SS

1 Introduction

‘How do you become not optional?’

William D. Green, CEO, Accenture

1.1 Overview

In 1937, British-born economist Ronald Coase concluded that the boundaries of firms are determined by transaction cost s.2

The concept of transaction costs used here is not to be confused with the discrete cost of transaction s such as requests, payments, trades and updates to databases. What is referred to here are the overall costs of economic exchange between two parties, including but not limited to costs incurred in finding and selecting qualified supplier s for goods or services of required specifications, negotiating an agreement , cost of consuming the goods or services, governing the relationship with suppliers, to ensuring that commitments are fulfilled as agreed.

Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract , and taking appropriate action (often through the legal system) if this turns out not to be the case.

Sometimes it makes sense for a business to own and operate asset s, or conduct activities in-house. At other times, the sensible thing is to seek alternatives from the open market. As prevailing conditions change, boundaries of the firm contract or expand with decisions such as make , buy , or rent . Coase received the Nobel Prize in Economics for this remarkable idea.

The world is changing at a faster pace than ever before. The forces of the internet, inexpensive computing, ubiquitous connectivity, open platforms, globalization, and a fresh wave of innovation are combining in ways that dramatically alter the transaction costs in almost every business. The result is greater dynamism and flexibility in the definition of markets for services. Markets are created almost spontaneously with innovative business model s and value propositions. They emerge within enterprises, defy standard industry classifications, and extend farther in geography. The digitization of commercial activities, social interactions and government has meant fewer physical constraints on new business models, strategies and relationships. Knowledge and productive capacity are more dispersed than ever before. Organization s can rent what they were earlier forced to make or own . Generic concepts like rent translate into collaborative relationships with service provider s who provide access to capabilities and resource s otherwise not available to the organization.

There is similar growth in consumer services driven by various social and economic factors and technology. Among the forces driving the consumption of services are rising per capita incomes, demand for social services, size and role of the public sector, complexity of work environment s, increased specialization (division of labour), and relaxation of trade barriers.3 These trends are contributing worldwide to the growth of the service economy in a remarkable fashion.

Information technologies (IT) enable, enhance, and are embedded in a growing number of goods and services. They are connecting consumers and producers of services in ways previously not feasible, while contributing to the productivity of numerous sectors of the services industry such as financial services, communications, insurance, and retail services.3 Government agencies, too, have experienced similar gains associated with the use of IT.

 Organization s exploit resources as and when needed without owning them, even when those resources are remotely located and simultaneously shared.

 They use self-service channels such as websites, mobile phones, and kiosks to expose business functions such as billing, order processing, reservations, and technical support to consumers. Quality of service is no longer constrained by the capacity of branches, stores, and other staffed locations.

 Entrepreneurs and individuals compose new services assembled from existing services available in the commercial and public space.

 Service -oriented architecture s are allowing organizations to not only reduce complexity of their business applications and infrastructure but to further exploit such asset s in new ways.

Tremendous change and growth is taking place in information-based services. Information, previously a supporting element, has become the basis for value by itself. The relaxation of physical constraints has changed our thinking about how information is produced and consumed. Recent years have seen significant increases in valuation for businesses that simply facilitate interactions or the exchange of information. Capabilities and resources in the management of IT and the management of services are no longer perceived as merely operational concern or detail. They are the basis for creating value, for competition, and distinctive performance .

The trends noted above require IT organization s to have a keener sense of the nature and dynamics of services as a means for providing value to customer s. It is not surprising that growth and prosperity of a trade are accompanied by greater demands on the tools of the trade. The practice of service management grows, learns, and matures under the pressure of new challenges and opportunities.

Imagine you have been given responsibility for an IT organization. How would you decide on a strategy to serve your customers? Perhaps you would examine requirement s in detail and plan appropriately. You might track ongoing demand and adjust accordingly, while maintaining operational efficiency . Surely an attentive service provider with low costs must inevitably succeed. Unfortunately, while these are all necessary factors, things are rarely so straightforward.

First, issues surrounding services are complex. Not only in their individual details but also in the dynamic complexity that comes with many moving and interrelated parts. Long-term behaviour is often different from short-term behaviour. There are many tools for dealing with details but few offer insight into how the problems we have today have developed over time. What are needed are methods to help organizations understand the likely consequences of decisions and actions.

Second, customer specifications are not always clear, certain or even correct. Much is lost in the translation from requirements document to service fulfilment . The most subtle aspect of strategic thinking lies in knowing what needs to happen. Customer outcomes, rather than specifications, are the genesis of services. Strategic plan s, while critical for enacting change , are not enough.

A strategic perspective begins with the understanding of competition. Sooner or later, every organization faces competition. Even IT organizations with a relatively captive internal market of owner-customers are not entitled to a perpetual monopoly. The recent trends in outsourcing of business functions and operation s have made that clear. A change in prevailing business conditions or a new business strategy pursued by the customer can suddenly expose the IT organization to competition. Even government and non-profit IT organizations have shown themselves to be subject to competitive forces. It is important for IT organizations to review their positions and know for sure how they provide differentiated value to their customers.

Customer s perceive value in economic terms or in terms of social welfare, as is the case with pure public services offered by government agencies, or both. The differentiation can be in traditional terms such the organization’s knowledge and experience with the customer’s business, excellence in service quality , capabilities to reduce cost , or innovation.

The idea of strategic assets is important in the context of good practice in service management . It encourages IT organizations to think of investments in service management in the same way businesses think of investing in production system s, distribution networks, R&D laboratories, and various forms of intellectual property such as brands and patents. Asset s such as people, processes, knowledge and infrastructure are by themselves valuable for the benefits they generate for their owners. Strategic assets are those that provide the basis for core competence, distinctive performance , durable advantage, and qualifications to participate in business opportunities. IT organizations can use the guidance provided by ITIL to transform their service management capabilities into strategic assets.