Preserving value 1. Deviations in performance

In a mature organization, customers are concerned not only with the utility and warranty provided at a defined cost, but also the total cost of utilization (TCU) associated with the service(s) provided. The TCU also includes all costs incurred indirectly in the process of receiving the committed utility and warranty.

While the utility and warranty combines to provide value, it can also be easily lost due to hidden costs that the customer incurs from utilizing a service. Poor management of services over the lifecycle can result in customers paying much more than the price of the service when the effect of hidden costs sets in. As a result, the enduring value for

customers turns out to be much lower than the value created, and so eliminating hidden costs is a challenge, a critical success factor and a risk.

2. Operational effectiveness and efficiency

Efficiency goes to waste when outputs or outcomes are not fit for purpose or fit for use.

This is highly common in the case of IT services as many aspects of value are often

intangible. Effectiveness is the quality of beings able to bring about a desired effect. In the context of services, the two primary effects are utility and warranty. Efficiency may be seen as the ability to provide the ability to serve greater amounts of demand while using the same amount of resources. Particularly in the case of the service lifecycle, improvements to Service Design and Service Operation may drive efficiency gains. Service providers should be mindful of the feedback mechanisms between effectiveness and efficiency, as a change to one can have either a positive or negative effect on the other.

Figure 6.21: – Activity-based Demand Management

© Crown Copyright 2007 Reproduced under license from OGC

3. Reducing hidden costs

One category of hidden costs is transaction costs, which include costs for resources that service providers spend to determine customer needs, user preferences and quality criteria that underpin value and pricing decisions. Costs are also incurred when changes are made to services themselves, SLA‟s and demand in a „trial and error‟ manner.

Well defined service management processes, measurement systems, automation and communication, should drive down transaction for the service provider. Where possible, the standardization and reuse of service components should occur, so that any resources and effort spent can be applied optimally to the benefit of a greater number of services and customers.

4. Substantiating hidden benefits

One way of reducing asset lock-in is to rent or lease the assets rather than buying them.

In a similar way for customers, managed services provide an attractive alternative to asset purchases, offering the utility of an asset without the related lock-in. From a broader

perspective, through the development of various technology standards as well as the increased adoption of standardized service management processes, the risk and costs associated with switching service providers has also been reduced.

5. Leveraging intangible assets

The use of intangible assets can increase the scalability of service systems, whereas tangible assets (e.g. office and storage space, financial resources, human resources etc.) cause a loss of opportunity for other competing demands. Intangible assets are generally don‟t have an associated opportunity cost as they can be replicated and concurrently deployed to service multiple instances of demand. As an example, knowledge intensive systems can be highly leveraged with virtually zero opportunity costs as they primarily deal with intangible assets. From a service management perspective, the structure of service models, designs and processes can be analyzed to determine the proportion of intangible elements over tangible ones.

Where possible tangible elements should be substituted with intangible ones so that

service design becomes more scalable with less opportunity costs. When service elements are well defined, it is possible to increase the throughput of the service delivery system by software-based replication, where software agents supplement human agents by taking care of some or all types of transactions (e.g. bank ATMs and interactive voice response systems).

6.8.4 Risks

Risk is defined as uncertainty of outcome, whether positive opportunity or negative threat.

Managing risks requires the identification and control of the exposure to risk, which if materialized may have an impact on the achievement of an organization‟s business objectives. Every organization manages its risk, but not always in a way that is visible,

repeatable and consistently applied to support decision making. This is true for many organizations, where one of the greatest risk factors is a lack of accurate information when making decisions. The task of management of risk is to ensure that the organization

makes cost-effective use of a risk framework that has a series of well-defined steps. The aim is to support better decision making, through a good understanding of risks and their likely impact.

Figure 6.22: – Generic framework for risk management

© Crown Copyright 2007 Reproduced under license from OGC

1. Transfer of risks

Service providers in many cases seek to reduce the risks to the customer‟s business by taking them on themselves, and where possible, sharing them across multiple customers.

Customers compensate the service provider for these risks, primarily through the prices paid for any services consumed. Where charging is not possible or feasible, the service provider should seek to engage their customers in discussions as to how risks can be compensated for in the most appropriate way. The transfer of risks between customers and service providers (both ways) can be seen in the figure 6.23.

Figure 6.23: – Transfer of risks

© Crown Copyright 2007 Reproduced under license from OGC

2. Service provider risks

There are numerous risks faced by a service provider, including the materialization of:

 Technical instability;

 Loss of control in operations;

 Breaches in information security;

 Breach of regulations; and

 Financial shortfalls.

If the risks materialize the impact is normally measured in financial terms or in a loss of customer, supplier or partner goodwill. While it is easier to measure the financial impact, the impact arising from a loss of goodwill shouldn‟t be underestimated. As a guide, the financial measures should then be used as indicators, rather than purely direct measures of risk.

3. Contract risks

Risks that threaten the ability of the service provider to deliver on contractual commitments are strategic risks, because they jeopardize not only operations in the present (short-term consequences), but also the confidence and goodwill of customers in the future (long-term consequences). Supplier contracts are vulnerable to many kinds of risks, including

strategic, design, operational and market risks. In the context of the Service Lifecycle, Service Transition is a primary source of guidance for evaluating the risks in contractual commitments, however all lifecycle phases have a role to play in the management of identified risks.

4. Design risks

With the design of any new or modified service there is always a risk that it won‟t deliver the expected utility and warranty as desired by the customer. In cases where there is a lack of formalized functions and processes in Service Design, this risk increases as the feedback loop to normalize agreed requirements and service levels may not be effective.

Where scalability is a concern, the best designs are those that take into account the required performance potential for predicted demand cycles, but also can tolerate variations within a specified range. From a financial perspective, services should be designed to be economical to operate yet flexible to future improvements and modifications.

5. Operational risks

The operational risks faced organizations can be grouped into two main categories, those affecting the business units and those affecting the service units. Service Management primarily seeks to identify and manage those risks faced by the service units (including the service provider and other suppliers or partners). Risks may be identified such as the under-utilization of assets, failures to deliver sufficient warranty levels or rising costs

incurred in the delivery and support of services. Constraints that should be considered and managed include:

 Asset specificity;

 Scalability;

 Set-up and training costs;

 Dependencies and relationships; and

 Overloaded assets.

In regards to the scalability of services and overloading of assets, communication should be engaged between the customer representatives, technical specialists and IT architects to evaluate and agree upon a suitable level of idle (buffer) capacity that should be

implemented for contingency purposes. In modern environments that make use of virtualization technologies, the service provider may reduce operational risks by being more agile in the production or reduction of capacity.

6. Market risks

A common risk faced by all types of service providers is the choice that their customers have on sourcing decisions and look to sign contracts with other providers in pursuit of better supporting strategic objectives. Reducing the Total Cost of Utilization (TCU) may be one method to persuade customers to stay so that the costs and risks of switching

outweigh the potential benefit. Another strategy may be to expand the service catalogue so that the customers‟ scope and depth of requirements are perceived to be met.

Two broad strategies that service providers can use to manage market risks are:

 Differentiation – developing and improving assets and services that are not adequately provided by competitors; and

 Consolidation – developing and improving assets and services that can be utilized to serve a range of consolidated demand sources (e.g. many customers using websites from a single web server).