SS

Figure 3.9 Business units are coordinated goal-driven collections of assets

The business unit’s capabilities coordinate, control , and deploy its resource s to create value. Value is always defined in the context of customers. Some services simply increase the resources available to the customer . For example, a storage service may assure that a customer’s business system s can achieve a particular level of throughput in transaction processing with the availability of adequate, error -free and secure storage of transaction data. The storage service simply increases the capacity of the system, although one might argue that it actually enables the capability of high-volume transaction processing. Other services increase the performance of customer’s management, organization, people and processes. For example, a news-feed service provides real-time market data to be used by traders to make better and quicker decisions on trades.

The relationship with customers becomes strong when there is a balance between value created and returns generated. The catalogue of goods and services amplifies the effect and strengthens the capabilities and resources of the business unit. Better returns or cost recovery allow for greater investments in capabilities and resources. The resources and capabilities complement each other.

The business unit could be part of an organization in the public or private sectors. Instead of revenue from sales there could be revenue from taxes collected. Instead of profits there could be surpluses. The customers of the business unit could be internal or external to the organization.

Understanding the customer’s business

Back at the office

Pick a customer and carefully analyse their business to understand the ecosystem in which they operate . What conditions make the customer’s business grow? How do your services create or sustain such conditions? What challenges and opportunities does their business face? How do your services help your customer address them?

Suggestion: Visualize the ecosystem diagram with the various boxes and connectors that constitute the closed-loop system for creating and sustaining value.

3.2.2.2 The service unit

Service units are like business unit s, a bundle of service asset s that specializes in creating value in the form of services (Figure 3.10). Service s define the relationship between business units and service units. In many instances, business units (customers) and service units are part of the same organization . In other instances service units are separate legal entities.

Figure 3.10 Customer assets are the basis for defining value

There are many possible relationships between business units and service units (Figure 3.11). In the example below, Service X is provided to Business Unit A by Enterprise 2. It is hosted by Service Unit 1 and Service Unit 2. Service Y is provided to Enterprise 1 by Service Unit 2. It is shared by Business Units A, B and C. Demand for Service Y is consolidated across Enterprise 1. By pooling demand across the business units, Enterprise 1 negotiates better terms and conditions for Service Y, including pricing discounts. Enterprise 2 is willing to accept those terms and conditions because consolidated demand represents a lower risk of poor return on asset s for Service Unit 2 – thereby reaching the break-even point sooner.

Service Z is provided to Business Unit D by Service Unit 3, both of which exist within Enterprise 3. Service Unit 3 commercially offers Service Z to the business units of Enterprise 1. This increases the return on assets required for the service and potentially reduces the unit cost s of providing the service internally to Business Unit D.

Figure 3.11 Common relationships between business units and service units

Customer s and service provider s are usually a part of a larger value chain or value network . Customers have their own customers to serve, and service providers are in turn served by their service providers

3.3 Service provider types

‘There is no such thing as a service industry. There are only industries whose service components are greater or less than those of other industries. Everybody is in service.’

Professor Emeritus Theodore Levitt, Harvard Business School

Case example 4: Infrastructure service s

Some time in the late 1990s, the internal IT Service Provider for a global conglomerate decided to source all data centre operations to external service provider s. The primary driver was lower costs. Five years and several mergers and acquisitions later, and despite having achieved its cost reductions, the internal provider is considering in-sourcing all data centre operations.

What do you suspect is the reason?

(Answer at the end of Section 3.3)

It is necessary to distinguish between different types of service provider s. While most aspects of service management apply equally to all types of service providers, others such as customers, contract s, competition, market space s, revenue and strategy take on different meanings depending on the type. There are three archetypes of business model s service providers:

 Type I – internal service provider

 Type II – Shared Services Unit

 Type III – external service provider

3.3.1 Type I (internal service provider)

Type I providers are typically business function s embedded within the business unit s they serve. The business units themselves may be part of a larger enterprise or parent organization . Business functions such as finance, administration, logistics, human resource s, 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 risk s associated with conducting business with external parties.

The primary objective s of Type I providers are to achieve functional excellence and cost-effectiveness for their business units.11 They specialize to serve a relatively narrow set of business needs. Service s can be highly customized and resources are dedicated to provide relatively high service level s. The governance and administration of business functions are relatively straightforward. The decision rights are restricted in terms of 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 metric s for measuring performance and outcomes.

Type I providers operate within internal market spaces. Their growth is limited by the growth of the business unit they belong to. Each business unit (BU) may have its own Type I provider (Figure 3.12). The success of Type I providers is not measured in terms of revenues or profits because they tend to operate on a cost-recovery basis with internal funding. All costs are borne by the owning business unit or enterprise.