'From Processes to Promise: How complex service providers use business model innovation to deliver sustainable growth' - White Paper released at Service Week, 21 September 2011.

Executive Summary:

The ‘pure’ service sector represents three quarters of the developed world’s economy. Forty per cent of manufacturing firms sell services as well as products. In some cases ‘traditional’ manufacturing firms generate over fifty per cent of their revenues from services. It is clear that service offers companies significant opportunities to create and capture economic value. Underlying this shift to service is a change in the nature of service.

Increasingly firms are focusing on how they can deliver services that help their customers deliver value to their stakeholders. In essence service providers are shifting from being ‘doers’ to becoming ‘problem solvers’, capable of orchestrating the delivery of complex services. Our research explores the challenges and opportunities associated with this shift. Through interviews with 24 managers from 12 different companies we show how complex service providers are innovating their business models to obtain sustainable profits and growth.

A key finding of our research is that these service business model innovations do not occur in isolation. Instead one has to take account of the ecosystem – the business environment in which the service provider operates. This ecosystem consists of all those organisations that are able – directly or indirectly – to influence the service provider’s ability to create and appropriate value. Our research suggests that the impact of ecosystems is growing.

We also find that business model innovation involves service providers extending their ‘value proposition’. They move from offering relatively simple services, such as IT support or equipment maintenance, towards more comprehensive service offerings, such as ‘cloud’ computing capacity or guaranteeing equipment availability. In doing so, complex service providers position themselves as solution-providers, offering to be held accountable for the delivery of service outcomes.

Service providers have three options to extend their accountability. First they can extend the scope of services they provide. Second they can increase the timeframe over which these services are provided. Third, they can change the nature of the contract, by guaranteeing outcomes and performance levels. Each of these innovations offers new opportunities to create value, by more closely aligning with the customer’s business model.

Importantly the service provider also has to decide how to structure the service delivery system. Service providers may remain accountable for the ultimate service delivery, but they do not need to undertake all of the elements involved in service delivery. They have the freedom to decide how the service will be delivered. This freedom means they can innovate the service delivery system. Often they use technology – smarter services – to enhance service delivery.

Rarely do single service providers have all of the capabilities required to deliver services. This is particularly the case as value propositions become more complex and service delivery systems become more technologically dependent. By partnering, service providers can fill their own competence gaps, but by partnering the service provider is also exposed to more risk.

Separating what the provider is accountable for from how this promise is delivered increases the accountability spread. As a consequence the service provider is exposed to risks that originate from: (i) the value proposition, (ii) the value delivery system – either of the provider or the broader ecosystem, or (iii) beyond the ecosystem.

Our research reveals how complex service providers are innovating their business models in the pursuit of increased growth and profitability. It also enables us to identify the organisational capabilities that organisations need in order to successfully innovate their business models. These capabilities relate to the three aspects of service business model innovation – the value proposition, value delivery and accountability spread.

So, for example, the service provider should have a thorough understanding of the way its customers do business, and create and capture value, in order to define effective value propositions. The service provider must be able to clearly define and articulate the value proposition and its benefits to customers and build confidence in the viability of their value proposition.

To deliver value effectively the service provider must have the organisational capabilities required to manage and orchestrate the ecosystem. It must make the right decisions about who to involve in value delivery, be able to assess and choose the best partners, and build and maintain productive relationships with them. The service provider must also be able to work effectively with the customer to co-create value.

Service providers also require capabilities to deal with the accountability spread produced by service business model innovation. Some of these capabilities concern risk identification. Other capabilities relate to being able to measure and manage the risks arising from changing the value proposition and delivery systems, and containing and sharing this risk together with other members of the ecosystem. Being able to articulate and price the risk is important; it involves identifying appropriate mechanisms, commercial and legal constructs, for example, with which to operate effectively across the network and capture value.

Finally, for executives who want to pursue this approach to business model innovation, we suggest some initial measures. Steps should be taken to establish and analyse the value proposition, value delivery system, and resulting accountability spread. Efforts made to understand and map the ecosystem. These and other critical activities should be embedded into the roles of key individuals with the accountability to drive profitability. Leaders should prepare for transformation and change.