Future vs. Present

This requires that we accommodate the pace of business change as business opportunities arise and disappear. The strategy has to be more than a plan and be able to adapt to the unforeseen.

Operational Effectiveness vs. Improvements in Functionality

Operational effectiveness should not be delivered at the expense of distinctiveness or the service provider may lose its customer base. There is a balance to be achieved here because although improvements increase competitive advantage, it is still important to deliver and provide the required functionality.

Value Capture

In the third dynamic, we are considering value capture. This refers to the value gained when innovations are launched versus the value captured during ongoing operations. Value capture is the portion of value creation a provider is able to keep. There is a very small window between the time an innovative feature is launched and the time the next competitor has the same capability. The service provider needs to be able to achieve a balance between introducing new functionality and maintaining normal practice.

Managing the balance between these opposing dynamics is critical for a successful service strategy. It is important for the service provider to understand the requirements of the organization and be able to react and predict, adapt, and plan to meet the changing needs of the business. Flexibility is a key attribute of the strategic approach.

Perspective

Perspective is the vision and direction of the organization. A strategic perspective articulates what the business of the organization is, how it interacts with the customer, and how its services or products will be provided. A perspective cements a service provider’s distinctiveness in the minds of the employees and customers.

Positions

When we consider the position of a strategy, it should describe how the service provider intends to compete against other service providers in the market. The position refers to the attributes and capabilities that set the service provider apart from its competitors. Positions could be based on value or low cost, specialized services or providing an inclusive range of services, knowledge of a customer environment, or industry variables.

The framework considers a number of different types of positioning.

First, we look at variety-based positioning. This is where the service provider differentiates itself by offering a narrow range of services to a variety of customers with varied needs. For example, a cell phone company offers a range of predefined packages based on time and type of usage. Customers choose the package that suits them, even though they and other customers may use the same package differently.

Another option is that of needs-based positioning. The service provider differentiates itself by offering a wide range of services to a small number of customers. This type of positioning may also be called “customer intimacy.” The service provider identifies opportunities in a customer, develops services for them, and then continues to develop services for new opportunities or simply continues to provide valuable services that keep other competitors out. The relationship between the service provider and the customer is key in needs-based positioning. Examples here might be specialist service providers of medical systems in the pharmaceutical industry.

When a service provider targets a particular market and offers tailored services commonly based on a special interest or location, this is known as access-based positioning. Typically, only people in that group will have access to the service. For example, a service provider might offer branded items that can be bought in only a specific store or through a particular outlet, such as Harrods (London).

Last we consider demand-based positioning. As the name suggests, this is a type of positioning in which the service provider meets the demands of a customer by using a variety-based approach to appeal to a broad range of customers. The difference from variety-based positioning is that they allow each customer to customize exactly which components of the service they will use and how much of it they will use. This is an approach that is being explored by online service providers like Dropbox, which allows its customers to choose from different packages.

Plans

A strategy should be documented so that it is formally communicated throughout the organization. This is often the most tangible form of a strategy, a set of documents referred to as the strategic plan, and in many organizations this may be referred to as “the strategy.” The plan contains details about how the organization will achieve its strategic objectives and how much it is prepared to invest in order to do so.

To provide for an uncertain future, plans usually contain several scenarios, each one covering a strategic response and level of investment. Throughout the year, the plans are compared with actual events. This allows for adjustments to be made to adapt to any changes in the organizational requirements.

Some plans are high-level plans, such as the overall strategy, while others are more detailed, such as the execution plans for a particular new service or process. All plans should be coordinated and follow the same strategic framework.

Patterns

When we talk about patterns in service strategy, we are describing the ways in which an organization organizes itself to meet its objectives. The patterns could be organizational hierarchies, processes, interdepartmental collaboration, or services. Some patterns involve the way the organization works internally, whereas others involve the way in which the organization interacts with its customers and suppliers.

Recognizing patterns is important because they ensure that the service provider does not continuously react to demand in a new way every time. A pattern will enable the service provider to predict how a strategy will be met and forecast the investment that will be required.

There are two ways in which patterns can be formed. In some cases the organization will define the patterns it needs in its strategy. It will then define the way in which everyone complies with the patterns. In other cases, patterns that have been successful in the past will be formalized into the strategy of the organization. These are often referred to as emergent strategies.

Relationship between the Four Ps

We have already explored the way in which a service provider’s perspective and position will allow it to develop plans that, if executed, will ensure that the service provider achieves its strategic objectives.

However, planning involves the future, and even with the best intent, no plan can be fully reliable. Changes to the organization, its customers, and their respective environments can impact the successful execution of a plan. It is important that the service provider be flexible and not stick rigidly to a plan that is no longer valid. It may be necessary to alter the plan, defer it, or abandon it. In some cases, a service provider may have to merge plans or even create new ones. This is shown in Figure 2.3.

It is necessary to ensure that a strategy is not a rigid application of plans in a changing environment but is instead a continually adapting process, ensuring that the business and service provider stay relevant to a changing environment.

Internal and External Customers

Services are delivered to both internal and external customers.

Internal services are delivered between departments or business units within the same organization, whereas external services are delivered to external customers.

To deliver value, the service provider must be able to differentiate between services that support an internal activity and those that achieve business outcomes, and understand the prioritization of each from the customer’s perspective. The activity to deliver the services may be similar, but internal services must be linked to external services before their contribution to business outcomes can be understood, measured, and prioritized. For example, email is important to an organization even though the organization manufactures cars as its main business. How well would the organization be able to function without this element of the desktop service? It may be the most important communication device for the entire organization and therefore should be prioritized accordingly.

The service provider can differentiate the types of service it delivers as described in the following sections.

Core Service

A core service is one that is fundamental to the delivery of a basic outcome required by a customer. It will deliver the value that the customer needs and is prepared to pay for. An example of this is the delivery of Internet banking functionality.

Enabling Service

An enabling service is a service that is needed in order for a core service to be delivered. Using the Internet banking example, an enabling service would be the network or the ISP provision. It is not normally something that an Internet banking user would consider or be aware of, but without it, the service could not be delivered.

Enhancing Service

An enhancing service is a service that is added to a core service to make it more exciting or enticing to the customer. Using the Internet banking example, this would be the provision of an additional feature such as the inclusion of a savings management program or the purchase of a financial savings package. It is not vital to the delivery of the core service, but it may make the service more attractive.

Utility

Utility affects the increase of possible gains from the performance of customer assets and the probability of achieving desirable business outcomes.

Figure 2.5 illustrates an example of an airline baggage handling service, which is able to load baggage onto an aircraft within 15 minutes 80 percent of the time. This is shown by the light-colored curve. With new security legislation, they will be required to perform additional security checks and to record the location of each bag in the aircraft hold. These additional activities require changes to the utility of the services.

In response to these new requirements, the airline changes the service to be able to do the additional work and is still able to load baggage onto the aircraft within 15 minutes 80 percent of the time. This new level of utility is shown by the dark-colored curve. The standard deviation remains the same since the warranty has not changed.

Warranty does not automatically stay the same when utility is increased. In fact, maintaining consistent levels of warranty when increasing utility usually requires good planning and increased investment. More investment is required for making changes to existing processes and tools, training, hiring additional employees to do the increased work, obtaining additional tools to perform newly automated activities, and so on.

Thus, the utility effect means that, although the customer assets perform better and the range of outcomes is increased, the probability of achieving those outcomes remains the same. This can be seen in the diagram; the shape of the graph and the space under the line remain the same.

Warranty

The effect of improving warranty of a service means that the service will continue to do the same things but more reliably. Therefore, there is a higher probability that the desired outcomes will be achieved, along with a decreased risk that the customer will suffer losses due to variations in service performance. Improved warranty also results in an increase in the number of times a task can be performed within an acceptable level of cost, time, and activity. Customers are interested in reliability and the impact of losses rather than the possible gains from receiving the promised utility.

Figure 2.6 shows how the standard deviation of the performance of a service changes when warranty is improved.

The lighter line shows that a significant percentage of service delivery is outside of the acceptable range. By making various improvements (e.g., training, process, and tool improvement; new tools or processes; automation), the service provider is able to increase the probability that the service will be performed within an acceptable range.

Using the airline baggage handling example, suppose that one year after adding the new utility, the airline would like to increase its “on-time departure” rate. Achieving this means that baggage handling needs to improve its performance. Without adding any new utility, the baggage handling service finds a better way of scanning and recording the location of bags. As a result, the baggage handling service is able to complete the loading of baggage onto the aircraft within 15 minutes 90 percent of the time—a significant improvement.

Combined Utility and Warranty

In Figure 2.7, you can see the impact of utility and warranty and how investment can be allocated according to the importance of the utility and warranty provided.

In the bottom-left quadrant, you can see low business impact with variable utility and warranty bias:

• This is showing assets with little value even with utility and warranty.
• This shows that minimal investment in the asset and the utility and warranty is justified, or there is an option to retire the service.

In the top-left quadrant, the diagram shows low business impact with low utility and high warranty:

• This shows the asset deriving little value because service does not meet needs regardless of the high level of warranty.
• It shows that investment should be reallocated to improve utility.

In the bottom-right quadrant, the diagram shows high business impact with high utility and low warranty:

• Again, the value is low because the service does not perform well even with high utility.
• This time the investment needed will be to improve the warranty of service.

In the top-right quadrant, you can see high business impact with balanced utility and warranty:

• Any bias to utility or warranty will be highly visible because the outcomes are valuable to the business.
• This justifies optimum investment in the “zone of balance.”

Once we reach an appropriate balance between utility and warranty, customers will 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. This is shown in Figure 2.8.

The arrow marked with a + (plus sign) in the diagram indicates a directly proportional relationship; here, the higher the utility, the higher the performance average. The arrow with a – (minus sign) indicates an inversely proportional relationship; here, the higher the level of warranty, the lower the performance variation.

In the diagram, services with a balance between utility and warranty increase the average performance of the customer assets. We could say that they will result in higher-value outcomes. This will also have the effect of reducing the performance variation, increasing the reliability of the service.

The combined effects of utility and warranty will enable the customer assets to achieve the customer’s business outcomes and result in a return on their assets. In other words, value is realized.

Communicating both utility and warranty is important for customers to be able to calculate the value of a service.

Communicating Utility

Communicating utility will enable the customer to determine the extent to which utility is matched to their functionality requirements.

Communicating utility in terms of ownership costs and risks avoided means that the service provider should be able to articulate the following points:

• That the service enables the business to achieve the desired outcomes more efficiently. This allows the business to reduce its costs (and in commercial organizations, to increase its profit margins).
• That the service improves the reliability of outcome achievement. In other words, the service mitigates the risk of the business not being able to achieve its outcomes.

Communicating Warranty

Warranty ensures that the utility of the service is available as needed with sufficient capacity, continuity, and security—at the agreed cost or price. Customers cannot realize the promised value of a service that is fit for purpose when it is not fit for use.

Warranty in general is 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 either make a product unavailable for use or reduce its functional capacity. Warranties assure that the products will retain function for a specified period under certain conditions of use and maintenance. Warranties are void outside such conditions; normal wear and tear is not covered. Most important, customers are owners and operators of purchased goods.

Service providers communicate the value of warranty in terms of levels of assurance. Their ability to manage service assets instills 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.

Usability refers to whether users can actually perform the required actions and access the information they need in order to be able to achieve the desired outcomes. For example, factors of usability may include readability of text, whether data entry is straightforward and logical, and so on.

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, they prefer the greater certainty in the support of business outcomes, provided it is offered at a competitive price and by a service provider with a reputation for being able to deliver what is promised.

One point to bear in mind when defining both utility and warranty is the affordability of the service. A service provider can build a perfect service, but the utility and warranty need to be balanced against what the customer can afford to pay. Affordability is a good way for customers to prioritize the elements of warranty and utility, given the outcomes they want to achieve.

Business Unit

ITIL describes a business unit as an organizational entity, led by a manager, that performs a defined set of business activities that create value for customers in the form of goods and services.

The goods or services are produced and delivered using a set of assets, referred to as customer assets. 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.

It is the responsibility of the business unit to create value, which is determined in the context of the customer and the customer’s assets.

Service Provider

While some organizational units are business units, some are clearly service providers. A service provider is an organizational entity, led by a manager, that performs a defined set of activities to create and deliver services that support the activities of business units.

Service providers use service assets to deliver services to business units, and these service assets are used to enhance the performance of business assets to achieve business outcomes.

If there are constraints that affect the ability to deliver services, an investment in both resources and capabilities may be required to overcome them.

Suppliers may be included in this value chain, and they will need to invest in their own resources and capabilities to deliver according to the service provider’s requirements. But in service strategy, the focus for the service provider is the business outcome and how this can be established.

Service Asset

In Figure 2.9, you can see the representation of service assets driving services.

Constraints will have an effect on the service that is delivered, either positive or negative, and this in turn will have an impact on customer assets and the ability to achieve business outcomes.

All organizations have some restrictions on the use of their assets. No organization has unlimited resource, and this will necessarily have an impact on the capability of delivery.

Other constraints may force the use of better-quality components—an example here would be security or regulatory requirements driving an improved capability in service.

IT Service Management

When we consider IT service management in the context of customer and service assets, it is the management of the service assets (resources and capabilities) used to deliver services that support the achievement of the customer’s business outcomes. Customers could be external or internal.

Service management enables the service assets to perform according to customer requirements while identifying and reducing the impact of constraints on the service assets. IT service management does this by managing IT’s capabilities and resources. This is done either internally or through the support of external service providers and technology vendors.

Achieving this is not straightforward and often takes several years of hard work and cultural change. Changes in the capability of staff and the resultant experience that they will gain takes time to develop.

Most IT service providers start out by organizing their departments according to technical specialization. This is an important principle because each type of technology is very specialized and requires people with specialized skills to manage it.

But this means that goals are accomplished and reporting is done in silos, and the selection of staff is based on expertise, not any strategic plans. Often functional managers compete with each other rather than act in partnership, and as a consequence, issues that affect the organization across the functions are not addressed.

Processes are used as a means for managing silos, to bridge the gaps between the departments. Processes can be self-contained or cross-functional, dependent on the outcome that is required. They should enable thinking of IT as a set of cohesive resources and capabilities, not just as a set of individual departments or specialisms.

It is important that the processes focus on outcomes, not just outputs. Otherwise, the individual departments will simply focus on their specific output and ignore the fact that the outputs produced by all are used to deliver the overall outcome required by the business.

To achieve this successfully, IT priorities must be aligned to the drivers of business value, otherwise the IT department will be entirely inwardly focused.

IT Service Provider

The logical conclusion of this engagement between business units, service management, processes, and IT departments is that the IT department models itself as a service provider, with the goal of meeting business outcomes.

As can be seen in Figure 2.10, the resources and capabilities of the service provider are utilized to support the service (in the context of utility and warranty), and these in turn support and enable the business unit. Use of customer assets in the form of resources and capabilities will deliver the business outcomes.

This is a direct connection from the service provider on the right of the image to the business outcomes on the left. Management of service assets by the service provider is used to deliver the utility and warranty, with the positive and negative effects of risks and costs driving the use of assets, both for the service provider and the customer.

This is often viewed as an end-to-end approach for the delivery of service.

Working backwards from the service potential ensures that any strategic decisions are based on customer value.

Here are some key questions to ask to ensure that the service provider will deliver the business outcomes:

• Who are our customers?
• What do those customers want?
• Can we offer anything unique to those customers?
• Are the opportunities already saturated with good solutions?
• Do we have the right portfolio of services developed for given opportunities?
• Do we have the right catalog of services offered to a given customer?
• Is every service designed to support the required outcomes?
• Is every service operated to support the required outcomes?
• Do we have the right models and structures to be a service provider?
• What we are trying to achieve as a service provider? Are our customers happy?
• Do they view our services as strategic assets?

We know that assets are resources and capabilities that are used to deliver services. A strategic asset is any asset (customer or service) that provides the basis for core competence, distinctive performance, or sustainable competitive advantage or that qualifies a business unit to participate in business opportunities. It is an asset that makes a significant difference to the organization.

Strategic assets are dynamic in nature. They are expected to continue to perform well under changing business conditions and objectives of their organization. That requires strategic assets to have learning capabilities, and that means being able to learn from past experience.

Part of service strategy is to identify how IT and IT service management can be viewed as strategic assets rather than an internal administrative function. It is important that IT is able to link its services to business outcomes, which in turn will contribute to the organization’s competitive advantage and market differentiation.

We begin to grow service management into a strategic asset by building on our capabilities. This perception of IT as a valuable and trusted strategic part of the business does not happen overnight. It takes a concerted and formal effort in which IT demonstrates its contribution one area at a time.

Each new challenge that IT enables the business to overcome allows IT to develop additional credibility and enables the business to see IT as a strategic service provider. The more trusted IT becomes, the more services the business will ask it to provide, and at higher service levels. This increase in credibility and trust will justify more investment in the IT department, which in turn will allow for investment in greater capability.

Confidence and credibility in a provider have to be earned. Figure 2.11 represents cycles of earning trust. In practice there will be many more. It is of course possible for the cycle to run backwards if you fail to provide the service the business expects.

The sequence of activity is as follows:

• Within an existing IT service provider, the cycle begins when the service provider and business have selected an opportunity—which could be an existing service or an initiative that has already been defined. The value of this opportunity is defined in terms of outcomes that need to be achieved and the investment required to meet them. The opportunity will also specify which customers and market spaces the opportunity addresses.
• The service provider ensures that the capabilities and resources are in place to deliver the service(s).
• When delivered at the agreed levels, these services enable the business to achieve its objectives or overcome the defined challenge. It is important that these achievements are documented and reported to the stakeholders.
• The customer recognizes the IT service provider’s contribution to their success (the value of the service).
• As a result, the customer is willing to entrust even more opportunities to the service provider.

Service management is viewed as a strategic asset (rather than a set of purely operational processes) when it can demonstrate how it enables the service provider to compete and differentiate itself effectively.

Service management does this by performing the following actions:

• Establishing a catalog of services that contribute to strategic business objectives and outcomes
• Identifying the market spaces in which IT enables the business to compete
• Defining how these services meet business challenges and then measuring them to ensure that this is achieved
• Building capabilities and resources to deliver these services and overcome identified challenges
• Communicating with the business about delivery achievements

Types of Service Providers

There are many options in the market place for the type of service provider an organization might use, and each has its own risks, costs, and benefits. This means that any choices made in sourcing IT from a service provider will need to align to the overall business strategy.

We will need to consider resources and capabilities and the overall outcomes that are required from the service provider, just as we do for a service that they deliver.

Type I Service Provider

The example in Figure 2.12 shows the Type I service provider. Type I providers are service providers that are dedicated to, and often embedded within, an individual business unit. The business units themselves are usually a part of an organization. They are funded by overheads and are required to operate strictly within the mandates of the business. Type I providers have the benefit of working closely with their customers, and are able to avoid certain costs and risks associated with conducting business with external providers. The control of all services remains within one organization.

Because Type I service providers are dedicated to specific business units, they are required to have an in-depth knowledge of the business. They are usually highly specialized, often focusing on designing, customizing, and supporting specific applications or on supporting a specific type of business process.

The diagram shows three business units with Type I service providers. Each IT unit is dedicated to a single business unit and delivers specialized services to that business unit only. A disadvantage of this approach is that there may be duplication and waste when Type I providers are replicated within the organization.

Competition for Type I providers is from providers outside the business unit, such as corporate business functions, who may be able to utilize advantages such as scale, scope, and autonomy.

Type II Service Provider

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 independent special unit called a shared services unit as shown in Figure 2.13. IT is shown as a single department with a service catalog that is available to multiple business units.

Shared service units can create, grow, and sustain an internal market for their services and model themselves along the lines of service providers in the open market. Often they can leverage opportunities across the organization and spread their costs and risks across a wider base. They are subject to comparisons with external service providers whose performance they should match, if not exceed.

Type II providers can offer lower prices compared to external service providers by leveraging internal agreements and accounting policies. They can standardize their service offerings across business units and use techniques such as market-based pricing to influence demand patterns. Market-based pricing is the approach where the service provider compares itself to an external provider for its pricing model. This makes comparison easier for the customer and may highlight internal economies. A successful Type II service provider can find itself in a position where it is able to provide its services externally as well as internally.

It is possible to combine Type I and Type II within an organization where there is a mix of requirements for IT services—for example, some specialists and dedicated service provisions and some shared services.

Type III Service Provider

A Type III service provider is a service provider that provides IT services to external customers. In Figure 2.14, you can see an example of a Type III provider.

The business strategies of customers sometimes require capabilities more readily available from a Type III provider. Type III providers assume additional risk because their core business is the delivery of service and they are competing against internal Type I and Type II providers. Type III providers can offer competitive prices and drive down unit costs by consolidating demand from a range of clients. They may have the economies of scale to be able to deliver against specialisms that are too expensive for an individual customer by offering the capability to a wider range of customers. A further aspect of Type III service providers is that they provide specific capabilities or activities that are used by a Type I or II service provider to support their services.

Although this is not shown in the diagram, it should be noted that organizations using Type III service providers will still need an internal IT function or functions to manage the specification of services, coordinate the contracts, and ensure that business outcomes are met.

Evaluation of Service Providers

An organization needs to understand the advantages and disadvantages of each provider type. The choice of provider will be influenced by a number of factors, including the cost per transaction with the service provider, the best practice in a particular industry sector, and any specific requirements that can be met by only a particular type.

Of course, a major consideration should be the core competencies that are delivered by the service provider. The decision will need to take into consideration the service provider’s risk management capabilities and the impact that the use of a specific provider type might have on the organization and the resultant risk. Another factor to consider is the economy of scale the service provider can deliver.

The tendency is for core services to be delivered by Type I or Type II providers (or indeed a mix of these), while enhancing services are often supplied through Type II or Type III providers (or a mix, as before).

It is important to remember that the organizational requirements may change over time, and this may have an impact on the sourcing model that is required. In Table 2.1, we have an organizational view of the movement from one service provider type to another. For example, changing from a Type I provider (left-hand column) to a Type III provider (right-hand column) would be classified as outsourcing.

Evaluation of the service provider types depends on the nature of the provision, and whether customers keep a business activity in-house (aggregate), separate it out for dedicated management (disaggregate), or source it from outside (outsource) will depend on the answers to the following questions:

• Does the activity require assets that are highly specialized? Will those assets be idle or obsolete if that activity is no longer performed?
  • If yes, then disaggregate and/or outsource.
• How frequently is the activity performed within a period or business cycle? Is it infrequent or sporadic?
  • If yes, then outsource.
• Does the activity require knowledge specific to a particular business unit, even if the activity is infrequent and/or specialized?
  • If yes, then disaggregate or insource.
• How complex is the activity? Is it simple and routine? Is it stable over time with few changes?
  • If it’s stable over time, then outsource. If it is complex and volatile, it might need to be disaggregated.
• Is it hard to define good performance?
  • If yes, then aggregate.
• Is it hard to measure good performance?
  • If yes, then aggregate.
• Is it tightly coupled with other activities or assets in the business? Would separating it increase complexity and cause problems of coordination?
  • If yes, then aggregate.

Organizations learn and improve over time during lasting relationships with customers. Fewer errors are made, investments are recovered, and the resulting cost advantage can be leveraged to increase the gap with competition. This is the same for the relationship between the service provider and their customers.

It is a fact that customers find it less attractive to turn away from well-performing incumbents, simply because of the costs relating to switching to a new provider. Experience can be used to improve assets over time and therefore improve the service delivery.

Service providers must therefore focus on providing the basis for a lasting relationship with customers. It is important for the service provider to carry out strategic planning and control to ensure that common objectives drive everything that is delivered. This requires knowledge to be shared effectively between units and the results of experience fed back into future plans and actions.

Desired Business Outcomes

The customers use their assets to achieve specific outcomes. Understanding what these outcomes are will help the service provider define the warranty and utility of the services and prioritize service needs.

Customer Assets

Services enable and support the performance of the assets the customer uses to achieve its business outcomes. Therefore, it is necessary when defining services to understand the linkage between the service and the customer assets.

Constraints

Customer assets will be limited by some form of constraint, such as lack of funding, lack of knowledge, regulations, and legislation. Understanding those constraints will enable the service provider to define boundaries for the service and also help the customer overcome, or work within, many of them.

How Value Will Be Perceived and Measured

Customers always measure performance, quality, and value. It is vital that the service provider understands how the customer measures the service—even if the service provider is not able to measure the service the same way.

The value of a service is best measured in terms of the improvement in business outcomes. These should be attributable to the impact of the service on the performance of business assets. Some services increase the performance of customer assets, some maintain performance, and others restore performance following an incident. A major aspect of providing value is preventing or reducing the variation in the performance of customer assets.

Services and Service Packages Can Include Options

Service providers need to differentiate between service packages to allow for different customers to receive their individual service requirements. Potentially, each type of consumer will require a different level of warranty and utility.

Where a service or service package needs to be differentiated for different types of customer, one or more components of the package can be changed, or offered at different levels of utility and warranty, to create service options. These different service options can then be offered to customers and are sometimes called service level packages.

For example, when considering a core service of satellite television channels:

• Option A includes 100 channels.
• Option B includes 200 channels.
• Option C includes only channels appropriate for families with young children.
• Option D includes 300 channels and 5 pay-per-view sporting events per month.

Each of these services has a defined level of utility and warranty.

Service packages may be created to offer a number of different options to the customer. Each of these options will be documented in the service catalog, allowing the customer to choose the option that best suits its requirements.

Cloud Computing

In the case of cloud computing, the customer is able to pick and choose combinations of services and service levels. The customer is choosing its own packages and options.

Segmentation

An organization may choose to categorize its customers. This enables them to package services targeted to the needs of the categories.

In its simplest form, this could, for example, be a golf club or leisure center offering different membership packages (e.g., individual, family, junior, senior), but it could be more sophisticated, such as the example of the media company offering entertainment and communication packages, mentioned previously.

Segmentation can be extremely valuable for targeting marketing and sales campaigns, for example, as well as for defining service packages aimed at different segments. IT providers can use the same technique to segment IT users.

This will allow service packages to be developed to meet the needs of each user type while giving the following advantages:

• Maximization of standardization
• Minimization of different and diverse services
• Easier distribution
• Simplification of support issue

Designing and Transitioning Service Packages

The design and transition of service packages follows exactly the same process as any other service. A suggestion or request for a new service package (or change to an existing service package) is submitted through service portfolio management. The service package is modeled and assessed, and a change proposal submitted. Once the change proposal is authorized, the required levels of utility and warranty for the service package and its options will be documented in the service charter and submitted to design coordination.

A service design package (SDP) will be created to support the design, transition, and operation of the service package throughout the service lifecycle. The service transition processes will build, test, and deploy the service packages, just as they would any individual service, using the service charter and SDP as a basis for this activity.

The service package and its options will be documented in the service catalog.

Business Case

A business case is a decision support and planning tool that projects the likely consequences of a business action. The outcome may be assessed on both qualitative and quantitative criteria. A financial analysis is often central to a good business case.

Business objectives are an important part of the business case because they will be the justification for the request for funding. There is a difference between the business objectives of a profit organization and nonprofit organization. This must be part of the consideration for any service provider when constructing a business case.

Business impact is another essential part of the business case, but it is often only based on cost analysis. If there is a nonfinancial business impact, it should be linked to a business objective to provide a value.

A minimum sample business case structure includes an introduction, presenting the business objectives to be addressed, followed by the methods and assumptions that have been used. This defines the boundaries of the business case, such as the time period and how benefits and costs are being calculated.

The business impacts section of the business case covers the financial and nonfinancial results that are expected. This often includes expressing nonfinancial results in financial terms, such as translating staff improvements as a reduction in expenditure on training and hiring.

Risks and contingencies will be important for the decision-making process and must be included in the business case.

The final section should cover the recommendations and specific actions.

Pre-program ROI

The term capital budgeting is used to describe how managers plan significant outlays on projects that have long-term implications. A service management initiative may sometimes require capital budgeting to fund the project or service.

An additional factor to remember when performing pre-program ROI is the relative value of the investment over time. An investment typically occurs early, while returns do not occur until sometime later.

Capital budgeting falls into two broad categories:

• Screening decisions relate to whether a proposed service management initiative passes a predetermined requirement—for example, a minimum return. Screening decisions are usually made using a discounted cash flow method of net present value (NPV).
• Preference decisions relate to choosing from among several competing alternatives—for example, electing between an internal service improvement plan (SIP) and a service sourcing program. Preference decisions are usually made using a discounted cash flow method of internal rate of return (IRR).

In screening decisions (using net present value), the program’s cash inflows are compared to the cash outflows over time. The value of the money spent today will probably change over time due to inflation, currency fluctuations, and so on. This fluctuation in the value of income and expenditure over a period of time is called the discounted cash flow.

These discounted cash flows need to be taken in account when ROI calculations are used to calculate the return over a period of time. The difference, called net present value, determines whether or not the investment is suitable. If the NPV is positive, the return is greater than the minimal rate of term, and the program is considered acceptable. If the NPV is zero, this means that the return is equal to the minimal rate of return, which again, may be acceptable. Whenever the net present value is negative, the investment is unlikely to be suitable. This is shown in Table 2.4.

Table 2.5 shows an example of the calculation of the net present value.

You can see the initial investment value, the time frame (5 years), and the annual cost savings being achieved, along with the required rate of return (10%).

In Table 2.6, you can see the application of the discounted cash flow to show the final total, which shows that the NPV is positive, producing a return of over five thousand dollars at the end of the five-year period.

Preference Decisions (Using Internal Rate of Return)

While many opportunities pass the screening decision process, not all can be acted on. Financial or resource constraints may require comparison of alternatives. Preference decisions, sometimes called rationing or ranking decisions, must be made. The competing alternatives are ranked.

Simply calculating and comparing the NPV of one project with that of another does not compare the actual size of the investment and returns. As a result, the internal rate of return (IRR) is widely used for preference decisions. The higher the internal rate of return, the more desirable the initiative.

The IRR, sometimes called the yield, is the rate of return over the life of an initiative. IRR is computed by finding the discount rate that equates the present value of a project’s cash outflows with the present value of its inflows. That is, the IRR is the discount rate resulting when an NPV of zero is achieved (or the exact time when the project will break even and start producing a positive contribution).

In Table 2.7, the calculation of IRR is based on the previous example we used for NPV.

Both of the project options have a positive NPV, but project 2 (Table 2.7) shows a greater internal rate of return than project 1 (Table 2.6). This conclusion is based only on financial return and does not include any nonfinancial returns that may be achieved from the projects.

Post-program ROI

Many companies successfully justify service management implementations through qualitative arguments, without a business case or plan, often ranking cost savings as a low business driver.

But without clearly defined financial objectives, companies cannot measure the added value brought about by service management, thereby introducing future risk in the form of strong opposition from business leaders.

Stakeholders may question the value of a service management program. Without proof of value, executives may cease further investments. Therefore, all significant projects should be subjected to a post-program ROI analysis. However, if service management is initiated without prior ROI analysis, it is even more important that an analysis be conducted at an appropriate time after (when the anticipated returns can reasonably be measured).

Figure 2.24 illustrates the model for a post-program ROI.

Once the objectives of the program have been identified, data collection takes place to determine the program costs. Understanding the effects of the program, and how they will be expressed in a suitable monetary format, will lead to the calculation of the ROI based on the program costs and expected returns.

The forecast analysis (Figure 2.25) for the success of a program shows a trend-line analysis (or another forecasting model), which is used to project data points had the program not taken place.

This kind of visual analysis is a very clear demonstration of the effect of an improvement program, as shown by the two different trend lines achieved by assessment of the different amounts of funding applied.

Business Impact Analysis

Business impact analysis (BIA) is a method used to evaluate the relative value of services and is often performed as part of service portfolio management.

Instead of analyzing the positive returns of the services, BIA examines what would happen if the service was not available, or only partially available, over different periods of time. The value of this method is that it is easy for the customer to express the value of the service in terms that are meaningful to it—both financial and nonfinancial.

An advantage of this approach for internal service providers is that it is an excellent communication tool, demonstrating to their customers that they have understood their priorities and how they have allocated their resources.

This focus on assessing the outages of services, combined with assessing the severity of the outage, makes it a useful method for IT service continuity management and other related service management processes and functions. It will help to answer useful questions about the organization and to support the choices that need to be made to support the required business outcomes.

The BIA high-level activities are as follows:

• Arrange resources from business and IT for the analysis.
• Prioritize candidate services.
• Identify core analysis points for risk and impact assessment.
• Weight the risk and impact elements from a business perspective.
• Score services against weighted risk elements.
• List services in order of risk profile.
• Agree on standard time period for comparing outage costs.
• Calculate the financial impact of each service.
• List services in order of financial impact.
• Generate charts showing company’s risk and financial impact for specific services.

Using the results of business impact analysis enables the business to decide on the priorities of service provision in a meaningful way—by comparing the investment in the service with the cost of not having it (or having access at a reduced level). This is an important aspect of strategy.

Insourcing

This approach relies on utilizing internal organizational resources in the design, development, transition, maintenance, operation, and/or support of new, changed, or revised services.

Outsourcing

This approach utilizes the resources of an external organization or organizations in a formal arrangement to provide a well-defined portion of a service’s design, development, maintenance, operations, and/or support. This includes the consumption of services from application service providers (ASPs), described later.

Co-sourcing or Multi-sourcing

Co-sourcing or multi-sourcing is often a combination of insourcing and outsourcing, using a number of organizations working together to co-source key elements within the lifecycle. This generally involves using a number of external organizations working together to design, develop, transition, maintain, operate, and/or support a portion of a service.

Partnership

A partnership is a formal arrangement between two or more organizations to work together to design, develop, transition, maintain, operate, and/or support IT service(s). The focus here tends to be on strategic partnerships that leverage critical expertise or market opportunities.

Business Process Outsourcing

Business process outsourcing (BPO) is an increasing trend of relocating entire business functions using formal arrangements between organizations. One organization provides and manages the other organization’s entire business process(es) or function(s) in a low-cost location. Common examples are accounting, payroll, and call center operations.

Application Service Provision

This involves formal arrangements with an application service provider (ASP) organization that will provide shared computer-based services to customer organizations over a network from the service provider’s premises. Applications offered in this way are also sometimes referred to as on-demand software/applications. Through ASPs, the complexities and costs of such shared software can be reduced and provided to organizations that could otherwise not justify the investment. For example, Google now provides Gmail and Google Docs as additional service functionality for users.

Knowledge Process Outsourcing

Knowledge process outsourcing (KPO) is a step ahead of BPO in one respect. KPO organizations provide domain-based processes and business expertise rather than just process expertise. In other words, the organization is required to not only execute a process, but also to make certain low-level decisions based on knowledge of local conditions or industry-specific information. For example, when credit risk assessment is outsourced, the outsourcing organization has historical information that it has analyzed to create knowledge, which in turn enables it to provide a service. Every credit card company collecting and analyzing this data for themselves would not be as cost effective as using KPO.

Cloud

Cloud service providers offer specific predefined services, usually on demand. Services are usually standard, but they can be customized to a specific organization if there is enough demand for the service. Cloud services can be offered internally but generally refer to outsourced service provision.

Multi-vendor Sourcing

This type of sourcing involves sourcing different services from different vendors, often representing different sourcing options from the options we have just explored.

Governance

Sourcing governance is a complex area. There is a frequent misunderstanding of the definition of governance, particularly in the context of sourcing. Companies have used the word interchangeably with vendor management, supplier management, and sourcing management organization. Governance is none of these.

Governance refers to the rules, policies, processes (and in some cases, laws) by which businesses are operated, regulated, and controlled. These are often defined by the board or shareholders or by the constitution of the organization, but they can also be defined by legislation, regulation, or consumer groups.

Management and governance are different disciplines. Management deals with making decisions and executing processes. Governance is the framework of decision rights that encourage desired behaviors in the sourcing and the sourced organization.

Governance is a major factor in a sourcing strategy. It should include the following components:

A Governance Body With a manageably sized governance body with a clear understanding of the service sourcing strategy, decisions can be made without escalating to the highest levels of senior management. When representation from each service provider is included, stronger decisions can be made.

Governance Domains Domains can cover decision-making for a specific area of the service sourcing strategy. Domains can cover, for example, service delivery, communication, sourcing strategy, or contract management. A governance domain does not include the responsibility for its execution, only its strategic decision-making.

Creation of a Decision-Rights Matrix This ties all three recommendations together. RACI charts are common forms of a decision-rights matrix.

Supplier Management This ensures that contracts and external service providers are managed according to the organization’s governance policies, standards, and controls.

It is important to understand the costs and risks associated with changing from one sourcing model to another. The costs of change can sometimes overshadow any benefit, and the additional management of an outsourced contract can eat into expected savings.

In addition, the risk of moving critical operational activities from one entity to another can be disruptive, and can be irrevocably damaging if this disruption is felt over an extended time. It is important to consider the following critical success factors when making the decision to ensure a successful sourcing strategy:

• Desired outcomes, such as cost reduction, improved service quality, and diminished business risk
• The optimal model for delivering the service
• The best location to deliver the service, such as local, onshore, nearshore, or offshore

The recommended approach to deciding on a strategy includes these three points:

• Ensuring that there is analysis of the organization’s internal service management competencies
• Comparison of those findings with industry benchmarks
• Assessment of the organization’s ability to deliver strategic value

When the results of the strategic assessment are considered, the sourcing strategy will depend on the levels of competence of service management within the organization.

If the organization’s internal service management competence is high and also provides strategic value, then an internal or shared services strategy is the most likely option. The organization should continue to invest internally, leveraging high-value expert providers to refine and enhance the service management competencies.

If the organization’s internal service management competence is low but provides strategic value, then outsourcing is an option, provided services can be maintained or improved through the use of high-value providers.

If the organization’s internal service management competence is high but does not provide strategic value, then there are multiple options. The business may want to invest in its service capabilities so that they do provide strategic value, or it may sell off these service capabilities because they may be of greater value to a third party.

If the organization’s internal service management competence and strategic value are low, then they should be considered candidates for outsourcing.

Prior to any implementation, an organization should establish and maintain a baseline of its performance metrics. Without such metrics, it will be difficult to assess the true impact and trends of a service sourcing implementation.

Measurements can take on two forms:

Business Metrics Financial savings, service level improvements, business process efficiency

Customer Metrics Availability and consistency of services, increased offerings, quality of service