE2® offer well-tested sets of methods based on analytical models. These should be evaluated and adopted within the context of Service Strategy and service management.
9 Challenges, critical success factors and risks
9.1 Complexity
9.1.1 IT organizations are complex systems
A complex system is characterized by organized complexity, as opposed to disorganized complexity (random systems) or organized simplicity (simple systems). In an organizational setting, for example, the operations group is a system made up of people, process and technology. However, the components of the operations group must interact with each other to perform. Hence they are interdependent. The operations group in turn must interact with other components of the IT organization.
This complexity explains why some service organizations resist change. Complex systems behave differently from simple systems and pose unusual challenges. They are tightly coupled. They are adaptive and self-organizing. Hence they are self-stabilizing and policy resistant. Their complexity overwhelms our ability to understand them. The result: the more you try to change them, the more they resist.
The reason is due to a limited learning horizon. Organizations do not always have the ability to observe the long-term consequences of their decisions and actions. They generally fail to appreciate the time delay between action and response. They are often caught in a vicious cycle of reacting to events and attempting to predict them, rather than learning from them. Without continual learning, over a far enough horizon, today’s solutions often cause tomorrow’s problems. The result is policy resistance, the tendency for improvement initiatives to be defeated by the response of the organization to the initiative itself.
The natural tendency is to break services down into discrete processes managed by different groups with specialized knowledge, experience and resources. This approach is useful. However, the more divided a system, the greater the need for coordination between components. An automobile, for example, is more than a collection of parts. The parts by themselves do not have a life of their own. The most significant breakthrough in braking systems for automobiles is not from simply enhancing the performance of brake pads or rotors, but from extending the braking system to include not only the brake components, but also road and weather conditions, changing the driver’s mental model of how brakes are to be applied, and the dynamic interactions between these elements. The systems view led designers to move beyond simply continual improvements in materials science and manufacturing to the counterintuitive idea of anti-lock braking systems (ABS) which compensate for variations in weather conditions and driver skills.
Similarly, breaking services and service management down into specific processes is a suitable tactic if their interconnectedness is not lost. Service management processes are a means and not the end. They are necessary because working together they produce the characteristics of service that define value for the customer. Treated separately, some of the most significant consequences of decisions and actions may remain hidden until after major problems and incidents.
9.2 Coordination and control
Decision-makers in general have limited time, attention span and personal capacity. They delegate roles and responsibilities to teams and individuals who specialize in specific systems, processes, performance and outcomes. This follows the principle of division of labour with managers acting as principals and their subordinates acting as agents. Specialization allows for development of in-depth knowledge, skills and experience. It also allows for innovation, improvements and changes to occur within a controlled space. Service management is a coherent set of specialized competencies defined around processes and lifecycle phases. An increase in the level of specialization leads to a corresponding increase in the need for coordination. This is a major challenge in service management because of the level of specialization needed for various phases of the Service Lifecycle, processes and functions. Coordination can be improved with cooperation and control between teams and individuals.
Cooperation problems involve finding a way to align groups with divergent and possibly conflicting interests and goals, to cooperate for mutual benefit. This is true not only for cooperation between internal groups but also between customers and service providers. How do you agree on the definition of service levels with respect to a given level of user satisfaction? How much should a customer agree to pay for a given service level? What is a reasonable time frame for a change request to be approved? What service levels can you impose on an internal function or service group? How can multiple service providers cooperate as an alliance in serving a common customer? Cooperation problems can be partially solved by negotiating agreements in which every party is better off. This requires the presence of mutual welfare of all groups involved. One of the reasons why relationships fail is the lop-sided nature of agreements. Type I providers are particularly vulnerable to such agreements since they have less choice and freedom in terms of their Customer Portfolio. However, as emphasized in earlier chapters, without a financially viable and self-sustaining system of value creation, service providers are bound for eventual failure. Value capture is necessary for growth and improvement in value creation.
Another means to improving coordination between groups is to maintain shared views of outcomes towards which all performance is directed. Such views are defined in terms of service strategies, objectives, policies, rewards and incentives. The views are further detailed with customer outcomes, Service Catalogues, service definitions, contracts and agreements, all described with a common vocabulary. Further coordination and control is achieved with the use of shared processes that integrate groups and functions, shared applications that integrate processes, and shared infrastructure that integrates applications. A Service Knowledge Management System allows various groups to have simultaneous but distinct control perspectives on the same reality.
Control perspectives are based on the objectives of one or more service management processes or lifecycle phases. They help managers to focus on what is important and relevant to the processes under their control and ensure that control information of good quality is available for them to be effective and efficient. Control perspectives may also be useful to determine the information requirements for implementing effective organizational learning and improvement. Financial Management provides one such control perspective. In a market-based system coordinated by prices, there is little need for customers to provide detailed specifications on service designs, to impose technical constraints, determine how service assets are to be deployed and how services are to be operated. Customers indicate the prices they are willing to pay for a given level of service quality.
The prices are indicative of the value customers place on outcomes. Service providers can then coordinate control and deploy their assets to provide services that facilitate the outcomes at a cost less than or equal to the price customers are willing to pay. They have autonomy and control over the design, development and operation of the service as well as improvements necessary over time. They can optimize, reconfigure, standardize and engineer the internals of a service as necessary while maintaining the value delivered to the customer in specified terms. Any uncertainties in demand and delivery can be factored for either in the service level commitments, the prices, or both. This allows for management on both sides to manage by outcomes.
9.3 Preserving value
9.3.1 Deviations in performance
Mature customers care not only about the utility and warranty they receive for the price they are being charged. They also care about the total cost of utilization (TCU). The concept of TCU is based on the principle of transaction costs discussed earlier. Customers perceive not just the direct costs of actual consumption but also all other related costs incurred indirectly in the process of receiving the committed utility and warranty.
For service providers, creating value for customers is a highly visible objective. Capturing value for their own stakeholders is also important. In the case of Type I providers, these two sets of objectives may be closely aligned. They can easily diverge or be in conflict, especially with Type III providers.
Value created for customers is easily lost to hidden costs that the customer incurs from utilizing a service. Poor management of services over the lifecycle can result in customers paying much more than the price of the service when the effect of hidden costs sets in. The enduring value for customers turns out to be much lower than the value created. Eliminating hidden costs is a challenge, a critical success factor and a risk. There is a need to reduce the total losses in the system (Figure 9.1).
Figure 9.1 Combined losses from deviation of performance (Taguchi Loss Function)
9.3.2 Operational effectiveness and efficiency
Services ought be a beneficial undertaking from both the customer and service provider perspectives. Value creation for the customer should result in value capture for the service provider. This mutual welfare is important for the economic viability of services. It avoids losses on both sides of the relationship in real terms. Otherwise, sooner or later there will be tension in the relationship and at least one of the parties will be wishing for alternatives.
It is not unusual to start with the idea of efficiency. The notion of value itself is commonly based on efficiency. There are several notions of efficiency. The one used here is the ratio or proportionality of specific output in relation to the necessary inputs in terms of resources. Measures of efficiency depend on the type of input resource. For example, they could be based on minutes, full-time equivalents (FTE), square feet of space for facilities and equipment, gigabytes of storage, or simply financial equivalents of those units.
Efficiency goes to waste when output or outcome is not fit for purpose or fit for use. This is all too common in the case of services, because value is largely intangible. Therefore efficiency should have the guide rails of some desired effect. Effectiveness is the quality of being able to bring about a desired effect. In the context of services the two primary effects are utility and warranty (Figure 2.2).
Increasing the efficiency of a process can effectively increase remaining capacity to support additional units of demand. Increase in efficiency can result in more units of demand served from the same amount of a resource. Improvements in Service design and Service Operation can drive such efficiency gains. There is feedback and interaction between efficiency and effectiveness (Figure 9.2).
Figure 9.2 Efficiency and effectiveness
An increase in efficiency can lead to an increase in effectiveness, which in turn can result in a further increase in efficiency until some optimization limit is reached. A shortfall in effectiveness when addressed by allocating more resources to recover the situation results in a decrease in efficiency. Efficiency losses in turn can lead to lower effectiveness because of the lower potency of each unit of output. These interactions between efficiency and effectiveness result in drifts or lifts in performance.
9.3.3 Reducing hidden costs
One category of hidden costs is transaction costs. These include costs for the resources that service providers spend to determine customer needs, user preferences, quality criteria that underpin value, and pricing decisions. Costs are also incurred when changes are made to services, service level agreements and demand in a trial-and-error manner. Custom-built services and low volumes of demand mean that set-up and tooling costs for the services are all borne by the customer. Standardization, shared services and reuse, coupled with segmentation and differentiated service levels should drive down transaction costs of coordination by reducing such overheads. This way, the needs of user segments are efficiently served while optimizing the use of service provider resources for maximum gain.42 Well-defined service management processes, measurement systems, automation and communication, should drive down the transaction costs related to coordination through hierarchies. Indeed the very purpose of service governance is to drive down transaction costs. Low transaction costs are an inducement for customers to buy services instead of owning and operating non-core assets to produce the same effect on their business outcomes.
9.3.4 Substantiating hidden benefits
Customers find value in leasing assets such as applications and infrastructure rather than owning them. Part of that value comes in the form of the reduced lock-in that would otherwise exist due to high switching costs. Switching costs are high when the investment in the capital assets is high, when a major proportion of the assets come from the same vendor, and when the depreciation of the assets is slower. Faced with high switching costs, customers are often discouraged from purchasing assets. One way of reducing lock-in is to rent or lease the assets rather than buying them. Services provide an attractive alternative to asset purchases. They offer customers the utility of an asset without the related lock-in. That represents value to the customer. Another way to reduce lock-in is to contract out the maintenance and repair operations (MRO) of the assets to a third party provided a similar or better level of service is available. MRO services define a distinct category of services.
However, services by themselves can be a source of lock-in for customers. This is characterized by the disruption of learning curves of users and other people assets of the customer. It is also characterized by the changes required to processes, applications and infrastructure when switching to a new service provider. Customers value standardization in technologies, processes and industry practices to increase network externalities. Standardization helps increase the possibilities of multiple connections within a value network. When service management processes are standardized across a particular industry, then greater efficiency and flexibility can be realized from consolidation, disaggregation, and flexible configuration of business processes, infrastructure components and human resources. The risk of lock-in is reduced when it is easier to switch service providers within a value network. It also reduces operational risk to the customer’s business from service provider failures. Internal service providers can be just as risky for customers as their commercial counterparts.
9.3.5 Leveraging intangible assets
Intangible assets are non-physical claims to future benefits generated by innovation, unique systems, processes, designs, organizational practices and competencies. They are combined with tangible and financial assets to create economic value for their owners.37 Certain assets such as physical assets, human resources and financial assets are called rival or scarce assets because a specific deployment of such assets prevents their concurrent use elsewhere. Examples include bank tellers assisting customers, storage space, or financial capital invested in a certain office facility. Thus rival assets suffer opportunity costs. In contrast, intangible assets are generally non-rival because they can be replicated and concurrently deployed to serve multiple instances of demand. For the most part the concurrent deployments do not interfere with each other or reduce their utility with an increase in the number of deployments. Of course, poor systemdesign may lead to congestion at points where underlying resources are being shared.
The use of intangible assets, such as web-based technologies and software-based automation of processes, can increase the scalability of service systems. Knowledge-intensive systems and processes can be highly leveraged with virtually zero opportunity costs. From a service management perspective, the structure of service models, designs, processes and infrastructure can be analysed to determine the ratio of intangible elements over tangible elements. Where possible, the tangible elements should be substituted with intangible ones so that the service design becomes more scalable and non-rival. Online service interfaces such as web browsers can effectively replace the many tangible assets required to interact with customers through physical channels such as branches, stores, kiosks and call centres. In other words, when services elements are well defined, it is possible to increase the throughput of the service delivery system by software-based replication, where software agents supplement human agents by taking care of some or all types of transactions.
The use of Interactive voice response systems with speech recognition, automated installation, automatic updates and rich-browser applications, can greatly reduce the cost of serving the same population of customers. They also reduce variations in service quality and compliance risks by reducing the workload on the human resources. The availability of services can be enhanced (or maintained in the face of an increasing workload) by the use of service interfaces or channels that rely more on intangibles than physical or human assets. It is much easier and faster to scale up an online customer support system to handle an extra million transactions through web browsers, than it is to support the same surge in demand by upgrading the voice infrastructure of a call centre or stores in a retail network. Also, the scalability does not bring the risks linked to installing additional network capacity or the training and orientation of new staff.
The non-rival or non-scarce attribute of intangibles represent the facility to deploy such assets simultaneously across a portfolio of services without diminishing their utility to any one customer. The scalability of intangibles is usually limited only by the size of the markets they can serve. The separation of intangibles from tangible assets may be difficult when they are embedded in physical assets. For example, the tacit knowledge stored in people in the form of experience, insight and certain skills is hard to codify or extract. Therefore there is considerable interaction between intangible and tangible assets in the creation of value. While this property of being embedded is a form of security for the owner, it does pose a challenge in the measurement and valuation of the intangibles.
9.4 Effectiveness in measurement
Case example 14: Monitoring services
Some time in 2004, a global automobile manufacturer sent out a call to its infrastructure outsourcingservice providers. The manufacturer, with 20+ data centres and 10,000+ servers spread across the globe, was frustrated by the inability to separate the service monitoring signal from noise. It sought a better way, one where the providers received their relevant service information and the manufacturer received business impact information.
What is your response or suggestion?
(Answer at the end of the section)