Thursday, 29 January 2009

Service Innovation Part 2: Economic Clusters

For a long long time we are being educated by economists that our economy has sectors.  The roughest devides it into Agriculture, Manufacturing and Services. But with 2%, 16% and 82% the Services sector is a bit too big to consider it a sector anymore. 

On the other hand, large chunks of these 82% have strong product characteristics. The energy, telecom,  rail and retail sectors are all good examples of services industries that primarily sell on a transaction basis: kWh, minutes, km and package are exact measures of what customers have to pay for.

These examples show that what contemparary economists reckon under services is a whole lot different that the defininition of my last post suggest. This is not a problem, but a fact one has to be aware of when talking about services.

One of the best - be it quite difficult - articles I've read so far that explains the difference between the "transactional" type of services and "real" services is an article titled Services, Products and the International Structure of Production by Luis Araujo and Martin Spring in Industrial Marketing Management 35 (2006).

Next to "transactional" services they put forward "transfer-based" services, i.e. services that are carried out without knowing in advance what will be the benifit / costs for both parties.  A good example is a consultancy meeting. None of the parties knows in advance if the time and money spent on the consultancy will be worth the money.

Furthermore they stress that it takes a lot of effort to make products transactionable, because the product itself is not transactionalble. For example, who would buy a car without warrenty? Who would buy one without a good networks of dealers to maintain it etc.

The same holds in my view for transferable services,  if they can be made transactionable, it will only be with a lot, a whole lot of effort.  And indeed, we notice that some consultants try to make "packages" of for example "change projects".  Often this still doesn't mean one knows in advance what change will achieved, but at least the time and the pricing can be set in advance. So, in fact, the services is still largely a transfer, not a transaction.

It would take a long story to go into a detailed analysis of Araujo and Spring's work, but as long as the take-home message "there are transactionable and transfer-based services" has landed, my goal for today has been reached.

Friday, 23 January 2009

Service Innovation Part 1a: Definitions explained

Hooray! Someone (named Bart) commented on my previous post. He said:

Interesting definition, though I do not get it yet. Could you specify what you mean with the design of the output and management of the process? Preferably with some (simple) examples?

When we take a closer look at the services definition we see it demands three properties:

  1. the process is the product
  2. the customer/user is in control of the design of the output/outcome
  3. the customer/user is in control of the management of the process
Lets have a look at all three properties.

The process is the product - In a classical manufacturing business the production-process of the product lies fully in the hand of the producer. The producer can specify how the product is manufactured in advance . In services this is not the case, the services process is created over and over again on the spot. An example:

When I take my family to a pancake restaurant (pancakes are a local specialty, beloved by young and old) the process that the restaurant staff and "us" go through from the moment we enter the parking lot to the moment we leave it, has not been designed in advance but is co-created by both. If the staff is friendly, reacts well on the presence of my kids and guide them in a smart way to the playground, it all starts well. But when I enter the restaurant disturbing the experience of other guests by shouting "Hey, get me a table for five, we are hungry" this will certainly affect the course of events to happen during the stay.

So the product that is created by our interaction is the process. This also rebunks the idea that the services proces is owned by the services provider. Noop! The process is mutually produced - co-creation - but the process is not owned by the provider. More on this later.

The customer controls the design of the output - At first sight it is confusing to have a product and an output. This is not very "normal" in the product world. There product and output are the same. At least when they leave the factory. But as soon the product enters the channel and comes into the retail phase, the services aspect start to kick in. And in real services industries the product is customized to the extend that one can ask: who designed this thing? Two examples:
  • In the same pancake restaurant, the second thing I do is taking a look at the menu so see if they serve "ginger-bacon". If they don't I look if they serve "bacon" and "ginger". So far I have not found a pancake restaurant that don't have the second set. So when they don't serve "ginger-bacon" as a combination I ask the waiter for exactly that. Saying "I see you serve "bacon" and "ginger" pancakes. Can I have the combination? The answer has always been "yes" so far. An the bill is usually one or two Euros higher than "normal bacon". Who cares?
  • Anyone who ever saw "American Chopper" on TV must have noticed that some customer pop in during the build phase. Most come out of curiosity, but it is very clear that when the customer would say "hey, can this frame be redone, I want it shorter/longer/higher/wider, his wishes will be fulfilled. And the poor guy that works on the frame for 2 weeks (and spend the last 3 polishing it) will happily shred the frame and start anew.

In thse example it is clear that the customer controls the output. Of course it starts with the fact that I decide which pancake to order from the list of usually 60 to 80. And next I "reconfigure" the output by ordering a version that is not on the menu. So again, I'm in control of the output (of the kitchen). The same holds for the bike example.

The customer is in control of the management of the process - In agricuture and manufacturing the producer manages the production proces (altough I guess some farmers will disagree). They specify when the factory runs (when the crop is harvested), what products are produced (what to grow this year), how may people/machines are employed (harvest quick or slowly), etc.

In services this is different. Whatever the interaction between services providor and customer, it is always free for the customer to say things must be done different, stop the process for a while or even walk away. This is less true for the services providor. If one says to provide a service one should do that (to best effort). A few examples:

  • In the pancake restaurant I can say to the staff that I want a new pancake because this one arrived cold, that I want the bill now, that we will skip coffee (or even stop halfway the main dish) or that we are leaving right away because on of the children got sick. Actually I don't have to explain at all why we are leaving. Ofcourse, when you ordered a 4 stage meal you have to pay the full amount, but still you can leave.
  • If you ordered a hotel stay and the hotel notices that you will be the only guest for that night, they can do two things: stay open and serve you or cater for a good (read normally better) place to stay. They cannot (or better shouldn't) run away from their hospitality obligations.
  • Last week we left a lunch-restaurant after waiting for over 45 minutes because our orders for two simple buns hadn't arrived yet and I was given bad service by the waitress too. So we left without notice.
  • In a taxi you can always say to the driver. Please stop, I've changed my mind, I want to continue my yourney on foot (to see that park).

Bullet 1, 3 and 4 show that it is the customer who manages the proces. He/she can speed up, stop, change the service-interaction. Bullet 2 shows that the "production" can be relocated (to another hotel), but this decision is customer-focussed, not production focussed. Imagine what happens when the customer says "no, I don't want to be relocated".

So in general the process is managed by the customer, he/she owns the process, where "owning" means full control over entering, delaying, speedin, stopping or changing the services interaction.

So "Bart" I hope things are a bit clearer now. If they aren't, please let me know, else I will continue with Part2.

Wednesday, 21 January 2009

Service Innovation Part 1: Definitions.

As a notion, Service is probably among the most undefined. But surely Innovation of Services is even worse as Innovation is undoubtedly the most (mis)used word today.

Following Schumpeter (yes, the guy from the 1930's) I'm a stubborn advocate of the following definition:

Innovation changes the values onto which the system is based 

A clear example of a changing value system, and the gale of destruction that made Schumpeter famous, is the storm that is raging today through the (American) car industry. Big = out, economic = in, design rules stronger than ever.

It is interesting to note that the changes in the customer value system are not caused by competitors but - for a large part - by a wider move in society towards green, sustainability and ofcourse the mounting pressure from relatives and the general public to act environmentally sound. So the gale has origins outside the car industry, which probably explains my stubborness to a large extend.

Now on to service. What is it? Ever since Lusch and Vargo busted four populars myths about services being intangible, heterogenous, inseparability (of production and consumption) and perishability (see JOURNAL OF SERVICE RESEARCH / May 2004)  it is clear that services involve or even consume products. Anyone who ever visited a restaurant will see that this is clearly the case. 

I must admit it remained a mistery to me too until I met two old scolars in San Fransisco last year: Joel Goldhar and Daniel Berg. I really think their definition has potential to become a classic:

It clearly is a service when the process is the product and the customer/user is in control of both the design of the output/outcome and the management of the process

To me this definition has a lot of potential to take away most of the current confusion around the services notion as it neatly defines who is responsible for what and it ends the confusion around the role of (physical) products as it clearly states that the process is the product.

I think that coming up with an even better definition for "service" would be tough nut to crack. So I won't attempt and use this definition and the one for innovation above to move on next time to the subject of Innovation in Services. 

Tuesday, 20 January 2009

How to buy a service?

Last week I visited Interpolis a large (I would almost say dominant) insurance company together with a group of people interested in SaaS (Software-as-a-Service). After a tour around around their building (reknown in the Netherlands for their free-seating policy) two presentations were given by Interpolis staff.

The first one is relevant for the topic of this blog: how to buy a service as it focussed on a proces-improvement for handling window damage of cars. And given the type of weather we had lately over here the timing was perfect. It turned out that the number of broken windows had risen to 600 a week lately.

But well, let's concentrate on the case. The dominant player in the local market is Carglass, which is a worldwide player too. Carglass had approached Interpolis about options to speed up claim coverage checking, that is the part where the insurance company tell Carglass who should pay the bill: Interpolis or their customer.

After implementation, effectively Carglass is now able to automatically check coverage in the Interpolis system, bringing down costs on both sides and also dramatically reducing the troughput time between claim and payment (from 4 months to less than 2 weeks). 

Here's the catch: because everything is automated, all the costs on the Interpolis side are incurred by the IT department, not by the business. Where formerly the call center did the communication and the administraters of  the business unit did the majority of paperwork a lot of costs were invisible or easily charged (f.e. 60 calls on the call centre). But now that everything has been reduced to bits and data-traffic  running on virtualized infrastructures, the overhead costs in the business units are zero and all costs fall with IT and are exactly visible but impossible to allocate because the internal organization has been split into operations units with separate P&L's and all refuse to pay the (low) bill!

A second phenonenon is that now that costs are visible, it turns out that Carglass is by far the most expensive for Interpolis. This fact caused a lot of discussion in the group as those of us that reacted as clients (customers)  said: well, that is OK, since the service we recieve from Carglass is far superior. Eventually this led to the conclusion by the Interpolis people that they had no way of "buying services", they still purchased "window replacement" as if they were buying "windows". 

As a community we concluded two things:
  1. Although not a SaaS issue, automating information exchange between organizations can reveal internal weaknesses w.r.t. cost allocation. Previously invisible costs disappear in multiple places while new costs can be allocated precisely but also results in non-sendable bills.
  2. The servitization of our economy poses new demands on organizations to leave the product-centered way of selling and buying and embrace more holistic (management) models. 
To me both point 1 and 2 are at the core of SSME/Services Science as in Services Organization, Opertation and Information go hand in hand.  And changing such a system is a complex endeavor which makes clear the strongly relation between change and Services Innovation. 

I'll scratch my brain meanwhile to blog in the latter subject next time.

Monday, 19 January 2009

Self-organization (for the worse)

This was one of those days that one wished things were self-organizing in another way. Reading books the last years made me feel self-organization was a positive thing, but what if powerful systems organize the wrong way?

What if lots of stakeholders cannot put their stake into the ground and stop the system from self-organizing for destruction. Ever had that impression?

No, I don't mean the financial crisis. I mean around you. The city you live in, the company you work for, the partners you work with, the church you go to.

Lately I'm pondering about ways to intervene in such situation without real power.  Can it be done by an idividual? Do you need a collective? Can it be done via a silent revolution? Can it be painless?

Any suggestion is welcome, reactions on suggestions even more.

Thursday, 15 January 2009


In my previous post I studied Organizational Learning in little detail. One of the major words therein is systems. One can ask someone "what is a system" and from the answer it is most often quite easy to guess the educational or even cultural background of that person.

In general Westerners refer to systems as a "thing". A building, a person, a train, a city. And technologists love to talk about their (harware/software) system too. Often in great detail.

Easterners more often refer to systems in the language of relations. Their community, their company, their family. Often in that order too. They consider themselves to be part of thereby often not even referring to themselves while Westerners would say the system consists of .... me, my friend, etc.

Another perspective on systems is found in pre-modern cultures where actually there is little system thinking as we know it, but people consider their movements during the day in terms of places. It is known that aboriginals talk about going from A to B via resting place C they refer to that yourney only by mentioning C. A and B are said to be not known in their world. I'm not an expert in that field, but can imagine that such a way of talking about traveving can work for groups that know their environment very very well.

In some sciences, sytems are identical with wholes. Parts, relations and interactions (processes) together form the system. And states (like the aboriginals' Place C) are an important concept too.

It is that kind of systems that I'm writing about in this blog. Systems that are not on their own, but related. For example, one cannot be a child without having a father and a mother. Becoming a mother creates the child and v.v. It is exactly what Maturana meant when he wrote: drawing a like creates the necessity to defend it. And as we all know. Lines are a major cause for war. Ask Europe!

And I want to write about the organization and stucture of such systems, knowing that the part can never be well unless the whole is well. Ask society today about the pain it feels from the state its financial part (sub-system) is in.

Wednesday, 7 January 2009

Is there a problem with organizational learning?

At the start of this blog I stated that I would love to see an integration of the ideas from Beer (VSM), Senge (Organizational Learning) and Snowden (Narrative Knowledge Management). I still do and will pursue, but noticed that VSM and NKM are more prominent thus far.

Looking for a reason why I did some soul-searching over the holidays that I want to share here. Ofcourse one of the things I did was rereading the Wikipedia page on Peter Senge. And the first time it all sounded quite plausable to me. But a few days later I felt the urge to reread once more and bang there is was, the last part of the sentence in the first paragraph on Organizational Development:

Senge emerged in the 1990s as a major figure in organizational development with his book The Fifth Discipline where he developed the notion of a learning organization. This views organizations as dynamical systems (as defined in Systemics) in a state of continuous adaptation and improvement .

Now I know what bothers me. It is not OL itself, it is that constant background noise of people saying that organizations should learn and change itself. Some even refer to organizational change.

What I like in particular in the VSM way of thinking (and strongly augmented by the work of Maturana and Varela) is the whole idea that the organization should not change. Living systems don't change their organization over their lifetime. They grow from infact to adult, learn new behavoir, the repair damage when harm is done, over time they change the way they act, they grow old and become unable to do things that were previously easy or harmless (such as skating), but their organization stays the same: all processes such as learning, repairing, (social) behavior, moving are static, but allow for an enourmous variation and adaptability.

For example, the process to organize the repair of a wound has been organized from day 1, long before the would is inflicted. It is there, part of the organization of the whole system, even if the "wound" means "loosing a leg". Maybe the system (the living system) won't survive the disaster, but even then the plan (the organization) to do the repair was present as an integral part of the way the system was organized.

So rereading the phrase once more I discover that Senge doesn't say the organization itself should change. It says the organization is in a constant state of change and adaptation. Am I an optimist when I interpret this as changing offering, changing teams, changing geography and not as changing organization?

Well maybe Senge indeed had this in mind and my initial bad feelings indeed only had an external cause. But on the other had, we can all see a lot of organizations lack at least a fews processes today that are mandatory for survival according to the VSM way of thinking. So even if Senge didn intend this, it is a fact that may organizations should change their organization, even without changing their inputs or outputs. And NKM hands us some very practical ways to discover them.

So lets continue this year with studying how to bring VSM, OL and NKM together in this highly fragmented world.