Juan Enciso - Tec Blog

Service Strategy

Service Strategy is critical in the context of all processes along the ITIL service lifecycle.

Goal: help service providers to develop the ability to think and act in a strategic manner.

Objetives: Are the answer questions such as:

What services to offer to customers?
How to differentiate from competitors?
How to create value for customers?
How to make a case for strategic investments?
How to define and improve service quality?
How to efficiently allocate resources across a portafolio of services?

Scope:

strategy generation
the development of markets (internal and external)
services assets
service catalogue
implementation of strategy through the service lifecycle
demand management
financial managment
service portafolio management
organizational development
sourcing strategies
strategic risks

Basic Concepts

Mintzberg's four Ps

Perspective: Have a clear vision and focus.
Position: Take a clearly defined stances.
Plan: Form a precise notion of how the organization should develop itself.
Pattern: Maintain consistency in decisions and actions.

Value creation is a combination of the effects of utility and warranty. Both are necessary for the creation of value for the customer. For customers, the positive effect is the "utility" of a service; the insurance of this positive effect is the "warranty":

Utility - fitness for purpose. Functionality offered by a product or service to meet a particular need. Utility is often summarized as "what it does".
Warranty - fitness for use. A promise or guarantee that a product or service will meet it agreed requirements. The availability, capacity, continuity and information securiry necessary to meet the customers' requirements.

The value networks are defined as follows: "A value network is a web of relationships that generate both tangible and intangible value through complex and dynamic exchanges between two or more organizations."

Resources and capabilities are the service assets of a service provider. Organizations use them to create value in the form of goods and services.

Resources - Resources include IT infrastructure, people, money or anything else that might help to deliver an IT service. Resources are considered to be the assets of an organization.
Capabilities - Capabilities develop over the years. Service Providers must develop distinctive capabilities in order to maintain services that are difficult to duplicate by the competition. Service providers must also invest substantially in education and training if they are to continue to develop their strategic assets and maintain their competitive advantage.

Service providers are organizations that supply services to one or more internal or external customers. Three different types of service providers are distinguished:

Type I: Internal service provider - An internal service provider that is embedded within a Business Unit. There may be several type I service providers within an organization.
Type II: Shared Services Unit - An internal service provider that provides shared IT services to more than one Business Unit.
Type III: External service provider - A service provider that providers IT services to external xustomers.

The service portafolio represents the opportunities and readiness of a service provider to serve the customers and the market space. The service portafolio can be divided into three subsets of services:

Service catalogue - The services that are available to customers.
Service pipeline - The services that are either under consideration or in development.
Retired service - Services that are phased out or withdrawn.

Processes and other activities

The Service Strategy processes:

Financial management - An integral component of service management. It anticipates the essential management information in financial terms that is required for the guarantee of efficient and cost-effective service delivery.
Demand management - An essential aspect of service management in which offer and demand are harmonized. The goal of demand management is to predict, as accurately as possible, the purchase of products and, where possible, to balance the demand with the resources.
Service Portafolio Management (SPM) - Method to manage all service management investments in term of business value. The objective of SPM is to achieve maximum value creation while at the same time managing the risk and costs.

The Service Strategy activities:

Defining the market - Understand the relation between services and strategies. understand the customers, understand the opportunities, and classify and visualize the service.
The development of the offer - Create a service portafolio that represents the opportunities and readiness of a service provider to serve the customers and the market.
The development of strategic assets - Define the value network and improve capabilities and resources (service assets) to increase the service and performance potential.
Preparation of execution - Strategic assessment, setting objectives, defining critical success factors, prioritizing investments, etc.

Organization

There are five recognizable phases in organizational development within the spectrum of centralization and decentralization:

Stage 1: Network - An organization in stage 1 focuses on fast, informal and ad hoc provision of services. The organization is technologically oriented and is uncomfortable with formal structures.
Stage 2: Directive - In stage 2, the informal structure of stage 1 is transformed into an hierarchical structure with a strong management team. They assume the responsibility for leading the strategy and for guiding managers to embrace theirs functional responsibilities.
Stage 3: Delegation - In stage 3, efforts are made to enhace technical efficiency and provide space for innovation in order to reduce costs and improve services.
Stage 4: Coordination - In stage 4 the focus is directed towards the use of formal systems as a means of achieving better coordination.
Stage 5: Collaboration - During stage 5, the focus is on the improvement of cooperation with the business.

The goal of the Service Strategy phase is to improve the core competencies. Sometimes it is more efficient to outsource certain services. We call this the SOC principle (Separation of Concerns, SOC): that which results from the search for competitive differentiation through the redistribution of resources and capabilities. The following generic forms of outsourcing can be delineated:

Internal outsourcing:

Type 1 Internal - Provision and delivery of services by internal staff: this offers the most control, but is limited in scale.
Type 2 Shared services - Working with internal BUs; offers lower costs than Type 1 and more standardization, but is still limited in scale.

Traditional outsourcing:

Complete outsourcing of a service - A single contract with one service provider; better in terms of scaling opportunities, but limited in best-in-class capabilities.

Multi-vendor outsourcing:

Prime - A single contract with one service provider who works with multiple providers; improved capabilities and risks, but increased complexity.
Consortium - A selection of multiple service providers; the advantage is best-in-class with more oversight; the disadvantage is the risk of the necessity of working with the competition.
Selective outsourcing - A pool of services providers selected and managed through the services receiver; this is the most difficult structure to manage.
Co-Sourcing - A variation of selective outsourcing in which the service receiver combines a structure of internal or shared services with external providers; in this case, the service receiver is the service integrator.

Roles and responsibilities

Chief sourcing officer - The chief sourcing officer reports to the CIO and manages the implementation of sourcing.
Director of service management - The director supervises the provider on behalf of the business
Contract manager - The contract manager manages the service contract from the perspective of the service provider.
Product manager - The product manager is a key role within service portfolio management. The role is responsible for managing the services in the service provider's organization. Works closely with the business relationship manager.
Business relationship manager - The business relationship manager brings coordination and focus to the customer portfolio. This role represents the customer.
Process owner - Manages the process models that have been developed on behalf of the users.
Business representatives - They represent the customers' interests and manage the sourcing relationship from that perspective.
The financial manager - The financial manager is responsible for implementing and managing the IT Service providers budgeting, accounting and charging.

Methods, techniques and tools

Services are socio-technical systems with service assets as the operational elements. The effectiveness of Service Strategy depends on a well-managed relationship between the social and technical sub-systems. It is essential to identify and manage these dependencies and influences.

Tools for the Service Strategy phase can be:

Simulation - System Dynamics is a methodology for understanding and managing the complex problems of IT organization.
Analytical modeling - Six Sigma, PMBOK and PRINCE offer well tested methods based on analytical models. They must be evaluated and adopted within the context of Service Strategy and service management.

Three techniques for quantifying the value of an investment are suggested:

Business case - A way of identifying business objectives that are dependent on service management.
Pre-Program ROI - Techniques used to quantitatively analyze investments before committing resources.
Post-Program ROI - Techniques used to retroactively analyze investments.

Impementation and operation

Strategic goals are to be converted into plans with objectives and ultimate goals, based on the lifecycle. Plans translate the intentions of the strategy into actions, through Service Design, Service Transition, Service Operation, and Continual Service Improvement.

Service Strategy provides every phase of the lifecycle with input:

Strategy and design - Service strategy are implemented through the delivery of the portfolio in a specific market area. Newly chartered services or services that require improvements in order to suit the demand are promoted to the Service Design phase. The design can be driven by service models. outcomes, constraints or pricing.
Strategy and transition - To reduce the risk of failing, all strategic changes go through Service Transition. Service Transition processes analyze, evaluate and approve strategic initiatives. Service Strategy provides Service Transition with structures and constrains like the service portfolio, policies, architectures, and the contract portfolio.
Strategy and operations - The final realization of strategy occurs in the production plhase. The strategy must be in line with operational capabilities and constraints. Deployment patterns in Service Operation define operational strategies for customers. Service Operation is responsible for delivering the contract portfolio and should be able to deal with demand changes.
Strategy and CSI - Due to constant changes, strategies are never static. Service strategies need to be developed, adopted and continually reviewed. Strategic imperatives influence quality perspectives processed in CSI. CSI processes deliver feedback for the strategy phase on, for example: quality perspective. warranty factors, reliability, maintainability, redundancy.

Challenges and opportunities:

Complexity - IT organizations are complex systems. This explains why some service organizations are not inclined to change. Organizations are not always in a position to anticipate the long-term consequences of decisions and actions. Without continual learning processes, today's decisions often end up as tomorrow's problems.
Coordination and control - The people who make the decisions often have limited time, attention and capacity. Therefore they delegate the roles and responsibilities to teams and individuals. This makes coordination through cooperation and monitoring essential.
Preserving Value - Customers are not only interested in the utility and warranty that they receive for the price they pay. They want to know the Total Cost of Utilization (TCU).
Effectiveness in measurement - Measurement focus the organization on its strategic goals, follow the progression and provide the organization with feedback. Most IT organizations are good at monitoring data, but often they are not very good at providing insights into the effectiveness that they offer. It is crucial to perform the right analyses and to modify them as the strategy changes.

The implementation of strategy leads to changes in the service portfolio. This involves management of related risks. Risk is defined as follows: "a risk is an uncertain outcome, or in other words, a positive opportunity or a negative threat.". Risk analysis and risk management must be applied to the service pipeline and service catalogue in order to identify. curb and mitigate the risks within the lifecycle phases.

The following types of risks are recognized:

contract risks
design risks
operational risks
market risks

Functions and Processes

Financial Management

Introduction

Financial management is an integrated component of service management. It provides vital information that management need to guarantee efficient and cost-effective service delivery. If strictly implemented, financial management generates meaningful and critical data on performance. It is also able to answer important organizational issues, such as:

Does our differentiation strategy result in higher profits and revenue, reduced costs or increased coverage?
Which services cost most and why?
Where are our greatest inefficiencies?

Financial management ensures that the charges for IT services are transparent via the service catalogue and that the business understands them. The benefits are:

improving decision making
inputs for service portfolio management
financial compliance and control
operational control
value capture and creation

Basic concepts

Two vital value concepts for service valuation are defined:

Provisioning value - The actual underlying costs of TI (creation costs), both tangible and intangible. Examples of these costs include: hardware and software license costs annual maintenance costs, facility costs, taxes, compliance costs.
Service value potential - The value-adding component based on the customer's value perception or the expected additional utility and warranty that the customers can obtain compared to their own assets. Looks at the service's individual value components to determine the true value of the service.

Financial Management ensures correct funding for the purchase and the delivery of services. The expected demand for IT services is qualified and translated into financial terms via a plan. This plan may have three primary areas, each of which delivers financial results that are necessary for continued transparency and service valuation:

Operating and capital planning (general and fixed asset ledgers) - Translation of IT expenditures to collective financial systems as part of the collective planning cycle.
Demand planning - Need for and use of IT services as described earlier.
Regulatory and environmental planning (compliance) - driven from the business.

Financial management acts as a bridge between financial systems and service management systems. A service-oriented accounting function results in far more detail and understanding of he delivery and consumption of services, as well as the production of data for the planning process. Related functions and accounting properties are:

Service recording - Allocation a cost center for a service.
Cost types - High-level expenses. such as hardware, software, personnel costs, administration.

Once the basis for cost administration (e.g. per department, service or customer) is established, cost types are determined for cost entry.
The number of cost types are determined for cost entry.
Cost types must have a clear and recognizable description, so that costs can be easily allocated.
The cost types can then be split up into cost items and settlement for each cost item may be established at a later stage.

Cost classification - To ensure good cost control, it is important to gain insight into the types of costs that occur. Costs can be split up according to various aspects.

Variable Cost Dynamics (VCD) analyzes and searches for insight into the many variables that have an impact on the service costs. The VCD analysis is able to determine the expected impact of events like acquisitions, divestments and changes in the service portfolio or service alternatives.

Activities

During service valuation activities, the following decisions are made:

Direct costs versus indirect costs - Can costs be attributed directly to a specific service or are they shared by several services (indirect costs)? once the depth and with of the cost components have been identified, rules or policy plans may be required to indicate how the costs must be spread across the services.
Labor costs - Develop a system to calculate the wage costs for a certain service.
Variable costs - Variable expenses that depend on e.g. the number of users or the number of occurring events. To predict variable costs, you can use:

Tiers - Identify price breaks to encourage customers to buy a specific volume that is efficient to the customer and provider.
Maximum costs - Describe the costs of a service based on maximum variation.
Average costs - Set the costs at an average calculated over a defined period.

Translation of cost account data to service value - Can be done only if the costs are linked to services.

After having established the fixed and variable costs for each service, the variable cost drivers and variation level of a service should be determined.

Traditional model to fund IT service include:

Rolling plan funding - A constant funding cycle; suitable for a service lifecycle for which a funding obligation is incurred at the start of a cycle and continues until changes occur or the cycle ends.
Trigger based plans - Critical triggers activate planning for a specific event; the change management process, for instance, could act as a trigger for the planning process for all approved changes that have financial consequences.
Zero based funding - Only include the actual costs of a service.

The Business Impact Analysis (BIA) represents the basis for planning business continuity. BIA identifies the financial and operational impact that may result from an interruption of business operations as well as the impact on assets and customers. This information can help shape and improve operational performance. This is because it enables improved decision-making with regard to prioritization of incident handling, the focus of problem management, change management, release and deployment management, and project prioritization. BIA offers an additional tool to determine the costs of service failure and the relative value of a service. The costs of a service failure consist of the value of lost productivity and income for a specific period.

Some concept in financial management have a big impact on the development of service strategies. A number of these are highlighted, allowing each organization to determine which the best alternatives are for its Service Strategy:

Cost Recovery, Value Center, or Accounting Center? - IT's financial cycle starts with investment in resources that create the outputs. Customers identify those outputs as value, re-initiating the cycle. Depending on the acknowledgement of the added value, IT is then considered a cost center or a valuable asset for the business objectives.
Chargeback: to charge or not to charge? - A chargeback model for IT can enable justification and transparency. Charging increases the customer organization's awareness of the costs incurred to provide ot with information.

There are several chargeback models:

Notional charging - An accounting method that provides insight into the costs that would be charged for a specific settlement method.
Metered usage - Settling costs on the basis of carefully established consumption units; applies exclusively for organizations that have made serious progress in introducing financial management.
Direct plus - Less complex settlement model in which the allocated direct costs of a service are increased by a percentage of the general indirect costs for shared services.
Fixed or user cost - Simplest settlement model in which the costs are divided on the basis of an accpeted computing factor, such as the number of users; this method does not allow for much distinction and therefore makes the least contribution to cost awareness.

Financial Management implementation checklist - A number of example implementation steps for phased implementation: plan, analyze, design, implement, measure.

Inputs and outputs

Financial Management gathers data inputs from the whole organization and helps to generate and disseminate information as an output to base decisions and activities on.

Service Portfolio Management

Introduction
A service portfolio describe the services of a provider in terms of business value. It is dynamic method used to govern investments in service management across the enterprise, in term of financial values. With Service Portfolio Mangement (SPM), managers are able to assess the quality requirements and accompanying costs.

The goal of service portfolio management is to realize maximum value while managing risks and costs.

Basic concepts
By funtioning as the basis of the decision framework, the service portfolio helps to answer the following strategic questions:

Why should a client buy these services?
Why should a client buy these services from us?
What are the price and charge back models?
What are our strong and weak points, our priorities and our risks?
How should our resources and capabilities be allocated?

With an efficient portfolio having optimal ROI and risk levels, and organization can maximize the value realization on its constrained and limited resources and capabilities.

Product managers play an important role in the service portfolio management. They are responsible for managing services as products during the entire lifecycle. Product managers coordinate and focus the organizations and own the service catalogue. They work closely together with the Business Relationship Managers, who coordinate and focus on the Client Portfolio. In essence, SPM is a Governance method.

The service portfolio covers three subsets of services:

Service catalogue - The part of the service portfolio that is visible to customers. The service catalogue is an essential strategy tool because it can be viewed as the virtual projection of the actual and available capabilities of the service provider.
Service pipeline - Consists of all services that are either under consideration or in the production phase via the Service Transition phase. The pipeline represents the growth and strategic anticipation for the future.
Retired services - Services that are phased out or withdrawn. The phasing out of services is a component of Services Transition and is necessary to guarantee that all agreements with customers will be kept.

Activities

SPM is a dynamic and continuous process that entails the following work methods (see also Figure 3.1):

Define - Making inventory of services, business cases and validating the portfolio data; start with collecting information on all existing and proposed services in order to determine the costs of the existing portfolio; the cyclic nature of the SPM process signifies that this phase does not only inventory the services, but also validates the data over and over again; each service in the portfolio should have a business case.
Analyze - Maximizing the portfolio value, tuning, prioritizing and balancing supply and demand; in this phase