SS

Terminal and instrumental values are key shapers of behaviour and can therefore produce very different responses in an IT organization. Many mergers and acquisitions fail because of these differences. Culture is transmitted to staff through socialization, training programme s, stories, ceremonies and language.

A service management organizational culture can be analysed through the following steps:

 Identify the terminal and instrumental values of the organization.

 Determine whether the goals, norms and rules of the organization are properly transmitting the value of the organizational culture to staff members. Are there areas for improvement?

 Assess the methods the IT organization uses to introduce new staff. Do these practices help newcomers learn the organization’s culture? (Van Maanen34 identified 12 socialization tactics that are useful in orienting newcomers to an organization's culture.)

6.5 Sourcing strategy

‘The next layers of value creation – whether in technology, marketing, biomedicine or manufacturing – are becoming so complex that no single firm or department is going to be able to master them alone.’

Thomas L. Friedman, The World is Flat

Outsourcing is the moving of a value-creating activity that was performed inside the organization to outside the organization where it is performed by another company. What prompts an organization to outsource an activity is the same logic that determines whether an organization makes or buys inputs. Namely, does the extra value generated from performing an activity inside the organization outweigh the costs of managing it? This decision can change over time.

A service strategy should enhance an organization ’s special strengths and core competencies. Each component should reinforce the other. Change any one and you have a different model . As organizations seek to improve their performance, they should consider which competencies are essential and know when to extend their capabilities by partnering in areas both inside and outside their enterprise. Service sourcing is another example of the Separation of Concerns (SoC) principle. This time it is a separation of the ‘what’ from the ‘who’.

Case example 13: Service Strategy

During the early 2000s, companies rushed to implement a service strategy based on labour arbitrage: service providers decrease labour costs by making use of less expensive off-shore resource s. The strategic intent is to make a provider’s value proposition more compelling through lower cost structures.

While costs did indeed decrease for customers, providers were unable to make long-term gains to their financial bottom line.

Why?

(Answer in Section 6.5.1)

IT and business service s are increasingly delivered by service provider s outside the enterprise, and by the internal organization. Making an informed service sourcing decision requires finding a balance between thorough qualitative and quantitative considerations. Historically, the financial business case is the primary basis for most sourcing decisions. These analyses include pure cost savings, lower capital investments, investment redirections and long-term cost containment. Unfortunately, most financial analyses do not include all the costs related to sourcing, leading to difficult sourcing relationships with unexpected costs and service issues. If costs are a primary driver for a sourcing decision, include financials for service transition , relationship management, legal support, incentives, training, tools licensing implications and process rationalization, among others.

6.5.1 Deciding what to source

A business ’s strategy formulation is the search for competitive differentiation through the redeployment of resource s and capabilities. When a business decides to source services it is in essence deciding to source resources and capabilities. If candidates are only peripherally related to the business’s strategic themes and are available in competitive markets then they should be considered. Once candidates for sourcing are identified, the following questions are intended to clarify matters:

 Do the candidate services improve the business’s resource s and capabilities?

 How closely are the candidate services connected to the business ’s competitive and strategic resource s and capabilities?

 Do the candidate services require extensive interactions between the service providers and the business’s competitive and strategic resources and capabilities?

Case example 13 (solution): The inability to capture value

Early adopters of a labour arbitrage strategy made great gains because, for a while, the costs of services they offered were lower than any competing alternatives. But as more and more service providers made use of off-shore resources, the cost of services was lowered for everyone. This was great for customers but bad for providers – this distinctiveness was eventually eliminated. Value was created for customers but service provider s were not able to keep any of it. This ability of a service provider to keep a portion of any value created is known as ‘value capture’.

The sourcing strategy was vitally important for fending off competing alternatives. However, service providers who focused solely on this strategy, at the expense of other distinctive capabilities, soon encountered strategic failure in the form ‘mediocre performance versus competing alternatives’.

If the responses uncover minimal dependencies and infrequent interactions between the sourced services and the business ’s competitive and strategic positioning, then the candidates are strong contenders.

If candidates for sourcing are closely related to the business’s competitive or strategic positioning, then care must be taken. Such sourcing structures are particularly vulnerable to:

 Substitution – ‘Why do I need the service provider when its supplier can offer the same services?’ The sourced vendor develops competing capabilities and replaces the sourcing organization.

 Disruption – The sourced vendor has a direct impact on quality or reputation of the sourcing organization.

 Distinctiveness – The sourced vendor is the source of distinctiveness for the sourcing organization. The sourcing organization then becomes particularly dependent on the continued development and success of the second organization.

Do not confuse distinctive activities with critical activities. Critical activities do not necessarily refer to activities that may be distinctive to the service provider. Take, for example, customer service. Customer s may believe it is critical, but if it does not differentiate the provider from competing alternatives then it is not distinctive, it is context.

This does not mean critical activities are not important. Contextual activities are not of secondary importance. It means they do not provide the differentiating benefit that generates value. One service provider’s context may be another’s distinctiveness. What is distinctive today may over time become context. Contextual processes may be recombined into distinctive processes. Here is a basic test :

 Does the customer or market space expect the service provider to do this activity? (context)

 Does the customer or market space give the service provider credit for performing this activity exceptionally well? (distinctiveness)