Service Strategy Principles Tutorial

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3.1 Learning Unit 03 - Service Strategy Principles

Exercise 2: This is a scenario based exercise. Let us understand the scenario: Imagine yourself as a Mobile Service Operator who wishes to launch its new “Voice Mailbox “service in Market. You wish to identify the Value of this new service The exercise would be to identify what are the main areas or characteristics that you would consider to identify the value of this new service and why? You can mark your answers and discuss the same in your class room training. After this complete the quiz section.

3.2 Learning Unit Objectives

The topics in this unit will help you to: • Understand Fundamental Aspects of Strategy • understand and describe 4 P’s of Strategy • understand the Customer Perceptions of Value • understand the Value Added to Value Realized • know about the Strategies for Customer Satisfaction • understand the Kano Model • understand ROI - Different Considerations • And the Sourcing Strategies So, let’s begin with the fundamental aspects of strategy in the next slide.

3.3 Fundamental Aspects of Strategy

Strategic thought and action are difficult for the following reasons: • Using theory to support strategy: Theory is often discounted because of associations with the abstract or impractical. Theory, however, is the basis of best practice. Engineers use theory to solve practical problems. Investment banks use portfolio theory to validate investments. Key methods of Six Sigma are based on the theories of probability and statistics. • Strategy must enable service providers to deliver value: A good business model describes the means of fulfilling an organization’s objectives. However, without a strategy that in some way makes a service provider uniquely valuable to the customer, there is little to prevent alternatives from displacing the provider, degrading its mission or entering its market space. A service strategy therefore defines a unique approach for delivering better value. • A basic Approach to deciding a strategy: Imagine you have been given responsibility for an IT organization. This organization could be internal or external, commercial or not-for-profit. How would you go about deciding on a strategy to serve customers? Firstly, acknowledge that there exist other organizations whose aim is to compete with your organization. Even government agencies are subject to competitive forces. Secondly, decide on an objective or end-state that differentiates the value of what you do, or how you do it, so that customers do not perceive greater value could be generated from any other alternative. • Service Management as a Strategic Asset: To develop service management as a strategic asset, define the value network within which service providers operate in support of their customers. Strategic assets are carefully developed bundles of tangibles and intangibles, most notably knowledge, experience, systems and processes. Service management is a strategic asset because it constitutes the core capabilities for service providers. Service management acts as an operating system for service assets in effectively deploying them to provide services. • Strategy as a means to outperform competitors: Customers continually seek to improve their business models and strategies. They want solutions that breakthrough performance barriers – and achieve higher quality of outcomes in business processes with little or no increase in cost. Such solutions are usually made available through innovative products and services. If such solutions are not available within a customer’s existing span of control, service contracts, or value network, they are compelled to look elsewhere. • Government and Non – Profit Organizations: Government and non-profit organizations appear to operate in environments unaffected by the pressures of competition and markets. The ethics of social-sector services are about helping people, not beating them. But strategic competition is not at odds with a social-sector’s sense of mission. Government and non-profit organizations must also operate under limited and constrained resources and capabilities. A government or non-profit organization’s strategy, much like that of its commercial counterparts, explains how its unique service approach will deliver better results for society. No commercial enterprise can succeed by attempting to be all things to all people. Similarly, governments and non-profit organizations should make choices in what they will and, just as important, will not do. As we now have a clear understanding of the fundamental aspects of strategy, let’s discuss on the 4 P’s of strategy in the next slide.

3.4 The Four P's of Strategy

We had briefly discussed on the 4’ps in Introduction to Service Strategy. Here we will discuss the 4P’s in detail. The Lifecycle has, at its core, service strategy. The entry points to service strategy are referred to as ‘the Four Ps’ following Mintzberg20 as shown in the figure. They identify the different forms a service strategy may take. Perspective describes 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 describe how the service provider intends to compete against other service providers in the market. The position refers to the attributes and capabilities that the service provider has, that set them apart from their 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. Plans Describe how the service provider will transition from their current situation to their desired situation. Plans describe the activities that the service provider will need to take to be able to achieve their perspective and positions. Patterns describe the ongoing, repeatable actions that a service provider will have to perform in order to continue to meet its strategic objectives. Let us understand the first activity: Perspective The perspective of an organization expresses how it sees itself in terms of its context. It describes what the organization is, what it does, who it does it for and how it works, and it does this in a way that makes it easy to communicate internally and externally. The perspective reminds employees, customers and suppliers about the beliefs, values and purpose of the organization. It sets an overall direction for the organization and articulates how it will fulfill its purpose. Let’s continue to discuss on 4P’s in the next slide.

3.5 Four P's of Strategy - Cont

In our last slide we learnt about the Four P’s of Strategy and learnt about the first activity Perspective in detail. This slide talks about the second activity Positioning of Four P’s of Strategy. Strategy as a position is expressed as distinctiveness in the minds of customers. Positioning can be Variety Based, Needs- Based, Access Based and Demand Based. Variety Based Positioning – The service Provider differentiates itself by offering a narrow range of services to a variety of customers with varied needs. For example, a mobile phone company offers a range of pre-defined packages based on time and type of usage. Customers choose the package that suits them, even though customers may use the same package differently. Needs- Based Positioning – This type of positioning is also called “Customer intimacy” where the service provider identifies opportunities in a customer, develop services for them etc. This type of positioning is also called ‘customer intimacy*, where 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 service provider’s relationship with and knowledge about the customer is key in needs-based positioning. Access Based Positioning – The service provider highly tailored services to a very specific target market, usually based on location, special interest on some or the other category. Only people in that group will typically have access to that service. For example, branded motorcycle accessories can only be purchased from stores that sell that brand of motorcycle. Demand Based Positioning – This is an emerging type of positioning in which the Service Provider uses a variety based approach to appeal to a broad range of customers, but allows to each customer to customize exactly which components of the service they will use, and how much of it they will use. Online service providers are exploring this form of positioning at the time of writing. In the next slide, let us look at Plans and Patterns.

3.6 Four P's of Strategy - Cont

The third P of Strategy is Plans – The Plans activity Describes how the Service Provider will transition from their current situation to their desired situations. The most tangible form of a strategy is a set of documents referred to as the strategic plan, and in many organizations this is what is 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. Since the future is uncertain, plans usually contain several scenarios, each one containing a strategic response and the level of investment. Throughout the year, the plans are compared with actual events and adjustments made to adapt to the emerging scenario. Some plans are high-level, such as the overall strategy, while others are more detailed, such as the execution plans for a particular new service, or process. All plans are coordinated and follow the same strategic framework. The Fourth P of Strategy is Patterns – The Patterns activity describes the ongoing, repeatable actions that a service provider will have to perform in order to continue to meet its strategic objectives. Patterns are the ways in which an organization organizes itself to meet its objectives. These patterns could be organizational hierarchies, processes, inter-departmental collaboration, services etc. Some patterns involve the way the organization works internally. Other patterns involve the way in which the organization interacts with its customers and suppliers. Patterns are important because they ensure that the service provider does not continuously react to demand in a new way every time. Patterns enable the service provider to predict how a strategy will be met, and what investment will be needed. In the next slide let us understand how strategic places results in patterns.

3.7 Strategic Plans results in patterns

In some cases the organization will define the patterns it needs in its strategy and then require that 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. The diagram shown here depicts that, one plan is executed (at times with some adjustment), another is deferred and yet another emerges to respond to a strategy – impacting change. The net result is the executed plan plus the Emergent plan is the new patterns for the organization. So far we discussed about the 4P’s, let us now proceed to learn about customer and services.

3.8 Customer and Services

The concept of customers has been introduced in the previous learning unit, however let’s discuss this in detail here. Customers are those who buy goods or services e.g. The customer of the IT Service provider is the person or group who defines and agrees the service level targets. The customer is primarily interested in the outcome that they will receive, and does not need to be concerned with specific costs and risks that the service provider will have to incur in order to deliver the service. The customer will only be exposed to the sum total price of the service, which will include the entire provider’s risk and risk mitigation measures. How do customers differ from users and consumers?: IT service providers often talk in generic terms about 'the customer’ as anyone who receives a service of some kind. It is important that all IT staff treat people to whom they deliver services as customers. This ensures that IT staff members demonstrate good customer-service behavior, and that both users and customers are satisfied with the level of service that they receive. This, in turn, promotes customer retention. Internal and external customers: Regardless of how consistently customers and consumers are treated, they are not all the same. There is a difference between customers who work in the same organization as the IT service provider, and customers who work for another organization. Other IT organizations as customers: Some IT organizations encourage their staff to view every IT organization as a customer. The reason for doing this is to ensure higher quality work and more positive interactions between departments. While the objective is commendable, it is important to avoid any negative behavior resulting from a contrived customer-supplier relationship. IT as an external service provider: Most of the examples used above refer to IT as an internal service provider, but many organizations are in the business of providing IT services. ITIL Service Strategy is also about service providers that provide services such as internet service providers, hosting services and outsourcing companies. Business units as customers: In the IT service management model the relationship between an IT organization and other business units is characterized as a service provider-customer relationship. This is a useful model to explain the interactions between different parts of an organization and also to explain the dynamic nature of the IT organization's outputs and activities. In the next slide let’s look at the types of IT services.

3.9 Types of IT Services (Internal and External Services)

The IT services are categorized as Internal and external services: Just as there are internal and external customers, there are internal and external services. Internal services are delivered between departments or business units in the same organization. External services are delivered to external customers. The reason for differentiating between internal and external services is to differentiate between services that support an internal activity, and those that actually achieve business outcomes. The difference may not appear to be significant at first, since the activity to deliver the services is often similar. However, it is important to recognize that internal services have to be linked to external services before their contribution to business outcomes can be understood and measured. This is especially important when measuring the return on investment of services Supporting Services (internal) is a service that is not directly used by the business, but is required by the IT Service Provider so that they can provide other IT Services- for example, directory services, naming services, the network or communication services. In the next slide we will look at the examples of core, enabling and enhancing services.

3.10 Core, Enabling, or Enhancing Services

All services, whether internal or external, can be further classified in terms of how they relate to one another and their customers. Services can be classified as core, enabling or enhancing, and are defined in previous learning units. Examples of these services are provided in the Table. Core services deliver the basic outcomes desired by the customer. They represent the value that the customer wants and for which they are willing to pay. Core services anchor the value proposition for the customer and provide the basis for their continued utilization and satisfaction. Supporting services either enable or enhance the value proposition. Enabling services are basic factors and enhancing services are excitement factors. Enhancing services tend to drift over time to be subsumed into core or enabling services. In other words, what is exciting to a customer today becomes expected if it is always delivered. Until now we discussed about types of services and relevant examples. Let us proceed to understand the characteristics of Value in the next slide.

3.11 Value - Characteristics

The value of a service can be considered to be the level to which that service meets a customer’s expectations. It is often measured by how much the customer is willing to pay for the service, rather than the cost of the service or any other intrinsic attribute of the service itself. Unlike products, services do not have much intrinsic value. The value of a service comes from what it enables someone to do. Following this reasoning, the characteristics of value are: Value is defined by customers: No matter how much the service provider advertises the worth of their services, the ultimate decision about whether that service is valuable or not rests with the customer. An affordable mix of features: it is possible to influence the customer’s perception of value through communication and negotiation, but that still does not change the fact that the customer will still make the final choice about what is valuable to them. A good sales person can convince a customer to change the priorities influencing their purchase, but the customer will select the service or product that represents the best mix of features at the price they are willing to pay. Achievement of objectives: Customers do not always measure value in financial terms, even though they may indicate how much they are prepared to pay for a service that helps them to realize the desired outcome. For example, the police might focus on reduction in crime or the apprehension of criminals; social welfare departments might focus on the amount of funding disbursed to needy families; a mountain rescue organization might focus on the number of people warned about, or rescued from, avalanches. Value changes over time and circumstance s: what is valuable to a customer today might not be valuable in two years. For example, retail outlets might focus on selling a higher percentage of luxury goods when the economy is good, but during a recession they shift the focus to budget product lines and fewer luxury goods. What service(s) did IT provide? If IT is only perceived as managing a set of servers, networks and PCs it will be very difficult for the customer to understand how these contributed to the value. Value in achieved in terms of 3 areas: • The business outcomes achieved • The Customer’s Preference • The Customer’s perception of what was delivered Now let’s understand value from the customer’s perception in the next slide.

3.12 Customer's Perception of Value

Although a service provider is not able to decide the value of a service, it is able to influence how the value of the service is perceived by the customers. The figure shown in the slide illustrates how customers perceive value. In this diagram the starting point for customer perception is the reference value. This could be based on what the customer has heard about the service, or the fact that the customer is currently doing the activity themselves, or some previous experience of that or a similar service. The reference value may be vaguely defined or based on hard facts. An example of reference value is the baseline that customers maintain on the cost of in-house functions or services. It is important for the service provider to understand and get a sense of what this reference value is. This may be obtained through extensive dialogue with the customer, prior experience with the same or a similar customer or research and analysis available in the market. The positive difference of the service is based on the perceived additional benefits and gains provided by the service provider. These differences are based on the additional warranty and utility that the service provider is able to deliver. This is where the service provider is able to influence the customer’s perception most. This requires a marketing approach, which is discussed in the next section. The negative difference of the service is the perception of what the customer would lose by investing in the service. For example, they might perceive some quality issues or hidden costs. The service might not have the full functionality that they would like at the asking price. The service provider can also influence this area by listening to the customer requirements and matching the service features to them. They can also seek to influence the customer’s priorities by emphasizing the service’s strengths. The net difference is the actual perception that the customer has of how much better (or worse) the service is than the reference value after discounting the negative difference. This is the area that will drive the customer’s decision to invest in the service or not. The economic value is the total value that the customer perceives the service to deliver. It includes the reference value plus (or minus) the net difference of the service they receive, and is measured by the customer in the ability to meet their desired outcomes. In the next slide we will learn about value added and value realized.

3.13 Value Added and Value realized

To better describe the relationship between costs and value, Porter (1996) introduced the concept of value chains. A value chain is a sequence of processes that creates a product or service that is of value to a customer. Each step of the sequence builds on the previous steps and contributes to the overall product or service. A simple IT value chain is represented here. This is a pictorial representation of value realization. If you observe the Figure, you will find that number of components is used to deliver a service, and each component is managed by a department in IT. The database is managed by the database administration department, the application is managed by the application management department, application hosting is carried out by the application hosting department etc. Money is spent on procuring, developing and maintaining each component, and each department spends money on salaries, office space, benefits etc. As each department manages its component and makes sure it is working effectively, it adds value to the service. For example, a database on its own has relatively little value, but an application combined with a database has a value that is higher than just the cost of the two components. When combined with application hosting, the service becomes even more valuable. An analogy might be helpful here. A restaurant buys raw ingredients. It might be able to sell those ingredients for a small profit if there are no other providers in the area. If the restaurant spends some money on combining and cooking the raw materials into tasty dishes, they will be able to charge far more for the food than the actual cost of the ingredients, electricity etc. Serving drinks that complement the meals will increase the value even more. Since the infrastructure, applications and staff used to deliver services are generally not visible to the customer, it is difficult for them to understand just how much value has been added to their service. Attempts to describe their investment to the customer will be perceived as defensive, and an attempt to drive up the price of the service. Instead, the service provider should focus on building a model whereby they can measure the contribution of each internal service, and then link it to the achievement of the customer’s business outcome.

3.14 "Value Added" to "Value realized

This figure shows the internal and external services provided to internal and external customers by an IT service provider in terms of their value. It also depicts the ability of a service provider to retain a portion of the value created and realized. Moving ahead, let us learn about the effects of utility and warranty on service in the next slide.

3.15 Effects of Utility and Warranty on Service

Improving the utility of a service has the effect of increasing the functionality of a service or what it does for the customer, thus increasing the type and range of outcomes that can be achieved. The figure on the slide illustrates an example of an airline baggage handling service, which is able to complete the loading of baggage onto an aircraft within 15 minutes, 80% of the time. This is 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. 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% of the time. This new level of utility is shown by the dark-colored curve. Note that the standard deviation remains the same since the warranty has not changed. Figure 3.10 represents the standard distribution of the items being measured (in this case the x-axis represents the utility of the service, while the y-axis refers to the number of data points used to measure the service). It is important to note that the warranty does not automatically stay the same when utility is increased. In fact, maintaining consistent levels of warranty when increasing utility generally requires good planning and increased investment. This investment is required for making changes to existing processes and tools, training, hiring additional employees to do the increased work, additional tools to perform newly automated activities etc. The effect of improved warranty on a service: 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. Figure 3.11 shows how the standard deviation of the performance of a service changes when the 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, tool improvement, new tools or processes, automation etc.) 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, 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% of the time - a significant improvement. Figure 3.11 represents the standard distribution of the items being measured (in this case the x-axis represents the warranty of the service, while the y-axis refers to the number of data points used to measure the service). The warranty effect means that the performance of the service assets is improved. The utility effect means that the performance of the customer assets is improved. Now let’s look at the combined effects of Utility and warranty in the next slide.

3.16 Combined effects of Utility and Warranty

As explained in the last slide, both warranty and utility are required to create and realize value. Improving one or the other will result in improvements, but is often not enough. For example, increasing the warranty of a service that only meets 60% of customer requirements will continue to meet 60% of customer requirements more reliably. Increasing the utility of a service that experiences frequent outages is likely to make the customer even more frustrated than they were before, since the service is able to do more, but it still fails frequently. This Figure 3.12 shows the effect of improving both the utility and warranty of a service. In this diagram the original service is shown in the light color, and the improved service is shown in the dark color. In this case the range and number of outcomes is increased (shifting the line to the right) at the same time as improving the probability of outcomes (narrowing the standard distribution). This Figure shows a service at its initial range of outcomes supported, and performance (light color). After improving the utility and warranty, it is now able to support a wider range of outcomes, more reliably. Figure 3.13 shows a quadrant where services can be ranked according to their levels of warranty and utility. Services are placed in the quadrant according to their warranty and utility levels, as well as their value to the customer. The chart shows services that have a higher utility (services have functionality that meets the customer requirements), but a lower warranty (services are unreliable, unavailable or not secure). These services have a utility bias. This Figure also shows services that have lower utility than the warranty (services that are reliable, but their functionality does not meet customer requirements fully). These services have a warranty bias. Services that have the appropriate levels of both warranty and utility are balanced. These services have functionality that meets the customer requirements and they do so consistently. In the next slide we will look at value of a service in terms of return on asset for customer.

3.17 Value of a Service in terms of return on asset for customer

In our last slide we learned about the combined effects of Utility and Warranty. This slide talks about the Value of a Service in terms of return on asset for customer. The arrows marked with a plus in Figure 3.14 indicate a directly proportional relationship -here the higher the utility, the higher the performance average. The arrow with a minus indicates an inversely proportional relationship - here the higher the level of warranty, the lower the performance variation. In this Figure, services with a balance between utility and warranty increase the average performance of the customer assets (in other words result in higher value outcomes), while reducing the performance variation (in other words 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, the value is realized. Let us understand communicating utility in the next slide.

3.18 Utility and Warranty - Communicating Utility

Communicating utility and warranty is important for customers to be able to calculate the value of a service. Communicating utility will enable the customer to determine the extent to which utility is matched to their functionality requirements. Let us take the example of a bank that earns profit from lending money to credit-worthy customers who pay fees and interest on loans. The bank would like to disburse as many good loans as possible within a time period (desired outcome). The bank has a lending process that includes the activity of determining the credit rating of loan applicants. The bank uses a commercial credit reporting service, which is available over the phone and internet. The service provider undertakes to supply accurate, comprehensive, and current information on loan applicants in under a minute. The lending process is the consumer of the credit report, the loan officer being the user. The utility of a credit reporting service is from the high quality of information it provides to the lending process (customer asset) to determine the credit-worthiness of borrowers, so that loan applications may be approved in a timely manner after calculating all the risks for the applicant as shown in Figure. By reducing the time it takes to obtain good quality of information, the bank is able to have a high-performance asset in the lending process. Communicating utility is important for the customers to be able to calculate the value of the service. Communicating utility will enable the customers to determine the extent to which utility is matched to their functionality requirements. In this slide we discussed about communicating utility, in the next slide let us learn about communicating warranty and its combined effects.

3.19 Utility and Warranty - Communicating Warranty and Combined effects

Communicating warranty: Warranty ensures 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 and malfunctions make a product either unavailable for use or diminish its functional capacity. Warranties assure the products will retain form and function for a specified period under certain specified conditions of use and maintenance. Warranties are void outside such conditions. Normal wear and tear is not covered. Most importantly, customers are owners and operators of purchased goods. In the case of services, the customers are neither the owners nor the operators of service assets that provide utility. That responsibility, along with maintenance and improvements, belongs to the service provider. Customers simply utilize the service. There is no wear and tear, misuse, neglect or damage of service assets limiting the validity of the warranty. Even when a customer outsources the management of equipment that they own, the resources and capabilities of the outsourcing company to manage that equipment are not dictated by the customer. Service providers communicate the value of warranty in terms of levels of certainty. 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. Communicating the combined effect of utility and warranty: 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 commoditized or standardized. In such cases, it is hard to differentiate value largely in terms of utility for customers. When customers have a choice between service providers whose services provide more or less the same utility but different levels of warranty, then they prefer the greater certainty in the support of business outcomes, provided it is offered at a competitive price and by a service provider with a reputation for being able to deliver what is promised. ‘Fewest calls dropped on average’ is the value proposition of one major provider of mobile communication services expressed in its advertisements. An equally large competitor counteracts with the value proposition of best available coverage in the majority of urban areas. The other perpetual basis of differentiation is the number of calls made for a flat fee within peak hours of usage. This is an indirect measure of the capacity of over-subscribed service assets that service providers are assuring for the exclusive use of their customers. Of course, when competitive action leads to reduced differentiation based on warranty, service providers respond with service packages that offer additional utility, such as GPS navigation or wireless email on mobile phones. In the next slide we will discuss about the concepts of various assets.

3.20 Customer Assets, Service Assets and Strategic Assets

In our last slide we learned about Communicating Warranty and Combined effects. This slide talks about the concept of Customer Assets, Service Assets and Strategic Assets. Capabilities are developed over time. The development of distinctive capabilities is enhanced by the breadth and depth of experience gained from the number and variety of customers, market spaces, contracts and services. Experience is similarly enriched from solving problems, handling situations, managing risks and analyzing failures. For example, the combination of experience in a market space, reputation among customers, long-term contracts, subject matter experts, mature processes and infrastructure in key locations results in distinctive capabilities that is difficult for competitors to offer. This assumes the organization captures knowledge and feeds it back into its management systems and processes. Investments in learning capabilities are particularly important for service providers for the development of strategic assets. Figure 3.16 provides a simple representation of the dynamics of service within a business unit. Customer assets are used to drive the achievement of business outcomes. The better the customer assets perform, the more business outcomes can be achieved. The smooth operation of the customer assets, however, is slowed by constraints. These could be internal constraints such as a lack of knowledge or funding, or external constraints such a weak economy or regulations. Service providers and their relationship to the business units are illustrated in Figure 3.17. Service providers use service assets to deliver services (in this case, IT services) to the business unit. These services are designed to enhance the performance of the customer assets and or to reduce the effect of constraints. Just as customer assets are subject to constraints, so too are the service assets. These constraints may be similar, e.g.(pronounce as for example) Funding or limited capacity. The service provider may invest in services from a supplier to help reduce these constraints or to improve the performance of the service assets. In this case the supplier would view the service assets as customer assets, and the IT services as business outcomes. We will discuss about Strategic assets in coming slides. Moving ahead, let’s understand how Service management optimizes the performance of Service assets.

3.21 Service Management Optimizes the performance of service asset

Service management acts as an operating system for service assets in effectively deploying them to provide services. As defined earlier, service management is a set of organizational capabilities specialized in providing value to customers in the form of services. The capabilities interact with each other to function as a system for creating value. Service assets are the source of value and customer assets are the recipients. The shown Figure illustrates how 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. The basic approach to achieve this is outlined below. Similarly, let’s discuss on how Service management enables business outcomes in the next slide.

3.22 How Service Management Enables Business Outcomes

IT service management is a service provider to internal and external customers From a business point of view, IT service management enables the delivery of services which are used to achieve business outcomes as shown in the figure. Now, let’s proceed to understand how service provider enables a business unit’s outcomes.

3.23 How Service Provider Enables a Business Unit's Outcomes

Organizations are becoming less focused on the IT infrastructure, and more on how to automate end-to-end business processes and deliver business services. The challenge is to understand the operational objectives of the business process, and translate that into activities that can be provided by the IT infrastructure. Overcoming this problem is the objective of the processes. The figure on the slide illustrates the relationship between the service provider, the business unit and the customer’s business outcomes. In this Figure an IT service provider delivers services to an internal business unit which enables it to achieve its desired business outcomes. In this diagram the nature of the business outcomes determines what customer assets the business unit will need. The service provider uses its service assets to deliver a service that meets the needs of the business unit. The dynamics of this service relationship are illustrated in the Figure and are as follows (an arrow with a plus represents a directly proportional relationship; and an arrow with a minus represents an inversely proportional relationship): In order to achieve the outcomes, the business unit needs a minimum level of service. The performance potential of the service indicates what utility and warranty the service will have. This will indicate, in business unit terms, the performance that the service will be capable of. The business unit can then determine whether that will be suitable to enable its customer assets to produce the desired level of outcomes. The more utility and warranty, the higher the performance potential will be. As mentioned earlier in one of the previous slides, we had discussed about customer assets and service assets. Now, let’s discuss about the Strategic assets in the next slide.

3.24 Customer Assets, Service Assets and Strategic Assets - Cont

A strategic asset is any asset (customer or service) that provides the basis for core competence, distinctive performance or sustainable competitive advantage, or which qualifies a business unit to participate in business opportunities. 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. Performance in the immediate future should benefit from the knowledge and experience gained from the past. Part of service strategy is to identify how IT can be viewed as a strategic asset 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. In the next slide we will look at the different types of Service providers.

3.25 Service Providers - Types I, II and III - Internal(I), Shared(II) and External Service Providers(III)

In the introductory lesson, we had discussed about the types of service provider very briefly. Let us now learn about each of these providers in detail. As we know the service providers are classified into Type I – Internal, Type II – Shared and III as External Service providers. The Type I providers are service providers that are dedicated to, and often embedded within, an individual business unit. The business units themselves may be part of a larger enterprise or parent organization. Business functions such as finance, administration, logistics, human resources and IT provide services required by various parts of the business. They are funded by overheads and are required to operate strictly within the mandates of the business. Type I providers have the benefit of tight coupling with their owner-customers, avoiding certain costs and risks associated with conducting business with external parties. Since Type I service providers are dedicated to specific business units they are required to have an in-depth knowledge of the business and its goals, plans and operations. They are usually highly specialized, often focusing on designing, customizing and supporting specific applications, or on supporting a specific type of business process. The primary objectives of Type I providers are to achieve functional excellence and cost effectiveness for their business units. They specialize in serving a relatively narrow set of business needs. Services can be highly customized and resources are dedicated to providing relatively high service levels. The governance and administration of business functions are relatively straightforward. The decision rights are restricted in terms of the Business unit’s strategies and operating models. The general managers of business units make all key decisions such as the portfolio of services to offer, the investments in capabilities and resources and the metrics for measuring performance and outcomes. Let us understand the Type II service provider in the next slide.

3.26 Service Provider - Type II provider

In our last slide we understood the concept of Service Provider – Type I. This slide will discuss the Service Provider – Type II. Functions such as finance, IT, human resources and logistics are not always at the core of an organization’s competitive advantage. Hence, they need not be maintained at the corporate level where they demand the attention of the chief executive’s team. Instead, the services of such shared functions are consolidated into an autonomous special unit called a shared services unit (SSU) as shown in Figure. The model in Figure 3.25 allows a more devolved governing structure under which SSUs can focus on serving business units as direct customers. SSUs can create, grow and sustain an internal market for their services and model themselves along the lines of service providers in the open market. Like corporate business functions, they can leverage opportunities across the enterprise and spread their costs and risks across a wider base. Unlike corporate business functions, they have fewer protections under the banner of strategic value and core competence. They are subject to comparisons with external service providers whose business practices, operating models and strategies they must emulate and whose performance they should approximate, if not exceed. Although this Figure shows different types of shared service in the SSU, many IT organizations are separate Type II units, and are not combined with other corporate services. When using the term Type II, this publication refers primarily to the IT service provider (whether it is part of an SSU or a separate department). We will discuss about the External Service providers in the next slide.

3.27 Service Provider - Type III Providers

A Type III service provider is a service provider that provides IT services to external customers. The business strategies of customers sometimes require capabilities readily available from a Type III provider. The additional risks that Type III providers assume over Type I and Type II are justified by the increased flexibility and freedom to pursue opportunities. Type III providers can offer competitive prices and drive down unit costs by consolidating demand. Certain business strategies are not adequately served by internal service providers such as Type I and Type II. Customers may pursue sourcing strategies requiring services from external providers. The motivation may be access to knowledge, experience, scale, scope, capabilities and resources that are either beyond the reach of the organization or outside the scope of a carefully considered investment portfolio. Business strategies often require reductions in the asset base, fixed costs and operational risks, or the redeployment of financial assets. Competitive business environments often require customers to have flexible and lean structures. In such cases it is better to buy services rather than own and operate the assets necessary to execute certain business functions and processes. For such customers, Type III is the best choice for a given set of services. This Figure illustrates an organization that has outsourced several IT services and components to Type III suppliers, each with a catalogue of services that can be selected by the business units. So far we learnt about the types of service providers; in the next slide let’s see how to define service steps.

3.28 How to define Service - Steps

The first step is Defining the market. Define the market and identify customers In this context a market can be defined as the group of customers that are interested in and can afford to purchase the service a service provider offers, and to whom the service provider is able legally and logistically to supply those services. The first step in defining services is to understand the market in which the service provider operates. This will help to narrow down the options open to the service provider. Second step is to understand the customer: business strategies and objectives of the organization, and how each business unit meets those. It also means understanding the business outcomes that each business unit needs to achieve. For an external service provider, understanding the customer means understanding why they need the service they are purchasing. The service provider does not have to understand the detailed strategy, tactics and operations of the customer, but they do need to understand the reasons the customer needs the service and what features are important. The third step is Understand the opportunities. In this step the service provider will work with the customer to identify their desired outcomes. These definitions need to be clear and measurable and they need to be something that can be linked to the service. For example, for a lending bank value is created by the outcome of processing a loan application on time. Customers receiving the loan will have access to the required financial capital and the lender benefits from the onset and accrual of interest. The lending process is therefore a business asset whose performance leads to specific business outcomes. It is important for managers to gain deep insight into the businesses they serve or target. This includes identifying all the outcomes for every customer and market space that falls within the scope of the particular strategy. For the sake of clarity, outcomes are classified and codified with reference tags that can be used in various contexts across the Service Lifecycle Fourth step is to Classify and visualize. Every service is unique, but many have similar characteristics. If a new service shares common characteristics with an existing service, it will be easier to determine what it will take to deliver the service. If it has no characteristics in common with existing services, this means that the service will need to be evaluated and designed from the beginning. Creating a way to classify services and represent them visually will help in identifying whether a new service requirement fits within the current strategy, or whether it will represent an expansion of that strategy. It might also assist the service provider to decide not to make an investment in a service that moves them away from their strategy Fifth step is to understand the opportunities (market spaces): The service provider now has a good understanding of the customer and their assets, and is able to map existing capabilities and resources to existing customer assets to understand what service they are able to provide. Each customer has a number of requirements, and each service provider has a number of competencies. How does the service provider understand where its competencies will be able to meet the customer’s requirements? These intersections between the service provider’s competencies and the customer’s requirements are called market spaces. Sixth step is to Define the Services based on outcomes. An outcome-based definition of services ensures that managers plan and execute all aspects of service management entirely from the perspective of what is valuable to the customer. Such an approach ensures that services not only create value for customers but also capture value for the service provider. Solutions that enable or enhance the performance of the customer assets indirectly support the achievement of the outcomes generated by those assets. Such solutions and propositions hold utility for the business. When that utility is backed by a suitable warranty customers are ready to buy. Seventh step is service model. The definition of a service model is ‘a model that shows how service assets interact with customer assets to create value. Service models describe the structure of a service (how the configuration items fit together) and the dynamics of the service (activities, the flow of resources and interactions). A service model can be used as a template or blueprint for multiple services.’ Service models can take many forms;, from a simple logical chart showing the different components and their dependencies, to a complex analytical model analyzing the dynamics of a service under different configurations and demand patterns. Eighth step is to define the service unit and packages: Services may be as simple as allowing a user to complete a single transaction, but most services are complex. They consist of a range of deliverables and functionality. If each individual aspect of these complex services were defined independently, the service provider would soon find it impossible to track and record all services. Service units are like business units, a bundle of service assets that specializes in creating value in the form of services. In many instances, business units (customers) and service units are part of the same organization. In other instances service units are separate legal entities. A service package is a collection of two or more services that have been combined to offer a solution to a specific type of customer need or to underpin specific business outcomes. Service packages can consist of a combination of core, enabling and enhancing services. Please note that a service package does not need to have all three types of service - it only needs to have more than one service of any type to be a service package. Let’s continue to discuss on these steps in the next slide.

3.29 How to define Service - Steps - Cont

This slide talks about service package concepts. One strategy is for a service provider to have a small number of customers, and design unique services for each one. Since these services will be expensive (due to high development costs and dedicated resources), there is a very small number of service providers that will be able to make a commercial success of this strategy (since there is a limited number of customers willing to pay the premium for the tailored service). Most service providers will follow a strategy where they can deliver a set of more generic services to a broad range of customers, thus achieving economies of scale and competing on the basis of price and a certain amount of flexibility. One way of achieving this is by using service packages. A service package is a collection of two or more services that have been combined to offer a solution to a specific type of customer need or to underpin specific business outcomes. Service packages can consist of a combination of core, enabling and enhancing services, as illustrated in Figure 3.34. Please note that a service package does not need to have all three types of service - it only needs to have more than one service of any type to be a service package. It should be noted that service packages can consists of multiple services of each type, as illustrated in Figure 3.35. Also service packages can include one or more service packages as in Figure 3.36. It is important to ensure that services and service packages are grouped so that customers can relate to them better, thus making them easier to buy and use. Packages are constructed so that instead of a bewildering number of individual services being offered to customers, services can be combined in logical groupings to produce products that can then be marketed, sold and consumed to best meet customers’ needs. In previous slides we had discussed about value to customer and it was evident that value of service provided is important for resulting in customer satisfaction. To understand what is customer satisfaction from the customer’s perspective, let look at the Kano model in the next slide.

3.30 Strategies for Customer Satisfaction - Kano Model

Attributes of a service are the characteristics that provide form and function to the service from a utilization perspective. The attributes are traced from business outcomes to be supported by the service. Determining which attributes to include is a design challenge. Certain attributes must be present for value creation to begin. Some attributes are more important to customers than others. They have a direct impact on the performance of customer assets and therefore the realization of basic outcomes. Such attributes are must-have attributes. The Kano model describes the type of attributes that influence the customer’s perception of the utility of a service. This Figure illustrates the Kano model of customer perceptions of utility. This figure shows a relationship between the level of fulfillment of customer needs that a service offers, and the level of satisfaction that a customer feels. Let us understand this concept in detail in the next slide, by understanding the types of attributes.

3.31 The Kano Model and Service Attributes

The Kano model shows that there are three different types of factors involved in customer satisfaction: Basic factors: These are aspects of the service that have to be in place for the customer to receive the service. In many cases these basic factors are taken for granted. Sometimes they don’t offer any overt value, but if they fail, or are not delivered, customers will become very dissatisfied. For example, nobody eats at a restaurant because it has lights, but if there is a power failure and customers cannot see what they are eating, they will probably leave. In the same way, a user does not come to work because they have a personal computer connected to the network; but if the network or PC is not working, they will not be able to access email and other key services. These factors are sometimes called ‘must-have utility’, or the very least the service provider can deliver for a particular service. Excitement factors are where Attributes of the service that drive perceptions of utility gain but when not fulfilled do not cause perceptions of utility loss. These are attributes of a service that are generous, and which customers do not expect. When they are offered (within reason) they cause higher levels of satisfaction. The service provider is seen to be ‘going the extra mile’. For example, the restaurant offers a free drink with every main course. While excitement factors result in the quickest and highest levels of customer satisfaction, they are expensive to maintain, since the service provider is offering more than necessary at the same price. These factors may be exciting, but they are not essential to the service, and are therefore also referred to as ‘nice-to-have utility’. Internal service providers should be careful of introducing excitement factors in the interest of ‘customer satisfaction’ without doing a proper business case to justify the additional costs. Performance factors are where Attributes of the service that result in perceptions of utility gain when fulfilled and utility loss when not fulfilled in an almost linear one-dimensional pattern. These are the factors that enable a customer to get more of something that they need, or a higher level of service quality. The more a customer wants of each performance factor, the more they will expect to pay, thus the greater value it must contribute. These are also called one-dimensional utilities since each factor is increased or decreased along a predictable line based on customer demand. The higher the level of performance that fulfills a higher percentage of the customer’s requirements, the more satisfied a customer will be, although extremely high levels of performance may be perceived as ‘nice to have’. An example of performance factors is where a restaurant offers a discount to frequent diners, or to tables that order two or more of the daily specials. IT examples may include providing additional storage, bandwidth or other resource allocation for high priority services. Indifferent attributes Cause neither gains nor losses in perceptions of utility regardless of whether they are fulfilled or not. Reversed attributes Cause gains in perceptions of utility when not fulfilled and losses when fulfilled. Assumptions need to be reversed. A well-designed service provides a combination of basic, performance and excitement attributes to deliver an appropriate level of utility for the customer. Different customers will place different weights or importance on the same combination of attributes. Furthermore, even if a particular type of customer values a particular combination, they may not find justification to pay for additional charges. Questionable response is where the Responses are questionable possibly because the questions were not clear or misinterpreted. Extensive dialogue is required with targeted customers or segments of market spaces to determine the attributes a service must have, should have and could have in terms of must-have utility. Questionnaires are used to elicit responses from customers from which further analysis is possible. As we have a clear understanding of customer satisfaction, let us now proceed to learn about the Service economic dynamics of external providers.

3.32 Service Economic dynamics (External Service Providers)

The dynamics of service economics for external service providers are different from those for internal service providers. This is because the returns of internal service providers are mainly measured by their internal customers and do not accrue directly to the service provider. This figure shows the Service Economic Dynamics for External Service providers. Type III service provider delivers a service to an external customer for payment. The service provider calculates the total investment required to deliver that service, and measures it against the total revenue obtained from delivering the service. The success of the service provider is measured by its return on its investment (ROI).(pronounce as R-O-I) Let’s discuss on the service economic dynamics of Internal service providers in the next slide.

3.33 Service Economic dynamics (Internal Service Providers)

The figure on the slide shows the Service Economic Dynamics for Internal Service providers. The return on investment cannot be measured by an internal service provider in isolation from their internal customers. In Figure 3.39 an IT service provider delivers a service to another business unit, which covers the costs of the IT service. Therefore the investment in the IT service is carried by the business unit, and not the service provider. The funding provided to the IT service provider cannot be viewed as a return on investment, since the investment is being made by the business unit. Instead the return is in the form of the profitability generated by the business unit, and the ROI calculation is performed by the business unit. If the IT service provider attempts to demonstrate its ROI without referring to the business unit's revenue, the only time it will be able to demonstrate an actual return is when it reduces its costs. As a result many IT organizations find themselves being asked by the business to cut costs, even when their services are critical for the business to achieve its outcomes As we are familiar with the term ROI, let us learn about in detail in the next slide.

3.34 Return on Investment

Return on investment (ROI) is a concept for quantifying the value of an investment, and the calculation is normally performed by Financial Management. The term is not always used consistently. Sometimes it is used by financial officers to indicate the ROIC (return on invested capital), a measure of business performance. In service management, ROl is used as a measure of the ability to use assets to generate additional value. In the simplest sense, it is the net profit of an investment divided by the net worth of the assets invested. The resulting percentage is applied to either additional top-line revenue or the elimination of bottom-line cost. In economic terms, a good investment is one that exceeds the rate of return on the capital market. The calculation of ROI is equal to (Increase in profit resulting from the service divided by Total Investment in the service). While ROI calculations can be helpful in indicating the success of a service or a service management implementation, there are a number of factors that must be taken into account, including: ROI exercises that focus purely on financial metrics that do not indicate the full potential return. For example, some services have little direct return, but provide the basis whereby other services can be delivered. The ROI calculation should include some measure of how much the service, or service management project, moved the organization closer to achieving its strategy. These will often be qualitative statements about the service or project - for example, increased levels of customer loyalty. The ROI that is only based on cost savings for the service provider will not be perceived by the business as a return on their investment if there is no corresponding impact on the cost per unit of business service or product. ROI calculations that only focus on the short-term results will often yield negative figures. For example, many service management processes are focused on improving the capability and resources of the service provider. These may take some time to design and build (and significant investment) before they yield any returns. Let us now move on to our next slide, where we will discuss about different considerations of ROI.

3.35 ROI - Different Considerations

The limits of many traditional ROl calculations have led to the emergence of calculations aimed at including more of the intangible results expected from a service. These calculations are often referred to as Value on Investment calculations, and are covered in more detail in ITIL Continual Service Improvement. Nevertheless, ROl remains the primary business tool for assessing the value of a service, and will therefore be covered in detail below. While a service can be directly linked and justified through specific business imperatives, few companies can readily identify the financial return for the specific aspects of service management. It is often an investment that companies must make in advance of any return. Service management by itself does not provide any of the tactical benefits that business managers typically budget for. One of the greatest challenges for those seeking funding for ITIL projects is identifying a specific business imperative that depends on service management. For these reasons, this section covers three areas: • Business case – is a means to identify business imperatives that depend on service management • Pre-Program ROI – the techniques for quantitatively analyzing an investment in service management • Post-Program ROI – the techniques for retroactively analyzing an investment in service management. • Post – Programmed ROI – Forecast analysis. These are the Techniques for retroactively analyzing an investment in service management. Let us look at a ROI Business case in the next slide.

3.36 Return on Investment - Business Case

A business case is a decision support and planning tool that projects the likely consequences of a business action. The consequences can take on qualitative and quantitative dimensions. A financial analysis, for example, is frequently central to a good business case. An example of a business case structure is provided in the Table Capital budgeting: When the term ‘business case’ is used, it often creates the impression that it is appropriate only to include financial aspects of the service or project. This is not true. Successful businesses understand that their customers are not only interested in paying money; they need to be comfortable with the supplier and their ability to deliver what they have promised. This means that every business should focus on both the financial and non-financial impacts of the proposed project or service. Capital budgeting is the commitment of funds now in order to receive a return in the future in the form of additional cash inflows or reduced cash outflows. In the next slide we will discuss about pre-programmed ROI.

3.37 Pre - Programmed ROI(Techniques for quantitatively analyzing an investment in service management)

In our last slide we understood the Business Case. In This slide we will discuss the concept of Pre – Programmed ROI (Techniques for quantitatively analyzing an investment in service management). 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. It is the commitment of funds now in order to receive a return in the future in the form of additional cash inflows or reduced cash outflows (earnings or savings). An additional factor to remember when performing pre-program ROl is the relative value of the investment over time. An investment typically occurs early, while returns do not occur until sometime later. Capital budgeting : Capital budgeting is the commitment of funds now in order to receive a return in the future in the form of additional cash inflows or reduced cash outflows. Capital budgeting decisions fall into two broad categories: screening and preference decisions. Screening decisions relate to whether a proposed service management initiative passes a predetermined hurdle, minimum return. Preference decisions, on the other hand, relate to choosing from among several competing alternatives. Selecting between an internal Service Improvement Plan (SIP) and a service sourcing program is an example. Screening decisions (NPV)(pronounce as N-P-V): Net Present Value (NPV) and Internal Rate of Return (IRR)(pronounce as I-R-R). NPV is preferred for screening decisions for reasons discussed later. IRR is preferred for preference decisions, as explained in the next section. Under the NPV method, the program’s cash inflows are compared to the cash outflows. The difference, called net present value, determines whether or not the investment is suitable. Whenever the net present value is negative, the investment is unlikely to be suitable. Preference decisions (IRR): There are often many opportunities that pass the screening decision process. The bad news is not all can be acted on. Financial or resource constraints may preclude investing in every opportunity. Preference decisions, sometimes called rationing or ranking decisions, must be made. The competing alternatives are ranked. The NPV of one project cannot be directly compared to another unless the investments are equal. As a result, the IRR is widely used for preference decisions. The higher the Internal rate of return, the more desirable the initiative. Let us now move on to the next slide and discuss the concept of Return on Investment – Pre – Programmed ROI –NPV decisions.

3.38 Return on Investment - Pre - Programmed ROI - NPV decisions

An investment typically occurs early while returns do not occur until sometime later. Therefore the time value of money, or discounted cash flows, should be accounted for. There are two approaches to making capital budgeting decisions using discounted cash flows: Net Present Value (NPV) and Internal Rate of Return (IRR). NPV is preferred for screening decisions for reasons discussed later. IRR is preferred for preference decisions, as explained in the next section. Under the NPV method, the program's cash inflows are compared to the cash outflows. The difference, called net present value, determines whether or not the investment is suitable. Whenever the net present value is negative, the investment is unlikely to be suitable. Please note, however, that the organization does not have to use the discount rate as the minimum. These are two separate things, though for various reasons they might choose to use the same figure. When talking about NPV the discount rate used needs to be a reasonable estimate of inflation or interest rates from other sources etc. so that it reflects with some accuracy the value of the money now that will be spent taking into account what it could have been worth in the future. But the rate a company uses as a minimum before they will spend capital could be set at a higher rate, just to include various risk factors, or because they are not interested in ventures that don’t give them a high yield. Although there may be reasons why the two could be similar, they are not the same thing.

3.39 Service Economics Return on Investment - Pre - Programmed ROI - NPV decisions

In our last slide we understood the Return on Investment – Pre – Programmed ROI –NPV decisions. Let’s continue in this slide. There are other methods used for making capital budgeting decisions such as pay-back and simple rate of return. Neither method is covered, as pay-back is not a true measure of the profitability of an investment while simple rate of return does not consider the time value of money. In a service management NPV, the focus remains on cash flows and not on accounting net income. Managers should look for the types of cash flows shown in the Table. Although it has an effect on taxes, depreciation is not deducted. Discounted cash flow methods automatically provide for return of the original investment, thereby making a deduction for depreciation unnecessary. A simplifying assumption is made in that all cash flows other than the initial investment occur at the end of periods. This is somewhat unrealistic as cash flows typically occur throughout a period rather than just at its end. So far, we looked at the preprogrammed ROI concepts; from the next slide onwards let us learn about post programmed ROI.

3.40 Post - Programmed ROI (Techniques for retro actively analyzing an investment in Service mgnt)

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. Having experienced a history of shortfalls in past frameworks, stakeholders may question the resultant value of a service management program. Without proof of value, executives may cease further investments. Therefore, if a service management initiative is initiated without prior ROI analysis, it is recommended that an analysis be conducted at an appropriate time after. The calculation of a service management ROI is illustrated in the basic model as shown in the Figure Program objectives: Objectives should be clear and measurable, as they serve to guide the depth and scope of the ROl analysis. Objectives can range from simple terminology to the adoption of industry practices: • Deliver consistent and repeatable service • Lower the overall total cost of ownership • Improve quality of service Data collection: The collection of appropriate data is vital for a valid and quantifiable ROl result. The scope and objectives of the initiative should indicate what data is appropriate. Data collected prior to implementation should be compared with that collected after the implementation to enable a comparison of the two baselines. Examples of data to be collected include: Metrics for quality of service, Costs for service transactions and Questionnaires for customer satisfaction. Isolate the effects of the program: By this stage, the results of the service management program are becoming evident. By isolating the effects, there should be little doubt that the results should be attributed to the program. There are many techniques available such as Forecast analysis, Impact estimates etc. Data to monetary conversion: To calculate ROl, it is essential to convert the impact data to monetary values. Only then can those values be compared to program costs. The challenge is in assigning a value to each unit of data the technique applied will vary and will often depend on the nature of the data. Determine program costs: This requires tracking all the related costs of the service management program. It can include: The planning, design and implementation costs. These are pro-rated over the expected life of the program and the technology acquisition costs the education expenses Calculate ROI: Once the benefits and costs of the program have been determined, the actual ROI can be calculated and compared to the projected ROI in the original business case. Identify qualitative benefits: Qualitative benefits begin with those detailed in the business case, as described in a previous section. A second look at service management qualitative benefits is found in ITIL Continual Service Improvement. Lastly communicate the achieved results. In the next slide we will discuss on the post programmed ROI forecast analysis.

3.41 Post Programmed ROI Forecast Analysis

By this stage, the results of the service management program are becoming evident. By isolating the effects, there should be little doubt that the results should be attributed to the program. There are many techniques available: First is the Forecast analysis: this is a trend line analysis or another forecasting model is used to project data points had the program not taken place. An example is given in the form of a Figure •Impact estimates: When a forecasting approach is not feasible, due to either lack of data or inconsistencies in measurements, an alternative approach in the form of estimations is performed. Simply put, customers and stakeholders estimate the level of improvements. Input is sought from organizational managers, independent experts and external assessments. •Control group: In this technique, a pilot implementation takes place in a subset of the enterprise. That subset may be based on geography, delivery centre or organizational branch. The resultant performance is compared with a similar but unaffected subset In the next slide we will talk about business impact analysis.

3.42 Service Economics : Business Impact Analysis (BIA)

Business impact analysis (BIA) is a method used to evaluate the relative value of services, and is usually 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 non-financial. An advantage of this approach for internal service providers is that it is an excellent communication tool - helping them to share with the wider organization how they have understood their priorities and therefore how they have allocated their resources. A number of steps need to be completed while generating a BIA. Although there are a number of approaches and methods available in the industry, they all involve the following activities: • Arrange resources from the Business and IT that will work together on the analysis • Identify the top candidate’s service for designation as critical, secondary and tertiary, however it is not required to designate them at this point. • Identify the core analysis points for use in assessing the risk and Impact • With the business, weigh and estimate the probability of the identified elements of risk and impact. • Score the candidate services against the weighted elements of risk and impact, and total their individual risk scores (Failure Modes and Effects Analysis - FMEA - can be used for additional input here). • Generate a list of services in order of risk profile. Let’s now move on to sourcing strategy and structures in the next slide.

3.43 Sourcing Strategy : Sourcing Structures

Sourcing is about analyzing- how to effectively source and deploy the resources and capabilities required to deliver outcomes to customers. It is about deciding on the best combination of supplier types to support the objectives of the organization and the effective and efficient delivery of services. The dynamics of service sourcing require businesses to formally address provisions for a sourcing strategy, the structure and role of the retained organization, and the impacted decision rights processes. When sourcing services, the enterprise retains the responsibility for the adequacy of services delivered. Therefore, the enterprise retains key overall responsibility for governance. The enterprise should adopt a formal governance approach in order to create a working model for managing its outsourced services as well as the assurance of value delivery. This includes planning for the organizational change precipitated by the sourcing strategy and a formal and verifiable description as to how decisions on services are made. These structures are: • Multi Vendor Sourcing • In sourcing • Outsourcing • Co –Sourcing or Multi Sourcing • Partnership • BPO • Application Service Provision • KPO • Cloud In the next slide we will discuss about multi- vendor sourcing.

3.44 Sourcing Strategy : Multi - Vendor Sourcing

The approach of sourcing services through multiple providers has emerged as a good practice. Multi – Vendor Sourcing is often a combination of in sourcing 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. The enterprise maintains a strong relationship with each provider, spreading the risk and reducing costs. The challenges are in governance and managing the multiple provider. There are multiple approaches and varying degrees in sourcing. How far up an organization is willing to go with sourcing depends on the business objectives to be achieved and constraints to overcome as shown in the Figure. Regardless of the sourcing approach, senior executives must carefully evaluate provider attributes. In Figure shown here, an organization with limitations in internal capability might move to an outsourcing model where a single outsourcing organization is used to augment current capabilities through economies of scale (for example, specialized, expensive capabilities can be shared across more than one customer, making them available at a lower overall cost to all customers). A single-vendor outsourcing contract will eventually be limited in what it can provide to a large, complex customer base, requiring customers to source services from multiple providers. In the next slide we will look at the details on Service Provider Interfaces.

3.45 Sourcing Strategy : Service - Provider Interfaces (SPI)

To support development of sourcing relationships in a multi-vendor environment, guidelines and reference points (technical, procedural, organizational) are needed between the various service providers. These reference points can be provided through the use of Service provider interfaces (SPI). A service provider interface is a formally defined reference point which identifies some interaction between a service provider and a user, customer, process or one or more suppliers. SPIs are generally used to ensure that multiple parties in a business relationship have the same points of reference for defining, delivering and reporting services. SPIs help coordinate end-to-end management of critical services. The Service Catalogue drives the service specifications, which are part of, or extensions to, standard process definitions. Responsibilities and service levels are negotiated at the time of service relationship contracting, and include: Identification of integration points between various management processes of the client and service provider, Identification of specific roles and responsibilities for managing the ongoing systems management relationship with both parties Process SPI definitions consist of: • Technology prerequisites (e.g. management tool standards or prescribed protocols) • Data requirements (e.g. specific events or records), formats (that is. data layouts), interfaces (e.g. APIs, firewall ports) and protocols (e.g. SNMP, XML) • Non-negotiable requirements (e.g. practices, activities, operating procedures) • Required roles and responsibilities within the service provider and customer organizations • Response times and escalations. Let us understand sourcing governance in the next slide.

3.46 Sourcing Strategy : Sourcing Governance

Sourcing governance is a complex area. In addition, creating a sourcing strategy is a significant task, and will be more demanding than this section is able to articulate. This section highlights the need for undertaking these activities and provides a high-level overview of the area. There is a frequent misunderstanding of the definition of governance, particularly in a sourcing context. Companies have used the word interchangeably with ‘vendor management’, ‘retained staff, ‘supplier management’ and ‘sourcing management organization’. Governance is none of these. Governance is invariably the weakest link in a service sourcing strategy. A few simple constructs have been shown to be effective at improving that weakness: • A governance body. By forming 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. By including representation from each service provider, 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. Remember, 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 (pronounce as R-A-C-I) or RASIC(pronounce as R-A-S-C-I) charts are common forms of a decision-rights matrix. • Supplier management (explained in ITIL Service Design) this ensures that contracts and external service providers are managed according to the organization’s governance policies, standards and controls. Let us move to the next slide on Service structure in the value network.

3.47 Service Structures in the Value Network

From Value Chains to Value Networks: Business Executives have long described the Process of creating value as links in a value Chain. A value chain remains an important tool. They provide a strategy for vertically integrating and coordinating the dedicated assets required for product development. They do not, however, reflect the dynamic situation of services. A value network is a web of relationships that Generates tangible and intangible value through: • Marshal external talent – no single organization can organically produce all the resources and capabilities required within an industry. Most innovation occurs outside the organization. • Reduce costs – produce more robust services in less time and for less expense than possible through conventional value-chain approaches. If it is less expensive to perform a transaction within the organization, keep it there. If it is cheaper to source externally, take a second look. An organization should contract until the cost of an internal transaction no longer exceeds the cost of performing the transaction externally. This is a corollary to ‘Coase’s Law’: a firm tends to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction in the open market. The concept of Coase’s law was first developed by Tapscott.16 • Change the focal point of distinctiveness:– by harnessing external talent, an organization can redeploy its own resources and capabilities to enhance services better suited to its customer or market space. Take the case of a popular North American sports league and its Type I service provider. By harnessing the capabilities of Type III infrastructure service providers, the Type I is free to redeploy its capabilities to enhance its new media services, namely, web-based services with state-of-the-art streaming video, ticket sales, statistics, fantasy leagues and promotions. • Increase demand for complementary services – an organization, particularly a Type I, may lack the breadth of services offered by Type II and Type III service providers. By acting as a service integrator, such organizations not only remedy the gap but boost demand through complementary offerings. • Collaborate – as transaction costs drop, collaboration is less optional. There are always more smart people outside an organization than inside. In this slide we discussed about the concept of service structure in value network, in the next slide let us look at using value network.

3.48 Service Structures in the Value Network - Using Value Network

Services are often characteristics, by complex networks of value flows and forms of value, often involving many parties that influence each other in many ways. Value networks serve to communicate the model in a clear and simple way. They are designed to leverage external capabilities. Drawing a value network will therefore identify the key role players, and how they contribute to value within the core enterprise. Despite many actors, value networks can help the services operate with the efficiency of a self-contained enterprise, operating on a process rather than an organizational basis. The core enterprise is the central point of execution, rather than one actor in a chain, and is responsible for the whole value network. This includes the infrastructure by which other business partners can collaborate to deliver goods and services. In a value net diagram, an arrow designates a transaction. As shown in the Figure, The direction of the arrow denotes the direction of the transaction or impact on a participant: service provider or customer. Transactions can be temporary. They may include deliverables, tangible or intangible. Dotted arrows can be used to distinguish intangible transactions. In this Figure it shows that the traditional model of supplier-service provider-business unit is not adequate to show the complexity of real transactions in a service management situation. In the next slide we will look at the inputs from other lifecycles.

3.49 Inputs from other Lifecycle's

Inputs and Outputs from other Lifecycle’s: The main outputs from service strategy are the vision and mission, strategies and strategic plans, the service portfolio, change proposals and financial information. Table 3.21 shows the major service strategy inputs and outputs, by Lifecycle stage. The table here provides a summary of the major inputs and outputs between each stage of the service lifecycle. Let’s discuss these inputs and outputs in the next two slides. Firstly, Service Design inputs: • Input to business cases and the service portfolio • Service Design Packages • Financial Estimates and reports • Design related info in SKMS Outputs are: • Vision and Mission • Service Portfolio Policies • Strategies and Strategic Plans • Priorities Financial • Information and budgets • Service Models Service Transition Inputs are: • Transitioned Services • Response to Change Proposals Service portfolio updates • Change Schedules • Feedback on strategies and policies Financial • Reports Knowledge and information in SKMS Service Operations inputs are: • Operation Risks • Operational cost • information for total cost of ownership • Actual performance data Lastly, the CSI inputs are: • Results of customer and user satisfaction surveys. • Feedback on strategies and policies • Data required for metrics, KPI, CSF • Service reports Let’s look at the outputs in the next slide.

3.50 Outputs to other Lifecycle's

The outputs of the lifecycle stages are as follows: Firstly the Service Design outputs are: • Vision and Mission • Service Portfolio • Policies • Strategies and Strategic Plans • Priorities • Financial Information and budgets • Service Models and charters • Documented PBA’s and UP’s Service Transition Outputs are: • Vision and Mission • Service Portfolio • Policies • Inputs to change evaluation and CAB meetings • Change Proposals • Financial information and budgets Service Operations Outputs are: • Vision and Mission • Service Portfolio • Policies • Demand forecast and Strategies • Strategic risks and plans. Lastly, the CSI outputs are: Vision and mission • PBA • Achievement against metrics, KPI and CSF improvement • opportunities logged in the CSI register As we have looked at each lifecycle phase’s inputs and outputs, let us now proceed to learn about the recommended approaches.

3.51 Recommended Approaches

The recommended approach for deciding on a strategy includes: • Analyze the organization’s internal service management competencies • Compare those findings with industry benchmarks • Assess the organization’s ability to deliver strategic value. Let us know look at the critical success factors in the next slide.

3.52 Critical Success Factors

It is important to understand the costs and risks associated with changing from one sourcing model to another. The cost of risk can sometimes over shadow the benefits and additional management of an outsourced contract can eat into expected savings. It is thus important to consider the following critical success factors when making a decision to ensure a successful sourcing strategy. The factors for a Service Sourcing strategy frequently depend on: • Desired outcomes, such as cost reduction, improved service quality or diminished business risk • The optimal model for delivering the service • The best location to deliver the service, such as local, off-shore or on-shore. With this we have come to the end of learning unit 3, let us quickly summarize in the next slide.

3.53 Summary

The topics that we covered under Service Strategy principles are: • Fundamental Aspects of Strategy • The 4 P's of Strategy • Customer's Perception of Value • Effects of Utility and Warranty on Service • How Service Provider Enables a Business Unit's outcomes • Steps to Define Service • The Kano Model • Service Economics, ROI • Sourcing Strategy - Sourcing Structures • Inputs and Outputs from other Lifecycle's Now, take up the exercise and quiz in the next couple of slides before proceeding to learning unit 4 on Service Strategy processes.

3.54 Exercises

The exercises given here is to assess your understanding on the course. Follow the instructions to work on these exercises

3.55 Exercise 1 : Identify fields from "1-6" and Elaborate the Importance of SKMS

Exercise 1: Now you need to look at the figure carefully and Identify fields from “1 to 6 “ and Elaborate the Importance of SKMS. You can mark your answers and discuss the same in your class room training. Let us now move on to our next slide.

3.56 Exercise 2 : Identify Value Characteristics

Exercise 2: This is a scenario based exercise. Let us understand the scenario: Imagine yourself as a Mobile Service Operator who wishes to launch its new “Voice Mailbox “service in Market. You wish to identify the Value of this new service The exercise would be to identify what are the main areas or characteristics that you would consider to identify the value of this new service and why? You can mark your answers and discuss the same in your class room training. After this complete the quiz section.


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