introduction to services science unit 1: service and ...€¦ · service sector is largest sector...

© 2007 IBM Corporation

Introduction to Services ScienceUnit 1: Service and Services System

Michele Del Sordo, Executive IT ConsultantSeptember 2007

Introduction to Services Science – Unit 12

Unit objectives

Attain a comprehensive definition of Service and Services System

– Give context to the study of services

– Discuss differences between products and services

– View services as a system and discuss what that means

– Articulate key differentiators in a services system

– Understand how value is defined for a services system


Context and motivations


Context and motivations

Service sector is largest sector of most economies – Services represent over 78% of US GDP – > 70% of GDP in other developed countries – > 52% in developing nations

Rapid growth of service sector in recent decades– Fastest employment growth in service sectors

• Professional & business services #1• Health & education services #2• Leisure & hospitality services #3

– Manufacturing employment stable or fallingService sector as Tertiary sector– Agriculture & extractive industries: Primary sector – Manufacturing industry: Secondary sector


Percent employment in service jobs

26.421.217.813.1China

61.160.257.748.7Italy

70.866.463.656.9France

72.459.958.154.5Japan

73.974.870.867.2Canada

80.474.37167.1USA

1999199319871980

26.421.217.813.1China

61.160.257.748.7Italy

70.866.463.656.9France

72.459.958.154.5Japan

73.974.870.867.2Canada

80.474.37167.1USA

1999199319871980

US employment, % share

0

1020

30

40

5060

70

80

1850 1880 1900 1925 1950 1975 2000

ServicesManufacturingAgriculture


Defining the service sector

1997 NAICS-based service sector, US CensusAccommodation and Food Services (Sector 72)Administrative and Support, Waste Management, Remediation Services (Sector 56)Arts, Entertainment and Recreation (Sector 71)Educational Services (Sector 61)Finance and Insurance (Sector 52)Health Care and Social Assistance (Sector 62)Information (Sector 51)Management of Companies and Enterprises (Sector 55)Other Services (Except Public Administration) (Sector 81)Professional, Scientific and Technical Services (Sector 54)Real Estate and Rental and Leasing (Sector 53)Retail Trade (Sector 44-45)Transportation and Warehousing (Sector 48-49)Utilities (Sector 22)


Explanations for services growth

1. Growing final consumer demand for services As incomes rise demand for “luxury” goods rises and increases demand for service output (high income elasticity of demand)

2. Lower productivity growth in service sectorProductivity of labor in service sector fails to keep up with productivity growth in mfg. so services employ larger % of labor relative to other inputs

3. Globalization of tradeManufacturing jobs go overseas disproportionately, while service jobs are more locally tied

4. Growth of intermediate demandRole of services as intermediate input providers, due to both outsourcing/externalization of functions (design, legal) and rise of innovative new services and service providers/producers (software, e-commerce)


ProductsProducts are entities Products can be ownedProducts are tradableProducts can be distributed to different locations and at different times but preserve identityProducts are characterized from a life cycle (customer perspective)

– Determining requirements and justifying purchase of the product– Finding a product supplier– Financing the product– Installing the product– Modifying other products or processes to work with the product– Maintaining the product and replacing parts– Training personnel to use the product– Upgrading the product– Disposing of product waste– Disposing of the product

–


What is a Service

In economics and marketing, a service is the non-material equivalent of a good. Service provision has been defined as an economic activity that does not result in ownership, and this is what differentiates it from providing physical goods. It is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets.

By supplying some level of skill, ingenuity, and experience, providers of a service participate in an economy without the restrictions of carrying stock (inventory) or the need to concern themselves with bulky raw materials. On the other hand, their investment in expertise does require marketing and upgrading in the face of competition which has equally few physical restrictions.

Per Wikipedia (2006):

Separation of production/distribution from use is not possible for services.


Service features (1/2)

InseparabilityServices are created and consumed at the same timeServices cannot be inventoriedDemand fluctuations cannot be solved by inventory processesQuality control cannot be achieved before consumption

HeterogeneityFrom the client’s perspective, there is typically a wide variation in service offeringsPersonalization of services increases their heterogeneous naturePerceived quality-of-service varies from one client to the next


Service features (2/2)

IntangibilityServices are ideas and concepts that are part of a processThe client typically relies on the service providers’ reputation and the trust they have with them to help predict quality-of-service and make service choicesRegulations and governance are means to assuring some acceptable level of quality-of-service

PerishabilityAny service capacity that goes unused is perishedServices cannot be stored so that when not used to maximum capacity the service provider is losing opportunitiesService capability estimation and planning are key aspects for service management


The “Service” Logic

“Service Logic” views services, rather than goods, as the focus of economic andsocial exchange.Service: the application of competences (skills and knowledge) for the benefit of another entity. Such an application occurs in a provider-to-client interaction(relationship) that creates and captures value while sharing risks. Service Logic

– Shifts primary focus to “operant resources” from “operand resources”.– Sees goods as appliances for service deliver. Services have always been

part of product life cycle but the emergence of the Service-Dominant Logic reflects:

• An increase in emphasis on services in the life cycle, and increased differentiation or granularity in the life cycle

• The increasingly global scope of the ecosystem• The role of new information technologies in automating services, providing them

with higher quality and reliability, and enabling innovative new services– Implies all economies are service economies.

Services are value that can be rented. Services are autonomous, platform independent, business functions.


Skills and Knowledge

In the “Service Logic” the application of specialized skills and knowledge is the fundamental unit of exchange.Operant resources, especially “know-how,” are the essential component of differentiation. “Competitiveness in long run derives from ability to build, at lower cost and faster than competitors, the core competencies that spawn unanticipated products.”

Drucker’s “knowledge society”

Growing importance of specialists and specialized knowledge (applied knowledge) v. generalistsShift from knowledge to knowledges

– Requires knowledge workers to work in teams – teams, not individuals, as work units

– If not employee, knowledge worker must have affiliation with an organization

“…the knowledge investment . . .determines whether the employee isproductive or not, more than the tools, machines and capital ...”


Provider- Client relationship in a Service


Provider- Client relationship • Provider

– An entity (person, business, or institution) that makes preparations to meet a need

– An entity that serves• Client

– An entity (person, business, or institution) that engages the service of another

– An entity being served• Some general relationship

characteristics are that the Client:– Participates in the service process

(also known as the service engagement)

– Co-produces the value – The quality of service delivered

depends on customers preferences, requirements, and expectations


Service process matrix

Degree of labor intensityThe ratio of labor cost to capital cost

Degree of interaction and customizationAbility of the client to affect specialization

(Adapted from Lovelock (1983) and Fitzsimmons & Fitzsimmons (2003))


Nature and Availability of services


Service Delivery and Demand variation


Services and Value

There is no value until offering is used — experience and perception are essential to value determination.

It is easy to imagine that most of the value in a product is added by the processing of the materials that go into it; to build a car we process rubber to make tires, leather to make seats, steel to make the chassis and body...But even for cars, a great deal of value comes from intangibles and services after the product is purchased.

And for many products like clothing, pharmaceuticals, and software the cost of the raw materials is a negligible component of the value.

And for many products like airplanes the customer who buys them does so in order to use them to provide services to its customers -- people who travel.

Since value is always determined by the customer (value-in-use) — it can not be embedded through manufacturing (value-in-exchange).


Services in essence.

Services are intangible

Services are represented by processes, performances, sequences of events

Services are experienced by customers, often over significant periods of time

Service value is co-created with customers

Employees are the service in many cases


What are some everyday services?

Transportation (Trains, planes, delivery, etc.)

Hospitality (Hotels, restaurants, etc.)

Infrastructure (Communications, electricity, water, etc.)

Government (Police, fire, mail, etc.)

Financial (Banking, investments, etc.)

Entertainment (Television, movies, concerts, etc.)

Professional Services (Doctors, lawyers, skilled craftspeople, project management, etc.)

– Fastest-growing sector (employment, output and productivity) in advancedeconomies

– About 45% of gross output by this sector is intermediate output rather than to final customers

– Aggregate services value-added to final manufacturing output now close to 25%


“Product Logic” vs. “Service Logic”

Product Logic Service Logic


Transition to Service Logic (1/2)

Why? – Generate revenue

• Increased competition and more informed customers make it harder for firms to be profitable

• In many technology-intensive industries, Moore's Law relentlessly commoditizesproducts and reduces costs, so revenues decline

– Satisfy customer demand for services and solutions– Stay competitive

Many examples about the transition to a Service-Dominant Logic come from mature industries with low market growth and comparatively small or slow technological innovation. But even firms in industries with ongoing technology innovation need services to maintain growth and profitability. And furthermore, in high technology industries the rapid commoditization and increasing complexity of solutions increases customer need for services.

Product firms that successfully transition to providing more services and solutions tend to follow the same stages:

– Consolidate product related services– Entering the installed base market– Expanding to relationship-based services– Expanding to process-based services


Transition to Service Logic (2/2)

Product Concepts

Transition Concepts

Service Concepts


“Service Logic” main implications: Marketing Evolution

Marketing in the goods economy: financial optimization and the 4 P’s -Product, Price, Placement, PromotionMarketing in the services economy: communication across organizational boundariesFrom manufacturing (make and sell) to marketing (resource utilization for service provision)


“Service Logic” main implications: Services Ecosystem

Changed nature of the firm, both as an entity on its own and as part of networks or ecosystems of firms and service providers. Organizations exist to combine specialized competences into complex service that provide desired solutions.

– The firm is an integrator of macro and micro-specializations.Often a large "ecosystem" of other service providers grows up around a successful product or product category.This ecosystem spans the entire product life cycle and all its niches. It is many times larger than the supply and distribution chains for the product; most of the firms or individuals in the ecosystem have no direct link to the product manufacturer.Like an individual species in a biological ecosystem, each member of a business ecosystem shares the fate of the network as a whole, regardless of the that member's apparent strength.The success of a firm can depend heavily on how much it can balance its strategies for pursuing its own interests with those that promote their ecosystems' overall health.


“Service Logic” main implications: Intangible Assets

Current Assets: have a life span of one year or less, meaning they can be converted easily into cash.

Cash and cash equivalents

Accounts receivable consists of the short-term obligations owed to the company by its clients (credit extended by the company)

Inventory represents the raw materials, work-in-progress goods and the company’s finished goods

Non-Current Assets: assets that are not turned into cash easily, not expected to be turned into cash within a year and/or have a life-span of over a year.

Tangible assets such as land, building, machinery, computers

Intangible assets such as goodwill and intellectual property (patents, copyright, trademarks). IP questions:

Rise of services economy has not been thought through by IP lawyers

Trademarks have historically been the most significant form of IP protection for services

Business method patents have been issuing since the late 1990’s


“Service Logic” main implications: Innovation

Manufacturing innovation is focused on the "technical core" because that's where the most value is created, but in services that isn't a clear notion.Instead of viewing innovation in services as an impoverished or unsystematic version of product innovation we might consider that it is a strategy-driven activity, largely shaped by market forces as they shape the firm's business modelIn contrast to innovation in manufacturing, innovation in services often takes place at the "edges" of the firm where the services are delivered. This spreads out the service innovation process, making it less internally visible and systematic than the firm's product R&D activities. And because service innovations often involve the delivery of the service to customers, service innovations are highly externally visible.Some service innovations involve technology (self-service, other information-intensive services) but a great many don't (e.g. customer suggestions, customer demographics, etc.)


How do advances in IT trigger Service Innovation?

All services no longer locally bound: can provide services for remote customers

– Medical screening via web– Custom application software development– Customer-specific research– Computer maintenance

Services transformed into intangible goods– Codification and re-use of information or cultural/artistic modules developed for

individual client– E.g. software, accounting , consulting, architecture

IT enabled Services (some examples)– Research and development– Legal services– Accounting & financial services– Market research & management consulting– Architecture & technical consulting– Advertising– Manpower services (search, recruitment, etc.)– Engineering services– Industrial design services– …


What is a System?

Type Description Key Characteristic ExamplesNatural Systems

Biological, geological, or climatological phenomena that occur in the natural world

Constitutionally organic AnimalEarthquakeWeather

Manufactured Systems

Designed creations or artifacts of living beings

Having designed subsystems defined as components, parts, or assemblies

AutomobileComputerHouse

Socio-technological Systems

Combination of natural and manufactured systems

Interaction elements between sociological and mechanical aspects

BusinessGovernmentServices

A system is any set of available variables selected by an observer to identify fundamental objects, the influential attributes of the objects, and the relationships of these objects that result in a phenomena.Basic assuptions– Objects can be tangible or intangible; – Objects have attributes– There are relationships amongst the objects– There are relationships amongst the object attributesSome examples


Services System (1/2)A Services System is a Value-creation network composed of technology, people and organizations. There is at least one service provider and at least one service client.

The service provider interacts with the service client to create or "co-create" value. There may be other people or organizations who are affected by the interactions of the service provider and client; these are sometimes called stakeholders.

The interactions among the entities in the services system can be described in informal or qualitative ways, or in formal and quantitative ones.

So:– Services depend critically on people, technology, and co-creation of value– People work together and with technology to provide value for clients– A services system is a complex socio-technical system– Growth requires innovation that combines people, technology, value, clients


Services System (2/2)A typical Manufacturing System

A typical Services Supply Chain


Services System: Front stage and Back StageThe Service Business involves interaction. The product business involves material transformation.

As front end and back end become more differentiated the challenge is to align and coordinate them.

In a Services Business:the Front Stage can be an employee (e.g. a contact center) or a user interface (e.g. a self-service computer).

The Back stage is the foundation for the Front stage. The back stage operates on raw materials or information to create the finished products or processed information needed by the front stage.

"Industrialization" of the back stage to achieve efficiencies and economies of scale inevitably simplifies the front stage services.


Different Front-stage and Back-stage boundaries in a Restaurant

Services system can be viewed on a Continuum from Full-service to Restricted service based on the Intensity of Interaction.


Service Intensity

Correlation with PriceFront/Back Interrelationships


How is value created in a Services system?

Management

Gaining a Customer Keeping the Customer

Pre-Production Services

• Good and Service Design

• Supplier Services

• Purchasing Services

• Contract Negotiations

• Financing

• Good and Service Guarantees

• Consulting Services

• Education/Training Services

• Sales/Marketing Services

Production Process

• Create the Good or Service

• Process Type and Capability

• Good and Service Characteristics/Features

• Price/Cost, Quality, Time, Safety, Flexibility, Innovation and Learning, market and Financial Performance

• Value and Productivity

Post-Production Services

• Servicing Loans/Financing

• Installation, Maintenance, and Field Repair Services

• Transportation Services

• Warranty/Claims Services

• Training Services

• Postsale Visits and Services

• Consulting and Technical Services

• Recycle and Remanufacture

• Warehouse/Inventory Management

Synchronized Information and Feedback Loops

Value Creation

(Collier and Evans, 2005, p. 45)


Some Service Research AreasMeasuring work, service intensity, and service complexity– What are the limits to self-service? How much work can we shift to end-users?Representing and cataloging skills– How do we organize and breakdown the human skills needed to do work? How

can we take this into account in composing and optimizing teams?Global communication tools– What are the barriers to highly productive human-human coordination?

Distance, trust, communication, common ground, culture, technology?Service workforce management– Application of supply chain methods to service supply chains, which are people-

centeredEffective service automation– Understanding tradeoffs in human vs computer effort in creating customized

business services

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