Service Design and Delivery

Bill Hefley and Wendy Murphy (Eds.) Service Science: Research and Innovations in the Service Economy

For other titles published in this series, go to www.springer.com/series/8080

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Mairi Macintyre    Glenn Parry    Jannis Angelis ●

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Editors

Service Design and Delivery

Editors Mairi Macintyre The University of Warwick WMG, CV4 7AL Coventry UK [email protected]

Glenn Parry Bristol Business School University of the West of England BS16 1QY [email protected]

Jannis Angelis The University of Warwick Warwick Business School CV4 7AL Coventry UK [email protected]

ISBN 978-1-4419-8320-6 e-ISBN 978-1-4419-8321-3 DOI 10.1007/978-1-4419-8321-3 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2011924475 © Springer Science+Business Media, LLC 2011 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

Foreword

In the 1950s a company formalised a new science. The company was IBM, and the science was Computer Science. Computer Science took parts of existing scientific and engineering disciplines and combined them in a new way. IBM recognised the need for the application of scientific disciplines to the emerging field of computers, and decided to provide the impetus itself. Today, we are so familiar with computer science that we don’t think about how its origins were intertwined with the commercial world. In 2004 a company formalised another new science. The company was IBM, and the science was Service Science. Service Science took parts of existing scientific, engineering and management disciplines and combined them in a new way. Again, IBM recognised the need for the application of scientific disciplines in this new field. But as yet we are not familiar with Service Science. It’s new, strange, challenging, amorphous … just waiting to be defined and explored! This book is to help you to start to understand Service Science, its importance to the world and its potential for the future. Why should you be interested? Around three-quarters of the GDP of developed nations is service-related. Many services are highly complex, bringing together a mesh of organisations, people, technologies and information to deliver value to their customers. Yet, until recently there has been relatively little work done to understand how these complex service systems achieve what they do, and therefore how to establish a systematic approach to the delivery of service. This is Service Science. The vision of Service Science is “to discover the underlying logic of complex service systems and to establish a common language and shared frameworks for service innovation.”1 This is no easy task. It requires a multi-disciplinary approach that integrates knowledge from the areas of business, people and information technology, and uses scientific methods to ensure appropriate academic rigour.

 Succeeding through Service Innovation, ISBN 978-1-902546-65-0, © University of Cambridge IfM and IBM Corp, 2008.

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Foreword

But why should you be interested? Service Science is a new field that is of the utmost importance to the world. With so much of global GDP being service-related, it is essential that we drive improved effectiveness, efficiency and sustainability in the delivery of services. The world cannot afford to continue building services mainly on a foundation of “artistic thinking” rather than scientific discipline. There is therefore a need for people who can apply a unique combination of skills, knowledge and experience to this emerging field; people who can coordinate global resources of all kinds in the delivery of services, people who can identify and deliver a continuous stream of innovation in service systems in a repeatable and scientific way. University classes on Service Science are springing up worldwide, often encouraged and supported by IBM. This book aligns with one of these classes. Its development was initiated by IBM and WMG, a successful department at the University of Warwick with decades of experience in manufacturing research. Therefore, this book uses that expertise to compare the development of a product and a service. It takes a lifecycle view of a service in the way that we might view a product, considering its design, development, delivery, maintenance and eventual replacement. We believe that this approach is a good route into Service Science for those who have experience in manufacturing. It is very good for those in manufacturing companies who need to move forward from product-centric to service-centric thinking. We hope you enjoy this book, and that it helps to explain Service Science in a way that you find understandable and stimulating. We are in the early stages of Service Science research but you will see from this book that there is much value to be gained from applying what is already known. By building your Service Science skills you will be preparing yourself for success in today’s service-centric world. Peter Ward Client Technical Advisor Programme Manager North-East Europe SMS for Life Project Manager, Tanzania

About the Editors

Mairi Macintyre  joined WMG, University of Warwick in 2000 where she has focused on design and development management. She has led a joint team including Warwick, Cardiff, Cranfield, Bristol and Bath to develop master level courses from emergent service science research. Her interest in combing rigour with relevance has enabled her to repeatedly gain and sustain industry and public sector engagement in research projects. Mairi has worked collaboratively with the UK Lean Aerospace Initiative and aerospace companies to develop and deliver lean insights and practice. She is the Principal Investigator of the EPSRC funded WIMRC research project Agility in Self Care, with a presence at international conferences in both operations research and in quality improvements in healthcare. Dr. Glenn Parry  is Principal Lecturer in Strategy and Operations Management at Bristol Business School, University of the West of England and Senior Visiting Fellow at the University of Bath’s School of Management. His research is industrially focused and he has managed and contributed towards research consortia within the automotive, aerospace and construction industries. His research interests include organisational transformation, service, core competence, costing, lean, and enterprise software management. His project involvement includes the £16m EU ILIPT project which led to the book, Build To Order, published by Springer, Agile Construction Initiative, UK Lean Aerospace Initiative, Lean Flight Initiative, Supply Chain 21 and S4T. He holds a PhD in Materials Science from Cambridge University, a BSc in Chemistry and Business and an MPhil in Materials Science from Swansea University. He has previously worked for British Steel, LEK Consulting, Warwick Manufacturing Group and the School of Management at Bath. Dr. Jannis Angelis  is an Assistant Professor at Warwick Business School, and an associated researcher with the Centre for Technology, Policy and Industrial Development at MIT and the Institute for Manufacturing at Cambridge University. Following doctoral research at Cambridge which investigated numerical flexibility at P&G across Europe, Dr Angelis worked in venture capital in London. He has previously researched strategy for sustainable competitiveness at Harvard, flexibility and productivity in knowledge-intensive firms at Stanford and Berkeley, the human side of lean at Cambridge, high performance organisations in aerospace at Oxford and business development and support at the ILO and ITC/WTO of the UN. vii

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Acknowledgements

The editors would like to acknowledge the significant contribution made by the authors who together have made this book possible. We would also like to extend our thanks and appreciation to the many organisations and people who facilitated the development of the book with case contributions and their time. We would like to thank Marc McLening, Aftermarket Director GE Aviation for his considerable contribution to the work on complex deployed service and the staff of Dowty Propellers. We would like to acknowledge and thank the RAC for the time they gave to us; Debbie Hewitt, Managing Director of RAC Roadside, Dr David Bizley, Technical Director, Ian Laughlin and Tony Loyer. We would also like to acknowledge the support given by the EPSRC who helped make some of the contributions to this book possible. Thanks go also to Hannah Reese and Alison Kakoura who have supported the production of the book. Finally, we would like to thank our families, Amber Macintyre, Tsui, Lauren and Emilia Parry, Jelena and Alexandra Angelis and many supportive friends. Producing a book with so many authors is always a challenging experience, which takes up a lot of personal time, and this would not have been possible without their ongoing support and understanding.

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Contents

1 Understanding Services and the Customer Response............................ Jagdeesh S. Dhaliwal, Mairi Macintyre, and Glenn Parry

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2 Goods, Products and Services................................................................... Glenn Parry, Linda Newnes, and Xiaoxi Huang

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3 The IBM Story............................................................................................ Charles Loving

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4 Rethinking Lean Service........................................................................... John Seddon, Brendan O’Donovan, and Keivan Zokaei

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5 Designing Competitive Service Models.................................................... Veronica Martinez and Trevor Turner

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6 Shifting from Production to Service to Experience-Based Operations.............................................................. Jannis Angelis and Edson Pinheiro de Lima 7 Complex Deployed Responsive Service.................................................... Glenn Parry, Marc McLening, Nigel Caldwell, and Rob Thompson

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8 A Multi-organisational Approach to Service Delivery........................... 119 Valerie Purchase, John Mills, and Glenn Parry 9 Through Life Costing................................................................................ 135 Linda Newnes, A.R. Mileham, W.M. Cheung, and Y.M. Goh

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10 The Practitioner View.............................................................................. 153 Ian Smart, Stuart Bestwick, Neil Jarrett, Richard O’Conner, and John Gurnett 11 Are You Being Served?............................................................................ 167 Mairi Macintyre, Glenn Parry, and Jannis Angelis

Contributors

Jannis Angelis OM Group, Warwick Business School, Coventry, CV4 7AL, UK Stuart Bestwick Alexander, 5 London Road, Southampton, Hampshire, SO15 2AE Nigel Caldwell Research Fellow, University of Bath W M Cheung Lecturer in Engineering, Design and Manufacturing Research Group, Northumbria University, School of Computing, Engineering and Information Sciences, Ellison Building City Campus, Newcastle Upon Tyne, UK Edson Pinheiro de Lima Pontifical Catholic University of Parana, 1155 Imaculada Conceicao Street, Curitiba 80215-901, Brazil Jagdeesh S. Dhaliwal WMS, University of Warwick, CV4 7AL, UK Y M Goh Lecturer, TW222, Wolfson School of Mechanical and Manufacturing Engineering, Loughborough University, Leicestershire, LE11 3TU, UK John Gurnett TriloGee Limited, 19 Beamont Close, Lutterworth, Leicestershire, LE17 4GE Xiaoxi Huang Department of Mechanical Engineering, University of Bath Neil Jarrett CWC (UK) Limited, Warwick House, 25 Buckingham Palace Road, London, SW1W OPP Charles Loving Director of Operations, British Institute of Technology & E-commerce, London, UK xiii

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Contributors

Mairi Macintyre WMG, University of Warwick, CV4 7AL, UK Veronica Martinez Principal Research Fellow, Centre for Business Performance, Cranfield School of Management Marc McLening Aftermarket Director, Dowty Propellers, GE Aviation A R Mileham Professor, University of Bath, Claverton Down, Bath BA2 7AY John Mills University of Cambridge Linda Newnes Head of Costing Research, University of Bath, Claverton Down, Bath BA2 7AY Richard O’Conner CWC (UK) Limited, Warwick House, 25 Buckingham Palace Road, London, SW1W 0PP Brendan O’Donovan Vanguard Glenn Parry Bristol Business School, University of the West of England, BS16 1QY Valerie Purchase School of Communication, University of Ulster, Jordanstown Campus, Northern Ireland John Seddon Visiting Professor at both the Universities of Cardiff and Derby and the Managing Director of Vanguard Ian Smart Alexander, 5 London Road, Southampton, Hampshire, SO15 2AE Rob Thompson Research Associate, Helen Hamlyn Centre, Royal College of Art Trevor Turner Former Deputy Head of Detonators, ICI Explosives UK until 1990; Honorary Research Fellow, Strathclyde Institute for Operations Management, Strathclyde University Keivan Zokaei LERC, University of Cardiff

Service Perspectives The following perspectives are provided by experts working in practice and academia. The perspectives provide an illustration of the breadth of offerings described as ‘service’. They capture the essence of a number of service operations and bring focus to the variety of value propositions which create a service experience. On reading subsequent chapters these perspectives can be used as reference points to reflect upon how different theories may be applied in different contexts and how value is created through service. Total Place, efficient public services: Total Place in Coventry Solihull and Warwickshire is a sub-regional collaboration between public sector partners which is aiming to reshape services as we face the major reductions that will come in public sector funding. We’ve been one of 13 nationally funded pilots and our byword is “better for less”. Families and friends are pulling together to face the financial down-turn and they expect the public sector to do the same. We’ve been working across the system to redesign Children’s Centres to offer a more streamlined service and using design principles to make sure that we bring the views of the parents and children who use services-as well as front- line staff into the heart of how we specify and procure services. We have been using Lean to reshape the human resources teams that support schools. Our early experience is that if you use a systematic and engaging business redesign process and put quality at the heart of it, you really can improve services and get better value for money. Mike Attwood Programme Director Total Place in Coventry Solihull and Warwickshire

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EMI, a service that listens to customer. The Consumer Insight team at EMI Music offers an important service that helps shape the business. We use quantitative research exploring consumers interaction with music to guide EMI’s various record labels across more than 20 countries. First we listen carefully to the key business questions that EMI has. Too often in companies consumer insight misses opportunities to answer the key questions. At EMI we use insight to understand everything from which new artists we should invest in, where the opportunities lie for our artists across and within countries and what the strategic opportunities are for the business (such as new business models and new product / service opportunities created by shifting consumer preferences). Next we use our rolling program of c.500,000 interviews per annum to answer those questions. This requires significant research and data manipulation skills if the program is to be reactive enough to meet business needs and cost-effective enough to scale globally. Finally we help the businesses to do something different as a result. This requires drawing simple but powerful conclusions from the research, communicating them and making them available to all EMI employees on their desktops so that whatever they are working on, then can quickly and easily use consumer insight to help make decisions. David Boyle Senior Vice President Consumer Insight and Validation at EMI Music

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The Carbon Trust is a not-for-profit company with the mission to accelerate the move to a low carbon economy. We provide a specialist support service to help business and the public sector cut carbon emissions, save energy and commercialise low carbon technologies. Since 2001, the Carbon Trust’s Applied Research scheme has committed a total of £23 million to 188 projects that have demonstrated potential to develop into viable commercial technologies that could reduce UK carbon emissions. When the scheme was created in 2002, we initially took a ‘hands off’ approach to project selection and management. However, following an internal performance improvement review, we have changed the offering so that we are much more directly involved with the projects and the innovators. This new partnered service approach allows us to draw upon our knowledge base and broad functional capabilities to provide additional value such as introductions to investors, mentoring on commercialisation, and partnership development. Partnered service also allows us to better manage the risks associated with supporting early stage R&D by providing us with a much better understanding project developments and the context of these. Over the last three years, as we have introduced these changes, we have seen the proportion of projects leading to a tangible commercial outcomes (patents, investment and/or sales) increase from 55% to 67%. Dr Robert Trezona Head of Research and Development The Carbon Trust

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L.E.K. Consulting: Helping business leaders make informed decisions. L.E.K. is a global consulting firm that specialises in strategy, transaction services and performance improvement consulting. It advises the largest private and public sector organisations, private equity companies and smaller, more entrepreneurial businesses. With a reputation for resolving the most complex commercial issues, L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. Companies come to L.E.K. because they know it offers the deep industry expertise, insight and practical guidance needed to develop and execute the most effective commercial strategies. L.E.K. works closely with its clients to understand and address the critical issues they face, asking the hard questions, gathering and analysing the most relevant information, and developing innovative strategies that create value. L.E.K.’s ability to resolve its clients’ most complex challenges is demonstrated by the fact that more than 90% of its work comes from repeat clients or referrals. James Lloyd Head of Marketing L.E.K. Consulting LLP

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Managers and professional project managers typically draft implementation plans paying close attention to design for implementation, conformance to technical specifications, defining key performance indicators and aligning stakeholder interests. In my experience most companies (and most project managers) are often able to design the “system” part of change adequately. On paper, plans are most often technically “correct”. But a large percentage of implementations fail—due to delay, missed targets or lack of sustainability. The most common pitfall is neglect of the “soft” side of change. All implementation projects imply change, and successful change requires leadership. What separates leaders from managers is the ability to engage and excite stakeholders, to lead by example and to drive the change agenda. In my opinion most people will be part of change if they understand the need for change, have the adequate competences to perform in their new role and have the right incentives. Therefore leaders that are able to communicate the need for change, provide for adequate training and aligned incentives will be most successful. In addition, leaders that engage and motivate their employees through role modelling and personal involvement will not only succeed in implementation – they will thrive. Dr Ian Colotla Vice President Novo Nordisk A/S

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BAE Systems; providing complex engineering service. We have been challenged with delivering a very complex service, the repair, maintenance and upgrade of fast jets, under a new form of contract; the Availability Transformation: Tornado Aircraft Contract. BAE Systems was a traditional product manufacturer. We produced aircraft, systems and spare parts then sold them to our customers, our profits largely based on volume. The new service contract is very different. BAE Systems role is to provide availability for the RAF Tornado aircraft. That means maintaining the RAF’s fleet of aircraft providing spares and technical advice so that they are ready to fly. We don’t deliver this as a separate organisation, but instead we work with our partners as there are many different skills and resources that are required to keep the aircraft flying. That’s not just the Royal Air Force, who provide over 50% of our service technicians. We also work with numerous supply partners such as the MOD, SELEX, Claverham, Rolls Royce, to name only a few. BAE Systems has learned to work in a new way to provide service. We have developed an integrated service enterprise that brings together experts from many different organisations, providing a more cost effective service solution for the Ministry of Defence and ultimately saving the tax payers money, and shareholders returns through both volume and innovation. Steve Debonnaire ATTAC Program Director BAE Systems

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Estimating Through Life Cost is one of the major challenges of the cleantech industry. As clean technologies are mainly found in the energy, waste management and water management sectors, clean technology companies typically sell products that are mission critical, have a high degree of customization, and are designed for a long life of constant use. One of the key questions of customers is how reliable the technology will be over its life span – in particular, how likely the technology is to cause unpredictable costs in addition to its upfront cost, such as costs of maintenance or disruption. When an innovation is launched in such a market, reliable information about the life cost of the novel product is naturally lacking. This has proven to be a key obstacle to venture capital funded cleantech companies with innovations that are conceptually proven and that deliver significant improvements to conventional alternatives, but that lack enough reference installations to provide reliable data on life costs. One way out of this dilemma that is increasingly discussed among practitioners is servitization, i.e., the notion that the owner of the innovation should be an agency that is specialised in using and maintaining the product, letting the end customer become a buyer of the product’s service (such as heat) rather than the product itself. Harald Overholm Investment Director Sustainable Technologies Fund

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Value drives everything we do so let’s look at the dimensions of value. Value is contextual in terms of both when we experience and evaluate it. So value depends on the state of the world at the point of use. Value also has an emotional dimension. If your watch is worth anything more than £10, you bought it for emotional value because a functional watch may be purchased for £10 or less. There is also a practical value, an abstract concept that can be described as function. If you think of a chair, the practical value of a chair is the abstract notion of a seat. Conversely, there is nothing abstract about logical value. Its value is defined and purposeful. If you want to buy a tape measure the measurement on the tape measure must be accurate i.e. logical value is about objective standards. What is interesting to me is not merely that the dimensions exist, but that many firms just do not design and deliver all dimensions in their value proposition to the customer. Delivery across all dimensions is hard. There is also expected and perceived value. When we decide to buy, we weigh the expected value in the future and decide how much to pay now. When we experience the service we develop a perception of its value and compare that to what we expected. We then evaluate if we want to repurchase. Go to a café and critically evaluate the experience. What is the outcome of your experience in value terms? People often completely forget their own role in creating that experience. Customers cocreate value with the café by accessing their own resources which impact on the experience, such as selecting the people they take with them to the café. What does this mean for firms? Well, to service designers out there – how much of service design includes the design of the customer and the resources they might need to co-create value? Professor Irene Ng Professor of Marketing Science at the University of Exeter Business School, Senior Visiting Fellow, University of Cambridge, and Advanced Institute of Management (AIM) Research Services Fellow

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Chapter 1

Understanding Services and the Customer Response Jagdeesh S. Dhaliwal, Mairi Macintyre, and Glenn Parry

1.1 Products and Services So why have you picked up this book? Perhaps you are in a bookshop, browsing through titles and were attracted by its cover. Perhaps you bought it on-line and are now reading it in your bedroom. Maybe you’ve borrowed it from a friend and are browsing its pages during your coffee break. Whatever the circumstances, you, evidently, are the customer. But what of this book? Its title is ‘Service Design and Delivery’. So is this book a product or is it a service? The discipline of Economics has traditionally assumed that there is a distinction between products and services. This convention can be traced back to Adam Smith’s landmark work, ‘The Wealth of Nations’ (Hill 1999; Smith 1776). To view products and services as distinct outputs of a productive process is ingrained in economics, accounting and operations management (Hill 1999). The distinction has been considered useful since it is assumed that manufacturing and service industries need to be organised in distinct ways. Interestingly, however, the division between products and services is not as stark as you might initially imagine. Indeed a debate has raged in the literature about how they might be differentiated. Various authors have proposed their own discriminatory criteria (Smith 1776; Levitt 1981; Hill 1999; Gadrey 2000). The fact that this debate exists at all demonstrates how difficult it can be to distinguish between products and services. Surely it’s easy … you can physically touch a product but services are about people interacting... you can’t touch them … they are more difficult to pigeon-hole …?

J.S. Dhaliwal () WMS, University of Warwick, CV4 7AL, UK e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_1, © Springer Science+Business Media, LLC 2011

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Introductory textbooks in Economics focus on the idea of tangibility: Products are physically present whereas services are not. Therefore, in the sense that it is physically present, we might think of this book as a product. However, we can also think of this book as providing a service: as the authors of this book, our prime aim is to satisfy and ideally, to surpass, your expectations (our customer) through presenting core ideas about service design and delivery. It is the intangible ideas that are key and not the tangible, physical nature of the book. In other words, we have chosen to communicate our ideas through a book. But we might have chosen to achieve the same outcome via a different medium, say an audio book, a DVD, through organising a seminar or perhaps through pitching up at your house and inviting ourselves in for a chat. To address this issue, Peter Hill (1999) suggests a classification that includes Tangible Goods, Services and Intangible Goods. According to Hill, intangible goods originate from a creative source. Creative sources include authors, film makers, scientists, architects, software writers, orchestras and so on. As they are created, the original goods do not have physical tangible properties, but rather, they have to be captured and recorded on physical media such as a paper, a disk, CD or hard drive. But it could be argued that all products and services start out as a creative idea: The year 2020s coolest-looking car may today be a nothing more than a newly coalescing idea in a design-engineer’s head. This idea will need to be ‘recorded’ and translated into a tangible product. Equally, 2020s brave new health service may currently just exist as policy statements captured in a government paper: It will need to be translated into a tangible service that patients can experience in real life. Both products and services incorporate productive processes, but the point at which customers interact with this process tends to differ between products and services. Consider Fig. 1.1, which illustrates the classic productive process. Compare this with a productive process for services as shown in Fig. 1.2. This appears straight forward. But let us consider the ways in which product manufacturers are increasingly interested in engaging with customers at a much earlier stage in the productive process, often through using the advantages of ­automation offered by the Internet.

Fig. 1.1  A productive process

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Fig. 1.2  A productive process for a service

For example, a variety of companies allow you to custom-build your own home computer (PCSpecialist 2009; ComputerPlanet 2009). Car manufacturers allow customers to ‘build your own car’ (e.g. Jaguar 2009). Here, the process is more similar to Fig. 1.2 – the classic process for a service, than Fig. 1.1 – the classic process for a product.

1.2 Scripted vs Customisable Customer Experiences We have discovered, therefore, that a rigid distinction between services and products does not exist. Furthermore, there may be a trend of increasing fuzziness around the difference between products and services. Think about the degree to which you can personalise your mobile phone: • You can choose between numerous varieties of charming (or hideous!) fascia colours. • A plethora of tones can ring, wake, alert or remind you. • You can play with the function buttons so that they are set to open up the particular functions you want. • You can customise the software so that it does what you want. Product manufacturers increasingly seek to establish service relationships with their customers through offering a range of after-sales add-ons. Think about car manufacturers and their range of services: • In-house car insurance • Maintenance contracts • Breakdown services Conversely, some services seek to offer highly scripted, highly standardised services that offer a near identical experience wherever or whenever they are purchased. Think about some fast-food businesses and hotel chains: • Walk into any McDonalds in the world and your experience will be similar. • Ibis hotels have the same furnishing colours and décor whichever country you go to and again, your experience tends to be similar.

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The Internet offers new possibilities in terms of making services more tangible and products more customisable. • NHS, the UK’s national health service, offers an online diagnostic aid, through NHS Direct, that supports patients in sifting through their symptoms to arrive at likely diagnoses linked to management plans, self-help guides and contact numbers for support services. • Virgin Wines, an online retailer helps customers to build up a database of their drinking preferences which is then translated into the delivery of wine cases customised for each consumer. • Many products encourage you to register with their websites which offer services such as product information, updates, news and competitions. Considering the above, we conclude that we have historically found it useful to conceptualise products and services as distinct types of entities in Operations Management. There has traditionally been a perception that this distinction will help in our thinking around planning product and service businesses in different ways, but this mental model of ‘products’ and ‘services’ does not appear to be helpful in thinking about twenty-first century organisations. Perhaps it is time to jettison this mental model (Lovelock 2004) and move instead to the concept of a continuum of outputs, Fig. 1.3, ranging from those that are highly customisable to those that are highly scripted.

Fig. 1.3  The continuum of service outputs

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1.3 Why Does This Matter? Reflecting on products and services using the continuum model offers the possibility of introducing more tangible, scripted elements to services (e.g. NHS Direct) and unique, flexible elements to products (e.g. Virgin Wines). Our mental models are important since they provide a context for our ideas. The mental models (or paradigms) we hold may focus our thinking, but they may also limit it. Conversely, paradigms may ‘open out’ our thinking, so stimulating creativity, but failing to ‘lock down’ carries the risk of scattered, unfocused ideas. Therefore, it is helpful to think about services and products as a continuum. This model can aid in either focusing thinking (when considering ‘pure’ products or services) but it also allows ‘fuzziness’ (when considering scripted services or customisable products).

1.4 How Scripted? How Customisable? In designing services, exactly how scripted or how customisable should the client experience be? This of course, will be a question of deciding on the operations strategy. Slack et al. (Slack et al. 2006) identifies five sources of competitive advantage.

Quality

Speed Dependability

Flexibility

Cost

Being RIGHT

Being FAST

Being ON TIME

Being ABLE TO CHANGE

Being PRODUCTIVE

© Nigel Slack and Michael Lewis 2003

Services have to make a trade-off between these different sources of competitive advantage.

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The following diagram illustrates how an organisation might map out its priorities:

‘Fit’ is concerned with ensuring comprehensiveness, correspondence, coherence and criticality

Critical

Coherence

Speed Dependability Flexibility

Critical Critical

Critical

Cost

Capacity

Critical Supply Network

Market Competitiveness

Quality

Correspondence

Performance objectives

Resource Usage

Development Process and Technology Organization

Decision areas

Comprehensive? © Nigel Slack and Michael Lewis 2003

And to work through a concrete example, here are some of the factors an airline will want to consider in determining its operations strategy for different classes of travel:

First/Business class

Economy class

Services

First/Business - class cabin, airport lounges, pick-up service

Economy cabin

Customers

Wealthy people, business people, VIPs

Travellers (friends and family), vacation takers, costsensitive business travel

Service range

Wide range, may need to be customised

Standardized cabin

Relatively high

Relatively low

Rate of service innovation

Volume of activity Relatively low volume

Relatively high volume

Profit margins

Low to medium

Medium to high

Main competitive Customization, extra service, comfort features, convenience factors Performance objectives

Price, acceptable service

Quality (specification and Cost, Quality (conformance) conformance), Flexibility, Speed

Different product groups require different performance objectives © Nigel Slack and Michael Lewis 2003

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It is important to appreciate, however, that high quality-high cost services might not necessarily choose to offer more flexibility: indeed, the selling point might well be ‘a consistent, high quality, reliable service’. On the other hand, there may be circumstances where greater flexibility might enable a service to reduce its costs through avoiding waste. The key strategic decision to be taken in designing a service is for an organisation to define what mix of Quality, Speed, Dependability, Flexibility and Cost it is ­seeking to provide. This will constitute its Service Concept. As we will see, this service concept relates to the underlying emotions that the service seeks to provoke.

1.5 Customer Experience: It’s All About Eliciting Emotions 1.5.1 What Is the Ultimate Goal of Any Service or Product? Airlines want passengers to enjoy their travel experience with the aim of attracting positive publicity and repeat business. Theme-park operators want their customers to enjoy a series of thrilling rides…. with the aim of attracting positive publicity and repeat business. As authors of this book, we would like you to feel stimulated by the ideas on these page, with the aim of attracting positive publicity (you’ll tell your friends) and repeat business (you’ll see our names on other publications and think about reading them). The goal is the same: through their services or products, organisations seek to elicit favourable customer experiences that stimulate the behaviours of repetition (customers buy the service or product again) and service/product promotion (satisfied customers advocate use of the service or product amongst their social network).

1.5.2 But What Exactly Is a ‘Favourable Customer Experience’? Let’s consider some common service experiences. • Think about the last time you had a wonderful meal out at a restaurant. • The relief you felt when the RAC patrol officer managed to get your car going again. • How about an exhilarating day at a theme park? • A reassuring chat with your doctor. • Or a refreshing swim in the pool of your local gym. In each case what made the experience ‘favourable’ (or unfavourable) was the emotional response that the service elicited in you. • The positive restaurant experience was the result of triggered feelings of anticipation, being cared for, feeling energised (or relaxed) by the lighting and décor and feeling content at the meal’s end.

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• Your relief at having your car fixed was a result of feelings of fear and anger at the car not starting being assuaged by a confident, courteous patrol officer who was able to efficiently carry out the repair. It’s this emotional response that will motivate you to eat at that restaurant again or subscribe to the RAC again and tell all of your friends about your great experience. We can therefore consider an ‘experience’ to be a ‘set of emotions’. All of the above allows us to arrive at a fundamental conclusion about the nature of service design and delivery: The central goal of service design and delivery is to define and elicit favourable customer emotions.

1.6 The Importance of Emotions to Service Design and Delivery Our increasing understanding of the importance of emotions has turned many of our former assumptions about their role and importance on their head. The traditional perspective, the view that we are usually taught either formally or more often tacitly, is that emotions interfere with rational thought. Decision-making, is seen as a formal, rational, logical process whereas emotions are seen as irrational and a hindrance to effective decision making. However, over the past few decades the field of Experimental Psychology has overturned the whole notion of decision making proceeding as a linear, logical process: Rather, emotions are demonstrated to be KEY to rational decision making. (Goleman 1996; Ledoux 1998; Damasio 1999, 2006; Swaminathan 2007; Laibson 2005; Salvador and Folger 2009). In his paper ‘Decisions and Desire’, Gardner Morse (Morse 2006) succinctly describes the essence of how our human brains operate: The closer scientists look, the clearer it becomes how much we’re like animals. We have dog brains, basically, with a human cortex stuck on top, a veneer of civilization. This cortex is an evolutionarily recent invention that plans, deliberates, and decides. But not a second goes by that our ancient dog brains aren’t conferring with our modern cortexes to influence their choices – for better and for worse – and without us even knowing it.

A glance at Fig. 1.4 demonstrates this concept anatomically: In essence, the human brain is comprised of the brain stem, which takes care of basic life support functions such as breathing and digesting food, the limbic system, which is the source of our emotions and the neocortex which represents Morse’s ‘veneer of civilization’. Damasio and colleagues have studied the cases of over 50 people who have suffered targeted brain damage to their limbic system as the result of tumours or accidents (Morse 2006). The intelligence of these patients is unaffected (since they have not suffered any neocortical damage) but they are no longer able to interpret the emotional content of situations as a result of their limbic brain injury. For example these patients comment that emotion-laden pictures that would previously have provoked an emotional response no longer trigger specific feelings within them.

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NEOCORTEX Higher order thoughts and actions

LIMBIC SYSTEM Pre-programmed patterns of behaviour i.e. Emotions

BRAIN STEM Automatic. Basic life support functions

Fig. 1.4  The human brain

The surprising thing is that with normal IQs, but stripped of emotion, these u­ nfortunate people are unable to make decisions, particularly individual or social decisions. In considering the pros and cons of a given situation they try to dispassionately assess every possible ramification in the decision tree, leading to an impossibly large number of permutations. They are unable to rapidly ‘weight’ or ‘give value to’ the relative importance of the available options. They lack a ‘gut instinct’ which allows them to filter out low value information and focus on high value information. This research challenges our traditional view that emotions disrupt decisionmaking. Indeed we start to understand that it is emotions that enable us to ‘weight’ or ‘give value’ to different options in the decision-making process (Gladwell 2006). The concept of value and the importance of the value proposition are discussed further in the chapter, Designing Competitive Service Models. However, the key point to appreciate here is that the core essence of ‘value’ depends upon the human emotions that a service excites (or fails to excite). Neuropsychological research is revolutionising thinking in Economics and has spawned the growth of a new field dubbed ‘Neuroeconomics’ (Economist 2005). In their award-winning paper, Robert Heath and Paul Feldwick (Heath and Feldwick 2008) discuss the central importance of emotions to successful advertising. They describe the earlier research of Heath and colleagues (Heath et al. 2006) who have examined the relationship between the emotional potency of a range of on-air

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TV advertisements, their rational content (i.e. specific factual knowledge transmitted about the product) and brand favourability (i.e. the extent to which research participants thought favourably of the product after viewing the advertisements). They found that brand favourability varied with the emotional potency of advertisements but there was no relationship between the factual content and brand favourability. In other words, ‘it’s emotion that sells’. We buy on the basis of emotions (i.e. our ‘emotional brains decide’) and we THEN use our logical brains to rationalise or justify the purchasing decision (Hill 2003). Research using the technique of functional Magnetic Resonance Imaging (fMRI), where subjects undergo sophisticated brain imaging whilst they make decisions, is increasingly being used to explore the mechanics of our decision making and the interaction between the emotional and logical parts of our brains (Knutson et al. 2007; Grabenhorst and Parris 2008). Heath and Feldwick go on to explore the curious phenomenon that, despite mounting evidence over the past 40 years that emotions are central to advertising, the industry has clung to a mental model of the centrality rational content to successful advertising. As Heath and Feldwick (Heath and Feldwick 2008) state: It is not that people in advertising don’t believe there is a role for creativity, or that building brand relationships is unimportant. It is that, in practice, these ‘softer’ values are regarded as less important than, and subservient to the communication of information.

As we have discussed, the evidence suggests that the relationship should actually be the other way around. What are the implications for service design and delivery of this new understanding of the central importance of emotions? Do we ‘get things the wrong way around’ and consider the logical, neocortical aspects of service design first and then seek to tag on emotions (expressed as ‘value’ or ‘design’)? In a similar way to advertisers, we need to ensure that our mental map or paradigm places emotions at the centre of service design. In other words, in designing a new service, the starting point should be a conscious identification of the mix of emotions that a particular service is seeking to trigger. Failure to do so can spell disaster. The once mighty Woolworths can offer a salutary lesson. The brand name continued to inspire the affection of UK consumers, many of whom associated it with their childhood Christmas toys and ‘pick N mix’ sweets, but it collapsed nevertheless. Jeremy Baker’s analysis (Baker 2009) on the BBC News website sums up the views of many customers: “The in-store environment isn’t that good and you’re not sure what they’re good at”, he says. “If you want a cheap suit you think of Primark and if you want expensive food you think of Waitrose, but there are no items to associate with Woolworths. It has no unique qualities”. “Going into Primark, the whole atmosphere says ‘It’s fine, this is cheap’ but you feel good about yourself,” he says. “But you feel a loser going into Woolworths”.

Consider these two paragraphs and compare them to another quote from the same BBC article: When asked, ‘what are its strengths?’ a spokesman for Woolworths says that the answer lies in its annual report, which says the chain focuses on ‘the home, family and entertainment’,

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although the chairman notes in his statement that it is now less dependent on CDs and has moved more towards books and computer games.

It appears that Woolworths had identified, in a rational ‘neocortical’ way what its core business was i.e. ‘the home, family and entertainment’. The missing piece of the jigsaw however is contained in Baker’s final, emotional (limbic) comment: ‘But you feel a loser going into Woolworths’. Thinking with an ‘emotions are central’ paradigm would focus attention on Baker’s comments first which would then allow a logical selection of products: This model allows us to understand that the key question to ask is ‘How might Woolworth’s customers “feel good” again?’ A starting point might be the affection and nostalgia of UK customers for the brand, for example. This should then lead to rational decisions around product selection – what products ‘fit with the emotions’ that Woolworths is trying to elicit and in fact, rather than specific products, is it more about store design and organisation? Contrast this with the risk of ignoring emotions and starting with ‘which products to sell, how to organise logistics’ and other rational aspects of service design. What are the chances of recovery if customers, despite the efforts of any rational, neocortical strategy, continue to ‘feel like losers’ going into Woolworths? Compare Woolworths with the Virgin Group. Virgin does not have a core set of products or services. Rather, its website identifies a core set of values – in other words emotions: Virgin stands for value for money, quality, innovation, fun and a sense of competitive challenge. Virgin.com 2009

Clearly, this organisation has blended together a defined set of emotions and these lie at the core of its business. The rational, neocortical side of Virgin’s business is productively focused on triggering this set of emotions in its workforce and its clients. Virgin has a sense of how it wants us to feel and how it intends to elicit these limbic responses.

1.7 Service Design and Delivery: Putting It All Together What are the implications for service design and delivery of our discussion so far? In considering the setting up of a new service or in analysing an existing one, managers need to start off with two fundamental sets of questions: 1. LIMBIC: What emotional (limbic) response are we seeking to elicit in our clients and in our own work teams? a. How are we going to elicit these limbic responses? 2. NEOCORTICAL: What Service are we seeking to provide? What business are we in? i.e. are we providing after-care product support, rental services, retail services and so on.

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a. How are we going to provide these services? Addressing this question forms the basis of the rest of this book. The interrelationship between these questions is demonstrated in Fig. 1.5. Further, we can combine our understanding of limbic and neocortical brain processes, our idea of a continuum of products and services and Slack’s model of competitive advantage in the following grid (Fig. 1.6). To see how this might work, let’s consider a worked example. A water utility company. First, it needs to consider the limbic response it wants to elicit. How about this?! LIMBIC Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service? They are ‘luxurious’ ‘exclusive’ ‘unique’

We can instantly see that this ‘jars’ limbically, we see that it doesn’t ‘feel right’. In fact, the thought of a water company that’s into ‘luxury and exclusivity’ tend to raise the annoyance and anger levels and you can just imagine the screaming headlines about public utility profligacy. Compare the above with this: LIMBIC Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service? ‘safe and secure’ ‘reliable’ ‘trustworthy’ ‘caring’

Fig. 1.5  Fundamental strategy design questions

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Fig. 1.6  Service emotion, competitive advantage and degree of pliability

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You could also add the word ‘seamless’ in the sense that most of us don’t want much interaction with the water company! Rather the preference would be that water supply and sewage drainage continued to operate quietly in the background, seamlessly supplying water and removing effluent. This then translates into the following service transaction: Electricity Dependability Scripted Offering a They are service Consistent customer experience consistent ‘safe and secure’ Low level, scripted human experience ‘reliable’ interaction – ‘friendly, ‘trustworthy’ efficient, safe, secure, service’ ‘caring’

In other words, in case a customer did need to contact the water company, the nature of the transaction should be efficient, friendly but quick and seamless. An upbeat service where the water company representative ‘wants to become friends with you’ and seeks to take up your time jars with the emotional colour that this utility is aiming to paint. Contrast the above with a visit to a Disney theme park, which would seek to stimulate a different mixture of emotions: LIMBIC Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service? Fun, exciting, fast But still safe and secure

This could translate into the following model: They are ‘Fun, exciting, fast but still safe and secure’

Offering a consistent experience

Dependability

Scripted Consistent customer experience Scripted human interaction – ‘high energy, fun, relaxed yet, safe and secure’ but flexible enough to offer spontaneity.

Some services might want to elicit a powerful positive limbic response by pitching for emotional drivers that are odds with customer expectations. Consider car insurance.

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The expectation, no doubt, would be this:

LIMBIC Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service? They are ‘efficient’ ‘no nonsense’ ‘give me just want I need’ ‘cut out the waste’

An example of this might be the Endsleigh Insurance’s website (Endsleigh 2009).

Contrast this with another approach:

LIMBIC Key Emotional Drivers: How Do You Want Customers/Clients to Feel about your Service? They are FUN ‘efficient’ ‘no nonsense’ ‘give me just want I need’ ‘cut out the waste’

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And now look at Elephant.co.uk’s website (Elephant 2009).

The thought of car insurance being ‘fun’ seems anomalous but this is clearly part of the limbic response this company is seeking to create. In a similar vein, one popular Italian restaurant in the West Midlands thrives not because of the excellence of its food, but the renowned rudeness and indifference of its waiters! People love to talk about the antics of the waiters and their over-thetop snootiness! Much of the remainder of this book will concentrate on the practical, logical issues surrounding service design and delivery i.e. question 2. 2. NEOCORTICAL: What Service are we seeking to provide? What business are we in? i.e. are we providing after-care product support, dental services, retail services and so on a. How are we going to provide these services? But in discussing the importance of emotions in this first chapter and the neurological basis for emphasising their importance, we hope you will continue to keep question 1 at the forefront when analysing or designing a service. 1. LIMBIC: What emotional (limbic) response are we seeking to elicit in our clients and in our own work teams? a. How are we going to elicit these limbic responses? Getting this question order the right way round appears to be critical to designing and delivering successful services.

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Having read through this chapter, practise identifying and assessing your limbic and neocortical responses to services you encounter:

Exercises What mixture of limbic responses are WE aiming to elicit from this book?! Take a look at the cover, the colour scheme, the style of writing, the fonts used, the diagrams included …. Take a look at your bank’s website, visit a branch and talk to its employees … is there consistency in the underlying emotional messages? If the emotional flavour is ‘safe and discrete’ does this carry through? If it’s about being friendly, open and plain-speaking, is this reflected? The next time you are annoyed by a service, consider your underlying limbic and neocortical responses … was it specifically WHAT they did that upset you (i.e. the rational or neocortical aspect of the service) or was it HOW they did it (the limbic aspect … typically to do with how a member of staff interacts with you)?

References Baker J (2009) BBC News http://news.bbc.co.uk/1/hi/magazine/7741199.stm. Accessed February 2009 ComputerPlanet (2009) http://www.computerplanet.co.uk/. Accessed 16 February 2009 Damasio AR (1999) The Feeling of What Happens. Heinemann, London Damasio AR (2006) Descartes’ error: emotion, reason and the human brain. Vintage, London Economist (2005) Mind Games. Economist. 374(8409): 71 Elephant (2009) http://www.elephant.co.uk/?media=adwo5. Accessed 15 February 2009 Endsleigh (2009) http://www.endsleigh.co.uk/car-insurance.html. Accessed February 2009 Gadrey J (2000) The characterization of goods and services: An alternative approach. Review of income and wealth. 3(3): 369–387 Gladwell M (2006) Blink: The Power of Thinking Without Thinking. Penguin, London Goleman D (1996) Emotional Intelligence: Why it Can Matter More Than IQ. Bloomsbury Publishing PLC, London Grabenhorst FRET, Parris BA (2008) From affective value to decision-making in the prefrontal cortex. European Journal of Neuroscience 28(9): 1930–1939 Heath RG, Brandt D, Nairn A (2006) Brand relationships – strengthened by emotion, weakened by attention. Journal of Advertising Research. 46(4): 410–419 Heath R, Feldwick P (2008) Fifty years using the wrong model of advertising. International Journal of Market Research. 50(1): 29–59 Hill D (2003) Tell Me No Lies: Using Science to Connect with Consumers. Journal of Interactive Marketing. 17(4): 61–72 Hill P (1999) Tangibles, intangibles and services: A new taxonomy for the classification of output. Canadian Journal of Economics 32(2): 421–426 Jaguar (2009) http://www.jaguar.co.uk/uk/en/xk/build/buildyourown.htm. Accessed 13 February 2009

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Knutson B, Rick S, Wimmer G, et al. (2007) Neural predictors of purchases. Neuron 53(1): 147–156 Laibson D (2005) Impatience and Savings. NBER Reporter Fall Ledoux J (1998) The Emotional Brain: The Mysterious Underpinnings of Emotional Life. Weidenfeld and Nicolson, London Levitt T (1981) Marketing Intangible Products and Product Intangibles. Harvard Business Review 59(3): 94–102 Lovelock C (2004). The Future of Services Marketing: Trick or Treat for Practitioners, Customers, Students and Academics? lovelock.com. www.lovelock.com/associates/images/news/ Frontiers2004FutureofServicesMarketing.pdf. Accessed 31 October 2004 Morse G (2006) Decisions and Desire. Harvard Business Review 84(1):4251 PCSpecialist (2009) http://www.pcspecialist.co.uk/index.php?page=formindex&gclid=CPeGltvB 5pgCFcST3wodg33ibw. Accessed 15 February 2009 Salvador R, Folger R G (2009) Business Ethics and the Brain. Business Ethics Quarterly 19(1):131 Smith A (1776) The Wealth of Nations. Wiley, Chichester Slack N, Lewis M (2003) http://road.uww.edu/road/bramorst/250768/Slack%20PowerPoints/ ch02.ppt. Accessed 14 February 2009 Slack N, Chambers S, Johnston R (2006) Operations Management, Financial Times/Prentice Hall, London Swaminathan N (2007) Brain Damage for Easier Moral Choices. Scientific American 296(6): 36 Virgin.com (2009) http://www.virgin.com/AboutVirgin/WhatWeAreAbout/WhatWeAreAbout. aspx. Accessed 16 February 2009

Chapter 2

Goods, Products and Services Glenn Parry, Linda Newnes, and Xiaoxi Huang

2.1 Introduction Defining terminology is a useful starting point when reading or writing on the subject of service to prevent any confusion or assumptions that we all understand the terms to mean the same thing. So, what do we mean by goods, products and services? This is a book about service, but what is a ‘service’ and how is it different to ‘goods’ or ‘products’? Whilst most people intuitively know the difference between a product and service, actually defining this difference with clarity and accuracy of text is not straight forward. The terms ‘goods’ and ‘products’ appear to be used interchangeably in much of the literature, but even here we can find debate about meaning (Araujo and Spring 2006; Callon 1991, 2002). However, for the sake of brevity we will here accept that they both refer to the same thing and focus on attempts to differentiate goods and services. This quest is far from straightforward. Since the early eighteenth century academics and scholars from different domains have attempted to define these terms explicitly (Say 1803; Levitt 1981; Hill 1999; Gadrey 2000). In this chapter we will attempt to illustrate their findings in order to provide some background to the debate.

2.2 Goods In the eighteenth century Adam Smith (1776) stated that goods have exchangeable value and so a characteristic of a good is that its ownership rights can be established and exchanged. Goods can be considered as embodying specialised

G. Parry (*) Bristol Business School, University of the West of England, BS16 1QY e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_2, © Springer Science+Business Media, LLC 2011

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knowledge in a way that is highly advantageous for promoting the division of labour (Smith 1776; Demsetz 1993). Nassau Senior (1863) described goods as material things, meaning that goods are tangible and have physical dimensions. These concepts were still accepted over 100 years later when The System of National Accounts (SNA) (1993) defined goods as physical objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets. Hill (1999) summed up the major characteristics of goods as an entity that exists independently of its owner and preserves its identity through time; his definition supporting of that of the SNA. Following these definitions we can outline a set of attributes for goods: • • • • • • • •

Physical objects for which a demand exists Their physical attributes are preserved over time Ownership rights can be established They exist independently of their owner They are exchangeable Unit ownership rights can be exchanged between institutions They can be traded on markets They embody specialised knowledge in a way that is highly advantageous for promoting the division of labour

These attributes are broadly accepted by academics and reflect 200 years of ongoing debate.

2.3 Services Although we have found a long standing agreement over the definition of products/ goods and their characteristics, the definition of services has never reached consensus. Consequently it is hard to obtain full acceptance about the distinction between goods and services. Here we will present some of the different perspectives on service from the literature.

2.4 Intangible, Heterogeneous, Inseparable & Perishable (IHIP) Characteristics As marketers began to recognise and emphasise the importance of services (Fisk et al. 1993) they consequently called for services to form a separate part of a companies’ marketing strategy (Lovelock 1983). A major contribution to the services debate was a classification consisting of four features: • Intangible • Heterogeneous

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• Inseparable • Perishable These features of what makes a service, referred to as ‘IHIP’ characteristics, have formed the basis of a consensus in most of the marketing literature. But what do they mean in this context and do they provide a strong differentiator? Each characteristic is discussed below.

2.4.1 Intangible Intangible things are not physical objects and only exist in connection to other things. Examples include a brands image, or goodwill. Harker (1995) humorously, though usefully described services as ‘something that you cannot drop on your foot’, which vividly illustrates the intangible characteristics of services. Although the habit of describing services as intangible goods comes from the economics literature (Hill 1999; Miller 2000), this view is common in management and marketing sectors (Chase and Aquilano 1992; Bowen and Ford 2002). However intangibility may have failings as a differentiator between service and product. What is music, a book or a film? A product or a service? Hill (1999) identified this group of intangible products in the form of entities that are recorded and stored on media such as paper, film, tape or disk. Intangible products include the stories generated by authors, music created by composers or software games designed by software engineers. Although these have no physical dimensions of their own, Hill (1999) argues that in their saleable form these intangible products have the salient economic characteristics of goods and little in ­common with services. Therefore he suggests this type of intangible product should be recognised and marketed as a type of good rather than a service. The intangible nature of service is a useful characteristic to employ, but an ambiguity remains.

2.4.2 Heterogeneous A common service varies according to the context, nature and requirements of each customer. It may be varied according to different quality standards associated with different costs; services can be varied across regions or cultural background; services can also be fluctuated by different characteristics of providers. Therefore heterogeneity, referring to the multifaceted different experience that may be had from a single type of service is considered as a factor to distinguish goods from services. However, numerous exceptions can be invoked to counter this distinction. For example, some tangible goods can be heterogeneous. For example in the automotive sector, the Mercedes E Class car is offered with 1024 variations and the claim on the production line is there has never been two the same (Schaffer and Schleich 2008). In contrast, services can be standardised. McDonald’s produces food under highly

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automated and controlled conditions (Levitt 1972) and customers receive the same taste and quality of a certain type of burger all around the world – a homogeneous offering. Yet most would consider a car to be a product and fast food a service.

2.4.3 Inseparable Services may be said to be inextricably linked with customers in terms of production and consumption and so it is said that service is inseparable. For instance, a service provider may not provide their services until the customer engaged. In contrast, a manufacturing company can still manufacture and deliver goods through channels of distribution without knowing the end customers. However, this characteristic is also open to challenge and interpretation. Automated services such as an ATM allow customers access to a predefined set of services, such as to check bank account balances and withdraw money, without the preknowledge or assistance of banking staff. It could be argued that here the production and consumption must be separated in order for the service to be mechanised.

2.4.4 Perishable Using technical criteria to define services, Smith (1776) states a service will ‘perish in the very instant of its performance, and seldom leave any trace or value behind them for which an equal quantity of services could afterwards be procured’. Here Smith shows one of the important features of services, which is perishability. It may be said that services are not a stock of fixed assets and it is not possible to store services in inventories (Hill 1999; Gadrey 2000). For example, when operating an airline a seat on a plane may be offered for a Sunday night flight. If that seat is not sold, it cannot be stored and sold in the future – it has perished. Likewise, if a traveller buys the seat and flies to their destination, once the contract ends, the client is no longer entitled to stay in the seat or to acquire any further services from the airline. Hence, the services provided perish in the very instant of the contract termination and may be described as leaving no trace or value behind them. Jean Gadrey (2000) argued that services were not necessarily perishable, using the example of the servant to illustrate his point. If it is the servant’s task to clean and tidy the premises, then the output of their efforts does not vanish when the work is done. In fact, the visual result is used to evaluate the quality of the work. Therefore perishability is not a definite feature for all service sectors, but certainly may be a useful characteristic to recognise in many service domains (Fisk et  al. 1993; Hill 1999; Zeithaml et al. 2006; Araujo and Spring 2006). Whilst IHIP characteristics are useful to the discussion on services, the characteristics of a service offering they propose cannot be used to distinguish all goods and services because we can find exceptions in each case.

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2.5 Experience The notion of service as experience is provided by Pine and Gilmore (1998), who suggest: ‘Experiences occur whenever a company intentionally uses services as the stage and goods as props to engage an individual’. For instance, when a ticket for a rock concert is bought the buyer is provided a particular seat and is entertained by musicians. It may be argued that they did not wish to buy a ticket or a seat but in fact their purchase relates to their desire for a memorable and unique experience. Tangible goods and intangible services are brought together to create a memorable experience for customers at a point in time. Following Pine and Gilmore (1998) we can suggest that the value of experience is a significant intangible characteristic of a service.

2.6 Quality Customer service and service quality are key issues facing many service operations managers. For a tangible product, customers can visualise its physical attributes before purchase (Zeithaml 1981). For example, even though they perform a similar ‘transport’ function one can easily justify why a Rolls Royce is more costly than the basic Tata Nano motor car from their aesthetic characteristics (Bowen and Ford 2002). However, it is relatively more difficult to compare the banking service provided by two similar UK based high street banks such as HSBC plc and NatWest plc objectively. We may, for example, be heavily influenced by our own or our friends experience. Chase and Dasu (2001) conclude that ­ultimately a customer’s perception will be a determining factor on the ­effectiveness of a service organisation. Therefore managers of service operations would usefully have a methodology to evaluate customer satisfaction and loyalty subjectively (Heskett et al. 1994; Bowen and Shoemaker 1998; Paulin et al. 2000). Lundberg noted that more often than not, the quality and value for a particular service can depend wholly on the customer’s judgement at that particular instance (Lundberg 1991). For example, two people sat together can easily have different views on a music concert and even the same person can have different opinions of the service experience if asked at different times (Bowen and Ford 2002). One commonly cited method that has been developed to assess the subjective quality of a service is named SERVQUAL which is based on the gaps between expectation and the perception of the service delivered (Parasuraman et al. 1988). SERVQUAL enables service and retailing companies to evaluate consumer perceptions of service quality and helps to identify areas requiring managerial action (Parasuraman et al. 1988). The approach divides the notion of a service into five ­factors that address a customer’s perception of quality. The factors are: • • • • •

Tangibles – physical facilities, equipment, staff appearance, etc. Reliability – ability to perform service dependably and accurately Responsiveness – willingness to help and respond to customer need Assurance – ability of staff to inspire confidence and trust Empathy – the extent to which caring individualised service is given

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Quality is measured for each factor by the gap between the expectation and the perceived service delivered. Using this method it is possible to gauge how well a service offered meets the expectation of a customer. Using this model suggests that manipulation of individual customer expectation through marketing or brand management can alter perception and hence the quality of the service.

2.7 Tradability The producer of a certain product is its first owner, but the ownership can be transferred in terms of money or goods exchange during trading. According to Rathmell (1966), compared to goods, a service is an act rather than a thing. When a service is purchased the buyer pays out his money without establishing an ownership right because there is no actual asset to establish ownership of. In contrast, when a good is purchased the buyer acquires an asset where he can establish his ownership right. As such goods and services may be defined with reference to their tradability. The SNA (1993) definition mentioned earlier defined services as outputs produced to order and which cannot be traded separately from their production; ownership rights cannot be established over services and by the time their production is ­completed they must have been provided to the consumers. From this definition, two ways to distinguish goods and services are tradability and ownership rights, with goods often seeming more tradable than services. This is because goods such as clothes and electronics have a physical presence and therefore may prove relatively easier to distribute globally, providing sufficient funds and resources. In the days of Adam Smith it would have appeared near impossible to produce services in one country and subsequently export them to another country. However, as a result of the rapid development of technology, such as the internet and telecommunication channels, services can now be provided in a way similar to goods. It is not unusual, for example, to set up a telephone call centre in India and to provide services back to the UK (Araujo and Spring 2006). Companies adopting this approach may take advantage of the cheaper labour of one country whilst gaining the higher price of providing that service in another. Due to this, Hill (1999) concluded that services can be, and are, exported, but only by resident producers providing the services directly to non-resident consumers.

2.8 A Change of Condition Hill (1977) defined service as a change in the condition of a unit or a person, or of goods belonging to some economic unit, which is brought about as a result of the activity of some other economic unit, with the prior agreement of the former person or economic unit. Hill emphasises that the institutional structure of production is essential for the definition of services. Gadrey (2000) then built the service triangle

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involving producer-user interaction. The concept of the triangular relationship is illustrated by Gadrey’s garage example. Someone (A) owns a car (B) and the owner (A) requests a garage (C) to repair the car. Ownership rights are not exchanged, but value is created for both the owner in terms of having the car fixed and the garage in terms of financial reward. Gadrey (2000) points out services always involve a triangular relationship between A, B and C. This main contribution clarifies the nature of services and places producer-user interaction at the centre of attempts to distinguish between goods and services.

2.9 Goods and Services, or Is It All Service? From the analysis so far, it is found that there is no perfect definition for separating goods from services, though scholars have been trying for a very long time. In their attempts to identify the differences between goods and services the similarities between them are often neglected. Firstly, both goods and services can be tradable which means both entities must at least have one provider and one customer. The customer often pays an agreed fee to the provider in order to acquire the ownership of a certain good or gain services for a certain period of time. In addition, there is always a reason and motivation behind the act of providing certain goods and services. It could be the provider who wants to make profit or improve their reputation. Secondly, the characteristics of goods and services often overlap each other. It is believed that there are actually very few pure goods and pure services. Instead they may form a spectrum from pure goods on one side to pure services at the other, with tangibility as the differentiator, joint entities in between having variations of joint characteristics (Shostack 1977, 2001). Commodity items which are traded globally based solely on price may be thought of as a pure form of tangible good e.g. wheat, gold, crude oil. A purely intangible service may be teaching as each person in the class will gain something different from the experience. John Rathmell (1966) took a sculpture as an example of a pure good as ‘no act is performed’ – though as a sculpture has aesthetic value, which could be seen as intangible, this may be questioned. He also suggested that the benefit or utility arising from legal counsel represented a pure service. With these forming the extreme, most goods, whether consumer or industrial, require supporting services in order to be useful; most services require supporting goods in order to be useful. Hence they will sit at a point along this spectrum. It may be more appropriate to take a goods-services continuum view point rather than defining goods and services explicitly. Vargo and Lusch (2004, 2006, 2008) develop this line of thinking further and contend that all products and services only realise their value through their use. All products and services exist to provide ‘service’ to a customer, hence everything is a service. They have developed this into a concept they describe as ‘Service Dominant Logic’ or SD-logic. SD-logic focuses upon the concept of value creation rather than ‘production’ and places value creation as an interactive process where the firm and their customer must be considered within their relational context.

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Firms work in value creation networks, in dialogue with their partners co-creating value. They state that ‘innovation is not defined by what firms produce as output but how firms can better serve’. They make a clear distinction between competing with offerings called services, which reflects a product/service distinction and competing through service to provide value and positive experience for all parties. We can see the rise of ‘service’ within industry as manufacturing firms provide more complex product service combinations so that they do not need to compete on the basis of cost along (Neely 2010). Servitization is the term becoming more commonly used to describe this process, where companies increase revenue by offering service options in addition to their products, such as guaranteeing availability or providing service for the products life (Vandermerwe and Rada 1988; Oliva and Kallenberg 2003). This integration of products and services has been labelled a ‘product and service system’ [PSS]. PSS are described as offering ‘value in use’ (Baines et al. 2007), which means their value is only realised through their utility – which takes us back towards the concept of service as experience (Pine and Gilmore 1998).

2.10 What Are Products/Goods and Services? Despite many years of research clear definitions of product and service has eluded researchers. Figure 2.1 shows the timeline for some of the debate in the literature, covering more than 200 years. From this work the ambiguity of any single definition of service and how any perspective taken may influence process or value should be recognised. What we have seen is that the thinking has shifted from a pure service or pure product focus to a combination or product-service system (PSS). This recognises the offering of a combination of product and service for which greater revenue may be generated. Taking a pragmatic view, we should work with the customer to understand how goods and services best create a service value proposition, meet market requirements and generating sustainable profit for the firm and the customer.

Exercises • Identify three different services that you have used and are familiar with. ° Why are the three cases you chose services and not products? ° How is the service delivered? ° What contribution do you as a client have to make to access value from the service? ▪ E.g. fill in forms, make decisions etc. ° Could you improve on the design of one of these services to deliver a better experience for the client and greater profit for the provider?

Fig. 2.1  Defining goods and service: over 230 years and counting

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References Araujo L, Spring M (2006) Services, products and the institutional structure of production. Industrial Marketing Management, 35(7): 797–805 Axelsson B, Wynstra, F (2002) Buying Business Services. Chichester: John Wiley Baines T, Lightfoot H, Evans S, et al (2007), State of the art in product-service systems. Journal of Engineering Manufacture, Part B, pp. 1543–51 Bowen J, Ford RC (2002) Managing service organizations: does having a ‘thing’ make a difference? Journal of Management 28(3): 447–69 Bowen J, Shoemaker, S (1998) Loyalty: a strategic commitment. Cornell Hotel and Restaurant Administration Quarterly 39(1): 12–25 Callon M (1991) Techno-economic networks and irreversibility. In John Law (Ed.), A sociology of monsters: Essays on power, technology and domination, Routledge, London Callon M, Meadel C, Rabeharisoa V (2002) The economy of qualities. Economy and Society, 2(31): 194−217 Chase R, Aquilano NJ (1992) Production and Operations Management: A Life Cycle Approach, 5th ed. Irwin: Homewood, Ill Chase RB, Dasu S (2001) Want to perfect your company’s services? Use behavioral science, Harvard Business Review 79(6): 79–84 Delaunay JC, Gadrey J (1987) Les enjeux de la société de service. Paris: de la Fondation Nationale des Sciences Politiques Demsetz H (1993) The nature of the firm. Origins, evolution and development, Oxford University Press, New York Fisk RP, Brown SW, Bitner MJ (1993) Tracking the Evolution of the Services Marketing Literature. Journal of Retailing 69(1): 61–103 Gadrey J (2000) The characterization of goods and services: An alternative approach. Review of Income and Wealth, 46 (3): 369–387 Harker PT (ed.) (1995) The Service Productivity and Quality Challenge, 1–10. Norwell MA: Kluwer Academic Publishers Heskett JL et al (1994) Putting the service-profit chain to work Harvard Business Review, 72(2): 164–175 Hicks JR (1942) The Social Framework, Oxford: University Press Hill P (1977) On Goods and Services. The Review of Income and Wealth 23(4): 315–338 Hill P (1999) Tangibles, intangibles and services: a new taxonomy for the classification of output Canadian Journal of Economics-Revue Canadienne D Economique, 32(2): 426–446 Levitt T (1972) Production-line approach to service. Harvard Business Review 50(2): 41–52 Levitt T (1981) Marketing Intangible Products and Product Intangibles”, Harvard Business Review, 59(3): 94–102 Lovelock CH (1983) Classifying Services to Gain Strategic Marketing Insights Journal of Marketing, 47(1): 9–20 Lundberg CC (1991) Productivity enhancement through managing the service encounter. Hospitality Research Journal, 14(3): 63–71 Miller RL (2000) Economics today: The micro view, Boston: Addison Wesley Neely A (2010) Exploring the Financial Consequences of the Servitization of Manufacturing. Operations Management Research – at press Oliva R, Kallenberg R (2003) Managing the transition from products to services. International Journal of Service Industry Management, 14(2): 1–10 Parasuraman A, Zeithaml V, Berry L (1988) SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing 64(1): 12–40 Paulin M, Ferguson RJ, Payaud M (2000) Business effectiveness and professional service personnel. European Journal of Marketing 34(3/4): 453 Pine BJ, Gilmore JH (1998) The Experience Economy. Harvard Business Review 76(4): 97–105 Rathmell JM (1966) What is meant by services? Journal of Marketing 30(4): 32–36

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Say JB (1803) A Treatise on Political Economy, 1st America Ed. Reprints of Economic Classics, 1964 Augustus M. Kelly, New York Senior NW (1863) Political Economy 5th ed. Charles Griffin and Co., London Schaffer J, Schleich H (2008) Complexity Cost Management, in Build to Order: The Road to the 5 Day Car, Parry G, Graves A, Eds., Springer, London Shostack GL (1977) Breaking free from product marketing. Journal of Marketing, April 41(2): 73–80 Shostack GL (2001) How to Design a Service. European Journal of Marketing, 16(1): 49–63 Smith A (1776) The Wealth of Nations. Books I-III, Chichester: Wiley System of National Accounts (SNA) (1993) Commission of the European Communities – Eurostat, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations World Bank: Brussels/Luxembourg, New York, Paris, Washington, DC Vandermerwe S, Rada J (1988) Servitization of business: adding value by adding services. European Management Journal 6(4): 314–24 Vargo SL, Lusch RF (2004) Invited Commentaries on Evolving to a New Dominant Logic for Marketing. Journal of Marketing 68(1): 18–27 Vargo SL, Lusch RF (2006) The Service dominant Logic of Marketing: Dialog, Debate and Directions. ME Sharpe, New York Vargo SL, Lusch RF (2008) Service dominant logic: continuing the evolution. Journal of the Academy of Marketing Science 36(1): 1–10 Zeithaml VA (1981) How consumer evaluation processes differ between goods and services. In: Marketing of services, Donnelly JH, George WR, (eds.) American Marketing Association Proceedings Series, Chicago, IL Zeithaml VA, Bitner MJ, Gremler DD (2006) Services Marketing: Integrating Customer Focus Across the Firm, 4th Edition. McGraw-Hill, London

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Chapter 3

The IBM Story Charles Loving

This chapter explores an actual transition from a product-based company to one where services dominate. That company is IBM and the transition started in the early 1990s. As you will see, the changes do not happen overnight in a “big bang” ­apocalyptic event but more gradually in a series of phases; indeed, at the time of writing (2009), we are almost 20 years into the transition and we know that we are not finished yet. Underneath the headline change from products to services, there are a myriad of other process and procedural changes that have to be made to support the business and allow it to change dynamically in order to meet the needs of its clients, its shareholders and its suppliers. In this chapter, we will show how IBM has responded to these requirements and how it is applying the lessons learnt in this process to create an agenda for innovation in service creation and delivery to address global problems.

3.1 The IBM Story Until 1990 The current IBM company was first incorporated in 1911 as the ComputingTabulating-Recording Company (C-T-R) but its origins can be traced back to developments in time recording machinery at the close of the nineteenth century. C-T-R was a merger of several companies including the Tabulating Machine Company, formed in 1896 by Herman Hollerith to provide the U.S. Census Bureau with Punch Card Tabulating Machines to measure the rapidly expanding population. In 1914, Thomas J. Watson, Sr. joined the company as general manager and within 11 months he had became its president. The company focused on providing large-scale, custom-built tabulating solutions for businesses, and within 4 years,

C. Loving (*) Director of Operations, British Institute of Technology & E-commerce, London, UK e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_3, © Springer Science+Business Media, LLC 2011

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revenues more than doubled to $9 million and Watson had expanded the company’s operations to Europe, South America, Asia and Australia. In the years following World War I, C-T-R’s activities expanded both functionally and geographically, including the completion of three manufacturing facilities in Europe. In 1924, the name was formally changed to International Business Machines Corporation. The requirements of World War II helped lead to the development of various computational machines, eventually producing a computer built with vacuum tubes in 1952. In 1957, IBM introduced the FORTRAN programming language and, by the end of the decade, transistors were replacing valves in the computers. These computers were monolithic with no upgrade path; a need to increase computing capacity would require a completely different computer, peripherals and software. However, in 1964, IBM introduced the System/360, the first large “family” of computers to use interchangeable software and peripheral equipment; it offered a choice of five processors and 19 combinations of power, speed and memory. Improved technology produced higher performance and reliability; Fortune magazine dubbed it “IBM’s $5 billion gamble.” At the end of the 1960s, IBM changed the way it sold technology. Rather than offer hardware, services and software exclusively in packages, it “unbundled” the components and offered them for sale individually. Unbundling gave birth to the multibillion-dollar software and services industries, of which IBM is today a world leader. Through the 1970s and 1980s, IBM machines appeared in supermarkets, banks and department stores in the guise of checkout tills and cash dispensers. IBM ­technology was at the heart of business data processing; IBM mainframes, IBM operating systems, IBM applications, IBM peripherals and IBM networking products were the mainstay of many major corporations. IBM’s own business performance reflected this and, as we shall see, revenues continued to increase. In the early 1980s, IBM brought the IBM PC to the market, heralding a new phase in the business and bringing the IBM brand to homes, small business and schools. Advances in networking technology allowed PC users to exchange information and share printers and files within a building or complex. Meanwhile, IBM’s significant investment in research produced four Nobel Prize winners in physics, achieved breakthroughs in mathematics, memory storage and telecommunications, and made great strides in expanding computing capabilities. IBM was seen as an exemplar by the press and industry commentators, appearing top of Fortune magazine’s list of “America’s most admired corporations” from 1983 to 1986. At the end of the 1980s, IBM’s business was looking good (see Fig.  3.1). Revenues had been increasing year-on-year for 20 years and profits had been on an upward trend. The IBM PC has spawned a whole industry of complementary as well as competing products and was opening the IT market to new generations of users. What could possibly go wrong?

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Revenue $90

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Fig. 3.1  Revenue and net income of IBM Corporation 1970–1990

3.2 A Crisis of Confidence 1990–1993 We now approach a new period in IBM’s history. The charts in Fig. 3.2 present a very different story to what we have seen before. Something has clearly happened. In 1991, IBM posted its first ever annual loss of $2.8 billion and also its first decline in revenues since 1946. At that time, the world economy was in recession and many corporations were reporting reduced revenues and incomes. Many analysts saw this as a temporary setback, although some warned of systemic problems within the industry and within IBM in particular. However, the following year, IBM had to announce the largest annual loss in US corporate history so far – $4.97 billion. It seemed that the problems were more systemic than transitory and that some drastic remedies were needed. A week after posting those results, the CEO announced he was stepping down. In April 1993, after a 3-month interregnum, Louis V Gerstner took up the position of CEO. He became the first CEO since Thomas J Watson Sr to come from outside IBM’s own executive ranks, having most recently been the chairman and CEO of RJR Nabisco, Inc. During the rest of 1993, Gerstner set about changing the way IBM did business, which meant major restructuring and therefore more costs. As a consequence, the losses in 1993 reached $8.1 billion. Gerstner had prepared the market for these figures but still the analysts were divided on whether he was doing enough or even whether he was doing the right thing. In May 1993, Fortune magazine again highlighted IBM’s performance but this time not as an admired leader but as a “dinosaur.” Thirty years earlier, Thomas J Watson Jr had bet the company on the move to S/360; the stakes were again that high for Gerstner as he shifted IBM into position for the 1990s and beyond. As ever, only time – and the market – would decide how successful those moves would be.

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3.3 Recovery and Restatement 1994–2001 Did Gerstner succeed? Take a look at Fig. 3.3 which shows the financial results for the whole period 1970–2001. After the restructuring in 1993, IBM returned to reporting positive annual incomes in 1994 and by 2000 had reversed the record $8.1 billion loss into an $8 billion profit. What had Gerstner done to achieve this ­remarkable turnaround? The simple answer is that he redirected the company from one determined to sell products to one that provided services; however, the simple answer masks a massive undertaking to change the way a company of around 250,000 people conducts its business. Gerstner (2002) tells the story in his own words and is the best reference on the series of events necessary to effect this transformation. In his view, the uninterrupted financial success generated by the mainframe business had led IBM away from satisfying its customers requirements; instead, the company concentrated on producing the products that it could make rather then the products that its customers needed. But now, as Gerstner put it, “a customer is running IBM.”

3.4 A New Strategy? So how did Gerstner do it? He is famously quoted as telling analysts soon after he took over that “the last thing IBM needs right now is a vision.” Instead of creating that vision statement on day one, he spent time talking to customers, employees and business partners to understand their perspectives and to determine how IBM should best support them.

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Fig. 3.3  Revenue and net income of IBM Corporation 1970–2001

The information technology landscape had changed significantly in the late 1980s. As we noted earlier, the IBM PC had started a whole new market segment. Many competitors had entered the hardware market, offering IBM-compatible PCs. Moreover, many other companies had entered the software market offering PC-compatible applications and operating systems. In fact, this ability to mix and match hardware and software was available throughout the range of computing power – from PCs through to mainframes. In principle, a customer could have a mainframe from one supplier running software applications from another, with a third supplier of departmental machines running yet another supplier’s applications and a whole host of IBM-compatible PCs running whatever the users wanted. From today’s vantage point (in 2009), this might seem commonplace – but, at the time, this was in the historical context of having all hardware and software from a single supplier. However, such changes inevitably brought problems and Gerstner, with his strategy team, identified two key areas where customers needed help. The first area concerned the effects of having a multiplicity of suppliers. A fundamental question was being asked inside and outside IBM as Gerstner took over. Across the whole range of IT products from PC hardware through to mainframe applications, many of the niche suppliers had become very successful. In reaction to IBM’s poor results in the 1990s, proposals were put forward to break IBM into many small companies with the expectation that these small niche players would thrive against their competition and provide better overall returns to the shareholders. Gerstner’s view was that there was a better way to return value and it needed IBM to stay together and take advantage of the multiplicity elsewhere. Gerstner’s view arose from his time as an IBM customer with several other IT suppliers. His experience was that the implementation and management of systems from several suppliers was almost always problematic. He felt that customers were looking for systems integrators that would take responsibility for putting the systems together and then running them and fixing them when required. In other words, he was proposing to expand into the IT services market with a whole new range of offerings, including complete IT outsourcing. The success of this part of the strategy can be seen by noting that services revenue increased from $7.4 billion

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in 1992 to $30 billion in 2001, representing 23.2 and 42.1% of their respective annual revenues. The second area of the strategy concerned communications. In 1992, the internet did not exist outside a few research establishments. Corporations tended to have their own networks connecting their own computers and only in very specific circumstances would customers allow their computers to communicate with those of their business partners. This was not just a question of business privacy but more a question of technological difficulty. In general, the corporate networks were unable to connect and communicate with each other without major changes on each side. Even if the networks could connect there were problems in getting the applications to communicate and for the data to be recognised on each side. It was clear that there were many advantages to supporting transactions between customers and suppliers over a network, if only the technical hurdles could be overcome. Gerstner’s strategy team coined the term “e-business” to represent these transactions between businesses. However, technology had to be updated if the business benefits were to be realised. Therefore, IBM embraced the move to open standards where the interfaces between different manufacturers’ products would be standardised. Using these well-defined standards, two businesses would know that not only would their own networks be able to send messages to one another but also the format of the data within the message would be well-defined in each application. In the fullness of time, this move to standards allowed the growth of the internet which today (2009) routinely supports the transfer of data between huge numbers of computers of all types of configuration and complexity for both business and social purposes. The move to standards also had to be supported within IBM’s own product lines and also within its own internal processes. We have already noted that the mainframe heritage had produced systems that relied on a single manufacturer supplying hardware and software that worked together – and this was true for all the main IT manufacturers in the 1970s. Removing this reliance on proprietary products and architectures would increase competition but would also generate the potential for interconnectivity and interoperability, which IBM’s new service offerings could then support. Moreover, by implementing such solutions successfully within IBM itself, the company would then have the best reference for offering those solutions elsewhere. The effects of the business transformation within IBM were dramatic, as seen in Fig. 3.4. 1992

2003

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Fig. 3.4  The transformation of IBM’s internal IT infrastructure

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3.5 Moving into the Twenty-First Century In March 2002, Gerstner announced his intention to retire and that Sam Palmisano would succeed him. Palmisano had been closely involved with the growth of the services business and that growth continues, as can be seen from Fig. 3.5. However, there are two interesting features in that figure and both contribute to the story of IBM’s continued transformation during the first decade of the new century. The first feature is denoted by the lines above the columns in years 2000–2001. These show the results that were originally reported, whereas the columns represent revised numbers. So why were they revised? In 2000–2001, a number of high profile companies were involved in financial scandals, most notably a US energy company called Enron. As a consequence of the subsequent investigations, new regulations and legislation were enacted in 2002 that changed various accounting practices and reporting procedures. These changes are reflected in the revised accounts shown here, applied to the earlier years to allow comparison with results post-2001. There were further effects of the investigations into Enron and the other high profile cases. Accountancy firms were being pressed to clearly separate their auditing functions from their advisory and consulting businesses and, in order to comply, several decided to split into two distinct companies. At this point, IBM bought the consultancy interests that had been part of the PricewaterhouseCoopers accountancy firm. The costs of this acquisition are reflected in Fig. 3.5 by the reduced income in 2002, the second feature of note. So why did Palmisano spend several billion dollars on this company? It was a continuation of the move from a product-based company to one centred on services. To a successful technology services portfolio, IBM was now able to add a business services capability. It allowed IBM to provide a complete range of services to its clients; giving advice on business processes and how to implement them, then being able to implement and operate the technical solutions and then providing the

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Fig. 3.5  Revenue and net income of IBM Corporation 2000–2008

'04

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infrastructure to support those solutions from the IBM product catalogue, as well as other manufacturers as required. The success of this strategy is shown by the business results through the decade. We’ve already seen that the move into technology services increased the services contribution to annual revenue from 23.2% in 1992 to 42.1% in 2001; having added business services, that share moved to 57.2% in 2008. Another indicator of how successful the move to services has been is the annual global survey of brand value produced by Interbrand. In 1994, about a year after Gerstner’s appointment, IBM was ranked 284th most valuable brand; in 2008, IBM was 2nd overall and the highest placed technology brand.

3.6 Looking to the Future So where does IBM go now? The financial results show that the move from products to services has been a business success. Both Gerstner and Palmisano made clear that the major decisions to branch into technical and business services were made because clients needed those services; therefore, IBM’s business transformation was driven by those clients’ requirements. In two recent speeches made to the Council on Foreign Relations, Palmisano has reiterated that IBM’s business ­transformation will continue to be driven by client requirements. In 2006, his speech described the Globally Integrated Enterprise. This addresses the way in which a multinational company must change in order to function effectively in a truly global market. In the closing decades of the twentieth century, IBM was operating as a typical multinational organisation. Many of the IBM companies in various countries were essentially copies of each other; all with similar back office functions and support processes. In a Globally Integrated Enterprise, those functions will be performed in the most effective locations and each process should support the entire global organisation, not just one or two countries. In setting IBM on this track to become a Globally Integrated Enterprise, Palmisano was continuing the internal transformation that had started some years previously by, for example, reducing the number of CIOs from 128 to 1. In 2008, Palmisano’s speech outlined IBM’s Smarter Planet agenda. This continued the transformation of IBM’s relationship with its clients and continued to be driven by their needs. Since 2004, IBM had hosted a programme of meetings under the banner of Global Innovation Outlook where representatives from clients, governments and academia would discuss key issues that affected them and the world at large. Topics that were discussed include healthcare, transportation and water management and the resulting reports provided a launchpad for innovations in those fields. By 2008, it was clear that many of these topics affected not only individual clients but nations and continents as well. For example, congested roadways in the U.S. cost $78 billion annually, in the form of 4.2 billion lost hours and 2.9 billion gallons of wasted fuel; distributing electric energy through the currently inefficient

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grid systems can waste as much as 40–70% around the world; and the planet’s water supply is drying up. On the other hand, the world was getting more instrumented; for example, during 2009–2010, it is expected that there will be a billion transistors per human, four billion mobile phone subscribers and 30 billion Radio Frequency Identification tags. The world is also getting more interconnected: very soon there will be two billion people and around a trillion devices connected to the internet. Moreover, these devices are getting more intelligent in the sense that they can produce an enormous amount of data that can then potentially be analysed to make decisions. Given these parameters, it would appear that the basic technology exists to help solve some of these overarching challenges. For example, congestion charging schemes have been implemented in several cities such as Stockholm and London. However, in both those cities, the technical solution was only part of the whole; there had to be a complete service delivered on that technology base, as well as a political will to provide the necessary legislation to support it. Moving to a smarter planet entails producing and successfully implementing smarter solutions – such as smart healthcare, smart energy and smart cities. Each solution will require a complex technological infrastructure and will need to be delivered through an easy-to-use interface. Moreover, the scale of these solutions means that a coalition of interests will be required to build and deliver them. More recently, in January 2010, Palmisano extended these ideas in a speech made at London’s Chatham House. Within his speech, he introduced the decade of “Smart” where he stated that, for the foreseeable future, we will be faced with addressing many pressing global issues with less, rather than more, resources. Indeed, applying smarter technologies to drive cost out of legacy systems and institutions – doing more with less – will be critical to near-term and long-term economic prospects. The smart approach will be to extend the infrastructure’s useful lifetime and to ensure that next-generation systems are inherently more efficient, flexible and resilient. This will apply to IBM, its clients and those coalitions of interest that will arise to meet the challenges through the coming decade.

3.7 Summary In 2011, IBM will celebrate 100 years of its existence. Having built up a business that was lauded, envied and copied throughout the world, it almost disappeared at the end of the 1980s. The company was concentrating on enhancing its products when its clients were looking for services. With the change of leadership came a change in business focus and a change in business direction. IBM was now in the service business. From regaining customer and shareholder confidence during the early 1990s to building a new model for growth in the twenty-first century, IBM has had more than a decade of deep experience in business transformation. The services portfolio now includes both business consultancy as well as technology consultancy, with the ability to deliver the service. The acquisition of more

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than 70 companies in the past 5 years means that the product catalogue is still thriving – but the products are now components of the service rather than the other way round. The challenges of building a smarter planet are creating the business landscape that faces IBM and its competitors into the 2010s – the decade of “Smart.” How well IBM can manage its continued transition into this environment will determine how successfully it will start its second century of trading.

Reference Gerstner LV (2002) Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround. HarperCollins Publishers

Chapter 4

Rethinking Lean Service John Seddon, Brendan O’Donovan, and Keivan Zokaei

4.1 Introduction Ever since Levitt’s influential Harvard Business Review article ‘Production-Line Approach to Service’ was published in 1972, it has been common for services to be treated like production lines in both the academic literature and more widely in management practice. The belief that achieving economies of scale will reduce unit costs is a common feature of management decision-making. As technological advancement has produced ever more sophisticated IT and telephony, it has become increasingly easier for firms to standardise and off-shore services. The development of the ‘lean’ literature has only helped to emphasise the same underlying management assumptions: by managing cost and workers’ activity, organisational performance is expected to improve. This chapter argues that through misinterpretation of the core paradigm ‘lean’ has become subsumed into the ‘business as usual’ of conventional service management. As a result, ‘lean’ has become synonymous with ‘process efficiency’ and the opportunity for significant performance improvement – as exemplified by Toyota – has been missed. By revisiting the development of service management and in particular the moves to industrialise service, we articulate a ‘core paradigm’ for service management to account for what might be described as conventional service management. We then explain how ‘lean’ emerged and became codified, and as ‘lean’ extended its reach to service organisations, how the two – ‘lean’ and conventional service management – share the same (false) assumptions. Building on the literature about the differences between manufacturing and service management, it is argued that services should be treated differently to manufacturing organisations. Going back to the origins of the ‘Japanese miracle’, it is argued that service organisations must be understood and managed as systems. The inspiration for ‘lean production’,

J. Seddon (*) Visiting Professor at both the Universities of Cardiff and Derby and the Managing Director of Vanguard e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_4, © Springer Science+Business Media, LLC 2011

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Taiichi Ohno’s Toyota Production System (TPS), was developed through an understanding of counter-intuitive truths, a series of challenges to convention. It is then argued that similar counter-intuitive truths are to be found in services when they are studied as systems, with subsequent redesigns resulting in dramatic performance improvements. A ‘systems’ service management archetype is developed as an alternative to conventional service management. Finally, it is argued that the means by which such change should be made ought to be experimental, empirically-based and emergent (as change was for Taiichi Ohno) in contrast to ‘project managed’ or predetermined change.

4.2 From Manufacturing to Operations Management Until the 1980s, the study of business and management was primarily concerned with the manufacturing sector and the marketing, production and management of physical goods (Johnston 2005). The methods of mass production, applying Taylor’s ( 1911) ‘scientific management’ principles, had led industrial engineers to break work down into simple, standardised tasks, with wasteful motion stripped out and work set to the pace of the production line. Workers at plants that evolved from the Ford Motor Company’s mass production approach to manufacturing had narrowly defined, compartmentalised tasks, sometimes of only 30  s duration but performed nearly a thousand times per day (Krafcik 1988). ‘Factory management’, as these studies collectively became known (Lockyer 1962), was the application of Taylor’s philosophy more broadly to operations: the use of method study techniques to areas of capacity management, production planning and control had already begun to spread out of ‘pure’ manufacturing to include examples from distribution, transportation, hospitals, libraries, and publishers (Johnston 2005). Thus the field of ‘factory management’ was extended to become ‘operations management’ in the 1970s, with works by Johnson et  al. (1972) and Buffa (1976) making at least passing reference to the management of services as well as manufacturing.

4.3 Industrialised, Standardised Service In 1972, Levitt wrote a seminal Harvard Business Review article entitled ‘Production-line approach to service’. In it, he encouraged managers to pay the same attention to improving the design and management of services as was paid to manufacturing operations: In sum, to improve the quality and efficiency of service, companies must apply the kind of technocratic thinking which in other fields has replaced the high-cost and erratic elegance of the artisan with the low-cost, predictable munificence of the manufacturer. (Levitt 1972, pp. 43–44)

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Levitt used the example of fast-food production and service in McDonald’s as one example of how factory methods could be profitably employed in a service. The method by which McDonald’s achieved their market domination was through mastery of a ‘system’ which is ‘engineered and executed according to a tight technological discipline that ensures fast, clean, reliable service in an atmosphere that gives the modestly paid employees a sense of pride and dignity’ (p. 45). Levitt believed that McDonald’s had successfully applied ‘a manufacturing style of thinking to a peopleintensive service situation’ (p. 45). Service organisations were thus encouraged to employ the manufacturing approaches of industrialisation through standardisation. Perhaps the next seminal building-block in industrialising service was Chase’s HBR article which led to the separation of ‘front’ and ‘back’ offices in service organisations (Chase 1978). In essence, his argument for ‘back-office’ service production was that as the back office has no contact with the customer, it offers greater potential to operate at peak efficiency. Chase argued that service systems with high customer contact are more difficult to control and more difficult to rationalise than low contact systems; so decoupling front from back enabled what he saw as the ‘technical core’ to operate as a factory, decoupled from outside influences, following a resource-orientated schedule and thus optimising efficiency through batch scheduling, forecasting, inventory control and work measurement. These ideas continue to form the conceptual foundations for the way that services are designed and managed today.

4.4 The ‘Core Paradigm’ of Current Service Management The ‘Core Paradigm’ for conventional service management (Seddon 2008) is derived from the philosophy underpinning ‘factory thinking’. The three questions that make up the core paradigm are the questions that preoccupy managerial decision-making in transactional1 service organisations: • How much work is coming in? • How many people have I got? • How long do they take to do things? In line with Chase’s ideas about efficiency (Chase 1978), managers think of their job as a resource-management problem. The core paradigm leads managers to do the following types of things in pursuit of improving service operations: • Reduce average activity time (through procedures, job aids, call coaching and targets) • Use I.T. to replace, support or control the service agent

For example: financial services, telecommunications, IT services, police, local authority, government agencies and housing services.

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Outsource activity to lower-cost organisations/economies Increase functional specialisation (to reduce training costs) Standardise work processes Put similar work into back-office factories

All of the above managerial tactics are essentially concerned with managing cost. To manage customer service, managers focus on service levels, how long it takes to pick up the telephone or respond to a letter; how many things are done in three, five or however many days. Workers’ activity is managed in line with anticipated ‘standard’ times and their work is inspected to achieve quality control. These features are now common-place, representing a factory view of service work. Managers assume that people need to be commanded and controlled (Seddon 2003). Scripts, procedures, targets, standards, inspection and compliance govern the way these organisations work. We represent this factory view of service work as an archetype as shown in Fig. 4.1. The archetype is a high-level representation. In practice, service organisations are much more complex but the complexities, nevertheless, follow this quintessential logic. Managers schedule resources according to the volumes of work coming into the system. Usually, the first step in the flow is to ‘sort’ the work by, for example, using interactive voice response [IVR] systems in telephony (‘press 1 for x, 2 for y’) and with incoming mail the work is typically scanned and sorted into pre-determined electronic work queues, often breaking one customer demand into a variety of sub-tasks, allocating each to its own queue. When work is done it is managed by ‘standard times’, the assumed time it takes to complete each task and resources are devoted to inspection to control the output to the customer. Often a customer demand into such a system is fragmented into many sub-tasks and consequently the flow of work crosses functional, organisational and geographic

All demand is treated as

Sort by type

Queue

‘work to be done’

Inspect

Key measures: Activity and cost

Fig. 4.1  The industrial archetype for factory service management

Work to standard time

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boundaries. Following Chase (1978), efficiency is assumed to be associated with the costs of activities. We shall return to the systemic problems found in this archetype and offer an alternative archetype for transactional service design later, but it is into this environment that ‘lean’ and then ‘lean service’ arrived.

4.5 The Emergence and Codification of ‘Lean’ Whilst service operations grew into its own field of study from the late 1970s, the greatest innovation in manufacturing – the ‘Japanese miracle’ – was beginning to excite interest in the West. Study tours to Japan led to the adoption of ‘TQM’ on the assumption that the tools associated with quality control and the involvement of people through suggestion schemes were the secrets of the ‘miracle’. Tuckman (1994) gives an account of the folly that followed. It was only in 1990 that the broader explanation of the reasons for superior performance was brought to widespread Western attention. In ‘The Machine that Changed the World’ (Womack et al. 1990), the authors – inter alia – told the story of the Toyota Production System’s ‘TPS’ creation and the ‘genius’ behind it, Taiichi Ohno. Through necessity, Ohno had developed a contrasting approach to the mass production methods of US car firms. Ohno’s innovation represented a challenge to manufacturing management conventions. First published in 1990, Womack, Jones and Roos’ book used the label ‘lean’ to what had occurred at Toyota; giving it a label had begun the codification of method.2 The success of their first book led the authors to articulate ‘a better way to organise and manage customer relations, the supply chain, product development, and production operations’ in their subsequent book ‘Lean Thinking’ (Womack and Jones 1996, p. 9). Womack and Jones set out to answer the question posed by many who had read their work: ‘How do we do it?’, and offered five lean principles as the secret to Toyota’s success: Precisely specify value by specific product, identify the value stream for each product, make value flow without interruptions, let the customer pull value from the producer, and pursue perfection. (Womack and Jones 1996, p. 10)

The third step in the codification of method quickly followed: the articulation of the tools employed in the TPS. The TPS had developed new methods to manage unconventional ideas: balancing demand, managing flow, materials being ‘pulled’ through the system. The associated ‘tools’: standard work, takt time, 5S, value The first published use of the term ‘lean production’ was by John Krafcik (1988) a researcher with Womack, Jones and Roos on the International Motor Vehicle Program (IMVP) at Massachusetts Institute of Technology (MiT). However, it was Womack, Jones and Roos’ book which brought the term ‘lean’ into widespread use.

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stream mapping, kanban, poke yoke, etc., were documented and promulgated by many, promising that managers could replicate Toyota’s remarkable success by applying the TPS tools to their workplaces. The applicability of tools was assumed to be universal, applying to all types of manufacturing and service organisations. One central feature of the TPS which has particular relevance to the argument in this chapter is standardisation. The conventional desire to standardise and industrialise service organisations had only been reinforced by the promulgation of ‘lean’; it was an easy (conventional) argument to accept.

4.6 But Is Service the Same as Manufacturing? Returning to the development of factory and service management, from the 1970s onwards discussion continued amongst academics over whether there were differences between management of services and manufacturing. The new fields of ‘services marketing’ and ‘service operations’ evolved as a direct result of the perceived need to treat services as different to manufacturing (Johnston 2005). Grönroos was a leading critic of treating the two as the same: Managers of service organizations may be making a mistake in following methods similar to those used by their colleagues in manufacturing. (Grönroos, C 1990, p. 12)

Normann (1984) wrote an early book in the area entitled ‘Service Management’, quickly followed by others (Lovelock 1988; Bowen et al. 1990). Lovelock, writing on ‘service marketing’ (which despite its label encompasses much more than marketing), wrote: Are the marketing skills developed in manufacturing companies directly transferable to service organisations? I think not. It is my contention that marketing management tasks in the service sector differ from those in the manufacturing sector in several important respects. Among the characteristics distinguishing services marketing from goods marketing are the nature of the product, the greater involvement of customers in the production process, greater difficulties in maintaining quality control standards, the absence of inventories, the relative importance of the time factor, and the structure of distribution channels. (Lovelock 1984, p. 4)

These publications represented a ‘backlash’ against the limited treatment of services in the operations management literature and the assumed universalism across service and manufacturing (Johnston 1994). Grönroos (1990) offered a distinction between services and manufacturing management: A service management perspective changes the general focus of management in service firms as well as manufacturing firms from a product-based utility to total utility in the customer relationship. (p. 117)

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And Grönroos also provides a working definition of the components of a service: ‘For most services, four basic characteristics can be identified: 1. Services are more or less intangible. 2. Services are activities or a series of activities rather than things. 3. Services are at least to some extent produced and consumed simultaneously. 4. The customer participates in the production process at least to some extent’ (Grönroos 1990, p. 29)

Bowen and Jones (1986) argued that the main difference between service and manufacturing is that ‘service organisations experience a high degree of input uncertainty, because of the participation of customers in service exchanges’. Bowen also contributed to the other side of the argument, when, with Youngdahl, he revisited and updated Levitt’s work in an article entitled ‘“Lean” service: in defense of a production-line approach’ (Bowen and Youngdahl 1998). The authors described three case examples of service organisations: a hospital providing a single treatment, an airline renowned for efficiency and a fast-food chain. The latter, Taco Bell, was compared with Levitt’s original case, McDonalds, and argued to be the new exemplar of production-line fast food (Schlesinger and Heskett 1991). Bowen and Youngdahl argued that the cases were representative of ‘lean’ ideas in service and suggested that ‘lean’ ideas transfer well from manufacturing to service provided they were employed with minor alterations, for example training employees in customer service skills and training customers in how they contribute to quality service. Employing techniques such as ‘service blueprinting’ and ‘value analysis’, would, they argued, remove waste from processes and, hence, ‘lean’ would work in service organisations. The authors also argued that service and manufacturing were converging towards what they called ‘mass customization’. Johnston (2005) charts the history of the service/manufacturing debate and the development of the ‘large-scale, worldwide academic movement concerned with the management of services’. He appeals for the development of frameworks and techniques to provide greater rigour to this field. It is an appeal that remains both relevant and urgent.

4.7 ‘Lean’ Arrives in Service Organisations Despite this lack of a sound knowledge-base ‘lean’ (as tools) took off in service organisations. Today, if you search for ‘lean service’ on Google, you will receive over 21 million hits. While the spread of lean tools in service organisations has no doubt been driven by providers marketing ‘benefits’ and, in the public service sector, centrally-determined obligations to adopt ‘lean’, academics have also fuelled the growth. In 2006 Radnor et  al., in a report commissioned by the Scottish

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Executive, proclaimed as successful the adoption of ‘lean tools’ in the Scottish public service sector: Analysis from the research with organisations in the Scottish public sector, together with evidence from the literature, indicates that Lean is transferable to the public sector … (Radnor et al. 2006, p. 5)

Consistent with the commercial protagonists, Radnor et al. conceptualise ‘lean’ as a set of tools: A toolkit of methods for practical use at the operational level has been developed to support lean thinking. Tools include, for example, value stream mapping which is used to analyse the flow of resources, highlight areas where activities consume resources but do not add value from the customer’s perspective. (Radnor et al. 2006, p. 1)

Discussing the differences between service and manufacturing organisations, the authors wrote: In manufacturing, the emphasis is on a set of management tools and techniques that are used to standardise processes. Within the public sector, however, there is engagement with the principles of Lean, but less with the full range of tools and techniques. Most organisations, for example, used just a few tools, such as value stream mapping. This implies that many of the tools and techniques used in a manufacturing context are currently not immediately and obviously applicable to service environments. Instead, some of the tools need to be adapted to cope with the need for greater process flexibility that are found in the public sector to meet the needs of the customer. In some cases, the limited range of Lean tools in use in the public sector may be because the service sector has yet to understand the value, relevance or purpose of the tools being applied from within the toolkit. (Radnor et al. 2006)

Similarly, Ahlstrom (2004), despite acknowledging an important methodological weakness (participants were presented with descriptions of ‘lean’ concepts and asked to translate them for service organisations; the participants were all from ‘communications’ positions, thus unlikely to be familiar with service operations), claimed that the principles of ‘lean’ manufacturing principles were applicable, with ‘contingencies’, in service operations. Neither of these studies used objective measurements. It is insufficient to argue that evidence of use is evidence of efficacy and it throws no light on the reasons for efficacy. Both studies suggest lean tools will be usefully applied with adaptation but we learn little about what adaptations might be necessary and why they may be needed. Radnor instead places academic validation for the application of lean production principles to services on Bowen and Youngdahl’s work (Radnor et al. 2006, p. 9). However, Bowen and Youngdahl had described successful service organisations which could be described as possessing lean attributes. None was presented as having employed lean tools. Swank’s (2003) article in the Harvard Business Review described the application of ‘takt’ time to new business processing in a financial services organisation. Takt time is the measure used in the Toyota system to achieve a heart-beat through material flow (an essential component of the system). Swank’s use of the same term

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was to describe the use of ‘standard time’ in processing insurance documents, an entirely different (and more familiar) concept (to managers of conventional service organisations). In recognition of the doubts being expressed about the lean tools movement, Jim Womack rationalised what had occurred: The focus turned to how organizations everywhere could transform themselves from mass producers into lean exemplars. Given the magnitude of the task and its many dimensions, it’s understandable that lean tools came to the foreground – 5S, setup reduction, the five whys, target costing, simultaneous and concurrent engineering, value-stream maps, kanban, and kaizen. Indeed, I think of the period from the early 1990s up to the present as the Tool Age of the lean movement … (Womack 2006)

Womack went on to argue that what was missing was ‘lean management’ and acknowledged that he was unable to articulate its elements (Fig. 4.2). The TPS was, and is, first and foremost, a management issue. The tools were developed to solve problems associated with making cars at the rate and variety of customer demand; in other organisations management’s first task is to know whether or not they are solving the same problems. We shall return to this. Womack’s explicit acknowledgement that lean had become enrapt in the use of tools came at what many see as a low point for the ‘lean’ movement. In January 2007, the movement hit a nadir with press headlines of ‘Is this banana active?’ relating to the implementation of a ‘lean’ efficiency drive in Her Majesty’s Revenue and Customs (HMRC) (The Times 2007).3 The staff union criticised the lean programme as ‘demeaning and demoralising’, saying that it ‘reduced staff to little more than machines, on the whim of consultants’. Workers had been reorganised into more detailed specialist functions (hence had to do more repetitive work); the work processes had been standardised and were controlled through activity measurement. The ‘lean’ intervention in HMRC was having the same effect on workers as mass-production had on the workers at Ford in the 1930s: alienation and demoralisation (Berger 2001).

4.8 Back to the Beginning To unpick the development of lean service we need to go back to the ‘Japanese miracle’ and travel forward again through this history. As Tuckman (1994), commenting on the industrial tourists sent to study the ‘miracle’, observed: A major discovery of the early missionaries, however, was also that the Japanese miracle had been created by — to mix religious metaphors — western gurus. (Tuckman 1994)

See http://www.timesonline.co.uk/tol/news/uk/article1289640.ece for the coverage in the Times on January 5th 2007.

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Suppliers of materials and equipment A Receipt and test of B materials

Design and redesign

Consumer research Consumers

Production

Assembly

Inspection

Distribution

C D Tests of processes, machines, methods, costs

Fig. 4.2  Deming’s famous ‘Figure 1’ diagram: production viewed as a system (Deming 1982)

The guru most associated4 with the ‘miracle’ and one of the most important critics of conventional modern management was W. Edwards Deming. Following his significant contribution (using statistical techniques to improve manufacturing quality) to the US war effort, Deming had been sent to Japan to help with statistical approaches to population surveys. By chance he had the opportunity to present to Japanese top management (Neave 1990). His influence on Japanese manufacturing led to recognition by the Japanese Emperor in 1960, with the award of the Second Order Medal of the Sacred Treasure. It is perhaps ironic that Deming’s teachings were assumed by his audience to be the best of American management, for his message to managers in his home country was quite different: Most people imagine that the present style of management has always existed, and is a fixture. Actually, it is a modern invention – a prison created by the way in which people interact (W. Edwards Deming 1994)

His point was simple: we (mankind) invented management, we should re-invent it. His book (‘Out of the Crisis’ 1982) included a scathing and detailed critique of western management assumptions. The better alternative, he argued, was that we should understand and manage our organisations as systems (Fig. 4.3). His famous ‘figure 1’ from the book – a picture capturing the flow of work through a manufacturing organisation – achieved its notoriety because it was often the only visual aid he would use to orientate his Japanese audience as to what to pay attention to when considering their work as leaders. He viewed constancy of purpose to improve the system as the cornerstone of management’s efforts; his figure served also for discussions of method and measures: Management’s focus, argued Deming, ought to be with the flow of work through the system as opposed to measuring and managing work in functional activities. Operating at this ‘system’ level achieves far more than focussing on the refinement of individual functions and/or processes. While Deming was not the first or only ‘guru’ associated with the Japanese miracle, he became the most well-known, following his appearance in the (US) nation-wide airing of a television programme entitled ‘If Japan Can Why Can’t We?’ in 1980.

4 

4  Rethinking Lean Service Fig. 4.3  Understanding demand: an economic lever

51 Two types of demand on service organisations: Failure Service organisation Value

Predictable failure demand is preventable

In his criticism of what he called the ‘present style of management’ Deming illustrated how targets and all other arbitrary measures sub-optimised systems. He pointed to the absurdity of failing to understand that workers’ performance was, in fact, governed by the system; as a result appraisal practices were at best irrelevant and at worst drove sub-optimisation. These and other ideas were direct affronts to prevailing beliefs: to accept them would be to accept that much that was considered normal was flawed and would have to go. Deming’s descriptions of sub-optimisation created by the prevailing style of management were larger than mere production costs (such as poor quality or excess inventory), as they also incorporated human and societal costs. He argued that the greatest costs of sub-optimisation are ‘unknown and unknowable’ (Deming 1982, p. 98). Deming’s figure depicts manufacturing. We can look at it and imagine the Toyota system: cars being produced for consumers at the rate and variety of demand, the flow of work through the system – all the way back to suppliers – ­operating at the heart-beat created by the customers ‘pulling’ cars. But we can’t so easily envisage a service organisation while looking at Deming’s ‘figure 1’ (Fig.  4.2). Following Grönroos (1990), we have to build our understanding of ­service organisations as systems by studying what occurs at the point of transaction, we need to understand more about customer demand – what customers want – and how the system responds to those demands. To echo Ohno, our first step has to be concerned with understanding. It was Ohno’s favourite word: I believe it [understanding] has a specific meaning – to approach an objective positively and comprehend its nature. Careful inspection of any production area reveals waste and room for improvement. No one can understand manufacturing by just walking through the work area and looking at it. We have to see each area’s role and function in the overall picture. (Ohno 1988, p. 57)

4.9 Understanding Service Organisations To return to transactional service organisations, when we set out to comprehend them as systems, we learn, as Deming argued, that what he called the present style of management (described here as based on the ‘Core Paradigm’) has fundamental flaws.

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One flaw is the assumption that all demand is ‘production’ – work that has to be done. By studying the demands customers place on transactional service systems, from the customer’s point of view, you learn that much of the demand is waste and, worse, it creates further wasteful activity.

4.10 Value and Failure Demand At the highest level, there are two types of customer of customer demand: ‘value’ and ‘failure’ demand. Value demands are the ones companies want customers to place on the system, the reason that the company is in business is to serve these demands. Failure demands are: ‘demands caused by a failure to do something or do something right for the customer’ (Seddon 2003, p. 26). When service organisations do not do something that the customer has been expecting, customers call back, turn up again, or otherwise create more demand and hence more work. These, and failures to do something right from the customers’ point of view – not solving a problem, sending out a form that a customer has difficulties with and so on – ­represent a significant means to improve service delivery and reduce costs. Treating failure demand as though it is indistinguishable from all demand is to fail to see a powerful economic lever for improvement. In financial services, for example, failure demand can account for anything from 20 to 60% of all customer demand. In police forces, telecommunications and local authorities it is often higher (Seddon 2003, 2008). If we were to use Deming’s language, failure demand is a form of sub-optimisation. In Ohno’s language it is a type of waste. It is noteworthy that failure demand is not among the ‘seven types of waste’ promoted by the lean tools literature. Failure demand is a systemic phenomenon that is peculiar to service organisations; it is, also, the largest form of waste in transactional service systems when managed according to the present style of management. Given the economic leverage its removal provides, it is a poignant illustration of the general argument against ‘lean’ as tools. Starting an intervention with tools is to ignore the priority to know first your problem(s). Ohno saw the purpose of the TPS as the eradication of waste: The most important objective of the Toyota system has been to increase production efficiency by consistently and thoroughly eliminating waste (Ohno 1988, p. xiii)

And: The preliminary step toward application of the Toyota production system is to identify wastes completely. (Ohno 1988, p. 19)

Failure demand is waste. Predictable failure demand is preventable, a ‘common cause’ in a system, to use Deming’s language.

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The notion that demand is predictable conflicts with Bowen and Jones’ (1986) argument that service organisations experience a high degree of input uncertainty. A more accurate argument would be that service organisations experience a high degree of variety rather than uncertainty. In the authors’ experience all transactional service organisations have largely predictable demand. By understanding demand from the customers’ point of view management’s attention is drawn to the advantage of designing the organisation to absorb this variety. While Ohno’s (TPS) purpose was to build cars at the rate and variety of demand, a transactional service system’s purpose is, we argue, to absorb the variety of customer demand. Understanding the problem leads to tools (or methods) with which to solve it.5 Waste cannot be removed without understanding its causes. It is axiomatic that the primary cause of failure demand is the failure of the system to absorb the variety of customer demands. The single greatest reason for service systems to fail to absorb variety is standardisation. To the prevailing style of management this realisation comes as a significant shock. To give just one example of the impact of standardisation on performance, we return to HMRC, where the standardisation of taxation services has created failure demand not only back in to HMRC6 but also to many organisations ‘down-stream’ that are consuming resources dealing with the failure of the primary service(s) to work: local authorities, housing associations, advice centres, voluntary agencies, legal services and the courts are filled with demand created by the failure of HMRC (and the Department for Work and Pensions) to provide the primary service effectively (Advice UK 2008). In transactional service organisations, standardisation, central to the present style of management and valued by managers as a way of managing costs, can often drive costs up. Customers can ‘see’ the waste: they know how many times they need to call to get service, they are irritated by IVR systems that fail to get them to someone who can help them and hence mean they have to repeat themselves, they are infuriated by service workers who follow their scripts or procedures and thus fail to listen to or solve their problem. While we have explored the genesis of standardisation in service management literature and practice and the fit with the lean tools movement, it is worth pausing to reflect on the lean-tools promoters’ arguments for starting any intervention with standardising the work. They often argue that Ohno said ‘first you must standardise before you can improve’. While this is essential in manufacturing, in a service organisation to standardise would diminish the system’s ability to absorb variety. Fitting with the top-down conventions this means, in practice, that standards are determined by the hierarchy and/or experts and imposed upon workers (a common feature of tools-based interventions). In contrast, Ohno placed importance on ­workers writing their standards themselves:

Methodological principles for studying and acting on failure demand are summarised in: ‘Failure demand – from the horse’s mouth’ (Seddon 2009). 6  Yet the extent remains unknown in HMRC. In presentations of their lean tools initiative, HMRC personnel demonstrate no knowledge of failure demand on their system. 5 

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J. Seddon et al. Standards should not be forced down from above but rather set by production workers themselves. (Ohno 1988, p. 98)

It is a central feature of the TPS that improvements are made by workers adhering to a scientific method, an essential component in organisational learning (Spear and Bowen 1999) (Fig.  4.4). Missing this essential emphasis, Womack et  al. (2007) placed the responsibility for standardisation with management: The work process itself, along with the management process, must be absolutely standardized by managers, and by manufacturing and industrial engineers as well, before a work team can have any hope of improving it. Standardization in this context means creating a precise and commonly understood way to conduct every essential step in every process. (Womack et al. 2007, p. 290)

This merely reinforces the present style of management. In service organisations work typically has been standardised and industrialised from an internal, costfocussed point of view. Managers dumb-down the first point of contact (or outsource it) to employ cheaper labour and fragment the flow of work (again, to reduce training time and lower labour costs). The consequences are more handovers; more handovers means more waste, and an increasing likelihood of failure demand (further waste). The more work is fragmented – sorted, batched, handed over and queued, the more errors creep in. Every time a file is opened, it has to be re-read (duplication). These problems are exacerbated as workers are working to activity targets. This is a further flaw in the ‘Core Paradigm’: holding workers accountable for their work activity. Managers pay attention to activity statistics, monitoring workers and doing ‘one-to-ones’ with those who fail to meet their activity targets. As Deming pointed out, this is to focus on the wrong things: I should estimate that in my experience most troubles and most possibilities for improvement add up to proportions something like this: 94% belong to the system (responsibility of management) 6% special. (Deming 1982, p. 315)

Deming instead encouraged managers to study variation and its causes – for example, things that would make the calls longer or shorter. Imagine the potential causes Causes of failure demand

Activity Management Failure Functional specialisation Standardisation

Fig.  4.4  Understanding the causes of failure demand

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of variation in a call-centre worker’s performance: the nature of the call, the type of customer, whether processes have been designed from a customers’ point of view (and as managers do not frequently study demand as a matter of course, that is unlikely), whether the IT system works today, whether people in other departments have told customers things they did not tell people in the call centre, the knowledge of the worker and so on. These are the things that affect performance and are the things managers should be focused on (the ‘94%’ in Deming’s terms). Managing peoples’ activity is an incredible waste of management resource; worse, this style of management demoralises workers. Workers are taught their goodness or badness will be judged by whether they meet their activity statistics; they usually learn how to cheat their numbers to avoid attention (driving further waste into the system). The workers’ focus is survival not contribution and improvement; their ingenuity is driven by the system to work against its purpose. Managers find it hard to see things this way. When close monitoring of people gives managers evidence of people cheating, they claim it as evidence of the need for the controls (or more controls). Managers develop a jaundiced view of their people. When, on the other hand, ­management’s attention is on the system (the 94%), significant performance improvement follows (see, for example, Pyke 2008) . The prevailing style of management keeps failure demand and its causes invisible. Management’s view of their system is limited by the management information in use, all of which relates to activity and cost. The phenomenon is systemic: failure demand can only be removed when managers change the way work is designed and managed.

4.11 The Better Alternative Following Deming and Ohno, the better way to design and manage service organisations is to understand and manage the organisation as a system. The systems archetype below describes a design for managing service in such a way as to see and remove waste continuously (a feature that it shares with the TPS) (Fig. 4.5). By understanding the demands from customers, it is possible to train workers against the high frequency, predictable value demands (things we know we are going to get a lot of) that are hitting the system. The consequences are shortened training times (for example from 8 weeks to 2 weeks in financial services) and more productive employment of the worker. When the worker receives a customer demand for which he or she is not trained, the required expertise is ‘pulled’ as needed. In this way worker training is directly related to the requirements of the work. The worker aims to achieve single piece flow (to deal with each demand as it enters the system right through to resolution for the customer, before beginning with another demand) or, if the work has to be handed on to a flow, then the worker is focussed on passing it ‘clean’: it must be in such a state that the next person has everything they need to take the next step. Workers have measures which relate to the customer’s purpose in their hands (one-stop capability, measures of end-to-end

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J. Seddon et al. Train against HFPVD∗ ‘Pull’ support Understand demand by ‘type and frequency’

Work as single piece flow; ‘close’

(prevention)

Measure actual time

Or put ‘clean’ Measure actual performance in in to flow customer terms

Key measures: Capacity and capability

(knowledge)

∗ HFPVD = High Frequency Predictable Value Demand

Fig. 4.5  The systems archetype for transactional service systems

flow) and hence, like Ohno’s workers, have the latitude to experiment with and improve the work design. Training workers against demand and ensuring they are responsible for what they do is preventative (the better alternative to inspection). All arbitrary measures (standard times, cost, targets, standards) are removed from the system and instead real measures are used to help managers and workers alike understand and improve the work. It is better to know the actual time it takes to complete transactions as ‘one-stop’; this improves resource planning. Similarly it is better to know the true experience of the customer for any work that goes through a flow (end-to-end time or on-time-as-required) in order to improve the flow and, consequently, reduce costs. There are many examples of these principles in use, published examples include ODPM (2005), Jackson et al. (2007), Pyke (2008), McQuade (2008), and Zokaei et al. (2010). At its heart, the systems archetype is concerned with designing against demand, managing value rather than cost. And this is the heart of the paradox: when managers manage costs, costs go up; when they learn to manage value, costs fall. It is a counter-intuitive truth.

4.12 Counter-Intuitive Truths Ohno discovered a series of counter-intuitive revelations in creating the TPS. The most notable of these was to discover that costs were contained in the flow of work, not in creating economies of scale: To think that mass-produced items are cheaper per unit is understandable, but wrong (Ohno 1988, p. 68)

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This can be re-written for service organisations as follows: In service organisations to think that service activity is equivalent to cost is understandable but wrong. Ohno’s innovation might be termed ‘economy of flow’ (Seddon and Caulkin 2007) as compared to economy of scale. We have shown here how ‘economy of scale’ actually creates waste which is kept hidden by management’s practices. Commenting on this distinction H Thomas Johnson said: It is time to raise awareness of how production systems designed along the lines of Toyota’s system turn scale-economy thinking completely on its head, making it possible to build manufacturing capacity on a much smaller scale than ever before thought possible. (Johnson 2003, p. 7)

Elsewhere, he went further and said that ‘scale economy, beyond very small volumes, is a concept that should be discarded’ (Johnson 2008, p. 102). Grönroos similarly says: Scale economies may or may not be a strategically reasonable objective, but it is never sound, and it is always dangerous to automatically consider economies of scale as a source of profitability. Rather, an uncritical pursuit of large-scale production and the potential benefits of scale economies easily turns an operation into disaster. (Grönroos 1990 p. 120)

In this chapter we have explored further counter-intuitive truths concerning the design and management of services: that demand is the greatest lever for improvement, that current managerial controls create waste rather than control, that giving the workers control over their work (using measures derived from the work) achieves greater control and that managers should work on the system (not their people). Together, these truths represent a different, ‘systems thinking’ philosophy of management, comparable to the philosophy behind Ohno’s TPS, and in opposition to the prevailing style of management.

4.13 Change as Emergent, Not Planned Ohno placed high value on the need for gaining an understanding of an organisation as a prerequisite for making any changes. This too is an affront to convention. Managers are taught that change should be planned, starting with a business case, a cost-benefit analysis or targets for improvement. It is to assume knowledge; and as Deming would often point out, experience is not the same as knowledge. To make the fundamental change that moving from the present style of management to managing the organisation as a system requires managers first to understand their problems. As they study their organisation as a system, managers discover the problems they thought they had are not their real problems.7 7  A method for studying transactional service organisations as systems is provided in Seddon 2003 and 2008.

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It is worth pointing out this is also true for manufacturing organisations, for not all manufacturers make cars. John Darlington and Kate Mackle of Cardiff University’s Lean Enterprise Research Centre share the view that the tools developed in Toyota were responses to particular problems; the tools were a means to an end, not ends in themselves (Mackle 2005). Darlington argues that car manufacturing is just one type of manufacturing, and each different type has different problems to solve. Thus the first question a manufacturing organisation needs to ask itself is ‘what type of manufacturer am I?’ before implementing any tools (Darlington et al. 2008). In this chapter we have presented an archetype for transactional service systems. The problems to be solved are quite different from those to be solved in fast-food services such as Levitt’s McDonald’s example (where standardisation of production is essential). In response to Johnston’s appeal, it is a useful first step to articulate differences in service archetypes – different systems solving different problems. Two further archetypes not discussed here are ‘break-fix’ systems and ‘preventative’ systems (Seddon 2003).

4.14 Ohno Said: Do Not Codify Method The ‘lean tools’ movement is directly in conflict with the beliefs of the architect of the TPS. Taiichi Ohno asserted that method must not be codified: While most companies focused on stimulating sales, Mr. Ohno believed just-in-time was a manufacturing advantage for Toyota. And for many years, he would not allow anything to be recorded about it. He claimed it was because improvement is never-ending – and by writing it down, the process would become crystallized. (Ohno 1988, p. xi [foreword])

To codify method is to impede understanding, thus lessening the chance that people will challenge any underlying preconceptions they may hold. Writing about the differences between what Henry Ford intended (for Ohno saw Henry Ford as a fellow ‘flow’-thinker) and what subsequently occurred in the Ford Motor Company, Ohno said: As in everything else, however, regardless of good intentions, an idea does not always evolve in the direction hoped for by its creator. (Ohno 1988, p. 100)

The same could be said for Ohno’s ideas.

References Advice UK 2008 ‘It’s the System, Stupid! Radically Rethinking Advice’ AdviceUK: London (Downloadable from www.adviceuk.org.uk, accessed 7/4/2009)

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Ahlstrom, P (2004) ‘Lean service operations: translating lean production principles to service operations’ International Journal of Services Technology and Management, Vol 5, nos 5–6 pp. 545–564 Berger M 2001 ‘The automobile in American history and culture: a reference guide’ Greenwood Publishing: Westport, CT Bowen, DE. and Youngdahl, WE. 1998. ‘Lean Service: In Defense of a Production-Line Approach’ International Journal of Service Industry Management 9, 3 Bowen, DE, Chase RB, Cummings TG and Associates 1990 ‘Service Management Effectiveness’ Jossey-Bass, San Fransisco, CA Bowen DE and Jones GR 1986 ‘Transaction Cost Analysis of Service Organization-Customer Exchange’ Academy of Management Review Vol. 11. No. 2 Buffa, E.S. 1976, ‘Operations Management: The Management of Productive Systems’, Wiley, New York, NY Chase, R.B. 1978, ‘Where does the customer fit in a service operation?’ Harvard Business Review, Vol. 56 No. 4, pp. 137–42 Darlington, J, Francis M and Found, P 2008 ‘Flow Accounting and LEAN Enterprise’ CUIMRC Working Paper Series (see http://www.cuimrc.cf.ac.uk/sites/www.cuimrc.cf.ac.uk/files/ WP147%20-%20Flow%20Accounting%20and%20Lean%20Enterprise%20(JD,%20MF%20 &%20PF).pdf, accessed 21/05/09) Deming W E 1982 ‘Out of the Crisis’ MIT Press; Massachusetts Deming WE 1994 ‘The New Economics: For Industry, Government, Education’ MIT Press: Massachusetts Grönroos, C 1990 ‘Service Management and Marketing’ Lexington Books, Lexington, MA Jackson, M, Johnston, N and Seddon, J 2007 ‘Evaluating Systems Thinking in Housing’ Journal of the Operational Research Society no 59, 186–197 Johnson HT 2003 ‘Restoring the Human Side of Economic Enterprise: Can Humanity Survive the Financial Dictatorship of Business?’ Paper delivered at Meijo University 31/05/03 Johnson HT 2008 ‘Lean Management and True Sustainability’ in the Lean Manufacturing Yearbook 2008, Society of Manufacturing Engineers: Michigan Johnson, R.A., Newell, W.T. and Vergin, R.C. 1972, ‘Operations Management’, Houghton Mifflin, Boston, MA Johnston, R 1994 ‘Operations: From factory to service management’ International Journal of Service Industry Management Vol 5, No 1 Johnston R 2005 ‘Service Operations Management: Return to Roots’ International Journal of Operations and Production Management, Vol 25 No 12 First published in 1999 Krafcik, J.F. 1988, ‘Triumph of the Lean Production System’, Sloan Management Review, Vol. 30 No. 1, pp. 41–52 Levitt, T. 1972 ‘Production-Line Approach to Service’ Harvard Business Review, SeptemberOctober Lovelock C.H. 1984 ‘Service Marketing’ Prentice-Hall, Englewood Cliffs, NJ Lovelock, CH 1988 ‘Managing Services’ Prentice-Hall, Englewood Cliffs, NJ Lockyer, K.G. 1962 ‘Factory Management’, Pitman, London Mackle, K 2005 ‘Continuous Improvisation: why we are so good at it and how it holds back improvement’ Presentation to South Wales Innovation in Materials Management (SWIMM) (see http://www.swimm.co.uk/events/documents/swimmpresentation170205_000.pdf accessed 21/05/09) McQuade, D 2008 ‘Leading Lean Action to Transform Housing Services’ in Public Money and Management Vol 28 no 1 Neave H 1990 ‘The Deming Dimension’ SPC Press: Tennessee Normann, R 1984 ‘Service Management’ Wiley, Chichester Office of the Deputy Prime Minister (ODPM) 2005 ‘A Systematic Approach to Service Improvement Evaluating Systems Thinking in Housing’ ODPM publications: London Ohno, T 1988 ‘Toyota Production System’ Productivity Press: Portland, Oregon. Translated from Japanese original, first published 1978

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Pyke, W 2008 ‘Is performance personal or in the system?’ Management Services, Winter 2008, Vol. 52 Issue 4, pp. 40–47 Radnor Z, Walley P, Stephens A and Bucci G 2006 ‘Evaluation of the lean approach to business management and its use in the public sector’ Scottish Executive, Edinburgh Schlesinger and Heskett 1991 ‘The Service-Driven Service Company’ Harvard Business Review September-October Seddon J and Caulkin S 2007 ‘Systems thinking, lean production and action learning’ in Action Learning Research and Practice Vol 4 No.1 April 2007, special issue: ‘Lean Thinking and Action Learning’ Seddon J 2003 ‘Freedom from Command and Control’ Vanguard Press: Buckingham. Seddon J 2008 ‘Systems Thinking and the Public Sector’ Triarchy; Axminster Seddon, J 2009 ‘Failure Demand – from the horse’s mouth’ Customer Strategy Issue 1, Vol 2 Winter 2009 pp. 33–34 Spear and Bowen 1999 ‘Decoding the DNA of the Toyota Production System’ Harvard Business Review Sept-Oct Swank CK 2003 ‘The Lean Service Machine’ Harvard Business Review, October Taylor: FW 1998 ‘The Principles of Scientific Management’ Dover Publications: New York. First published in 1911 The Times 5/1/2007 ‘Is this banana active?’ http://www.timesonline.co.uk/tol/news/uk/ article1289640.ece (accessed 08/01/09) Tuckman, A., 1994 ‘The Yellow Brick Road: Total Quality Management and the Restructuring of Organizational Culture’ Organization Studies, Vol. 15, No. 5, pp. 727–751 Womack JP, Jones DT, Roos D 1990 ‘The Machine that Changed the World’ New York, Macmillan Womack JP, Jones DT, Roos D 2007 ‘The Machine that Changed the World (with a new foreword and afterword from the authors)’ Simon and Schuster, London Womack JP, Jones DT 1996 ‘Lean Thinking’ New York, Simon & Schuster. Womack JP 2006 November e-newsletter. See http://www.lean.org/Community/Registered/ ShowEmail.cfm?JimsEmailId=67 for the newsletter in full (accessed 15/11/07) Zokaei Z, Elias S, O’Donovan B, Samuel D, Evans B and Goodfellow J 2010 ‘Lean and Systems Thinking in the Public Sector in Wales’ Lean Enterprise Research Centre report for the Wales Audit Office, Cardiff University

Chapter 5

Designing Competitive Service Models Veronica Martinez and Trevor Turner

This chapter discusses the design of competitive service models through the analysis of companies’ value creation. In the study of value creation, the value propositions provide an innovative way to analyse companies’ value creation from the customers’ perspectives. This chapter is divided into two complementary parts; the first part called “the story” and the second one called “the theory”. In the first part, this chapter starts with the illustration of a case study “the ICI Explosives” case. This case shows how the company has transformed its value proposition, business model, service delivery and capabilities and skills from the 1960s to the 1990s. Then in the second part, the theory underpinning the case study is analysed and explained. This second part provides to the reader some model, frameworks and toolkits for the analysis and design of other competitive service models.

5.1 The Story 5.1.1 ICI Explosives UK The explosives developed in Europe in the late nineteenth and early twentieth ­century by the famous Swede and patron of the world peace prize, Alfred Nobel, were extremely durable and, apart from the introduction of the electric detonator, have remained in use with minor modifications for almost a century (Fig. 5.1a). In the 1970s a new invention started a process of change that has transformed the explosives business from being a supplier of products to a provider of a service. Survival very much depended on the agility of ICI Explosives UK, hereinafter referred to as “ICI Explosives,” in adapting to the new competitive environment. Manufacturing excellence was not a solution. Innovative thinking was required to sustain the ­business as changes in technology reduced the complexity that had ­protected the business from serious competition for over a century. V. Martinez (*) Principal Research Fellow, Centre for Business Performance, Cranfield School of Management e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_5, © Springer Science+Business Media, LLC 2011

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initiator

initiator

quarry surface

primers

single primer

a

b

c

Fig. 5.1  Bore holes in a quarry surface with different blasting explosive types (not to scale)

With the introduction in the 1970s by a small company in the USA that patented a blasting explosives manufacturing process that did not use nitro-glycerine, the explosives business was opened to newcomers. All the ingredients used in this new process were non-explosive and could be purchased and transported without a licence. The new formulation only became an explosive when the non-explosive ingredients were mixed together into viscous water-based slurry. This slurry was then made into long sausages (Fig.  5.1b), with plastic skins like salami, on a ­sausage-making machine for packing and transportation (Turner 1998). 5.1.1.1 The Slurry Era By using ingredients that were non-explosive and could be purchased and ­transported without a licence, the old licensing, transportation and safety ­procedures became obsolete. This new process of mixing non-explosive ingredients with water, making the slurry, also eliminated the large capital outlay and know-how involved in running a nitro-glycerine-based blasting explosives manufacturing plant. The governmental licensing problems were reduced because the non-explosives ­ingredients did not require licensed stores and could be stored near the manufacturing units. Slurry manufacturing units are less complex and relatively inexpensive to set up. The whole manufacturing process from raw materials to packaged ­explosives could now take place under the same roof rather than in separate buildings. As a consequence, slurry explosive manufacturing and packaging units could now be

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sited nearer to large areas of population and did not require the vast areas of land in remote regions normally associated with traditional nitro-glycerine-based ­explosives manufacture. Slurry plants began to appear in all parts of the world in countries not previously involved in explosives manufacture. The response by the major companies in the U.K. was to try to force the new entrants out of the market with a price war. They failed to do so. The newcomers had operating costs that were so low, that as the price fell they managed to survive. The comfortable, relatively stable, days of explosives businesses with large export markets in the nitro-glycerine era were over. Traditional explosives ­businesses had to change the way they operated or become extinct. 5.1.1.2 The Emulsion Era The next technological development had an even greater impact on explosives ­businesses. Although the slurry explosives were easier to make, they were still sold as packaged explosives and, in order to satisfy customers’ demands, required manufacturing units and depots with large stocks of explosives to be located near customers. As with the introduction of emulsion explosives in the 1980s, the “sausage skin” packaging of the explosives were no longer needed. Moreover, the ingredients were different and much cheaper than the packaged explosives. Emulsion explosives also allowed formulations to be created for use in small diameter, hence cheaper, bore holes. Nitro-glycerine explosives were no longer needed for quarrying and nitroglycerine plants were not required. Initially emulsion explosives were used as packaged explosives in the UK because, except for very large quarrying operations, it was not worthwhile setting up manufacturing units in quarries. The majority of quarries in the UK are small and do not carry out blasting operations every day. However, it was recognised by explosives businesses that the advantages of pumping bulk explosive directly into bore holes were considerable (Fig. 5.1c). It eliminated the packaging and storage activities. Also, if the explosives could be made reliably at the point of use from nonexplosive ingredients and then used, the problems of manufacturing and storing large quantities of explosives and the related licensed distance problems would be overcome. Large manufacturing plants and depots would no longer be required. This led the way in the 1990s to the use of mobile manufacturing units that carried the non-explosive ingredients separately and mixed them as they were pumped into bore holes. First one and then other major manufacturers began to use mobile manufacturing units to deliver and pump blasting explosives directly into customers’ bore holes. As the number of mobile manufacturing units increased, the manufacture of packaged explosives within the traditional manufacturing sites declined. It marked the beginning of the end of the manufacture of packaged explosives.

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5.1.1.3 The Blasting Service Era: From Supplying Explosives to Providing Rock on the Ground The move from nitro-glycerine to slurries and then the introduction of emulsion explosives led to a complete restructuring of the explosives businesses. The core competence of managing complex manufacturing plants was no longer required. New skills and systems had to be developed to respond to customers’ demands for lower prices and better service. This led ICI Explosives, one of the major businesses in the U.K., to consider how profit margins could be maintained by offering the customer a new concept. This concept was to sell “rock on the ground” to the customer, rather than ­explosives. ICI was already employing mining engineers who provided a technical ­service to mines and quarries on best practice concerning the use of explosives to blast rock safely and economically. These engineers were also used to liaise with customers to develop customer loyalty by advising them on how to satisfy ­explosives legislation and introduce new blasting techniques to improve yield from the quarries. The quarries purchased explosives and accessories, stored them at the quarry and then used their own personnel to carry out the routine drilling of bore holes, loading of bore holes with explosives, and shot-firing. They called in the mining engineers as advisors if problems such as misfires, fly-rock, or low yield occurred. Whenever blasting activity in the small UK quarries occurred, about once or ­perhaps twice a week, a team of people had to be pulled from their normal activities of digging and grading rock to load and fire the blast. Before the introduction of mobile manufacturing units, the explosives and accessories for the blast needed to be ordered and stored in secure, often remote, licensed magazines overnight prior to the day of the blast. Personnel had to be trained to satisfy government legislation for the use and handling of explosives. In the event of weather conditions becoming adverse and the loading not being complete during a day, personnel had to be employed to “guard” the shot overnight to prevent theft of explosives and accessories. The introduction of mobile manufacturing units meant that the storage and loading of blasting explosives on site was no longer required. Personnel from the explosives business travelled with the truck to load the bore holes and worked with the shot-firer and his team until the shot-firer took over to carry out the blast (Fig. 5.2). In the “rock on the ground” proposition, mining engineers and truck operators were taking over the blasting activity from customers. Rock on the ground was selling to customers the rock of the correct size distribution, in a mound of rock created during the blast of the correct profile and location to be easily dug and hauled by the quarry operator for further processing. With the introduction of quarry services, all the previous blasting activities were taken out of quarry managers’ hands and placed into the hands of experts who carried out these activities as part of their core competencies. There were enormous benefits for the busy, and often harassed, quarry manager. The quarry services team turned up on the day of the blast with the explosives mixing unit and accessories, carried out the blast, and left behind a pile of rock for the manager to dig and process.

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FlexibleHose

boreholes QUARRYSURFACE

QuarryFace ROCKPILE

Fig. 5.2  Mobile manufacturing unit operating in a quarry

The explosives business had transformed itself from making and selling explosives to providing quarry services. These services could be in the form of a contract to provide an agreed tonnage of rock over an agreed time scale. The services could be blasting only or could include drill and blast or even rock face profiling, blast design and layout, as well as drill and blast. As long as the quarry management were getting value for money from this service, then the explosives business could run the blasting side within the customer’s premises and by so doing protect their profit margins. This change in emphasis from manufacturing and selling a product to providing a service required considerably fewer people and facilities. Large numbers of people who made explosives had to be re-deployed to other activities both inside and outside the organisations. Large manufacturing operations and depots were no ­longer needed and had to be closed down or reduced in size. ICI Explosives had a policy of no enforced redundancy for its employees. This meant that the manufacturing personnel needed to acquire new skills to become service providers inside customers’ premises. Quite a different skill set was required, such as training people who had been “blue-collar” factory workers to drive heavy goods vehicles or to man the mobile manufacturing and shot-firing units to carry out blasting operations. All personnel involved with customers needed customer care training because they now had direct contact on a daily basis with quarry managers and other quarry employees. A resettlement team based in the Human Resource function was set up to ­facilitate the transfer of manufacturing personnel to the new jobs in Quarry Services.

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Selling Products “Nitro glycerine Cartridge”

Selling Products “Slurry”

Selling Products plus a Service

Selling Customised Blast Services “Delivering mounds of rock ready to use”

“Emulsion”

Fig. 5.3  The changing explosives business

All manufacturing and depot personnel were given the opportunity to apply for the new jobs and a very systematic approach was used in the selection process. The resettlement team broke the new jobs down into eight elements and identified ­competencies required to carry out these elements. Applicants were interviewed and tested to determine whether they had or could develop these competencies. Personality profiling and critical thinking tests were used. About 60 people were selected to transfer to the new jobs from manufacturing sites and depots from around the country. Some elements of the jobs required the applicants to obtain certificates before they could take up the positions. In particular HGV (Heavy Goods Vehicle) driving certificates were required as also were shot firing certificates. Successful applicants were given assistance in obtaining these certificates, required by law, before starting their jobs. Assistance with relocation was provided. In a relatively short period of time, ICI’s explosives had moved from being manufacturing experts to service providers. Technological and other changes in the marketplace had determined the new activities within their business. For companies in this arena, competitive excellence – and even survival – meant following a train of development similar to that becoming more and more common in many industry sectors (Fig. 5.3). ICI’s competitive criteria had changed from product functional excellence and on-time delivery performance to customer service excellence.

5.2 The Theory 5.2.1 Value Proposition The introduction of the concept of value propositions also called value delivery systems by Bower and Garda, in 1985, changed the way many practitioners and scholars analyse the value creation of organisations. Their concept highlights the need for companies to change their traditional view of value from the functional view of activities to an externally oriented view, as a form of value delivery. This can only be achieved by looking at the business from customers’ perspective. The “value proposition” is defined as

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… the implicit promise a company makes to its customers to deliver a particular combination of values. (Treacy and Wiersema 1993, 1996)

The customers’ perspective brings an external dimension to the value propositions, which makes organisations aware of continuous changes in the business environment. The perception of value could change due to five main factors; first, customers are becoming more sophisticated and demanding; second, co-production is increasing innovation; third, competitors are raising expectations, fourth, increase of customers’ business understanding and fifth, new technology allows new forms of customer contact (Huff et al. 2009). As Ramirez (1999) highlights, the external customers’ perspective brings a dynamic element that distinguishes the value propositions from other business frameworks. In ICI explosives there are three main value drivers of change. First the technological innovation around the explosives’ production; e.g. the transformation for the 1970s to the 1980s and from the 1980s to the 1990s. Second, the application of customers’ understanding and knowledge from the technical support team. Finally, the marketing analysis of different configurations of product-service offers. Payne and Holt (2001) argue that to revitalise the stakeholders’ value, organisations should follow the theory of the creative destruction from Joseph Shumpeter. ICI explosives creatively destroyed its manufacturing propositions to become a total service provider. Its value proposition was re-invented three times in a 30 years window. Kim and Mauborge’s (1999) and Woodruff’s (1997) rationale also suggests that since value is in a permanent status of change, organisations should continuously re-invent their propositions of value to customers because they are the main source of competitive advantage. The value propositions place emphasis on the creation of mutual value; this is what some marketing authors called co-creation (Vargo and Lusch 2004). It can be achieved as a consequence of a reciprocal relationship between organisations and stakeholders in a network (Bower and Garda 1985; Normand and Ramirez 1993). Treacy and Wiersema (1996) proposed three generic value propositions where organisations operate. They are: Operational excellence which proposes standard products to their customers, at the best price with least inconvenience. These organisations offer the best price for their products within their competitors’ radius. Product leaders propose new technologies and product designs to their customers at the right time. They offer the leading technologies and products; price is not a priority issue for their customers. Customer intimacy which operates with limited number of customers and offers the best total solution. These companies focus on delivering the best customised product, technology and/or service.

5.2.2 The Value Matrix Despite the clarity and functionality of Treacy and Wiersema’s value propositions, they are insufficient to understand how tangible and intangible value is

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SOFT

Product Leadership

Innovators

Brand Managers

Operational Excellence

Price Minimisers

Process Simplifiers

Technological Integrators

Socialisors

Customer Intimacy

Source: Martinez and Bititci (2006)

Fig. 5.4  The value matrix

created in organisations. The value matrix suggests that there is an additional dimension of value creation called the “hard and soft value dimension” (Martinez 2003; Martinez and Bititci 2006). Organisations that operate in the “hard value dimension” place strong focus on the delivery of tangible elements of the offering. For example, the delivery of value through new technology embedded in the product or a customised solution- based product. Conversely, organisations that operate in the “soft value dimension” place strong focus on the delivery of intangible elements of the offerings such as, building trust, status or creating an inimitable experience for the customer on the consumption of the offering. The value matrix takes a customer delivery approach to analyse companies’ value creation processes (Fig.  5.4). It has six value propositions. Innovators, price minimiser and technological integrators focus on the hard value creation; meanwhile, brand managers, process simplifiers and socialisers focus on the soft value creation. Innovators continuously provide innovative technologies, embedded on productservice offerings. These organisations offer the state of the art in product-service design to their customers and customers keep coming back for the upgraded offerings. Price minimisers propose good quality, reliable products and services at sensible prices to their customers. They strengthen the efficiency of their production process to drive operational costs down. Technological Integrators propose continuous total solutions. First, they understand the customers’ businesses and needs, then they tailor product-service offerings for carefully selected customers. Brand Managers focus on the brand image, quality and style of the ­product-service offering. They strive on the creation of a distinctive pre-, during and post- customer experiences. These organisations propose and deliver status,

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lifestyle and superiority feelings such as, feeding ego though the acquisition of the product-service offerings. Process Simplifiers provide easy availability and convenience to the productservice offering; by making customers’ lives uncomplicated and warranting ­hassle  free experiences. They build streamlined processes in a novel and profitable way. Socialisers propose flexible and reliable services on the basis of long-term ­relationships with customers. These organisations focus their efforts on the service delivery, building trust and inter-personal relationships with customers. Table 5.1 explains the value propositions from the customer and from the company perspectives. These value positions are used at the business unit level when organisations have more than two strategic businesses in different market segments or at the company level when the business has a single strategic direction for a single market.

5.2.3 Transformations Path of the ICI Explosive Business: In Search of New Value Propositions Before explosives became a non-profitable business in the late 1960s, ICI Explosives capitalised on the exploitation of the nitro-glycerine embodied on the classical nitro-glycerine explosives cartridges. ICI Explosive’s products were considered the best in the market; in this way ICI Explosives positioned itself as an innovator. The creation of value was reduced to the economical transaction products [explosives] for money. This initial value propositions was purely based on the tangible attributes of the products. The success of this early business model was protected by highly complex, specialised, risky and expensive operational processes. These processes included manufacturing, storage, transportation and delivery. They provided a natural barrier that protected the business from competitors and new entrants.

5.2.3.1 The First Change Trigger The first trigger was initiated by an external force, a competitor called “Ireko.” Ireko changed the nature of the explosives with the introduction of a new product innovation, the “viscous water-based slurry” made from non-explosives ingredients. The new non-explosive ingredients of the product minimised the production, transportation and inventory risks. The reduction of risks drove operations, insurance and licensing costs down. In the same way, the expensive manufacturing and technical facilities were no longer required. Therefore, the competitive advantage relied on the operational excellence of the processes. This is how ICI Explosives competed as price minimiser.

Status from the product, they get lifestyle, a feeling of superiority.

Ordinary, reliable products and services at lowest price possible. They get security on the product.

Convenience and availability of the products. Hazard free experience.

Tailored products and services. They buy total solutions.

Flexible services and interpersonal relationship because they trust in the company.

Brand Managers

Price Minimisers

Process Simplifiers

Technological Integrators

Socialisers

Build confidence and trustiness on the customers.

Tailor specific and continuous solutions for carefully selected customers on the basis of permanent relationships.

Building streamlined processes to make life simple and uncomplicated for customers in a novel and profitable way.

Production growth reaching high quality levels in the most costeffective way and waste free.

Expand the market reinforcing the solid brand image of the product and the company.

Table 5.1  Value propositions – what the customers get and what the companies need to do (Martinez 2003) Company needs to do Value proposition Customers get Strategic objectives Innovators New innovative designs, Provide breakthrough through products never seen before. generations of continuous new designs, new features within technological basis.

Sensitive fulfilment of customers’ needs supported by careful deliver, reliability, and honesty. Excellent personal service.

Strong relationship with customer. Knowledge of customers’ businesses, products and operations. Capacity to configure any specific need. Able to adopt the customer’s strategy.

Strong availability. Superb order fulfilment–distribution by conventional and un-conventional resources (networking, IT, etc.).

Strong order fulfilment sustained by efficient and effective production processes within tight quality processes controls.

Superb brand recognition. Focus market sector. Superior control over the product styles, quality and promotion.

Operational objectives Long-term vision, robust R&D and product development, capacity to innovate within short product lifecycles.

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This new value proposition of the 1970s still heavily relied on the tangible product “slurry” as main source of value creation. New comers and competitors started operating at very low costs that drove the explosives’ prices down and originated a price war among competitors. ICI Explosives managed to survive, however its large, stable international market was completely destroyed. Value was created through the physical proximity to customers by setting up hundreds of depots with large stocks of explosives.

5.2.3.2 The Second Change Trigger The second trigger of change was advocated to innovative product delivery, the “emulsion-based explosive” also called the “sausage skin.” Emulsion explosives were cheaper and more effective than slurry. For large quarries, the emulsion could be offered as free of package by pumping bulk of emulsion explosive into the bore holes. For small quarries, the emulsions could be offered as sausages. Emulsion could be used in slender holes, thus reducing mining operating costs, and eliminating packaging and storage costs. ICI Explosives’ value proposition adopted process simplifier as a way to facilitate the use and performance of the explosives to customers. This new value proposition of the 1980s made the large manufacturing plants and depots unnecessary and eliminated the storage and package activities. Despite the tremendous effort to increase the service delivery, this value proposition was still based on product delivery with few elements of service delivery.

5.2.3.3 The Third Change Trigger The third trigger of change was leaded by the technical marketing, mining service and quarry service teams. In the 1990s the company changed its value proposition from selling pure products to sell blasting services to selling a total solution “the rock in the ground.” The mobile units were operated by a wide range of explosive experts. This new value proposition technological integrators required fewer people and facilities and less manufacturing technology; conversely it required more experts in mining, chemistry, geology and quarry. The new service value proposition required the acquisition of new skills such as customer care training. The ICI Explosives’ transformation’s path from the 1960s to the 1990s is summarised in Table 5.2. It highlights the evolution of value propositions, value drivers, key capabilities, service delivery and drivers of change.

5.2.3.4 Mapping the Value Propositions into the Value Matrix Over time, ICI Explosives has demonstrated a continuous trend towards servitization.

Value offerings

Leadership in blasting practices-quarrying and mining

Key capabilities

Emulsion 1980s Process Simplifier: Product delivery

Operational excellence. Depots with large storage to satisfy demands located near to customers. Lean production supported by MRP II, ISO 9000

“Blast effectiveness” – Customers did not need to manage their own explosive storage magazines

Effective product. Formulation created for smaller diameters of holes therefore cheap ingredients

Effective product & its Manufacturing process: New production delivery: Direct pumping bulk explosive into holes process: mixing nonexplosives with water

Slurry 1970s Price Minimiser: Manufacturing excellence

“Product excellence”– expensive “Commoditized products”– cheaper and highly specialised products products plus mining guidance Improve safety

Highly specialised & unique Factory operations

Product novelty: Exploitation of the nitro-glycerine technology

Nitro-glycerine cartridges …. 1960s Innovator: Product excellence

Value driver

Offerings Value proposition

Table 5.2  The ICI Explosives transformations path

Tailored solutions leading into 2–3 years partnerships with customers Customers’ hassle free security legislation and operation costs

New service skills: simulation and risk analysis, scenario planning ERP, rock laser profile, rock size distribution, blasting services & customer care training

More effective blasts

Completed tailored & sustainable services solutions: Value-inuse: tailored service by the mobile units’ experts. Killed package & storage Ardeer operating service business

Blasting service 1990s Technological Integrator: In-situ total service solution

72 V. Martinez and T. Turner

High. Remote and expensive manuf. Facilities of nitroglycerine. Highly skilled chemical engineers

Manufacturing, transportation & storage of raw materials (nitro-glycerine) and. cartridges

Line- long & ineffective supply chain. High volume & stock

Mining engineers mainly sell the product

Mining engineers to help with the use of the product

Improve the nitro-glycerine use

High capital costs Insurances of depots production, transport & handing Government Licensing

Barriers to entry

Risks

Operations’ processes

Service delivered

Customization

Major challenge

Operating costs

Slurry too cheap and very few law restriction to produce it Very Low Transport, Depots near to key customers

Mining engineers converted the nitroglycerine customers to slurry customers

Mining engineers assist customers to use the product

Line- short supply chain

Price war competition. Finished products transport

Low. Manuf plants not longer required, set up locations were established near quarries

Project

Build strong and long term customers’ relationships

Operations risks are reduced.

Highly specialised and multidisciplinary technology coordinated to provide individual, tailoring services

Rain-water trapped into holes with explosives, lead to inefficient blasts Low Manufacturing, depots and packaging activities were eliminated Emulsion delivery

–

(continued)

Customer care training Units experts training: mining engineers, truck operators, and quarry service team

Low- led good revenues Mobile units: investment and maintenance

Updated and coordinated experts’ skills

Blast service customisation to fit with customers needs

Complete in-situ tailored services. Professional mining engineers Designing team: simulating, directly fill emulsion into the Mining team: methods holes to facilitate the blast to distribute the blasting effectively

Line

Raw material were easily stolen for other purposes

Medium technology barrier. If blast was not completed fast enough and rain-water was filtered in the hole, it led to inefficient blast

5  Designing Competitive Service Models 73

Nitro-glycerine cartridges …. 1960s High

Global distribution

Close to inexistent in Europe

“Ireko” Competitor invented the new “viscous waterbased slurry” from nonexplosive ingredients. Expensive chemical plants not required. Skills sets in operations had changed

Offerings Prices

Market

Competition

Driver of change

Table 5.2  (continued)

Medium

UK

Emulsion 1980s Low

Low

Europe and Mainly UK

Blasting service 1990s High. Payment based on rock weight per blast

Technology was easier for different people to do it and better Solution to technology customer understanding total service- rock in the ground problem “emulsion explosive.” Now, rainwater no longer affects the effectiveness of blasts. “integrated P-S” Terrorism steeling material

High. It took over local UK distribution (Slurry plants arose in all parts of the world)

Europe and Mainly UK

Slurry 1970s Very Low

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HARD

SOFT

Product Leadership

Innovators ICI Explosives 60’s Cartridges

Brand Managers

Operational Excellence

Price Minimisers ICI Explosives 70’s Slurry

Process Simplifiers ICI Explosives 80’s Emulsions

Customer Intimacy

Technological Integrators ICI Explosives 90’s Blast Services

Socialisors -

Fig. 5.5  The ICI Explosives servitization journey mapped in the value matrix

ICI Explosives has moved away from being an innovative product-centric manufacturer “Innovators” to become a total service provider “Technological Integrator.” ICI Explosives has not been alone in adopting a servitized strategy, however it was a pioneer in this type of transformation. Fifty-eight percent of US manufacturers operate a combined service-manufacturing model, and this approach is growing across other Western nations (Neely 2007). This servitization growth is driven by the increasing global competition and commoditisation in product markets (Martinez, Neely, Ren and Smart 2008). Servitization is occurring across many industry sectors and has implications across all organisational functions (Gebauer, Fleisch and Friedli 2005). The value creation analysis of servitized organisation has shifted – from looking at the business from the suppliers’ perspectives to customers’ perspectives (Treacy and Wiersema 1993. This new view is highly focused on the offerings’ utilisation (Gummesson 1995; Silvestro et al. 1992). The analysis of the ICI Explosives’ value propositions shows a servitization journey moving from being “innovators” to “price minimisers,” from “price minimisers” to “process simplifiers” and from “process simplifiers” to “technological integrators.” Figure  5.5 shows the servitization journey mapped into the value matrix. From Innovators to Price Minimisers In the early 1960s, the proposition of value of ICI Explosives, “innovators,” focused on the novelty of the tangible attributes of the product through the exploration of the nitro-glycerine. The entire operations, including manufacturing, logistics and procurement, revolved around the exploitation of this nitro-glycerine.

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In the 1970s, the ICI Explosives’ value proposition moved to “price minimiser,” but this time it focused on the tangible attributes of the product and price reduction. This innovation was externally pushed by the introduction of a new production process based on non-explosive ingredients. This innovation secured the reduction of cost, particularly storage, transport and materials handling and increased the market competition. However this business model was not sustainable in the longer term. From Price Minimisers to Process Simplifiers In the 1980s, ICI Explosives was urged by its extensive competition to offer a new value proposition. Therefore, the new ICI Explosives’ value proposition process simplifiers focused on the delivery of the product “slurry.” The new process implementation eliminated manufacturing, depots and packing. The mining service provided an efficient delivery and performance of the explosives. Customers were focused on planning the quarries rather than focusing on drilling and loading the explosives. This model was not economically sustainable; the key competitive advantages of this model drove revenues down. From Process Simplifiers to Technological Integrators Toward the 1990s, ICI explosives gauged a new window of opportunities to reduce competition and increase partnerships with key customers. Its new propositions focused on the delivery of customised solutions following technological integrator value proposition. This new service approach fundamentally changed the company’s operations, customers’ approach and competencies. Its major investment resided on the development of blasting experts and mobile units to deliver the service. This value proposition positioned again the company in a profitable and unique market niche. Over 40 years, the qualitative analysis of the ICI Explosives’ product-service offerings shows a continuous decrease of tangible products and an increase of services on the value propositions offered to customers. Professor Michael Cusumano, from the Massachusetts Institute of Technology, identified similar patterns in the US information telecommunications’ industry (Cusumano 2004, 2008). The ICI Explosives’ analysis illustrated in Fig. 5.6, confirms the consistent trend toward the servitization of the company. Nowadays, the ICI Explosives “technological integrator” value proposition created in the 1990s is still a very profitable business model. Attempts were made by competitors to replicate it but they found it difficult, particularly in the quarry services. Although, the ICI Group decided to divest from the explosives business because of the Oklahoma bombing experience, this business model and value proposition model was sold to Orica. Currently Orica is in business in a profitable and competitive position.

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Products

Services

Product based nitroglycerine

Customised solutionmobile units

Manufacturing process

Pump emulsion into holes Proximity of depots to customers

Process deliveryexplosives into holes Product embedded in the solution

Almost inexistent services

...

1960

1970

1980

1990

Time

Product Trend Service Trend

Fig. 5.6  ICI Explosives’ products and services transformation over time

5.2.4 Value-in-Use ICI Explosives has been one of the few multinationals that recognised the need to understand “What customers value from the use of the product-service offerings.” It was then when it re-designed a new proposition of value to the customers. The revised foundational premises of service-dominant logic from Vargo (2008) highlight that service is the fundamental basis of exchange. In the exchange, the customer is always a co-creator of value. While value is created in the customer space, organisations cannot deliver value, but only offer “value propositions.” Hence in designing a new value proposition it is an imperative to assess the value-in-use that the customer gets out of the offering’s consumption. The “technological integrator” value proposition of ICI Explosives proved to be the most profitable and difficult model to replicate by its competition. It embraced the tailored service approach to the key customers’ needs. Servitized organisations appear to be divided into two distinct groups: those that thrive under a servitization model with service margins up to eight times those in product sales, and those who are struggling to break even because they are unable to convince customers to pay for their services (Reinartz and Ulaga 2008). 5.2.4.1 Understanding Customer Value-in-Use Value has several meanings in management literature. Frequently, customer value is defined from the supplier’s perspective. For example, the customer value concept defines value as the economic worth to a firm of a customer, while the value-added concept allows sellers to think of bundles of attributes and seller-controlled variables (Woodruff and Flint 2006). Vargo and Lusch (2004) have inspired much recent discussion on this topic, proposing in particular an emphasis on value-in-use, but they neither define this term nor develop an argument as to how it can be created. Building on Vargo and Lusch (2004), Woodruff (1997) and Woodruff and

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Flint (2006), Value-in-use is defined as a customer’s functional outcome, purpose or objective that is directly served through the product/service consumption. Macdonald, Martinez and Wilson (2009) propose that value-in-use may provide a missing link in assessing the customer perception of value in product-service offerings. A value-in-use perspective may be superior to the existing embedded value perspective which is defined as: the presence of product//service attributes, and performances against those attributes, for which the customer is prepared to pay (Vargo and Lusch 2004). Vargo and Lusch (2006) highlight that there is no value until an offering is used. A company has control over the design of attributes of its products or services; however, “value is not created in a factory or in the back office of a service firm” (Gronroos 2006). Value cannot be embedded in goods created by the supplier; instead, goods are distribution mechanisms for value creation (Vargo and Lusch 2006). The customer uses the supplier’s product-services offerings as a means of satisfying their ends. In this process, value emerges as the consumer uses the offering. Indeed the evidence from the operations and marketing literatures show that existing customer insight measures do not accurately predict customer satisfaction or firm performance. They suggest that better understanding of the co-creation of value-in-use that gets closer to the customer, may be appropriate. Research in this gap is currently being carried out by Cranfield University; it aims to shade some light on the understanding of value-in-use, as a media to redesign innovative and successful value propositions to customers. The success of the current ICI Explosives’ value proposition “technological integrator” resides on the analysis and understanding of the value-in-use. This value-in-use analysis came unconsciously when the mining, technical and marketing teams started discussing the real value that the customers appreciate out of their jobs. The teams concluded that customers’ value some aspects of the product service offering such as, the simulation analysis of blasts lay out, the explosion effectiveness and hassle free contracts renewals among others. Table  5.3 shows the value-in-use that customers appreciated from the ICI Explosives’ offerings. Table 5.3  Customer value-in-use and ICI Explosives response Customers value-in-use ICI Explosives full fill the customers’ value with Simulation analysis Simulation of blasts Engineering team of blasts lay out Explosives effectiveness Customised formula Engineering and mining teams Particles size analysis Mining team Hassle free explosive ICI took the ownership of the explosive Marketing team licence product, processes and licences Explosives risk adverse Explosives’ transport and material Engineering and mining handling and storage teams Hassle free contracts: Created partnerships through Marketing team renewals and reviews long term contracts Drill hole process Subcontracted the drilling This was supervised by the mining team

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By identifying the sort of attributes and performance the customers value from the offering, ICI Explosives was able to customise a solution. Then the solution was tested with other customers. In this way, the company managed to create the mobile units complemented with the analysis of the particle size ground, simulation of the blast and quarry analysis. By providing a service, ICI absorbed ownership of the technology, material and skills. This change was partially pushed by the customer’s desire to compete in economies of scales in an Australian site; where the transport of the slurry was highly ineffective to cope with the daily blasting demands.

5.2.5 The Strategic Value Creation Road Map This chapter demonstrates the importance of the definition of the value proposition as a means to establish a sustainable and profitable business model. The strategic value creation road map (Fig. 5.7) highlights the series of analyses that need to be carried out to understand the company’s competitive position and realise offerings that better suit the customer’s value-in-use.

Suppliers Competitors New Entrants Customers

New Business Model

Markets Economy PESTEL Analysis VALUE-IN-USE Assessment

Analysis of External Environment

Analysis of Internal Environment

EMERGENT STRATEGY

Gap Analysis Business Model

Benchmark A.

Re-definition: Value Proposition Redesign to meet future needs

CURRENT STATE OF BUSINESS Mission, vision and ambitions Deliberated/ current strategy

Capabilities

Value drivers Products & services

Technology Processes

Plan Strategy Alignment:

Skills Core competencies

operations, mgmt and customers STRATEGIC THINKING STRATEGIC LEARNING

Fig. 5.7  The strategic value creation road map

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The strategic value creating road map starts with an analysis of the external environment, including a stakeholder analysis and the crucial customers’ “value-inuse” analysis. Once the customer value-in-use and the external environment are understood, the analysis of the internal environment is carried out. This includes the analysis of the current state of the business including the business objectives, ambitions, capabilities, skills, technology (R&D) and competitive processes. The internal and external analyses are compared and contrasted. The resulting analysis points out the gaps on the current business model, and potential new ways to do business. The current business proposition and potential new opportunities to deliver value are mapped in the value matrix. In the value matrix, the transformation from one value proposition to other are mapped and analysed. The result of this analysis will point out a new business model. The operationalisation of the new business model comes to life when the current resources, capabilities and skills are re-aligned with the new value proposition in a form of a new business model.

5.3 Conclusions This chapter discusses how organisations could compete as services through the re-direction of the value propositions. The chapter demonstrates through the illustration of the ICI Explosives case that this could only be achieved by understanding the customers’ value and transformation paths that organisations could take towards a servitized journey. The first part of this chapter the “ICI Explosives” case shows how the company has transformed its value proposition, business model, service delivery, capabilities and operating models from the 1960s to the 1990s. The second part of the chapter provides some model, frameworks and toolkits for the analysis and design of other competitive service models. An innovative and crucial element in this analysis is “the customer value-in-use analysis.” The better understanding companies have on the value that their product/services provide to the customers, the better the operating business model could be. Acknowledgment  The authors would like to acknowledge the support of the EPSRC/IMRC under grants numbers [IMRC 154 and 144], which is supporting the Product Service Systems research.

References Bower M, Garda RA (1985) The role of marketing in management. The McKinsey Quarterly, Autumn 34–46 Cusumano MA (2004) The Business Software. Free Press New York Cusumano MA (2008) The Changing Business of Software: Moving from Products to Services, IEEE Computer, 41:20–27 Gebauer H, Fleisch E, Friedli T (2005) Overcoming the Service Paradox in Manufacturing Companies. European Management Journal. 23(1):14–26

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Gronroos C (2006) Service management and marketing: a customer relationship management approach. 2nd ed., Wiley. Chichester Gummesson E (1995) Relationship marketing: Its role in the service economy, in Glynn, W. J. and Barnes, J. G. (eds.) Understanding services management (244–268), John Wiley & Sons, New York Huff AS, Floyd SW, Sherman HD et  al (2009) Strategic Management: Logic and Action John Wiley Sons, New York Kim CW, Mauborge R (1999) Strategy, Value Innovation, and the Knowledge Economy. Sloan Management Review, Spring 41–54 Macdonald E, Martinez V, Wilson H (2009) Towards the assessment of value-in-use of productservice systems: a review. Performance Measurement Association Conference, Dunedin, New Zealand, University of Otago Martinez V (2003) Understanding Value Creation: The Value Matrix and The Value Cube, Strathclyde University Scotland UK, PhD Thesis Martinez V, Bititci U (2006) Aligning value propositions in supply chains, International Journal of Value Chain Management. 1(1):6–18 Martinez V, Neely A, Ren G et al (2008) High value manufacturing- delivering the promise, AIM report ISBN 978-1-906087-15-9 Neely A (2007) Servitization of Manufacturing: an analysis of global trends. 14th EUROMA Conference, Conference Proceedings Normand R, Ramirez R (1993) From value chain to value constellation: designing interactive strategy. Harvard Business Review, July-August:65–77 Payne A, Holt S (2001) Diagnosing customer value: integrating the value process and relationship marketing. British Journal of Management, 12:159–182 Ramirez R (1999) Value co-production: intellectual origins and implications for practice and research. Strategic Management Journal 20:49–65 Reinartz W, Ulaga W (2008) How to sell services more profitably. Harvard Business Review, 86(5):90–96, 129 Silvestro, Fitzgerald, Johnson et  al (1992) Towards a classification of service processes. International Journal of Service Industry Management 3(2):62–75 Treacy M, Wiersema F (1993) Customer intimacy and other value -Disciplines. Harvard Business Review, January-February 84–93 Treacy M, Wiersema F (1996) The disciplines of the market leaders. Harper Collins, Hammersmith Turner TJ (1998) From a hard place to rock on the ground. Agility and global competition, (4):18–22 Vargo SL, Lusch RF (2004) Evolving to a new dominant logic for marketing. Journal of Marketing, 68:1–17 Vargo SL, Lusch RF (2006) Service-dominant logic: What it is, what it is not, what it might be, in Lusch, R. F. and Vargo, S. L. (eds.) The service-dominant logic of marketing: dialog, debate, and directions. Sharpe, New York Vargo SL (2008) Customer integration and value creation. Journal of Service Research. 11(2):211–215 Woodruff RB (1997) Customer value: the next source for competitive advantage. Journal of Academy of Marketing Science 25:139–153 Woodruff RB, Flint DJ (2006) Marketing’s service-dominant logic and customer value, in Lusch, R. F. and Vargo, S. L. (eds.) The service-dominant logic of marketing: dialog, debate, and directions. Sharpe, New York

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Chapter 6

Shifting from Production to Service to Experience-Based Operations Jannis Angelis and Edson Pinheiro de Lima

6.1 From Production to Service … This chapter covers the shift in focus of value added business operations from ­production to services, and in turn, to experience-based operations where customer involvement itself becomes part of the offering. The shift has significant implications for how businesses are managed. The greater service focus affects the firm’s unique value proposition, which necessitates considerations on strategy, supplier relations, post-sale offerings and so on. Meanwhile, the inclusion of customer ­experiences affect the way operations are designed and employed so that these are structurally systematically captured and capitalised. Services can be defined as activities or performance provided to satisfy customer needs, whereas goods are tangible products or stable intangible assets. The mix may range from pure tangible good, through hybrid goods and services, to pure service. While the typical manufacturing company has a total offering of tangible goods with accompanying services, the trend is toward hybrid offerings. Traditionally manufacturing is defined as the transformation of material into a finished product. However, the boundaries between products and services are increasingly blurred (Heineke and Davis 2007). Many manufacturers offer services in support of their products. Also, the goods/services separation has become somewhat of an artificial distinction as demand for services as an input to the production of goods has grown steadily. For instance, traditional manufacturing firms such as aerospace engine maker Rolls Royce, now derive substantial income from post-sale service and maintenance to the engine users. Similarly, healthcare companies are recognised as service firms while many of the healthcare processes employed rely heavily on manufactured products. Indeed, health care was one of the earliest sector adopters of the principles of scientific management and industrial engineering. Barnes’ motion and time study from 1937 describes ‘operating-room setup showing tables J. Angelis (*) OM Group, Warwick Business School, Coventry, CV4 7AL, UK e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_6, © Springer Science+Business Media, LLC 2011

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for instruments and supplies designed to facilitate the work of the surgeon, his assistants and the nurses’ (1980,p.177). So care needs to be taken when using the traditional industrial classifications for production and service. For instance, McDonald’s main competitive advantage is its knowledge in operating restaurants with high customer turnover. Application of scientific management to its operations was the key factor underlying McDonald’s early success (Chase and Apte 2007). Today, it arguably exhibits process applications to a greater degree than do many manufacturers in its main operating principles, such as standardisation and reduction of product variety, simplification and automation of processes and performance monitoring and control. Technological progress in information and communication technologies have both enabled and hastened the pace of change in the way products and services are made and offered, Apt and Mason (1995). For instance, use of information systems makes business process outsourcing viable to many companies. To this effect several concepts have emerged that encompass the reality of manufacturing and service firms, ranging from product-service systems, servitization and high value manufacturing. There has also been a significant research interest in service operations. Table 6.1 lists the main ideas developed in respective decade. It reveals an

Table 6.1  History of research in service operations (Adapted from Chase and Apte 2007) Time period Key theoretical and practical ideas 1900–1950s Application of scientific management to services Walt Disney: industrialised fantasy Holiday Inns: consistency in multi-site services 1960s

McDonald’s: production-line approach to services Service economy and operations in health care

1970s

Industrialization of services Match supply and demand in services Customer contact model Data envelopment analysis

1980s

Classify services to gain marketing and operational insights Gap model of service quality and SERVQUAL Psychology of queues Yield management

1990s

Service profit chain Using fail-safe methods in service systems Globalisation of information-intensive services Emergence of experience economy

2000s

Behavioural science in service operations Information technology in services and e-services Global business process outsourcing Service design

2010s

Process driven behavioural operations Experience-based operations

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extension of the process-focused shift towards greater customer involvement (Sower et  al. 1997; Roth and Menor 2003; Sprague 2007). Research on service operations has also incorporated behavioural considerations, as discussed by Boudreau et al. (2003); Bendoly and Hur (2007) and Heineke and Davis (2007). The distinction between high- and low-contact customer systems provides a basis for classifying service production systems. Following Chase’s (1978) customer contact model of services, the less direct contact the customer has with the service system, the greater is the potential of the system to operate at peak ­efficiency since the transformation of products is easier to manage when customer interaction is limited. This may result in the practice of decoupling services into front-office and back-office operations, with the former responsible for the high-contact elements of work and the latter taking care of the low-contact elements (Metters et al. 2006). An additional advantage of such decoupling services is that the back-office work can be detached from the physical locations that deal with the customers and moved to less expensive locations, including foreign countries. The services can be categorised into three distinct types: professional services, service shop, and mass services (Schmenner 1986). Professional services, as classified by Silvestro et al. (1992) and further explored by Ng et al. (2007), are organisations with relatively few transactions, highly customised, process oriented, with relatively long contact time. Most value is added in the front office, where considerable judgement is applied in meeting customer needs. Examples include management consulting and corporate banking. Mass services are characterised by a large number of customer transactions that involve limited contact time and little customisation. Offerings are predominantly product-oriented, with most value being added to the back office and little judgement applied by front office staff. The service shop category falls between professional and mass services. Service industries are distinct from manufacturing in the required immediacy of response. After all, as a rule hotel rooms must be available for occupancy when and where travellers want them. This necessitates a managerial emphasis on balancing supply and demand (Chase and Apte 2007). Expanding on this distinction, Haywood-Farmer and Nollet (1991) define service in terms of intangibility, heterogeneity, perishability and customer participation in the production process.

6.2 … to Experiences But as services and products become commoditised, customers derive greater value from experience. And for the product and service providers, offering such experiences enhances their value proposition and hopefully also improves their competitiveness (Fitzsimmons and Fitzsimmons 2005). This means that the customer’s experience becomes an integral part of the offering, and that least part of the production design explicitly aims at the emotional engagement of the customer (Sampson and Froehle 2006; Heineke and Davis 2007; Hartsuiker 2008). It also means that value is determined not only through the products and services themselves, but by

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the value they create (or offer), as perceived by their customers. This requires that managers understand the value proposition of both, and capturing this interactive process is important for successful product definition, development and delivery. Pullman and Gross (2004) emphasise the customer loyalty effect caused by emotional connections made because of the experience. Apple and Nike concept retail stores, or indeed the visit-your-car-being-built schemes many automakers employ are examples of such pursuit. Using the passive/active and absorption/ immersion axis classification of Pine and Gilmore (1999) to differentiate various customer experiences, experience-based operations fit in the immersive and active category. Customers must actively participate in and be an integral part of the offering. Researchers Prahalad and Ramaswamy (2004) call the business offering of such experiences co-creating. The customer engagement enables the product or service they receive. Moreover, according to Hartsuiker (2008), experience-based operations have two distinguishing criteria that separate them from traditional products and services: there is an explicit aim of the production process to emotionally engage customers in a personal and memorable way; and a concurrent customer presence in the production process. But unlike traditional product and service offerings, experience-based operations typically involve several interaction points with customers. This provides many opportunities for value added activities, but also many opportunities for not fulfilling customer expectations. This means that organisations need to, and often do, pay a lot of attention to their front line staff and the services they are providing. This can be experienced just by comparing the service differences when flying first, business or economy class with the same airline. As shown by Martin and Pranter (1989), experiences are also influenced by other customers, who may through crowding, unruly or unanticipated behaviour negatively impact on the perceived service quality. Thus, to be successful, employed process must take into consideration a range of factors that may influence the ­customer experience. For instance, in many services, the customer is present in the delivery process. This means that the perception of quality is influenced by outcome as well as its process.

6.3 Implication for Business Models The shift towards greater service content has resulted in a variety of new business models, such as servitization, product-service systems, experiential services, services sciences and service-dominant logic. This has made business decisions for both manufactures and service providers converge as strategies and operations increasingly face similar demands and solutions. Manufacturers tend to view services as a means to differentiate their manufactured offerings. The services are treated as features of the product. Such strategy of non-technical differentiation may include ­service elements at pre-purchase, at-purchase and after-sales services. Figure  6.1 illustrates these changes in business focus in manufacturing and services.

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Fig. 6.1  Shifts in the supply chain for manufacturers and service providers

The intangibility of service offerings means that they can be purchased separately from other transactions. For instance, a manufacturer can offer a service product that supports the products of competitors on the customer’s site as well as the manufacturer’s own supply. As described by Sawhney et  al. (2004), typically, manufacturers’ service ventures take new positions in the value chain by adding services to the chain (i.e. temporal expansion), controlling activities previously performed by customers (temporal reconfiguration), or introducing related chains (spatial expansion and reconfiguration). The integrated solutions business model means that firms expand their value-adding transformations. However, while manufacturing companies expand their operations downstream and pursue the after-sale market, service companies increase their operations upstream, towards the product manufacture, to ensure greater reliability in the integrated offerings. Facing similar environmental considerations as the manufacturers, service providers must build competitive capabilities such as consistent quality, convenience, accessibility to channels, customization, and low costs and ensure that these contribute to the required offering. The attainment of quality in products and services became a pivotal concern in the 1980s. Quality in services is measured by the SERVQUAL survey developed by Parasuraman et al. (1988) for managing the gap between expected and perceived service delivery. It is extensively used for measuring service quality in both operations and marketing. In addition, in services, yield or revenue management plays an important part. For instance, effective seat inventory control by an airline depends on forecasts of future bookings, the revenue values associated with each fare type, and an ability to make systematic tradeoffs between booking requests so as to maximise total flight revenues. As services and products are becoming commoditised, experience has become important whereby firms add value by providing offerings that create memorable or valued experiences for the customer. Businesses such as Disney theme parks and Starbucks coffee shops have been successful largely because their business models have incorporated the creation and sustain of service experience. In services one can make a distinction between intended and realised service offerings. The intended service is the planned customer offering. Realised service is the service actually perceived or purchased by the customer. In successful services it is important that the linkage between the intended and realised is close. In experience based operations, the two may be identical.

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Customer awareness and understanding that was previously hidden from back-office personnel is now often a requirement. This in turn places pressure on supporting facilities, such as selection and training of the personnel. Also, decisions include customer contact touch points, such as number and types of distribution channels (e.g. traditional stores, Internet). Customer expectations and perceptions need to be understood to better personalise their experiences. For general application, especially in a global context, service firms are finding that what sells in some countries or indeed local regions may have little appeal elsewhere. This affects the degree of standardisation that realistically and successfully can be employed. In turn, on corporate level it has an impact on how centralised the service design should be. One solution is to keep the offering highly standardised, and seek to influence demand through indirect means such as marketing or price. Firms with global products, such as Coca-Cola and Procter &Gamble with its Pringles chips, are examples of such an approach. Another ­solution is for firms to employ mass-customisation, whereby products and services offered appear unique or customised to the customer while the operations and ­trans­­form­a‑­ tions needed to make the offering have been both modularised and standardised.

6.4 Implication for Operations and Management The service profit chain developed by Heskett et al. (1997) links profitability and revenue growth of a service firm with the satisfaction and loyalty of its employees. Hence, a key issue for any service operations is selecting the target market. Companies usually segment potential customers into groups based on common attributes or characteristics, such as age, income and location. However, for ­processes, customers are often divided into operational attributes, such as degree of customer contact, process labour intensity, or degree of customisation. To successfully provide experiences that customers desire, relevant components that impact the experiences must be incorporated deliberately and from the outset (Pine and Gilmore 1999). Hence, in addition to the components required in services provision, such as appropriate physical environment, implemented processes and sufficient staff, managers must also incorporate behavioural components. As argued by Fynes and Lally (2006), these can be clustered into emotions and participation activities. These two components require particular emphasis in the development and implementation of experienced-based operations. Service industries ranging from call centres to the healthcare services are well positioned to apply processes. The main limitation is the variation inherent in human interactions. Such processes include TQM and agile operations. All share many concepts and techniques and can successfully be applied in a service environment despite having originated in manufacturing. For instance, Lean operations and its use of poka-yoke fail-safe methods to prevent human error during work tasks is found in the indented trays for surgical instruments in hospitals which assure that instruments do not go missing.

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Mistakes are often inevitable in any business environment, but in a service context creating dissatisfied customers must be avoided. This is partly done through proper offering, and partly through recovery from service failures. The latter may also turn dissatisfied customers into loyal ones (Hart et  al. 1990). An additional advantage in including the customer in the service provision is that it provides an excellent opportunity for product and process innovation (Voss et  al. 2006; Voss and Zomerdijk 2007). This means that design choices are based on substantial and systematic data collection on both customer preferences and their experience. In this, customer-based operations have the advantage over traditional products and service offerings in that feedback can be captured relatively easily and with less time lag. The increased customer involvement also necessitates the use of foolproof design to ensure that their own actions do not inadvertently affect experiences negatively. If employed correctly, techniques such poka-yoke provide the benefit of reduced customer discretion while simultaneously retaining their feeling of control. The former is necessary to ensure that quality standards and in turn customer expectations, are met. Such expectation management is vital in the design and management of operations in a service context. Human error cannot be managed out of a process, so businesses relying on customer interaction as part of their offering may have to make changes in staff job roles to ensure that quality standards are consistently met. This may require a differentiation of work roles according to task discretion. In their study of process implementation in a service context, Ritchie and Angelis (2008) categorise roles into role-centric job families, identifying skill type based on extent of training and qualification, and varied autonomy levels (see Table 6.2). These skill categories are

Table 6.2  Job families (Ritchie and Angelis 2008) Autonomy Low discretion High discretion Medium or high choice in which skills to Little or no choice employ to fulfil task in the skills employed in Low governance High governance fulfilling the task Medium or high Environment has external influence little or no external on working practices governance applied Skill type High-skilled specialist Nurse Actuary GP Specialist qualification >36 months High-skilled generalist Control Officer Senior Manager Company Director >36 months accredited training Semi-skilled Corgi-Gas Fitter Software Policeman Developer Accredited training Low-skilled Call Centre Agent Porter Financial Product Sales On the job training

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further separated into high-discretion and low-discretion types. Discretion is the freedom or authority to make judgements and to act as one sees fit, understood as the role holder’s ability to make procedural decisions (the independence from others when making those decisions). For instance, nurses are identified as ‘low-discretion’ roles. They are expected to assess the situation and respond with set procedures set by professional bodies without deviation. In contrast, a manager may decide that current processes being run are not efficient and may decide to commission a new process. Those with high-discretion are categorised into either high levels of governance or low levels of governance. Governance refers to the degree of external control that is applied to the role. In a normal product or service context such categorisation of job families is useful because it clarifies where operations can be standardised and where highly skilled staff are needed. However, in an experience-based environment staff of all levels interact with customers. Indeed, it is often the lowest trained (and paid) staff that have the greatest degree of customer involvement. And in this interaction the degree of task discretion may be difficult to fully take out, which may necessitate investments in higher skilled workers or more training. Both are costly and time consuming, especially in a context with many atypical or temporary workers. Of course, automation can be employed to reduce discretion, for instance, through the use of scripted responses to customer requests. But such deskilled tasks do not fully utilise staff, nor does it help in attracting skilled employees. In a manufacturing context, Hootegem et al. (2004) explain how the team work system at Volvo Ghent operates. The system relies on horizontal and vertical assembly line task integration. It combines the benefits of non-discretionary on-line work tasks with off-line improvement projects that require active operator involvement. The former is achieved through various design-for-manufacturing and pokayoke techniques, while the latter employs projects where the participating team members seek to improve the existing processes. Each member rotates from limited discretion on-line tasks to off-line improvement tasks i.e. work packages focused on particular areas (e.g. quality or safety). The system provides the quality benefits of low task control with the social and individual benefits of greater task control and captured worker insights. Operator focus on improving the process rather than the product is beneficial since the latter is better achieved through dedicated product design teams (Angelis and Fernandes 2007). The system at Volvo Ghent provides substantial transfer of tasks and responsibilities from line management and staff departments to the shop-floor. In a service context a similar approach to participation and improvement can be employed, with customers acting as operators. In an experience-based context the operators also play the part of the product. So the system remains valid, with the note that customers generally cannot be relied upon to participate in off-line improvement projects. Hence, their insights and expertise must be captured in a different manner. In a way, this means that the distinction between front- and back-office operators remains, as illustrated in Fig. 6.2. Back-office staff support front-office staff (1) who themselves provide direct customer service (2). Customers act as front-office participants in the operations (3) and associated improvement

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Fig. 6.2  Off- and on-line customer involvement

projects (4). In addition, select customers may be invited to participate in off-line projects, to ensure that their perceptions and views on possible improvement are captured (5). In experience based operations, the closer interaction between customers and staff also means that the link between internal and external service quality is more direct. The two may even be difficult to distinguish, making it unfeasible to have too great a disparity between back- and front office and customer conditions. For instance, staff minimum wages and poor work conditions may affect customer consumption behaviour less when buying a pair of sneakers than when eating in an expensive restaurant. And the more value the customer places on the experience, the less gap customers may accept. For services to generate maximum value, the psychological side must be taken into account (Bendoly et al. 2006). For instance, people tend to value the peak and ending in a sequence of events higher in their recollection of an experience. Unlike the manufacturing of goods, services require processes that motivate the customer to undertake service co-production. Also, unlike most industrial goods, services need to be adjusted to different cultures and support the customers’ business goals and practice. For experience-based operations, the consideration of subjected customers and their perceptions are similarly important, but extending to the operations as a whole rather than merely the downstream operations. Hence, customers naturally play a greater co-producing role in the delivery of experiences than for products or services. In the initial design stages of an experience-based operation, select customer representatives need to be included, to ensure their perceptions are captured and preferences recorded. This is similar to design stages of end-user value focused processes such as lean, where the customer is an integral part of the early design stages to ensure that perceived value is accurately captured in the final product or service. Operations with a greater degree of customer interface also necessitate particular consideration of the physical environment. Bitner (1992) calls such environments

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created by supporting facilities ‘servicescapes’. They are designed to influence customer and employee behaviour and their perceptions. For instance, significant efforts are made in automotive products to give cabin materials a particular feel when touched, and sounds when doors are closed or buttons pressed are also given consideration. Similarly, bright colours in fast food outlets to hasten meals, or calm music in elevators to keep anxiety levels down are designed to improve the customer experience. Once developed and fully functioning, an experience-based operation will require customer involvement as part of the offering itself as well as a means of capturing ideas and suggestions for improving the offering (Voss and Zomerdijk 2007). Such suggestions may be a combination of explicit and implicit techniques. For the former, suggestion boxes and feedback forms may be employed. This also signals that their views matter, which in itself may enhance the customer experience. For the latter, tracking movement or purchases offer data on customer preferences and hence act as a proxy for their experiences. But, as stated earlier, to ensure offerings meet customer expectation, the customer participation must be combined with techniques for task discretion to prevent human error (Conti and Warner 1997). This is even more important in a complex system environment where actions of one operation impacts on other operations.

6.5 Conclusion To conclude, this chapter has discussed the shift from manufacturing to services and the increased operational emphasis on customer experience as part of the business value proposition. This transformation has several implications. For select business models or strategies, this means that significant value-add will continue to be found downstream combined with greater customer interaction being incorporated upstream. For the employment and management of operations needed to realise these offerings, the emphasis on customer experience means that customer empathy and participation activities will require particular consideration. Operations need to be designed with customer perception and experience in mind, with corresponding performance measures and management. The split between front- and back office becomes less distinct, with greater customer involvement throughout the supply chain and stages of product or service life cycles. The experience-based operations do, by default, mean that we all, as customers become part of companies’ value proposition. On the positive side, it does mean that we are increasingly involved in the design of our own experience. This may lead to higher quality experiences, as defined by the eye of the beholder. But whether this also leads to greater control of the experiences as well only time will tell. Try the following exercises, to test and cement your learning.

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Exercise How do experience-based operations impact on positional value along the supply chain, and what are the implications for first and second tier suppliers? How can patients be integrated and involved in a healthcare environment, including primary and acute care? What should such a designed healthcare process consider to ensure maintained service quality?

References Apte U, Mason, R (1995) Global disaggregation of information-intensive services. Management Science, 417:1250–1262 Angelis J, Fernandes B (2007) Lean practices for product and process improvement: involvement and knowledge capture. In Olhager, J. and Persson, F. (eds.) International Federation for Information Processing, 246, Advances in Production Management Systems Springer, Boston Barnes R (1980) Motion and Time Study – design and measurement of work. 7th edition, John Wiley and Sons (first print by Barnes, 1937), New York Bendoly E, Donohue K, Schultz K (2006) Behavior in operations management: assessing recent findings and revisiting old assumptions. Journal of Operations Management, 24:737–752 Bendoly E, Hur D (2007) Bipolarity in reactions to operational ‘constraints’: OM bugs under an OB lens. Journal of Operations Management, 25:1–13 Bitner M (1992) Servicescapes: the impact of physical surroundings on customers and employees. Journal of Marketing, 56(2):57–71 Boudreau J, Hopp W, McClain J, Thomas J (2003) On the interface between operations and human resources management. Manufacturing & Service Operations Management, 5(3):179–202 Chase R (1978) Where does the customer fit in a service operation? Harvard Business Review, 56(6):137–142 Chase R, Apte U (2007) A history of research in service operations: what’s the big idea? Journal of Operations Management, 25(2):375–386 Conti R, Warner M (1997) Technology, culture and craft: job tasks and quality realities. New Technology, Work and Employment, 12(2):123–35 Fitzsimmons J, Fitzsimmons M (2005) Service Management: operations, strategy, and information technology. McGraw-Hill/Irwin, New York Fynes B, Lally A (2006) Innovation in Services: From Service Concept to Service Experience. IBM Services Science, Management & Engineering Conference, Palisades, New York Hart C, Heskett J, Sasser W (1990) The profitable act of service recovery. Harvard Business Review, 68(4):148–156 Hartsuiker D (2008) Towards a “unified experiences theory”. Proceedings of the POMS 19th Annual Conference, La Jolla, CA Haywood-Farmer J, Nollet J (1991). Services Plus: effective service management, Morin, Quebec Heineke J, Davis M (2007) The emergence of service operations management as an academic discipline. Journal of Operations Management, 25:364–374 Heskett J, Sasser W, Schlesinger L (1997) The Service Profit Chain. Free Press, New York Martin C, Pranter C (1989) Compatibility management: customer-to-customer relationships in service environment. Journal of Services Marketing, 3(3):5–15 Metters R, King-Metters K, Pullman M (2006) Successful Service Operations Thompson, Ohio

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Ng S, Russell-Bennett R, Dagger T (2007) A typology of mass services: the role of service delivery and consumption purpose in classifying service experiences. Journal of Services Marketing, 21(7):471–480 Parasuraman A, Zeithaml V, Berry L (1988) SERVQUAL: a multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, 64(1):12–40 Pine J, Gilmore J (1999) The Experience Economy. Harvard Business School, Boston Prahalad C, Ramaswamy V (2004) Co-creation experiences: The next practice in value creation. Journal of Interactive Marketing, 18(3):5–14 Pullman M, Gross M (2004) Ability of experience: design elements to elicit emotions and loyalty behaviours. Decision Sciences, 35(3):551–578 Ritchie R, Angelis J (2008) Implementing Lean in a service environment. Working Paper, WBS, University of Warwick Roth A, Menor L (2003) Insights into service operations management: a research agenda. Productions and Operations Management, 12(2):145–164 Sampson S, Froehle C (2006) Foundations and Implications of a Proposed Unified Services Theory. Production and Operations Management, 15(2):329–343 Sawhney M, Balasubramanian S, Krishnan V (2004) Creating growth with services. Sloan Management Review, Winter:34–43 Schmenner R (1986) How can service businesses survive and prosper. Sloan Management Review, 27(3):21–32 Silvestro R, Johnston R, Fitzgerald L et al (1992) Towards a classification of service processes. International Journal of Service Industry Management, 3(3):62–75 Sower V, Motwani J, Savoie M (1997) Classics in production and operations management. International Journal of Operations & Production Management, 17(1):15–28 Sprague L (2007) Evolution of the field of operations management. Journal of Operations Management, 25:219–238 Van Hootegem G, Rik Huys R, Delarue A (2004) The sustainability of teamwork under changing circumstances. International Journal of Operations & Production Management, 24(8):773–786 Voss C, Roth A, Chase R (2006) Experience, destination services and service strategy. Working Paper. Marshall School of Business, University of Southern California, Los Angeles Voss C, Zomerdijk L (2007) Innovation in experiential services: an empirical view. In DTI (ed). Innovation in Services:97–134 DTI, London

Chapter 7

Complex Deployed Responsive Service Glenn Parry, Marc McLening, Nigel Caldwell, and Rob Thompson

7.1 Introduction A pizza restaurant must provide product, in the form of the food and drink, and service in the way this is delivered to the customer. Providing this has distinct operational challenges, but what if the restaurant also provides a home delivery service? The service becomes deployed as the customer is no-longer co-located with the production area. The business challenge is complicated as service needs to be delivered within a geographic region, to time or the pizza will be cold, and within a cost that is not ­prohibitive. It must also be responsive to short term demand; needing to balance the number of staff it has available to undertake deliveries against a forecast of demand. Pizza is a relatively simple product. How do you manage when you are looking at repair and maintenance of a mechanical product such as an aircraft or even ‘fixing’ a person? A complex product adds to the challenge of meeting this service demand. This chapter will explore the nature of ‘complex deployed responsive service’ (CDRS) – providing examples and exploration of the challenge of taking service out to the customer. We shall explore just three core business challenges; providing geographic coverage, responding to dispersed customer bases and dealing with variability of demand. Three case examples are used to illustrate real examples from the automotive, health and aerospace sectors.

7.1.1 The RAC The Royal Automobile Club (RAC) was selected for study as is has been ranked as the number one roadside assistance service provider within their segment for the years 2006 and 2007 (JD Power 2007). The survey of over 3,000 UK motorists showed that it received the highest ratings for all three factors driving customer G. Parry (*) Bristol Business School, University of the West of England, BS16 1QY e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_7, © Springer Science+Business Media, LLC 2011

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satisfaction: timing (time taken for help to arrive and time taken at the scene), operator/dispatcher (including time taken to answer the phone, friendliness and reassurance) and mechanic/vehicle driver (includes appearance, courtesy and the ability to do what was needed). The study also highlighted that the use of subcontractors by the RAC is one of the lowest in the industry, which was recognised as a key element of satisfaction for the motorist. 7.1.1.1 The Business RAC is part of Aviva, the world’s fifth-largest insurance group (based on gross worldwide premiums for the year ending 31 December 2005) and the biggest in the UK, where it operates under the Norwich Union brand. The RAC brand offers a range of motoring products and services including breakdown cover, windscreen replacement, car insurance, loans, driving schools and vehicle HPI checks. Its primary business is a road-side assistance service that utilises a network of patrol vehicles to attend vehicle breakdowns on the roadside – which will form the focus of this case example. The service offered in its most basic form operates thus; when a customer of the RAC has a problem with their vehicle, such as a breakdown on the road, he or she phones the RAC who sends out a trained technician in a van to assist the individual wherever they are in the UK and get them back on the road again. The RAC customers pay an annual fee that allows them to access an agreed level of service – the more they pay, the greater the range of services on offer. The ­services range from basic roadside assistance to packages that guarantee completion of journey, provide a replacement vehicle or hotel accommodation and offer recovery of the vehicle to a garage for repair etc. 7.1.1.2 Providing Geographic Coverage Of the 2.7 million breakdowns per annum that RAC attended, 91% of these were by RAC directly and 9% were attended by contractors. They have 1,900 of their own patrols, a number of ‘specialist’ patrols, such as the 100 VW specialist assistance, and prestige services for vehicles including Porsche, Lexus, Lamborghini and Bentley. They have 50 dedicated recovery vehicles. Each patrol effectively acts as its own business. They work from home and each has their own fully equipped patrol vehicle, though the larger recovery trucks are not located with individuals. 10–15 patrols are grouped together under a ‘lead’ patrol. The lead is an ‘active’ patrol, but would spend a couple of days per week on management and admini­ strative duties that support their patrols. Service delivery managers have 10–15 lead patrols reporting to them. They operate nationally in the UK and divide the country into geographic areas, the size depending on the number of patrols, which is in turn dependent on population and vehicle traffic density. There are 230 distinct ­operational ‘cell’ areas across the UK. Cell size depends on population and demand, many within London that may be only 2 miles by 2 miles; some may be up to 50  miles, such as one that covers Norfolk.

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7.1.1.3 Responding to Customers A call is received by the RAC and routed to a call centre. The safety of the customer is the sole priority of the service and it responds accordingly. The delivered response to calls is prioritised only on this basis. The RAC operates three call centres, entitled ‘Breakdown Assistance Centres’, which are located in Stretford, Glasgow and Bescot. The three centres provide regional coverage for the whole country. Each builds up specialised knowledge of responding to their geographic area. However, the IT employed allows all three centres to provide national coverage and act as a single centre, able to seamlessly route calls between themselves during busy periods. The three separate centres provide physical resilience to the service at an optimal economic level. For service provision there are three key pieces of information that need to be established. Firstly, is the caller entitled to service? Secondly, what is the vehicle? Thirdly, what is their location? Systematic questions and call centre computer databases are used to establish the answers to these questions. The RAC has access to DVLA data and registration details are used as a key that draws information to populate a customer data screen that helps determine both customer right to service and also vehicle data. The service has developed a bank of contextual questions to facilitate vehicle diagnostics over the phone. This ‘expert system’ of questions may allow them to diagnose the problem. As such, the patrol person arrives at the scene with knowledge of the problem they are facing and how long the job may take. It also means that ‘simple’ problems may be remedied by the customer themselves from the driver’s seat. This provides a dual benefit – RAC does not incur the expense of a patrol attending and the customer is moving again more quickly, as well as the customer having a positive emotional response with the satisfaction of ‘fixing’ their own vehicle. The expert system allows them to ascertain a percentage probability of a patrol being able to fix the problem at the roadside. If a roadside fix is not possible, a secondary tow would be required. It is better for both the utilisation of the patrol fleet and the customer if the correct vehicle is sent out first time – either a patrol for roadside or a recovery vehicle if a tow is required. Location is established using digital maps which have over 14 million local landmarks on them. These are used with customers to establish where they are based on what they see around them. It is possible, with the customer’s permission, to establish a ‘fix’ on their position using their mobile phone. However, within the limits of current technology this is not very accurate, but is used when the customer doesn’t know what region of the country they are in. The command and control centre knows exactly where each patrol vehicle is, as each vehicle has a gps tracking device. Coupled with knowledge of the likely repair required, this allows the centre to estimate job times, travel times, customer locations and can thus give the customer an estimated time of arrival for assistance. If changes occur and the system shows that the service will arrive earlier than predicted, either a phone call or an automated SMS text message will be issued. If the service is lagging, a phone call is made. Bad news is always given over the phone as this personal contact is experienced more positively by the customer.

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7.1.1.4 Customer Demand Customer demand is highly variable and follows cyclical patterns of greater car use, linked to key holiday dates, seasons and the weather. In bad weather, more people use their cars. A cold work and school day Monday in the winter may lead to 10,000 calls being received in a morning. Monday is a key day as a customer’s car may not have moved for a few days and, coupled with cold weather, leads to greater call out numbers – the common fault a flat battery. During a sunny mid-week in the summer only 5,000 calls may be received all day. Weather is a key driver of the business. Weather patterns are very localised, as is response. The service needs to forecast and plan accordingly. To operate effectively the workforce needs to be adaptable to meet the demand patterns. Our business is highly variable in terms of the demand at the roadside. It varies with the time of day, with the day of the week, with the time of the year – and then those volumes are themselves influenced by things like the weather and also by one off events, you know if Manchester United were playing at home, then there’s going to be a lot of people driving along that area, and that will create local peaks in demand.

In March breakdowns peaked at 11,300 in a day, but the lowest was 6,000. Peaks may reach 15,000 and troughs may be at 5,000 leading to a threefold variability. These effects are amplified as demand will also peak at specific times during the day in question, for example, during the rush hour. 7.1.1.5 Meeting Customer Demand Meeting variability is dependent on the area of operation as one additional call out in a highly populated area will not increase the percentage workload, whereas in sparsely populated areas each job has a more significant effect on demand and hence resource required. In Carlyle if you get one additional breakdown you probably increased [demand] by 100% in that hour. In Corey, you get one additional, which probably increased by 7% and that’s just the scale that we have to cope with.

The RAC has a system that forecasts its potential demand on a daily basis. The demand forecast model includes numerous variables such as long term weather forecasting, holidays and major events and over its years of operation, the RAC has developed and fine tuned their advanced rostering system. A great deal of effort has been focussed on developing the power of their models as their ability to predict demand determines the efficiency of their operations. Typically a greater number of patrols are rostered for a Monday and a greater number of patrols are rostered for a winter Monday than in the summer. Most patrols are contracted to complete a basic 40 h week. It is then possible for a patrol to take on additional hours from an hours ‘pool’, up to a maximum of 48  h. This floating availability gives the RAC greater productivity from their patrols, and importantly, increased ability to rapidly meet unexpected peaks in demand

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and hence provide greater customer satisfaction. The patrols also benefit as they are rewarded for the extra work that they perform. In addition, call centre staff are incentivised through pay structures so that they may also be rapidly mobilised to add capacity. A ‘tree structure’ of contact details allows the RAC employees to rapidly contact colleagues and request additional support during spikes in demand. The RAC has found that this system works very well as many of their employees work flexible hours and live close to their call centres. Having discussed RAC, we will now examine the NHS ambulance service. Like the RAC they respond to telephone calls for assistance from customers who are geographically dispersed. However, their requirement to prioritise customers by need and respond quickly is literally a matter of life and death, and the volume of demand placed upon their operations is significantly greater.

7.1.2 NHS: Ambulance Service In 1948 the Government of the United Kingdom set up a National Health Service (NHS) with slight variations across the four components of the UK (England, Scotland, Wales and Northern Ireland). Prior to 1948 healthcare was largely paid for by individuals, the introduction of the NHS created a system of publically funded free healthcare for the first time. The NHS is responsible to the Department of Health and accounts for most of that department’s expenditure of £98.7 billion in 2008–2009. The NHS is divided into Primary and Secondary care providers. Primary care providers are the first point of contact for patients and are responsible for the general health of the population e.g. local doctors, pharmacies, opticians and dentists. Secondary care providers (acute hospitals and ambulance services) deliver elective (planned) or emergency services. Whereas planned health care interventions are delivered within the acute hospitals, emergency interventions usually start at wherever the patient is.

7.1.2.1 The Service Hospitals began operating a dedicated ambulance service to transport sick and injured people in the eighteenth century. Patients were transported to and from hospital by cart and horse-drawn carriage up to about 20 miles. Patients from rural areas were transported by train and collected from the station. The main advantage of motor-powered vehicles, developed in the 1900s, was the ability to transport patients more quickly and over greater distances. Their adoption accelerated throughout World War I as demand for ambulances increased. Motorised ambulance fleets were established in urban areas and distributed around towns and cities. Initially, ambulances were staffed by drivers with limited first aid training. Ambulance services have gradually progressed from simply conveying patients to and from hospitals, to delivering medical capability into the community and treating patients on-scene.

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The ambulance service has traditionally provided emergency care, focusing on transportation of patients to hospitals. With recent changes in the NHS (including the creation of a new role, the Emergency Care Practitioner or ECP) the ambulance service is attempting to move away from emergency care and towards urgent care, by providing treatment and discharging patients in their own homes. Such initiatives bridge the gap between the primary and secondary healthcare sectors. Finally whilst the emergency journey is the headline grabber, the bulk of the work of the ambulance service in terms of journeys is more mundane. Planned/ non-emergency patient journeys – include all other patient journeys by the Trust. These are for any patients not given emergency, urgent or special priority e.g. most journeys for outpatient’s appointments, hospital admissions and discharges of a routine nature, including transport to and from other healthcare facilities. In 2007/8 this figure was 9.51 million journeys. 7.1.2.2 Providing Geographic Coverage In England, NHS Ambulance Trusts are responsible for providing emergency access to NHS healthcare services and in some cases provide transport for patients to get to hospital. There are currently 12 Ambulance Trusts, defined by geographic location, shown in Fig. 7.1. National performance standards are managed by a prioritisation procedure introduced in April 2001. These have nationally set response times which act as key performance indicators for the service. There are three categories for prioritisation of response, defined below: • Category A: presenting conditions, which may be immediately life threatening and should receive an emergency response within 8 min irrespective of location in 75% of cases. Presenting conditions which require an ambulance vehicle capable of transporting the patient to attend the incident must be on the scene within 19 min in 95% of cases. • Category B: presenting conditions, which though serious are not immediately life threatening and must receive a response within 19 min in 95% of cases. • Category C: presenting conditions which are not immediately serious or life threatening. For these calls the response time standards are not set nationally but are locally determined. Response time starts when details of the telephone number of the caller, the exact location of the incident and the nature of the chief complaint have been ascertained. Response time ends when the first emergency response vehicle arrives at the scene of the incident. A response within 8 min means 8 min 0 s or less. Similarly, 19 min means 19 min 0 s or less. This standard is itself being tightened so that the clock will start when the call is connected to the control room. For example East Midlands Ambulance Service attended 79% of life threatening (category A) calls within 8 min and 94% of urgent (category B) calls within 19 min in 2007/08.

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Fig. 7.1  Map of ambulance trusts by geographic region

7.1.2.3 Responding to Customers In 1937, London launched the first dedicated emergency telephone number. Dialling 999 from a telephone triggered a red light and buzzer in the operator exchange. By the 1970s this service was available from every telephone in the UK The European Union (EU) adopted 112 as a common emergency telephone number in 1991. This service works alongside each country’s local emergency number and can be called free of charge from landlines and mobile telephones. Each year there are around 100 million medical emergencies reported in the EU. In the UK the ambulance service receives more than six million emergency telephone calls each year; twice as many as a decade ago. The Advanced Medical Priority Dispatch System (AMPDS) is used to triage 999 calls by the ambulance service call taker. It is made up of a sequence of questions that help to assess how urgent a medical problem is. First of all, the call taker will establish the location of the caller. BT landlines automatically let the call taker know the address of the caller. This information ensures that an ambulance can be dispatched, should it be required. Then a general explanation of the problem is required. This determines an initial level of response that is appropriate and hence medical dispatch requirements.

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The expert system is based on 32 chief complaints – chest pain, breathing difficulty, falls and so on – each of which has a different set of questions. As the call progresses computer software updates the relevant questions and the severity of the call. To ensure that Category A calls are reached within the allotted 8 min, ambulances are dispatched almost immediately and then downgraded if it becomes apparent that the 999 call is less serious than first thought. For example, certain types of call, such as a fainting, may begin as a Category A, because the person is unconscious, but is rapidly downgraded as they regain consciousness. Of the 5.9 million calls received in 2007/8 calls resulting in an emergency response, 31% (1.8 million) were classed as category A – immediately life threatening incidents and 42% (2.5 million) were classed as category B – serious but not immediately lifethreatening incidents (NHS 2008). Information received by the call taker is transferred to a medical dispatcher. The computer system highlights the nearest available vehicles on a control screen, possible as each has GPS tracking, and it is then up to the dispatcher to identify the most appropriate vehicle/s. This might be determined by the type of call, if for example a crew member has paediatric expertise and a child is the patient. The dispatcher logs the times of acceptance by a crew and arrival on scene. It is also up to the dispatcher to manage the availability of the crews and their rest breaks. 999 calls that do not require an ambulance, but have a medical requirement, may be transferred for telephone advice by NHS Direct. This is a 24 h telephone service that provides urgent care services, response to health scares and support for patients with long-term conditions, out of hours support for GPs and dental services, pre and post operative support for patients and remote clinics via telephone. 7.1.2.4 Customer Demand There were 7.2 million emergency and urgent calls in England during 2007/08, 5.9 million of which resulted in an emergency response and 4.26 million required a patient journey. Demand for emergency services show a very stable pattern over time with huge spikes in demand on Friday and particularly Saturday nights with a large number of alcohol related calls. Boxing Day, 26 December, is another peak and generally the emergency service is less used in the early hours of the morning. Weather conditions are less of a factor in driving up demand than outbreaks of serious conditions (e.g. vomiting and diarrhoea). Although it is clearly not possible to predict the exact location of an incident, demand models can indicate areas where incidents are most likely to occur. Historical data is used to prepare rosters and match demand against resources. Additional planning is put in place for large events that may require a higher level of cover and risk assessments are undertaken for each event to determine the potential resources required from the ambulance service. The importance and hence demand for ambulance service is expected to increase in coming years. The case for delivering urgent healthcare in the community, as opposed to hospital settings, has been strengthening. Those aged over 65 are healthier and are living longer, and 75% of NHS users are now aged 65 and over

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(Health Development Agency 2005). By 2031 the number of people over 65 will grow to 15.8 million; a 60% increase (Government Actuary Department 2007). These individuals have a great deal to gain from the community delivery of urgent care via ambulance because they are less mobile and more dependent on community support than their younger counterparts. Furthermore, there is growing concern regarding systemic pressures on the UK health care system. A 2001 report (Department of Health 2001) found that emergency admissions in the UK had risen by 20% in the previous 10 years. This pattern of increasing emergency admission is the result of a complex arrangement of factors; for example, local doctors are no longer required to provide out of hours services. 7.1.2.5 Meeting Customer Demand This section discusses meeting customer demand at two levels of analysis, macro and micro. At the macro level there are social changes and cost pressures which favour treating people in the community instead of at hospitals and at the micro level strategies are employed to provide capacity flexibility. Increasingly the NHS and the Ambulance Trusts in particular are being forced to examine ways of reducing demand at key pressure points in the healthcare system, one of these being Accident and Emergency admissions. Most 999 calls do not lead to hospital admission, and many patients currently conveyed by ambulance are discharged from the emergency department within 4  h of arrival. A substantial proportion of these patients could be successfully treated in the community and closer to home if the correct services and supporting technologies were in place. There were 6.3 million 999 calls made in England during the year 2006/07, an 8% rise on the previous year and almost double the number of calls received 10 years previously. As mentioned above, in 2007/8 this rose again to 7.2 million. This inexorable rise in demand will lead to a corresponding rise in hospital emergency department attendances and emergency hospital admissions unless steps are taken to prevent this. Once admitted as an emergency, patients stay in hospital for an average of 6.8 days at a cost of around £7,000 to the NHS. The emergency ambulance service is therefore undergoing a transformation from an organisation designed to convey patients to hospital, to a professional group that is capable of assessing urgency and delivering the appropriate treatment to the patient providing the right response, first time, in time (Department of Health 2005). At the micro level, all managers at Ambulance Trusts have to maintain their paramedic skills, such that in an extreme incident such as a multiple motorway pile up or major fire etc the entire management team can be called to provide additional capability. To add immediate capacity ambulance trust managers carry ambulance kit in their personal vehicles. In addition the Armed Forces maintain their own emergency healthcare specialists and this is another potential resource. Having discussed two national providers of responsive service, we shall now examine a service that responds to customers call for assistance anywhere in the world, a truly global support service provider Dowty Propellers Field Service Support, part of GE Aviation.

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7.1.3 Dowty Propellers Field Service Support GE is the world’s leading provider of aviation services, providing customers with the experience and resources they require to keep their aircraft flying. Dowty Propellers, part of GE Aviation, is a leading supplier of all-composite propeller systems. Dowty Propellers supplies most of the modern generation turboprop engines. All-composite blade propeller systems feature advanced aerodynamics for optimised take-off, climb and cruise performance and low noise. The modular control system ensures excellent maintainability and low lifecycle cost. The over 19,000 all-composite blades produced to date have accumulated more than 270 million propeller flying hours, with lead propellers achieving in excess of 40,000 h flying time. Designs offer low noise with minimal vibration. The propellers’ modular configuration allows ease of maintenance and coupled with their high reliability, provide users with low through life costs. Service is driven by lean processes ­focusing on value added activities by eliminating waste and an economical and environmentally sound ‘repair first, replace last’ philosophy. Dowty Propellers manufactures the original equipment and completes scheduled repair and overhaul services within their facilities. In addition they also provide a global field repair service which will be the focus of this study (Fig. 7.2). The Field Service Repair (FSR) team’s work is predominantly focussed on supporting six different aircraft types, representing approximately 1,000 aircraft in

Fig. 7.2  C130J Aircraft shown with composite Dowty Propellers

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operation around the world. This includes the global fleet of Bombardier Q400s, a 70-seater regional aircraft used by airlines including Flybe UK, Tyrolean, Japan Air Commuter, Air Philippines, Horizon US, as well as the military Lockheed C130J transport aircraft used by national air forces including the RAF (UK), RDAF (Denmark), RAAF (Australia), USAF (USA), AMI (Italy). 7.1.3.1 The Field Service Repair Business Dowty Propellers (DP) Field Service Repair business is primarily operated from their manufacturing centre in Gloucester, UK. The service operates 24 h a day, 365 days a year and responds to aircraft operators across the world. Two different business models operate to provide field service support. A Dowty Propeller Field Service Representative (FSR) may be permanently placed at the customer’s facility responding to local needs and requirements. The second option is a responsive service whereby the aircraft operator may telephone with a repair request and an FSR representative will travel to a location where the repair will take place. The urgency of a potential repair will depend on a number of factors, including the availability of spare propellers. An aircraft operator is able to remove a damaged propeller and replace it with a functional spare. He can then contact DP and schedule an FSR to come and repair the damaged propeller. An airline operator with five spare propellers and ten aircraft flying would not have the same urgent requirement for a repair as an airline with 60 aircraft flying and only five spare propellers. As an example of cost, should a civil aircraft operated by an airline be unexpectedly grounded due to a lack of available spares, referred to as an AOG (aircraft on ground), the potential economic cost to an airline may run into the tens of thousands of pounds. This includes not just the cost of lost business, but also the potential cost of providing a replacement aircraft or compensation for customers and potential loss of future custom. The decision over which service is most appropriate to the aircraft operator will be made based on fleet size, their capability to perform repairs themselves, their spares availability and likely urgency and cost impacts of potential repair required. The majority of permanent FSRs are assigned to military contracts. 7.1.3.2 Providing Geographic Coverage To meet global demand for responsive service DP locates FSRs in key locations around the world based on the demand in geographic regions. FSRs have been placed in Australia, Canada, Denmark and France with the remaining technicians based in the UK. Despite the need to provide global coverage the number of individuals in the field service repair team is relatively small, numbering in the 10s. This is due to

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factors including operator capability in repairing their own propellers, global competitors and the option, if spares are available, to send the damaged propeller to a repair and overhaul facility; this is equivalent to taking your car to a garage vs. calling out the RAC. The number of global field service technicians is also limited due to the highly skilled nature of the repair work and the requirement for the technician performing the repair to have the necessary qualifications to provide a guarantee that the work performed is of sufficient standard to allow the safe operation of an aircraft. The challenge facing the FSR management team is sending an FSR, the necessary tooling and materials required to complete a repair to a location. This raises a number of challenges: • The individual FSR may require a work visa to enter the country where the aircraft is located to carry out the repair. The nationality of the individual FSR will also have an impact on the ability to gain visas and for them to travel. • The location of the repair has a bearing on whether the FSR will drive or fly. This decision has implications for the transportation of tooling and the materials used for the repair of composite propellers. • The tooling required to carry out propeller repairs can be relatively large, depending on the repair required. To reduce response time some tooling has been strategically located with customers. If it is necessary to fly to the location, the tooling will require air freight to be organised as it cannot be carried on board. • Repair materials may include adhesives and composites that are classed as hazardous. This presents another set of challenges in transporting them across the world. Allowance must be made in predicted response times due to delays caused by import/export regulations and compliance.

7.1.3.3 Responding to Customers Initial contact is made by telephone to the DP Product Support Department. Some customers have highly skilled technicians on site who are able to accurately describe the nature of the repair required. In such cases a repair schedule is rapidly agreed with the operator. Other customers do not have this capability and a dialogue between a DP technician and the customer will begin that may include the emailing of digital images of the damage so that the nature of the repair required may be diagnosed. Based on the customer description of the problem and the photographic image of the repair a judgement will be made on whether to send additional materials to site to mitigate the risk of delays caused by any possible additional work required. The Product Support Department must identify the appropriate individual for a repair dependent on individual FSRs training and capability to carry out the required repair, their availability and the geographic location of the propeller. The Product Support Department then puts travel arrangements in place to transport the FSR to the location required.

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FSRs have their own tool suites for repairs and major tooling, parts and materials required to complete the repair are picked from the Dowty Propeller store by Product Support. These are then given to the Dispatch Department who package and prepare the required paperwork for transportation across the world. As Dowty Propellers is the original equipment manufacturer they usually have immediate access to the materials and tooling required for repairs which gives them a competitive advantage over other companies who have to order materials and tooling from their supply chain.

7.1.3.4 Customer Demand The FSR responsive service currently receives approximately 200 calls per year. Patterns of demand appear stable over a year as the volume of work is linked to the operating hours undertaken by the aircraft. This is dictated by the winter and ­summer operating schedule of the airlines, as more flights are undertaken during the two main holiday seasons. The routes the aircraft fly also influence the service requirement. Aircraft operating in and out of European airports are less likely to require unscheduled maintenance than those landing in airports that do not have smooth runways, are not as well controlled or where the propellers may be subject to airborne abrasion from dust or sand. Due to the low number of responsive calls, statistical analysis is difficult. Spikes in demand occur when any unforeseen technical issues occur with the propeller, due to accidental damage or changes made in the maintenance practice or supplier. 7.1.3.5 Meeting Customer Demand Responsive services are dealt with based on need. Aircraft on Ground (AOG) takes priority over other requests in the airline industry. The global airline community is small, with most operators knowing their equivalents in other airlines personally. There is an understanding between parties that AOGs take priority and there is a great deal of co-operation and some joint contracts between airlines to help each other with spares and support to keep their aircraft flying safely. Typically response times are 5 days from receiving the call to attending site. However, average response times do not make much sense in this context as they can vary from a local repair that may be responded to and the FSR returned to base on the same day, to a time of a week or more, typically caused when hazardous materials are held up by customs. A factor is also the current location of the FSR, in some cases it may be the same day and others longer if they have to make a long haul flight. Politics adds an additional challenge to global service operations. GE Aviation is a US owned company. As such, certain trading restrictions apply to the business so that they are unable to service aircraft that may belong to or operate in countries

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that fall outside permitted US trade agreements. Attention must also be paid to the geo-political stability of any region that a field operative is sent to and travel advice from governments is sought. The business is currently running at full capacity and is seeking to expand and grow through recruitment and training of skilled technicians. As such the FSR’s time is at a premium. If there is any ‘dead time’ then the FSR’s will contribute to analysis of reliability data or may be used to add capacity to OEM production. 7.1.3.6 Service Management The three business models described all provide services that are responsive to customer demand, though each on a different scale. The ambulance service responded to over seven million calls in 2007/8, over twice that of the RAC at 2.7  million and both vastly greater than Dowty Propellers’ 200 service requests. The ambulance service is effectively a monopoly and has to provide total national coverage. In contrast, both the RAC and Dowty Propellers operate in a competitive market and to a certain extent can select the areas in which they chose to offer their service – the limits being customer demand, their capability and ability to access the area, and the financial viability of providing that service. 7.1.3.7 Managing Geographic Coverage The scale of geographic coverage offered by the services is also markedly different. Dowty Propellers offering an almost global service, limited by customer demand, current political tensions and international trading legislation. In contrast both the RAC and ambulance service offer national coverage. However, to provide appropriate management of geographic coverage all of the services described have divided the area they cover into regions. Both the RAC and Dowty have defined their regional boundaries and located their personnel based solely on customer demand within the geographic markets in which they provide service. The Ambulance trusts have followed a similar strategy, though their boundaries are derived from both customer and service provider – in this case the hospital – location. This is because there is a criticality in the service they provide in that they must be able to reach both their patients and hospitals within a given timescale and so their ability to specify coverage boundaries are linked by two separate drivers. All three services locate their individual service repair assets strategically to facilitate rapid response. Dowty place a permanent individual at the location of customers likely to have a large volume of work and then act responsively to the rest of their market. When not on a repair, both the RAC and Ambulance service strategically locate their responsive vehicles on standby in places where they are likely to be required and are also able to quickly respond to and reach a customer e.g. motorway junctions, railway stations (Black and Davies 2005).

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7.1.3.8 Managing Customer Contact All of the case examples use telephones as the primary customer contact. All advertise a single customer phone number and then route calls appropriately. Due to differences in volumes of calls there are differences in how calls are handled. The lowest volume of calls are to Dowty Propellers responsive service where customers are all directed to a single point, the location of the Field Service team in Gloucester, UK. The caller speaks directly to an agent who is able to assess the issue and gather the required data from the caller. It is likely that the caller is an engineer from an airline and so will have specific and detailed knowledge of the repair required. If they are not, experts at Dowty can diagnose the problem through discussion and may also use digital images sent by the customer to ascertain the problem faced. Whilst potentially a time critical service, it is important that time is spent identifying the problem so that the correct materials and tooling are taken to site as sending further materials across the world could add significantly to the time taken to complete a repair. Aircraft served will all be at airfields and so identification of exact customer location is not an issue as with the other cases. However, the nature of the airline customer operation may give rise to other challenges. A request for service may be received from a number of different sources including an airlines head office, its engineering function or from the aircraft itself. Contact may be necessary with all three and each may be located in a different country. This may lead to complications in communication that the service operator has to handle including the nature of the repair required, any contractual obligations between the airline and Dowty, the responsibility to sign off any invoices generated, and differences in time zone and hence availability of required individuals. The larger call volumes handled by the RAC and Ambulance services utilise routing technology to place calls through call centres. Both utilise ‘expert systems’, a structured series of key questions, to allow them to diagnose the nature of the problem and appropriate service response required. This approach alleviates the need for expert knowledge on the part of either the caller or operator. Further technology allows the dispatcher to identify where their assets are and to contact them and direct them to the necessary location. All of the services are time critical and the prioritisation of customers in terms of response is an important factor. None of them operate a queuing system leading to a First In First Out (FIFO) strategy as all have customer safety as a core principle. Both the RAC and Ambulance service prioritise calls based solely upon the safety of their customers. The RAC examines the location and nature of the caller to judge the potential danger the customer may be in – with those on the motorway hard-shoulder and single females or vulnerable individuals prioritised. The Ambulance service uses an expert system of questions to assess caller criticality and dispatches appropriately. Both are able to contact their service operatives in the field and rapidly divert or reassign them should a critical incident arise. Whilst Dowty Propellers service is safety critical in terms of the operation of the aircraft, a grounded plane (AOG) does not necessarily pose a danger to individual clients. Instead, Dowty must prioritise its responsive services based on the financial impact

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that the customer is likely to face. It is able to do this without alienating other customers who may be waiting service repair through the tacit recognition that, should others be in a position of having an AOG, they would be prioritised. This situation is also facilitated by their specific market context, in that this is a small global market and many of the airline operators and engineers know each other personally and cooperatively support each other to keep their planes flying. 7.1.3.9 Managing Variable Demand Whilst the services examined are all responsive to customer contact there is a significant difference in the scale of variability of demand against that which may have been predicted. Despite the very large volume of calls received by the Ambulance Service, the volume of calls they receive follows a very stable pattern allowing them to plan and roster staff as required. Major events are analysed and if required additional resources are built into the roster. For serious incidents or when the country is hit by epidemics additional capacity can be mobilised by drawing upon senior managers or the military services. Despite having a relatively small customer base Dowty does not have flexibility of scale and its service is currently run almost to capacity. It is able to rapidly meet priority demands when airlines experience AOGs due to the context of the market in which it operates and the close relationships described above. However, AOGs are described as ‘rare events’. The majority of the ‘higher priority’ work is in response to airlines recognising they have a low availability of spares and the potential for an AOG should those spares run out. The RAC faces a potential threefold variation in demand in any one day, from 5,000 to 15,000 calls and many potentially being received around the same time in that day. Management of this is made even more difficult as the demand is linked to weather patterns which, whilst predictions improve every year, add a random variable to their demand patterns. To help mitigate for ‘spikes’ in demand, they have developed incentivised systems which allow them to rapidly increase and decrease their available capacity both in their call centres and in the field which, critically, are supported by their staff. When capacity is reached any priority calls will be dealt with first and an agent may be taken off a current job, if it is not deemed critical, if they are required to deal with a customer who may be in danger.

7.2 Theoretical Perspectives 7.2.1 Social and Mechanical Repair There is much written about service culture and behaviours and the contrast with a manufacturing culture (Anderson et al. 1997; Bowen et al. 1989; Bowen and Ford 2002)

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but it is in tangible examples of good service that the essence of a service culture can be discerned. The services presented provide more than mechanical or physical repair as the customer will be calling on the service due to a physical failure and may be in some state of distress which must also be addressed. For example the RAC patrol not only solves the technical problem but also repairs the social damage caused by the failure of the product (Brown and Duguid 1991). They may calm the individual down, providing a sense of relief from their frustration or fear caused by their vehicles failure. Representatives may also build their organisational brand by providing relief to the customer and could even rebuild trust in a third party brand by providing a rapid repair or support to the customer. For the services competing in markets, the financial value of this combination of social, brand and product repair will be reflected in the contract price negotiation.

7.2.2 Implications of Flexible Capacity Ferdows et al. (2004) highlighted the fundamental rule of queuing models, which shows that waiting time increases exponentially when capacity ‘gets tight’. In their work with clothing company Zara, lower capacity utilisation in factories and distribution centres is tolerated to react to peak or unexpected demands more quickly than rivals, conferring competitive advantage. The relational model between capacity utilisation, waiting time and demand variability was described by Ferdows (2004) et al. in the context of clothing manufacturing and retail operations, and is shown in Fig. 7.3. The model shows that, as capacity utilisation increases at lower levels, waiting time increases gradually. As capacity reaches certain limits, waiting times accelerate rapidly. With increased variability this acceleration occurs at lower levels of capacity utilisation. This holds true in the context of the services described. From the literature and figure we can see that as capacity utilisation increases, waiting times increase. To explore this mathematically, we can take a simple case

Fig. 7.3  Capacity utilisation vs. waiting time model (Adapted from Ferdows et al. 2004)

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of a single operator who works at a constant service rate and people arrive randomly (Hendrickson 1998). In our equation w is the average waiting time and l the average arrival rate of customers, and x the service rate (in customers per unit of time). The expected average waiting time for a customer in this situation is given by the equation: w=

l l  2 x 2 1 −   x

We can define the average utilisation rate of the service, u, as a ratio of the average arrival rate and the constant service rate: u=

l x

Then, we can redefine our equation for expected average waiting time in the queue as: w=

u 2 x (1 − u )

If the average arrival rate approaches the service rate the waiting time can become very long. If arrivals equal or exceed the service rate then the queue expands indefinitely. In our case examples we can assume that customer arrivals are at best random, but more likely volumes will be driven by specific events such as weather, rush hour traffic, holiday seasons or attendance at an event. As such people seeking to access the services are likely to arrive more frequently at specific times as opposed to their demand for service being evenly spread over time. This means that service demand is, at certain key moments, likely to exceed service rate and bottlenecks will occur unless extra service capacity is planned and made available to accommodate these spikes in demand. All of the case examples are time critical in their approach to customer service. From the literature we could infer that they should tolerate high levels of low capacity utilisation to cope with the peaks in demand. This would make the service business model very expensive. To maintain a rapid response at reasonable cost, demand prediction analysis and flexibility of staff and staffing hours to meet unexpected demand spikes is required. A services ability to rapidly vary their capacity utilisation coupled with their experience of demand changes allows them to operate their business more cost effectively, and closer to the limit of capacity, before the point that waiting times increase exponentially. Being able to mange resource capacity operation close to the limit when waiting time increases exponentially confers competitive advantage. In the case examples given all resources employed (ambulances/medics, RAC patrols, field service engineers) are costly to maintain and employ. Maximising the

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return on these key assets is therefore a business priority and achieving this involves operating a process near to full capacity whilst ensuring that the customer’s expectations are met. The NHS Ambulance service does this through rostering against fairly stable demand, RAC uses powerful forecasting models and Dowty Propellers operates at capacity, but is able to manage customer expectation as the market accepts priority is given to a customer with an AOG.

7.2.3 Complexity The examples presented represent complex systems in operation. Complex systems stem from the work on non-linear systems in the sciences to understand and describe the function of the living world. A complex system may be described as one made of a large number of interdependent parts which together make up a whole that is interdependent within some larger environment (Anderson 1999). The idea of complex systems is brought into focus by the concept of complex adaptive systems. Four tests for whether a system is complex adaptive are proposed (Pascale 1999). First there must be many agents acting in parallel. Second, there are multiple levels of organisation. Third, the system is subject to the laws of thermodynamics and must be replenished with energy to prevent it slowing down. Finally, pattern recognition is employed by the system to predict the future and learn. Many systems are complex (they meet some of the criteria), but not all are adaptive, meeting all of the criteria. The problem of analysis of a business is different to a natural system as service systems are largely constructed. We move from understanding the system, to understanding the system under control (Taylor and Tofts 2009). In the context of industry production and process it is proposed that complexity may be measured along three dimensions (Daft 1992). The vertical axis shows the number of levels in an organisation, on the horizontal is the number of departments or job titles and on the third axis is the spatial complexity, perhaps of different geographical locations. All three case studies may be described as complex adaptive. For Pascale’s definition we find in all the case examples that there are many agents acting in parallel to provide service. They are supported by a multi-tiered organisation with departments providing scheduling, forecasting, materials and equipment support, telephone call centres etc. They are human systems and so require constant reenergising. They all employ, to a greater or lesser extent, demand forecasting and pattern recognition to facilitate their capacity scheduling or personnel rosters. With regards to Daft’s definition, the organisations are all geographically dispersed in their operations. They are part of larger organisations that have great depth and breadth of departments, but all minimise this for their specific operations to facilitate management. Emergent complexity, illustrated by the combination of simple shapes to form complex fractal patterns, is driven by a few simple objects that combine to generate infinite variety (Pascale 1999). Inherent in this natural phenomenon is the

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finding that it is not possible to see the final outcome at the start as there are infinite possibilities (Kao 1997). When applied to production processes, the challenge for managers is to set the direction for the future and adapt to environmental changes (Santos 1998). When managing complex services like those described in the case examples, macro levels of adaptation are critical to meet the market demand and micro levels to deal with the customer requirement faced by the service provider when they arrive at the customer location. Any rigid, linear process or mechanical system would be unable to meet the variety of different customer requirements that the service provider may face or the variability of demand placed upon the system. The flexible process structures the case study companies utilise allow them to function successfully in their markets. Maintaining quality through management rigour, without losing control of the process is the key challenge. Generative complexity takes place in the boundary between rigidity and randomness – applied to process management, if applied processes are too rigid a company will fail owing to a lack of creativity or flexibility, too random and a company may lose direction or lose control of its function – there are numerous examples of failed companies who could not find a balance (Pascale et al. 2000; Santos 1998). These boundaries are where change in the company processes are managed and these are set out in procedures. Procedures are defined as organisational design statements and capture the methods or process to execute a task (Rogers 1995). These are written by organisations to manage aspects of operations and many procedures in place today are still dominated by hierarchical command-and-control structures from the past (Brodbeck 2002; Mercer 1999; Rogers 1995). Rigid, rule bound structures are incapable of adaptation to meet new situational requirements but provide management with a sense of control (Stacey 2000). As organisations introduce rigid procedural structures they often depersonalise the social elements and practices that had developed (Rogers 1995) and create instead a rule based system that neutralises adaptability and innovation thereby inducing a state of ‘trained incapacity’ in the employees (Stacey 2000). Complexity theory can influence the design and development of procedures which place a greater emphasis on the impact of natural human behaviour – the natural drivers to ‘get the job done’. In this regard, procedures could be developed to promote self organising frameworks utilising natural laws which in turn drive simplicity and generate greater influence without the need for ‘force’ or through detailed bureaucratic dictat (Anderson et al. 1999; Harald et al. 1999; Sherman and Schultz 1998). This approach uses the language of complexity theory and describes how things ‘fit’ into business landscapes of market opportunities and competitive dynamics (Kauffman 1995). Self-organisation is seen as a default natural state, which sets a new aim of aligning the formal organisation so that structures, systems and processes fit the goals, rewards and structure of the informal organisation (Coleman and Henry 1999). Managers often get in the way of activities that self organise and could self correct (Weick 1979). The behaviour of individuals is selforganising when people (or agents using the language of complexity) are empowered and free to network with others and cross organisational boundaries to pursue their goals (Coleman and Henry 1999). Most procedure is routed in a linear cause-andeffect theory, but an approach could be taken that utilises inherent self motivational

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desire. Increased effectiveness can be achieved through identifying formal and informal organisational structures and employing processes that fit within each in terms of goals, rewards and structures (Brodbeck 2002; Drago 1998). Complexity theory identifies the gatekeepers of an organisation as those that stand at its boundaries and translate information between the internal and external world (Lissack 1997). It is the nature of these gate keepers interactions with other business units, suppliers and customers that we wish to standardise without resort to the application of rigid procedures that would destroy the evolutionary nature of the system. Furthermore, competitive advantage may be gained through creating the capability to continuously adapt and co evolve within the environment thereby embedding a system capable of undergoing continuous metamorphosis in order to respond to a dynamic business landscape (Brodbeck 2002; Lewin et  al. 1999). Within the context of developing such a dynamic response it is recognised that time to market is critical, though it is maintained that managing quick-response product development is difficult (Gupta and Wilemon 1990; McDonough III and Barczak 1992; McDonough III and Spital 1984; Thomke and Fujimoto 2000). This ­difficulty demands that gate keepers develop procedures which allow them to quickly integrate, to take action both internally with other business units and externally with different customers and suppliers. This speeds up the creation of an operating system and infrastructure which will facilitate the manufacturing and delivery of the product to its required specification and quality standard. Organisations may increase their effectiveness if they are able to achieve good ‘fit’ between their structures and organising mechanisms and the context in which they operate, including such factors as environmental volatility, company size and age (Drago 1998). Fitness for purpose is therefore closely related to the flexibility of procedures or a procedures capability to encourage employees to self-organise as change occurs. Such procedures, modelled on complexity theory, would suggest an improved capability to adapt and also to provide continuous fit between structure and context (Brodbeck 2002). Two aspects of procedural design have been identified within the literature and can be divided into procedural requirements (form of conduct) and process requirements (method of doing) (Anderson 1999). Three main requirements are proposed for procedure: the presence of a reward and penalty mechanism; consistency within the business setting (standards); fairness in application (transparency). With regard to process requirements the following conditions are pre requisite: relevant and timely performance measurement; strong communication and staff involvement; authority to act. Clearly these are requirements for success in the responsive service case examples provided. The staff of each business must provide a coherent consistent service offering whilst being empowered to act appropriately to meet the customer requirement they are faced with at their location. If they became restrained by rigid process their ability to respond to unforeseen customer requirements would be diminished and hence their service offering. The authors are of the view that these requirements, which include authority, communication, and transparency have resonance with the upper hierarchy needs in the motivational literature (Alderfer 1969; Kanfer 1998; Maslow 1954) and that benchmarking against

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industry standards is portrayed as a natural desire for self appraisal that both encourages greater competition and fulfils esteem and self-actualisation needs (Anderson 1999). Steve Miller, a Managing Director for the Royal Dutch Shell Company remarked ‘The leaders provide the vision and are the context setters. But the actual solutions about how best to meet the challenges of the moment have to be made by the people closest to the action’ (Pascale 1999). The authors hope that the case studies presented illustrate these theoretical concepts and provide diverse leading examples of the management of complex deployed services.

Exercises Having read through this chapter, try the following exercises to cement your understanding. Identify another service that faces a similar set of challenges? What other elements than those highlighted here may be a challenge to the provision and management of such a service? What solutions could be provided to meet those challenges? Is it appropriate to divide the service area covered into regions and if so, what are the drivers for regional boundary positioning?

References Alderfer CP (1969) An Empirical Test of a New Theory of Human Needs. Organizational Behaviour and Human Performance 4:142–75 Anderson P (1999) Applications of complexity theory to organizational science. Organization Science 10:216–32 Anderson EW, Fornell C, Rust RT (1997) Customer Satisfaction, Productivity, and Profitability: Differences between Goods and Services. Marketing Science 16(2):129–145 Anderson P, Meyer A, Eisenhardt K, et al (1999) Applications of complexity theory to organizational science. Organization Science 10:216–376 Black JJM, Davies GD (2005) International EMS Systems: United Kingdom, Resuscitation 64:21–29 Bowen D, Siehl C, Schneider B (1989) A Framework for Analyzing Customer Service Orientations in Manufacturing. Academy of Management Review 14(1):75–95 Bowen J, Ford RC (2002) Managing Service Organizations: Does having a “Thing” make a difference? Journal of Management 28(3):447–469 Brodbeck PW (2002) Complexity theory and organisation procedure design. Business Process Management Journal 8:377–402 Brown J, Duguid P (1991) Organizational Learning and Communities of Practice: Toward a unified view of working, learning, and innovation. Organizational Science 2(1):40–57 Coleman J, Henry J (1999) What enables self organising behaviour in business. Emergence 1:33–49 Daft RL (1992) Organisation Theory and Design, West Publishing, St. Paul, MN Department of Health (2001) Reforming Emergency Care: Practical Steps. Department of Health, London

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Department of Health (2005) Taking Healthcare to the Patient. Transforming NHS Ambulance Services. http://www.dh.gov.uk/assetRoot/04/11/42/70/04114270.pdf (Accessed April 2009) Drago WA (1998) Mintzberg’s ‘Pentagon’ and Organisation Positioning. Management Research News 21:30–40 Ferdows K, Lewis MA, Machuca JAD (2004) Rapid-Fire Fulfilment. Harvard Business Review November:104–110 Government Actuary’s Department (2007) The Government’s Expenditure Plans 2007-08. Departmental Report, Spring. Government Actuary’s Department, London Gupta AK, Wilemon, DL (1990) Accelerating the Development of Technology-Based New Products. California Management Review 32 Harald SH, Heaton DP, Alexander CN (1999) Evolution of organisations in the new millennium. Leadership and Organisational Development Journal 20:198–207 Health Development Agency (2005) Annual Report. Health Development Agency, London Hendrickson C (1998) Project Management for Construction, Prentice Hall. Available free online: http://pmbook.ce.cmu.edu/ J.D. Power and Associates (2007) UK Roadside Assistance Study, JD Power, Guildford Kanfer R (1998) Motivation. In: Nicholson N (editor), Encyclopaedic Dictionary of Organisational Psychology, Consulting Psychologists, Palo Alto, CA Kao J (1997) Jamming: The art and discipline of business creativity, Harper Collins, New York Kauffman S (1995) At Home in the Universe: the Search for the Laws of Self Organization and Complexity, Oxford University Press, New York Lewin AY, Long CP, Carroll TN (1999) The co-evolution of new organisational forms. Organization Science 10:535–50 Lissack MR (1997) Of chaos and complexity: Managerial insights from a new science. Management Decision 35:205–19 Maslow AH (1954) Motivation and Personality, Harper and Row, New York NHS Information Centre (2008) Ambulance Services, England 2007-08, Government Statistical Service, ISBN: 978-1-84636-214-9 McDonough III EF, Barczak G, (1992) The Effects of Cognitive Problem-Solving Orientation and Technological Familiarity on Faster New Product Development Journal of Product Innovation Management 9:44–52 McDonough III EF, Spital FC (1984) Quick-response new product development. Harvard Business Review 62:52–53 Mercer D (1999) Organisational futures: unprepared for the surprises to come. Management Decision 37:411–16 Pascale RT (1999) Surfing the edge of chaos. Sloan Management Review 40:83–94 Pascale RT, Millemann M, Gioja, L (2000) Surfing the edge of chaos : the laws of nature and the new laws of business, Crown Business, New York Rogers EM (1995) Diffusion of Innovations (4th edn), The Free Press, New York Santos M (1998) Simple, Yet Complex. CIO Enterprise Magazine Sherman H, Schultz R (1998). Open Boundaries, Perseus Books, Cambridge MA Stacey RD (2000) Strategic Management and Organisational Dynamics (3rd edn), Englewood Cliffs, Prentice Hall, New Jersey Taylor R, Tofts C (2009) Managing Complex Service Systems, Springer: New York Thomke S, Fujimoto T (2000) The effect of “front-loading” problem-solving on product development performance. Journal of Product Innovation Management 17:128–42 Weick KE (1979) The Social Psychology of Organizing, Wesley, Reading, MA

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Chapter 8

A Multi-organisational Approach to Service Delivery Valerie Purchase, John Mills, and Glenn Parry

8.1 Introduction Who is involved in delivering a service? There has been growing recognition in a wide variety of contexts that service is increasingly being delivered by multi-rather than single-organisational entities. Such recognition is evident not only in our experience but in a number of areas of literature including strategy development, core competence analysis, operations and supply chain management, and is reflected in and further facilitated by ICT developments. Customers have always been involved in some degree in the process of value delivery and such involvement is increasing to include complex co-creation of value. Such interactions are challenging when they involve individual customers, however, this becomes ever more challenging when the ‘customer’ is another organisation or when there are multiple ‘customers’. Within this chapter we will consider some of the key drivers for a multiorganisational approach to service delivery; examine the ways in which the parties involved in service co-creation have expanded to include multiple service providers and customers; and finally, identify some of the challenges created by a multiorganisational approach to service delivery.

8.2 Key Drivers for Multi-organisational Service Enterprises Why are organisations adopting a multi-organisational approach to delivering value? In this section we will examine some of the key drivers for the adoption of a multi-organisational approach to service delivery. Several inter-related factors will be considered including: the trend for organisations to narrow the scope of their activities and outsource all non-core activities; the growing requirement of customers

V. Purchase (*) School of Communication, University of Ulster, Jordanstown Campus, Northern Ireland e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_8, © Springer Science+Business Media, LLC 2011

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to have holistic solutions; and the need to work collectively with others in the value chain to both reduce costs and improve performance. Key drivers for the development of multi-organisational service enterprises include the following trends: The increasing trend towards a focus on core competence and outsourcing noncore competence – Individual organisations are increasingly adopting a strategy of identifying and focusing on their core competence. This leads to a narrowing of capability and increased specialisation. A core competence perspective states that companies should differentiate between their competencies as ‘core’, those that are essential to compete in the market and the firm is extremely good at, and ‘non-core’ those that are not essential to compete in the market (Lonsdale and Cox 2000). Basically, organisations are focusing on and investing in what they do best. The objective of this approach is that firms should strengthen and leverage their core competencies (Ellram and Billington 2001) and outsource non-core competencies. This is particularly the case when ‘the total costs of owning [them] are demonstrably higher than sourcing externally, and the associated risks of market failure or market power are not excessive’ (Lonsdale and Cox 2000). Only those competencies that are non-core should be performed externally by a third party company. This trend is now well established in many sectors where prime contractors are increasingly relying on ‘full service’ suppliers for whole subsystems (Gadde and Jellbo 2002, p. 43), as well as being in charge of managing and designing their own supply chain (Doran 2003). The need for holistic customer solutions which cannot be delivered by individual companies – While individual organisations have been that narrowing of their ­strategic focus onto certain technologies, services or processes, customers are ­moving in the opposite direction, increasingly seeking total solutions and services. For example, in the Opel Automotive Plant in Ruesselsheim, Germany, a separate company, MAN Ferrostaal, has a sequencing and logistics centre. This service organises many of the vehicle components into the correct sequence for production and delivers them to the production line side. Their order sequencing and line delivery operation is completely integrated within the Opel production facility, with Opel arranging delivery of parts and components to them and then accepting the sequenced products from them on the line. To meet this customer need, organisations increasingly seek to offer total, systemic product or service solutions. However, since the trend has been to outsource non-core activities, fewer organisations are able to provide a one-stop solution utilising their own resources alone. This problem has driven organisations in all sectors toward greater collaboration. The strategy deployed is to offer the customer a complete solution and to achieve this integration of each of the elements via close collaboration with a network of specialist external providers (Moller and Halinen 1999). The proposition that it is collaborations of companies that now compete rather than single companies, is well supported in the literature (Akkermans et al. 1999; Lawrence 1999; McAfee et al. 2002). Need for collaborative cost reduction and performance improvement – a further key driver for multi-organisational collaboration is the need to reduce overall

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service costs. Globalisation and customer demands for better products and services at lower costs has led companies to seek ways to reduce the overall cost of delivering customer value. While individual company costs might be reduced by a single company approach, the systemic impact of such cost reductions may be detrimental to the whole service. Therefore a multi-organisational service enterprise perspective is needed to achieve significant cost reduction. Inter-organisational cost management techniques, including the use of target costing, may deliver significant benefits if they are adopted in an integrated manner (Slagmulder 2002). In the same vein, performance improvement in the overall service to customers is similarly only possible from a service enterprise perspective, in order to avoid ‘islands of excellence’ in an otherwise dissatisfactory service.

8.2.1 Multi-organisational Solutions for Service Delivery Individual organisations can be difficult to delineate and define. ‘Organizations are social entities that are goal-directed, are designed as deliberately structured and coordinated activity systems’ (Daft 1992). Such organisations may have multiple divisions and locations and yet still be seen as single organisations providing a product or service. Within this section, we will examine the organisational solutions developed to deliver service, which can be delivered by ‘multi-organisational entities’ which may be functionally, or geographically and legally distinct. Such multiorganisational enterprises are, nevertheless, also goal directed and designed as deliberately structured and coordinated, activity systems to deliver customer value. As you will see, however, there are many challenges in managing such systems. Starting from the simplest standpoint, service delivery involves at least two ­parties – the service provider and the customer. Considering only two parties enables organisations to design their service offerings and processes within a basic dyadic framework (Fig. 8.1). Customers will clearly undertake some of the process element in service delivery including establishing their need for a service and their willingness to accept and pay for the value delivered. For example, a patient walks into the health centre to have a routine asthma review with a nurse. In this example, it would seem clear that a single provider

Fig.  8.1  Service delivery by a single provider organisation showing the limits of the service enterprise

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organisation has delivered a service through their employee. On the provider side, even within this simple framework, it is often the case that a variety of distinct organisational sub-units coordinate their various functional activities with varying degrees of success to deliver service. However, service delivery is often and increasingly more complex than this dyadic framework suggests. Even in this seemingly simple example of service delivery, there may be a more complex organisational solution for delivering basic healthcare. The receptionist who made the appointment may be employed by the local health centre; the nurse may be supplied by a separate agency or specialist asthma unit within the nearby hospital; the premises where the service was located may belong to the local community centre. In such cases several organisations have come together to provide a much needed accessible service. In the following sections, we will examine how service enterprises have expanded to include, firstly, more involvement from other service providers and secondly, greater involvement of customers in co-creating value.

8.3 Moving Beyond Single ‘Service Provider’ Boundaries As highlighted earlier, organisations increasingly need to look beyond their own boundaries for the capabilities necessary to deliver customer value in terms of both delivering services and products. Evidence of this trend towards multi-­organisational collaboration is found in a number of areas of the literature, and has led to a ­prolifera-­ tion of multi-organisational concepts. A number of brief case study illustrations will be presented including examples from both within and across the private and public sectors. At a strategic level companies have been encouraged to consider how they might work with others to deliver customer value. In an important early paper, Normann and Ramirez (1993) suggested that in today’s volatile competitive environment, strategy is no longer a matter of individual companies positioning a fixed set of activities along a value chain, and argued instead for value constellations where the task for firms is the reconfiguration of roles and relationships among a constellation of actors to deliver value. They move our thinking away from a focus on individual organisations by beginning with the simple observation that any product or service is really the result of a complicated set of activities: myriad economic transactions and institutional arrangements among suppliers and customers, employees and managers, teams of technical and organizational specialists. In fact, what we usually think of as products or services are really frozen activities, concrete manifestations of the relationships among actors in a value-­ creating system. (Normann and Ramirez 1993, p. 68)

In taking this perspective, organisations are then free to consider what activities companies were able to provide to deliver products or services and where they can link with others to provide other elements of value. A number of other writers similarly took this stance and suggested that companies identify capabilities and

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compete together to deliver customer value. The concept of ‘value nets’ (Parolini 1999; Bovet and Martha 2000) similarly emphasises the notion of systems of activities performed by a set of different economic players involved in delivering a total customer solution. For example, a food court in a shopping mall has a number of competing suppliers operating food outlets. The outlets must provide complementary offerings to support the service variety demanded by the mall owner to attract the maximum number of customers to their mall. They will co-operate in sharing a space where their customers consume their food, and provide a shared third party cleaning and clearing service to minimise their individual costs and keep the eating environment pleasant. Whilst they compete, they also work together to provide customer value. To create an effective multi-organisational value net, Parolini strongly emphasises the primacy of designing to meet customer needs, rather than starting with existing company functions and competence as the starting point for strategic analysis and the involvement of the customer in the value chain. In the value net approach to strategic analysis the elementary units are activities which it is argued ‘allows us to begin by identifying the activities leading to the creation of customer value and describing their characteristics, before moving on to explore how these activities are divided among the various economic players involved in carrying them out’. A further group of writers, based at the Sydney Graduate School of Management in Australia, have also advocated adopting a multi-organisational approach to ­delivering value, describing the organisations as being part of a ‘value chain’ which delivers products and services to customers. In similar ways to earlier writers, this group advocate that companies should examine what they do best from both a strategic and operational perspective, and look for ways in which all parties could benefit from collaborating to deliver value (Walters and Lancaster 2000; Walters 2004; Rainbird 2004). Rainbird (2004) further recommends that companies need to ‘understand the industry value chain context that it operates in and should seek to maximise it’s place in the industry value chain by positioning itself in that chain based on its resources and capabilities’. Thus, managing your position in multi-organisational service enterprises becomes an important task for companies. The relationships between partners in a multi-organisational collaboration can vary in formality and status. Partners may operate together through a traditional supplier customer relationship where a focal company contracts to deliver services and simply contracts with the suppliers to deliver certain elements of the product/ service (Fig. 8.2). On the other hand relationships between partners can be much closer than those developed between contractor and supplier. Often referred to as Strategic Partnering, this relationship can involve an up-front agreement between parties who see economic advantage and risk-sharing benefits in working together (Veludo et al. 2006). These relationships can be highly formal. Both parties have ownership or some proprietary claim on the product or service, though this may not necessarily be 50/50 (Cox et al. 2001).

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Fig. 8.2  Moving beyond single entity to multi-organisational delivery of service by extending the part played by a number of provider organisations in delivering a total service solution

In the context of this book on service design and delivery, the multi-organisational entity will be called a ‘multi-organisational service enterprise’ and this will comprise all the key parties in delivering service including the key supplier and their constituent organisational units, and core elements of the supply chain. Supply chain companies are being encouraged to more closely align their strategies and operations to support the delivery of customer value. This process of closer integration has been evolutionary beginning with an operational focus. Initial supply chain integration efforts have focused on ­achieving high levels of transparency and visibility of inventory and information throughout the supply chain, and utilizing technology that enables the trading partners to “see” the relevant operational transactions of their other supply chain members. Companies such as Dell and Hewlett Packard have demonstrated the effectiveness of such practices in generating leaner inventories, lower working capital, higher profits and productivity, and better customer service. (Spekman et al. 2002, p. 414)

However, the concept of extended enterprises has moved beyond sharing operational information. Different tiers of the supply chain are integrated through common objectives in order to facilitate both improved operational and strategic performance; knowledge sharing is emphasised to allow customers and suppliers to adapt readily to changing needs and circumstances (Coughlin et al. 2003). There are many challenges to achieving such co-orientation in the supply chain, as outlined in a later section of this chapter. Nevertheless, despite the implementation challenges, the rewards for companies who can build this collaborative enterprise culture seem to be considerable. As a study by Spekman et  al. (2002) highlighted, companies who value a culture of collaboration and learning across the supply chain, tend to be more responsive, adaptive and flexible; report lower inventory levels, greater customer account penetration, improved cycle time and faster new product development. Hence service provider organisations would seem to

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Fig.  8.3  Moving beyond strategic partnerships by providers, to a ‘service ethos’ in the supply chain

need their suppliers to move away from simply seeing themselves as supplying products, towards viewing their role as providing a ‘service’ of which the product may be part of that service. In this way the whole supply chain can better support the delivery of value to the customer (Fig. 8.3).

8.4 Beyond Provider Organisations to Greater ‘Customer Involvement’ in Service Delivery In the healthcare case described previously, we examined how a number of strategic partners delivered service to customers as a ‘multi-organisational service enterprise’. Such enterprises can be made up of a variety of provider organisations and also have the customer play a significant role in value co-creation. The developing prominence of the customer’s involvement in co-creating value has been highlighted by many writers within academic literature. As previous chapters have highlighted services generally involve at least some proportion of customer involvement. This involvement may be minimal, such as when you purchase your coffee, select your drink and add your own milk, sugar etc. or more extensive as the next case study will illustrate. This section will examine how customers have become increasing involved in the service delivery process. Normann and Ramirez (1993) used the example of IKEA to illustrate their discussions on how companies were operating as part of larger systems or ‘constellations’ for creating value. They described how customers were becoming a

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fundamental part of ‘value co-creation’. IKEA challenged our understanding of the role of customer in a number of ways, including their role in delivering their own value – literally. IKEA offers customers an opportunity to be involved in getting well-designed products at substantially lower prices. Within their business model, the customer helps to reduce costs by agreeing to undertake certain activities which would have traditionally been undertaken by the manufacturers and retailers including selection from the warehouse, delivery and assembly. IKEA wants its customers to understand that their role is not to consume value but to create it. IKEA offers families more than co-produced furniture, it offers co-produced improvements in family living – everything from interior design to safety information and equipment, insurance, and shopping as a form of entertainment. To call these services amenities is to underestimate their central significance to IKEA’s strategic intent: to understand how customers can create their own value and to create a business system that allows them to do it better (Normann and Ramirez 1993, p. 67)

Certainly in our everyday experience, we can see examples of situations where as customers, we are undertaking some of the service roles once provided by the service provider companies. In the past, when you wanted to go on holiday, a travel agent provided a full service of organising holiday packages, booking service and providing tickets and travel schedules. Many holiday makers now book their own flights, arrange hotels and transport using a single or multiple IT platforms. The service providers provide the infrastructure which enables the customer to take part in the ‘co-creation of value’ (see Fig. 8.4). This shift in view, where customers are part of the value creating enterprise has been highlighted by many writers. Vargo and Lusch (2004, 2008) described

Fig. 8.4  Moving beyond single entity to multi-organisational delivery of service by extending the part played by customers in value co-creation

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the shift as one where moving from a traditional goods centred or ‘productdominant logic’ to an emerging ‘service dominant logic’. In the former way of thinking, the customer was seen as the passive recipient of goods, whereas recent thinking has recognised that the customer is co-producer or co-creator of value. Prahalad and Ramaswamy (2000, 2003) argued that companies should encourage the customer to be proactively involved in co-creation of value. They describe customers as being ‘co-opted’ into the design and delivery of services. Indeed, they suggest that the co-creation of value has shifted our ways of thinking about products and services and the boundaries between provider and customer. Boundaries for multi-organisational service enterprises are set to get more complex! (Prahalad and Ramaswamy 2003, 2004; Prahalad and Krishnan 2008) highlighted that providing an active role for customers in the co-creation of value went beyond simply allowing customer access to a technology base or input in new product or service development. They argued that the ‘centre of gravity’ needed to shift from the provider to the customer’s experience and the consumer community as a source of innovation. They illustrated this shift through the example of a business selling pacemakers. Rather than simply selling the pacemakers, this business could focus on the patient’s experience. The value of the pacemaker to the patient could be significantly enhanced if it could be remotely monitored and if the patient and doctor could be simultaneously alerted to any deviations from the norms jointly established for that patient. Further, if the patient is travelling and he experiences any abnormality, his doctor could suggest a nearby hospital to go to. His doctor could establish a conference with the doctors in the remote hospital to develop a treatment modality. All these additional steps would be very welcome to cardiac patients (Prahalad 2004, p. 171)

However, as Prahalad points out, this would require all parties to be connected over a network, the entire experience would require multiple organisations and individuals, and experience would be influenced by the quality of all the interactions in both provider and consumer communities. The increasing involvement of consumer and broader external communities in product and service development and delivery is evident through the concept of ‘open innovation’. Within this model of innovation businesses are open to both the outward and inward flow of entrepreneurial ideas and technologies from both customer communities and other institutions and sectors (Chesbrough 2006). In the world of networked video gaming, increasingly it is the customer community who create the worlds the characters explore and link together to form teams. The service providers give the customers the tools for them to build their worlds or additional gaming levels, and the IT platforms for communication, but the forums and groups that link the communities together are frequently created by the user communities, co-creating value (Fig. 8.5). The challenges involved in achieving value delivery in such complex and ever expanding service enterprises are explored in the next section.

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Fig. 8.5  Moving beyond customer to consumer communities in service delivery

8.5 Case Study: A Complex Multi-organisational Service Enterprise in Action In the case study which follows, the co-creation of value is ably demonstrated as public and private sector partner organisations work together to deliver value in terms of support services for the Tornado aircraft fleet to ensure availability for the Royal Air Force. The case study demonstrates how multiple organisations and sub-organisations are required to work together in various complex patterns to deliver value.

ATTAC: Supporting Tornado Availability The UK Ministry of Defence is increasingly opening the support of military systems to private companies, and working in partnership with multiple organisations to deliver support. One example is ATTAC (Availability Transformation: Tornado Aircraft Contracts), a 10-year, whole-aircraft availability contract where BAE Systems take prime responsibility to provide Tornado aircraft with depth support and upgrades, incentivized to achieve defined levels of available aircraft, spares and technical support at a target cost. The support contract is delivered through a complex ‘multi-organisational service enterprise’ comprising a variety of on-base organisations at RAF Marham, supported by off base organisations acting in partnership (Mills et al. 2009). The drivers for the adoption of this partnered approach was the need (continued)

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(continued) for reductions in cost of providing this service and the belief that the service could be more effective through closer working between public and private sector partners. In this case study, a simplified version of the service is described and the main organisations, their role in service delivery and their interdependence are illustrated. From the time an aircraft is recalled for servicing, to the time it becomes available again for further duties, a wide variety of organisations and sub-organisations have collaborated in providing this ‘availability service’. BAE Systems are the prime service provider and perform many key roles either directly or through managing RAF personnel to deliver their services. Managed by BAE Systems, a ‘Fleet management’ organisation provides the planning activities that translate the RAF Squadron requirements for Tornado’s into the schedule of aircraft through the maintenance hangers. BAE Systems then manage the hanger activity, staffed by both BAE Systems and the customer RAF Air Command personnel, where the operational services are delivered. Engineering support is managed by BAE Systems based at both RAF Marham and their other sites. This activity resolves technical queries and safety issues and is similarly staffed by RAF and industry personnel. The Defence Equipment & Support managed Tornado IPT (Integrated Project Team) contains solely RAF staff covering administration, engineering, logistics, and commercial support of ATTAC on behalf of the Ministry of Defence. This organisation is responsible for airworthiness and procurement and monitoring of contract performance. Following maintenance, the aircraft may need to be repainted. A third party company provides a painting service, one of the later inline processes in the delivery of maintained aircraft and therefore a significant dependency. None of the support services would be possible without the a variety of suborganisations within RAF Air Command who both provide and are responsible for the hangars themselves, and their electrical / hydraulic power and ­information technology infrastructure. A number of the supply chain organisations are also a critical part of this multi-organisational service enterprise. Spare components and systems are provided by both the prime and sub-tier supply organisations which may deliver to the prime, to the customer or directly to the RAF squadron for aircraft on duty. Finally, a further organisation, the Defence Storage and Distribution Agency, is the sole provider of transport and off base storage of Tornado parts. Clearly the ATTAC services are co-created by a complex and inter-dependent multi-organisational service enterprise, which must align and coordinate activities to support delivery of the service for the RAF. Managing such complex interactions is a significant achievement needing to overcome a range of challenges highlighted in the next section.

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8.6 What Are the Challenges in a Multi-organisational Approach to Service Delivery? While there are a number of clear drivers for multi-organisational collaboration in delivering services, adopting such an approach is not without significant challenges for all parties involved. This section will address some of the identified challenges in a multi-organisational enterprise approach including risks, obstacles and the need for a series of new capabilities.

8.6.1 Risks Encountered As we have seen in the case studies outlined, in order to collaborate across multiple organisations to deliver value, there is a need for greater openness, transparency and coordination. This creates an external dependency and hence risk, caused by the firm’s limited control over the resources it needs to operate but which come from third parties, such as specific parts, products or services, land, labour, capital, and information (Parry and Roehrich 2009). A firm’s key resources are related to their critical or core competence(s) and are often discussed in the context of outsourcing decisions to try to ensure they are not undermined. In developing closer supplier relationships that facilitate outsourcing the exchange of proprietary information becomes more likely and hence also the potential loss of core competences (Parry et al. 2006). As a result, outsourcing has become an increasingly complex and vital issue for many organisations, offering significant benefits whilst posing potential future risks. In opening their operations to multi-organisational collaborations, companies can run the risk of losing control of critical and versatile resources and competences (Mills et al. 2004). Hence, the need for organisations to understand, maintain and protect their core competences is even greater in a ‘service enterprise’ environment. Yet despite these challenges services enterprises are expanding to involve ever greater openness and innovation across a wide spectrum of parties. As outlined earlier, companies are looking to the consumer communities for innovation in services and beyond their service delivery partners to other sectors and research institutions for transferable ideas and technologies. This brings new challenges including competitive, intellectual property, and communication issues that must be addressed (van de Vrande et al. 2009).

8.6.2 Potential Obstacles Obstacles to effective enterprise collaboration include the strength of the single company perspective and practices. Organisations may see themselves as independent entities in a chain, separate from customers, suppliers and other external

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stakeholders. This can also be reflected in performance measures and reward structures which tend to be company- rather than enterprise-centric, and therefore not conducive to strategic alignment for the deliver of customer value. Some writers have also highlighted that traditional supply chain management precepts of vantage point and customer superiority, appear to contrast with enterprise concepts of collaboration and transparency (Lamming 1996; Spekman and Davies 2004). It may therefore be difficult to forge new relationships that call for awareness of interdependency and joint responsibility for service quality.

8.6.3 The Need for Enterprise Level Management The challenge for companies within a multi-organisational service enterprise is the design and redesign of organisational solutions for service delivery from an enterprise rather than single company perspective. Delivering services through multi-organisational enterprises requires organisations to move beyond their own narrow concerns and efficiencies to take an enterprise wide perspective. Brandt (1998) describes enterprise level management as focusing on the whole process regardless of ownership and includes consideration of all customers at all levels within the service value chain.

8.6.4 Managing Multiple Values and Communication As the examples presented in this chapter have illustrated, service enterprise partners often differ in terms of their strategic interests, motivations and status within the service enterprise (Keyton et  al. 2008). Yet little attention has been paid to understanding and improving communication and collaboration which are key business enablers. Both communication and collaboration are impacted upon by relational power differences, situational manipulation and self-interest by the partner organisations involved (Hardy Lawrence Phillips 2006). Multi-partner value systems can be especially complex to co-manage in the Defence, Health and Construction sector where the value system involves both public and private sector partners with different needs, goals and power (Klijn et al. 2008). All of these challenges require intensive interaction that needs to be effectively managed especially as the multi-organisational enterprise learns to work as interdependent partners. Recent research has also shown that communication plays a critical mediating role in high performance, not only in individual organisations, but in complex multi-organisational enterprises. However, while the need for more effective enterprise communication has become evident, there is little detailed understanding of appropriate roles, processes and forms of communication to bridge the organisational gaps (Paulraj et al. 2008).

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8.7 Conclusions In this chapter, we have explored the ways in which organisations come together to collaborate in delivering customer value. There are many drivers for such collaborations including the growing requirement of customers to have holistic solutions; the trend for organisations to narrow the scope of their activities and outsource all non-core activities; and the need to work collectively with others in the value chain to both reduce costs and improve performance. Information Technology developments have opened up huge possibilities for inter-organisational and supplier/customer interaction. Companies, their supply chains, customers and consumer communities can now network more effectively and this is leading to service innovations. The development of multi-organisational service enterprises has also created many challenges for the participant organisations and the individuals within such organisations. The preceding sections have highlighted that organisations cannot operate alone in a service environment, yet there are risks and significant interdependencies which need to be managed effectively. Perhaps the most critical challenges lie in supporting multi-organisational service enterprises to take a holistic perspective and to move away from the adversarial relationships of provider/customer to a true partnership for value co-creation. There is therefore an urgent need to better understand service enterprise level design, implementation and management. Whole value system business tools are required to support leaders of multi-organisational service enterprises in co-orientating the interdependent partners for improved value delivery. Have a go at the following exercises to test and help embed your learning from the chapter.

Exercises Identify examples of other services that are delivered by ‘multi-organisational service enterprises’ What are the key drivers for their multi-organisational approach? What challenges are faced by this ‘multi-organisational service enterprise’ and how have these challenges been addressed?

References Akkermans H, Bogerd P, Vos B (1999) Virtuous and Vicious Cycles on the Road Towards International Supply Chain Management. International Journal of Operations & Production Management 19(5/6):565–581 Bovet D, Martha J (2000) Value Nets: Breaking the Supply Chain to Unlock Hidden Profits. Wiley, New York

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Brandt J (1998) Beyond the Supply Chain. Industry Week, 247 (20):6 Chesbrough H (2006) Open Business Models: How to Thrive in a New Innovation Landscape. Harvard Business School Press, Boston, MA. Coughlin P, Coghlan D, Lombard F et al. (2003) Managing collaborative relationships in a period of discontinuity. International Journal of Operations & Production Management 23 (10):1246–1259 Cox A, Sanderson J, Watson G (2001) Power regimes: a new perspective on managing in supply chains and networks. The 10th International Annual IPSERA Conference Daft RL (1992) Organization theory and design. West, St Paul, MN Doran D (2003) Supply chain implications of modularization. International Journal of Operations and Production Management 23(3):316–326 Ellram L, Billington C (2001) Purchasing leverage considerations in the outsourcing decision. European Journal of Purchasing & Supply Management 7:15–27 Gadde L, Jellbo O (2002) System sourcing-opportunities and problems. European Journal of Purchaisng and Supply Management. 8:43–51 Hardy Lawrence Phillips (2006) Swimming with sharks: Creating strategic change through multisector collaboration. International Journal of Strategic Change Management, 1:96–112 Keyton J, Ford DJ, Smith FI (2008) A mesolevel communicative model of collaboration, Communication Theory 18:376–406 Klijn E, Edelenbos J, Kort M, Twist M (2008) Facing management choices: an analysis of managerial choices in 18 complex environmental public/private partnership projects. International Review of Administrative Sciences 74:251 Lamming RC (1996) Squaring Lean Supply with Supply Chain Management. International Journal of Operations & Production Management 16(2):183–196 Lawrence FB (1999) Closing the logistics loop: a tutorial. Production & Inventory Management Journal 40(1):43–51 Lonsdale C, Cox A (2000) The historical development of outsourcing: the latest fad? Industrial Management & Data Systems 100(9):444–450 McAfee RB, Glassman M, Honeycutt ED Jr (2002) The effects of culture and human resource management policies on supply chain management strategy. Journal of Business Logistics 23(1):1–18 Mills JF, Schmitz J, Frizelle GDM (2004) A Strategic Review of Supply Networks. International Journal of Operations and Production Management 24(10):1012–1036 Mills J, Crute V, Parry G (2009) Enterprise Imaging: Visualising the scope and complexity of large scale services QUIS 11 – The Service Conference, June 11th-14th, Wolfsburg Germany Moller K, Halinen A (1999) Business relationships and networks: Managerial challenge of the network era. Industrial Marketing Management 28(5):413–427 Normann R, Ramirez R (1993) From value chain to value constellation: designing interactive strategy Harvard Business Review, July/August Parolini C (1999) The Value Net. Wiley, Chichester Parry GC, Graves A, James-Moore M (2006a) The Threat to Core Competence Posed by Developing Closer Supply Chain Relationship, International Journal of Logistics: Research and its Applications, 9(3):295–306 Parry G, Roehrich JK (2009) Strategic outsourcing of core competences in the automotive industry: threat or opportunity? International Journal of Automotive Technology and Management 9(1):40–53 Paulraj A, Lado A, Chen IJ (2008) Inter-organizational communication as a relational competency: Antecedents and performance outcomes in collaborative buyer–supplier relationships. Journal of Operations Management 26:45–64 Prahalad CK (2004) The Blinders of Dominant Logic. Long Range Planning (37):171–179 Prahalad CK, Ramaswamy V (2000) Co-opting customer competence. Harvard Business Review Jan-Feb:79–87 Prahalad CK, Ramaswamy V (2003) The new frontier of experience innovation. MIT Sloan Management Review, Summer:12–18

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Prahalad CK, Krishnan MS (2008) The New Age of Innovation: Driving Co-created Value Through Global Networks McGraw-Hill, New York Rainbird M (2004) A Framework for Operations Management: the Value Chain. International Journal of Physical Distribution & Logistics Management, 34(3/4):337–345 Slagmulder R (2002) ‘Managing costs across the supply chain’, in Seuring, S. and Goldbach M (Eds) Cost Management in Supply Chains, Physica-Verlag, New (Eds) Cost Management in Supply Chains, Physica-Verlag, New York Spekman R, Spear J, Kamauff J (2002) Supply chain competency: Learning as a key component, Supply Chain Management, 7(1):41–55 Spekman RE, Davies EW (2004) Risky business: expanding the discussion on risk and the extended enterprise. International Journal of Physical Distribution & Logistics Management 34(5):414–43 Van de Vrande V, de Jong JP, Vanhaverbekec W et al (2009) Open innovation in SMEs: Trends, motives and management challenges. Technovation, 29(6–7):423–437 Vargo SL, Lusch RF (2004) Evolving to a New Dominant Logic for Marketing. Journal of Marketing 68:1–17 Vargo SL, Lusch RF (2008) Service-dominant logic: continuing the evolution. Journal of the Academy of Marketing Science 36:1–10 Veludo M, McBeth D, Purchase S (2006) Framework for relationships and networks. Journal of Business & Industrial Marketing 21(4-5):199–208 Walters D (2004) New economy, new business models, new approaches, International Journal of Physical Distribution and Logistics Management 34(3/4):219–229 Walters D, Lancaster G (2000) Implementing Value Strategy through the Value Chain. Management Decision 38(3):160–178

Chapter 9

Through Life Costing Linda Newnes, A.R. Mileham, W.M. Cheung, and Y.M. Goh

9.1 Introduction This chapter introduces the issues of Through Life Cost (TLC) Management. The industrial example used to illustrate the challenges of providing cost estimates for the total life of a product/capability will focus on the aerospace and defence sectors, where in general the products produced are highly complex, long-life and of low volume. The challenges faced to predict the TLC for these products/services will be introduced. To develop a product there are a number of life cycle phases that occur, for exaple; concept, assessment, development, manufacture, in use and re-use/disposal. Furthermore, it is common knowledge that in each phase of the development of a product, a company spends money and also incurs a set of costs (Ullman 2002). The cost of a product is typically related to its technical performance, in other words ‘cost’ is a design factor. Indeed, when the design of a product is complete, although only 20–30% of the total cost has been spent, 70% of the costs will have been committed (Ullman 2002). This is depicted in Fig. 9.1, in the cost-commitment curve from Rush and Roy (2000). The more the project is advanced the greater the difficulty of reducing the final cost because of the high costs of modification and change (Kawauchi and Rausand 2002). It is thus essential to understand the value of these design parameters as early as possible in the design cycle and preferably in the conceptual design stage. However, this is also the point in the design process where there is very little concrete information and data available to perform accurate cost estimation. This is particularly the case for innovative low volume products where insufficient statistically significant data could reduce the level of accuracy of the estimation (Newnes and Mileham 2006). An area of activity that is of interest to many industries is Through Life Costing (TLC). Estimating the TLC of products encompasses predicting the cost of a product from the initial concept stages until it is re-used/disposed. This enables one to L. Newnes (*) Head of Costing Research, University of Bath, Claverton Down, Bath BA2 7AY e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_9, © Springer Science+Business Media, LLC 2011

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Fig. 9.1  Cost commitment curve (Rush and Roy 2000)

assess whether this is the correct product, is it at the right cost, what is the most appropriate concept to select/product design which will meet my customer requirements as well as reduce the overall cost through the whole life cycle. Hence, the question to ask yourself is – Why should I be interested in the TLC of a product? The example below illustrates why this is something you should be interested in.

9.1.1 Example: How to Provide an Armoured Vehicle for Soldiers What happens if you have been asked to design a new product such as a vehicle for army use to transport soldiers in freezing and wet conditions? Your boss states that you want to make a 50% profit. So, What costs do you need to calculate and why? If you have a number of concept designs – which design do you select and why? Would you select the concept which is cheapest to manufacture, or would you select a design that is more expensive to manufacture but would last longer? The answers to these questions depend on how you are planning to sell the vehicle to the Army. Imagine a few scenarios. (a) You wish to sell the vehicle outright. In this particular scenario you sell the vehicle to the customer and that is the only transaction you have. To make a 50% profit you would need to estimate the amount you could sell the vehicle for and then calculate the cost for manufacturing

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the product and apply overheads to cover costs such as design, administration, raw materials ordering parts, manufacturing yield etc. To do this you could use a cost model that adds all the costs together such as manufacturing time, raw material, assembly etc. Assuming this could provide you with an estimate that is close enough to the final cost of making the vehicle, you could then use this model to compare alternative designs. The aim of the model would then be to use it as means of selecting the vehicle design which meets the customer requirements and provides you with the maximum profit. This could then be optimised (e.g. by redesign, outsourcing, improved processing) to provide your 50% profit. You may also build into the model expected spares, consumables etc and the profit you may make on this. In some cases the spares and consumables markets are where companies make their money. A good example of this is inkjet printers – cheap to buy as most of the money is made from the consumables – the ink cartridges. (b) You wish to lease the vehicle. For this scenario you design and manufacture the vehicle, but, rather than sell it you charge the customer a monthly fee over a set time period (e.g. 5 years). For this monthly charge your company provides all the maintenance as part of the monthly charge. The agreement would also involve e.g. a repairer arriving within 24 h of a breakdown occurring, repairing or providing another vehicle if for example the vehicle could not be fixed within seven working days. So the costs you would need to calculate are the costs of manufacture, overheads (design, administration, yield etc.). However, you will also need to ascertain the costs of planned maintenance, unplanned maintenance (i.e. breakdown, repair), retrieval, re-use/disposal over the 5 year period. The difficulty with this model is you have to predict events that may happen such as a breakdown and undertake a trade-off between using more reliable parts within the design. The challenges here are that you would not want to have the vehicle costing too much as you may not be able to charge a high enough monthly fee to make adequate profit. In modelling this, you also use for example, probability analysis. In other words you cannot say that every 6 months the vehicle will break down; this would be a random event. (c) You wish to manufacture the product and be paid for availability. For this scenario, the army just needs the vehicle to be operational and ready when they need it. An example may be that the army requires ten vehicles to be available for use at anytime and they must be able to undertake journeys lasting 24 h. In this particular scenario if the army try to use all the vehicles and they are not ready then you do not get paid/incur a penalty –resulting in loss of profit. So the costs you would need to calculate are the costs of manufacture, overheads (design, administration, yield etc.). You would also need to understand in detail criteria such as; the expected running time of a vehicle, repair, breakdown etc. This differs from scenario (b) as the agreement is that a set number of vehicles must always be ready for use when required. However, in scenario (b) you have agreed that the vehicle can be repaired within a time frame. Although much of

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the modelling would be similar to that of (b), you have to have a model that can assess the reliability, repair times and so forth with confidence. So, the task of designing and selling a product to make 50% profit is no longer simple. It all depends on the business process model you are using and how you intend to sell the product. Is it a straight sale, are you leasing or are you providing availability? To further complicate the decision, some markets will set a price. In other words the army may only wish to pay £35,000 to buy the product outright, scenario (a). For scenarios (b) and (c) there may be an upper monthly/yearly price they are willing to pay. Hence, not only do you have to work within a market buying price, but you then have to use this as the upper limit, still make your 50% profit whilst maintaining reliability and so on. To help explain how important this is, the following sections will describe what this means in terms of the aerospace and defence sectors; the challenges these approaches provide for designers and cost modellers; and how they try to predict the ‘real costs’ of such activities so they can maintain profits and still meet the customer requirements.

9.2 Industrial Context: Defence and Aerospace The defence and aerospace sector has a turnover of £20 billion with the UK Government committing 5.8% of all its expenditure on defence in 2006/7 and allocating over £16 billion for defence procurement activities in their 2007/8 expenditure plans (MOD 2009). Unfortunately the National Audit Office (NAO) has highlighted major issues with large MOD projects, such as late delivery and over budget (NAO 2007) as well as stating that for 20 of the largest projects the average delay was 96 months and an average of over £205 million over budget. To add to this current challenge Deloitte have also identified that cost overruns in the defence and aerospace sectors may increase to 46% (up 26%) in the next 10 years. However, these challenges are also evident in many projects including construction such as the Scottish Parliament Building where the outturn costs increased to £430 million, compared with the initial cost estimate of £40 million and the 2012 Olympics which are already three times the estimated costs (BBC 2008). To further complicate the challenges of estimating the TLC of a product, industrial business processes have moved from delivering spares and parts to total care packages through the whole lifetime of the product, i.e. to provide a service. The in-service costs for the Defence Equipment and Support arm of the MOD was £10 billion in 2007–08 excluding new equipment (UKMoD MOD Accounts 2008). In effect products such as aircraft are now being leased and the customers pay per hour of flying time. Rolls Royce used to refer to this as ‘Power by the Hour’ but it is now branded as Total Care packages. For example, in aerospace engines, 55% (£4.265 billion) of Rolls Royce’s sales were from aftermarket service in 2007 (Rolls Royce 2007). They have estimated that by 2028 the after sales market for civil engines will be worth US$550 billion and for military engines US$300 billion.

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Hence, ­modelling through-life costs and making a decision at the concept design stage to save 1% on in-service costs would save taxpayers US$3 billion – just on military engines. With these changes in business processes, the question that many companies are attempting to address is how they estimate the TLC for their products. In particular how do they predict the in-service costs for the products at the concept design stage to enable informed decision making? The major challenges for estimating the TLC of a product include; limited/dispersed information on current products, estimates have to be made before the product is in-service, with the further challenge being that these estimates often occur years before the aircraft are in-service. These are some of the major challenges for cost modellers. The traditional modelling used to predict the cost of a product (i.e. in general the design and manufacture of that product), are no longer suitable. With this change and the importance being placed on TLC there are a plethora of acronyms to describe cost modelling, commercial packages are continually being introduced and industry have been focusing on building their own cost models, with many being based on excel files (ref industrial survey) (Cheung et al. 2007a, b). The next section will describe the definitions of TLC and the many acronyms/ views that are used in this domain. This will enable you to ascertain what these acronyms mean and the commonality between them.

9.3 Definition and Terminology of Through Life Costing This section summarises the different definitions of TLC across a number of industrial sectors. By the end of this section you should: • Be aware of the varying definitions/names of TLC. • Understand what categories are used to make up a TLC. • Be able to discuss TLC in terms of a sectorial vision. The term Life Cycle Cost (LCC) is used across many industries such as ­aerospace, oil and chemical, railway systems and construction (Followell 1995; Ehlen 1997). However, Cheung (2007) found that LCC is identified by numerous names such as; Whole Life Costing (WLC), Through-Life-Costing (TLC), Total Cost, TotalLife-Costing, Total-Cost-Of-Ownership, Costs-In-Use and Ultimate Life Cost. Due to the number of different terms that are used this section will describe the most commonly used terms. Cole and Sterner (2000) summarised LCC as ‘a set of methods that consider not only product life cycle costs but also the environmental and social aspects in the life cycle’. This however is not the same as the definition used by others such as Bradley and Dawson (1999). In their view the term WLC encompasses the whole cost of owning the product i.e. from its initial conception all the way through to disposal/reuse. Bradley and Dawson take all cost categories into consideration for

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their modelling e.g. design, manufacture and training. Within the military sector the cost of ownership is presented by the Ministry of Defence (MOD 2009). The MODs definition of TLC is the aim of identifying the total Cost Of Ownership (COO) i.e. what will it cost them to own an aircraft, tank etc. Their particular approach is similar to that used in the construction sector where the COO consists of various levels of cost such as the in-service but also the training, staff, and energy costs. In the USA, terminology definitions in reporting cost data is a standard practice and legally binding process for defence contracts. The UK construction sector (National Audit Office 2005), has relied on recognised standards for capital costs in procurement for many decades. One of the challenges here is that there are no construction industry accepted standards for TLC, neither does the construction industry have the regulations to perform TLC consistently in practice. It is not surprising that one of the key barriers identified by the National Audit Office to transform construction procurement to include TLC is that, ‘the first hurdle to overcome must be eliminating confusion over terminology and providing a common data structure and method for predicting and reporting TLC’. Although TLC standards are now more established in the construction industry in the UK (ISO 2007), this is not the case in other areas of product development such as electronics, mechatronic or mechanical products. ISO standards in this area have been developed mainly for life cycle analysis in a variety of different applications such as Product Lifecycle Management (PLM) Weber (2003) and Standard for the Exchange of Product Model Data (STEP) Eurostep (2008). In summary, terms such as Through Life Costing, Cost of Ownership, Life Cycle Costing are used interchangeably. The key difference between them depends on how they are used and what factors they consider. The construction industry is moving towards attempting to provide standards, although there is no ‘common/standard’ approach used between companies. So, when discussing TLC, WLC, LCC, COO etc., you should ensure that the boundaries of what is included in the cost are identified. However, identifying what you should model and what is the most appropriate approach to use for modelling has achieved much attention in academic research and commercial systems.

9.4 Cost Modelling Research and Commercial Tools There are various ways in which cost can be modelled. These range from spread sheets to neural networks. However, deciding what to use and when is an answer all cost modellers would like to have! To achieve this ideal situation many researchers have examined different modelling approaches and there are many commercial software packages for modelling cost. Within this section we will present some of the current research activities being undertaken today and describe some of the commercial cost modelling systems on the market.

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9.4.1 Research on Cost Modelling As with the previous sections when modelling TLC for a product, researchers have different viewpoints, use different terminology and there is no standard approach which everyone agrees on. This is evident from the work of Sandberg et al. (2005) who conclude that if companies are moving from supplying products to supplying a service such as total care there is a greater need to model the lifecycle of the product from concept to end of life. Within the research they presented, a jet engine was used as their exemplar, hence they focussed on the aerospace industry. Nicolini et  al. (2000) examined the use of target costing, for estimating TLC within the construction sector. The main aim of the work they were undertaking was to provide innovative approaches within the construction sector to improve the valuechain management for the design and delivery of e.g. a building. Within their approach they proposed the use of target costing through the whole value chain and reducing the TLC whilst maintaining quality, reliability etc. In the oil and chemical sector, Kawauchi and Rausand (2002) propose an approach that can be used for TLC. In their proposed model Markov chains (Susova and Petrov 1997) are utilised as well as probability distributions to ascertain the TLC. Their model proposed three levels for the analysis component, sub-systems and integrated systems. If one was modelling an intergrated system you could for example plug and play different subsystems and examine the costs of different intergated systems. Davis et al. (2003), have a particular view of LCC in that it should provide an overall cost of the product. This overall cost should, in their view, include all the costs such as health and safety, energy etc. Their main aim was to provide a model which would enable users to follow a structured approach to provide a cost versus benefit comparison. Within their work, Davis et al. (2003) classified the LCC into phases and then presented these under three categories (see Table 9.1) namely: • Producers (those that make the product/provide the service) • Users (e.g. people who use the product e.g. the MOD for a fighter jet) • Society (waste disposal, recycling, fumes) Researchers such as Ugwua et al. (2005) have focused on the need to predict the maintenance requirements of a bridge. For their research, their aim was to predict the requirements at the concept design stage so they assessed alternatives in terms of TLC, in particular the choices of materials, construction methods and durability. Although their research focused on the construction sector, the same processes can be applied in the aerospace sector for providing through life support. For example if your company was asked to design and maintain an aircraft engine and you were paid by flying hour, you would want to know maintenance costs, reliability and so on. You would then use these predictions/models to help you select the most appropriate solution to minimise the TLC. Although the industrial sectors the researchers have focused on in this section are varied, the common theme that underpins all their activities is to provide reliable and robust models/rules/methods to undertake TLC from the product/system

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Table 9.1  Life cycle phases and example costs (Adapted from Davis et al. 2003) Life cycle phase Cost to the producer Cost for the user Cost for society Technological Contract DESIGN (concept, Market recognition, development, negotiation, Research & development & Grants and other Design Development, Design assessment) support requirements/ stages, Legislation, market need legal requirement analysis Health and safety, Sales MANUFACTURE

Facilities, Process development, Logistics design, Energy, Legislation

OPERATION (in-use/ in-service)

Service support, Warranty, Spares, Production and Distribution

Buy-Back, Recycling/ END OF LIFE Disposal (recycle, disposal, re-use)

Health and Safety, Employment. Environmental waste, energy usage etc. Parts and Storage, Maintenance, Support, Operations

Emergency services, Waste Managements, Environment Health

Decommissioning, Waste Management, Environment Health Recycling/ Disposal

inception through to in-use/disposal, in particular to enable the estimation of these costs at the concept design stages enabling informed decision making and design selection. Table 9.2 summarises some of the research presented in this section in terms of the aims of the research, the industrial focus of the research and the functional characteristics of the research activities.

9.4.2 Commercial Cost Estimation Systems To be successful in business one has to make a profit. Hence, being able to model the cost of products/services and compare alternatives is important and can enable you to make the most appropriate decision at that point in time. This section introduces some of the commercial systems on the market at the time of this review. These are summarised in Table 9.3. The systems were identified and analysed using the following criteria: • Literature from the software vendors describing their systems. • On-line web searches of the software applications and the vendor websites. • Analysis of the software systems identified that the majority of the commercially available packages focused on the design and manufacturing aspects of TLC Acquisition Operating Framework (2008). What was not evident was any clear modelling of the in-service costs and looking at alternatives on how to model and manage the in-service costs.

9  Through Life Costing Table 9.2  Research summary Research works System characteristics Nicolini et al. To addresses of whether target (2000) costing and whole life costing can be applied in the construction industry

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Functional characteristics Development of innovative practice within the construction industry to improve supply-chain management in the design and delivery of major capital assets

El-Haram et al. (2002)

A generic approach to minimising WLC in the Construction industry

Development of a WLC breakdown structure for a building

Kawauchi and Rausand (2002)

A system to support production regularity assessment in LOC analysis for oil and chemical process industries

The approach is based on Markov modelling and probability distributions throughput capacities of subsystems

Seo et al. (2002)

A system using ‘learning algorithms’ to train to use the known characteristics of existing products to estimate the life cycle cost of new products during the conceptual design phase without the overhead of defining new LOC models

Aritificial neural networks are trained to generalise product attributes and life cycle cost data from pre-existing LOC studies

Hochschorner and Finnveden (2003)

A paper presents preliminary suggestions of how to integrate lifecycle assessment in the acquisition process of defence material

Using existing LCA data or create new LCA data coupled with databases technology to achieve the assessment

Sandberg et al. (2005)

A methodology uses in design support of jet engine components that can simulate LOC in early phases

A parametric cost estimation technique is utilised with a knowledge-based engineering approach to couple the geometry definition process to the cost estimation on activity

Ugwua et al. (2005)

A framework for integrating durability factors and facilitates achieving the objectives of durability design that account for LOC and sustainability of design options in the bridge domain

An object-oriented (OO) framework in decision-making for design for durability to achieve the objectives of durability and minimum maintenance costs at project level

However, a few systems do model some of the in-service and maintenance costs. Two systems, namely, LCCWare and Relex LCC, offer modelling capability through the whole lifecycle of the product. LCCWare. This software was developed with the aim of providing a package that could undertake life cycle cost modelling. Within this model the cost elements are represented in the form of a tree structure that is created interactively. The objects at the bottom level of the tree represent cost functions that can comprise both local and global variables and constants. Libraries of frequently used cost functions allow rapid development of the model.

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Relex LCC was also developed to calculate the cost of a product over its lifetime. Relex is also capable of utilising user-defined cost breakdown structures, net present values calculations, inflation factors, calculations of over multiple time interval and sensitivity analysis. However, although these packages are designed for through life cost modelling, there is little emphasis on modelling in-service costs at the concept design stage to enable you to make a decision that will minimise the through life cost of the product. Although the packages can be adapted to include these they require further enhancement to meet the challenges required in for example costing for an aircraft from concept to disposal under an availability agreement. Of the thirteen systems shown in Table  9.3, SEER-DFM, SEER-H, from Galorath (Golorath 2008), and PRICE-H from PriceSystems (PRICE 2008) are the commercial models that appear to be dominant in the market. Both SEER and PRICE utilise historical data and are particularly good at estimating costs for similar products. In other words they are very useful for costing product families and products with incremental changes in their design. In terms of details they do not focus on the non-recurring costs (e.g. to set up a service, design time) and life cycle costs. However, they do take account of the costs for disassembly and re-use.

9.5 Acquisition Cycle: Low Volume, Long-life, High Value Products As described in Sect. 9.4, there are various models and approaches that can be used to estimate the TLC for a product. Estimating these costs is becoming even more important to sectors such as aerospace and defence due to the move to product service systems, where the product is effectively leased to the end user (similar to the vehicle example – but a lot more complicated!). In these cases the end user pays for product availability, such as number of hours of flight etc. This creates further challenges for the cost modelling, especially if you have noted how the majority of the commercial cost models and the current research activity focus on the earlier stages of the design and manufacturing focus. Very few have detailed in-service and design for in-service capabilities, although some are now attempting to enter this domain and provide in-service cost models. When you are selling a product your aim is to reduce the cost of the product through to in-service. In general you are not optimising the in-service part of the process because this is where you can also make your profit. For example, this could be through the selling of spares, upgrades etc (vehicle scenario (a)). However, the move to PSS may mean that the seller may be responsible for the product through its whole life. In this case you want to spend less on spares and maintenance whilst being paid for providing the capability, service (vehicle scenario (c)). To understand the impact of this and how it can be modelled the following section will describe the acquisition cycle for low volume, long life products such as those used in the aerospace/defence sector and the modelling that you need to undertake in each phase.

http://www.estimatingsystems.com Pulsar http://www.isograph-software. com/1ccWare

http://www.kapes.com KAPES

http://www.engineous.com/product_ FIPER.htm FIPER http://www.aceit.com/(Automated Cost Estimation Integrated Tools) ACEIT Family http://www.deccansystems.com/DeccaPro http://www.mevatec.com/FasTrack ABMTM

http://www.valerdi.com/cosysmo/ COSYSMO (2007); Isograph LCCWare (2007) http://www.dfma.com/Boothroyd and Dewhurst (DFMA) http://www.t-systems-ts.com.br/CAPPe http://www.cognition.us/products/ca_ proddesc. htm Cost Advantage

http://www.pricesystems.com/PRICE-H

System providers and product name http://www.galorath.com/SEER modules

–

– –

Aerospace and Defence

Any Industry IT organisations to manufacturing and distribution Electronics, Aerospace and Automotive Construction and Building Building, Ship, Weapon system and Power Any Industry

– 1ccWare Relex

–

KAPES

– –

– 1ccWare

–

FIPER

– ACEIT 7.0

– Cost Advantage

– Cost Advantage

COSYSMO

COSYSMO

DFMA

PRICE-H

PRICE-H

DFMA

Detailed SEER-H

Concept SEER-H

Design

General Design and Manufacturing Automotive Standard Manufacturing Processes and Electronic Assembly Aerospace

Domains of applicability Electronic and Mechanical Hardware Electronic and Mechanical Hardware Aerospace

Table 9.3  Commercial costing system – application domains and stages

Relex

Pulsar 1ccWare

KAPES

DeccaPro FasTrack ABM TM

ACEIT 7.0

FIPER

CAPPe Cost Advantage

DFMA

COSYSMO

PRICE-H

Manufacturing Facilities, process and logistic SEER-DFM

Relex

Pulsar 1ccWare

–

DeccaPro FasTrack ABM TM

ACEIT 7.0

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Fig. 9.2  CDDMIP cycle

The acquisition cycle for defence products consist of six stages, CADMID (http://www.aof.mod.uk/aofcontent/tactical/ppm/content/lifecycles/cadmid.htm) as summarised in Fig. 9.2, namely: Concept – At this stage a user requirement need is acquired i.e. what is it that the customer wants the piece of equipment to do? This can be expressed in terms of capability e.g. to have access to remote desert locations. In the concept stage promising technological and procurement options are considered and planning is made for the development/assessment phase. The cost modelling at this stage is normally at a high level (i.e. based on e.g. cost estimating relationships such as overall weight). Paradoxically, this is where the available information is limited, yet where the majority of the costs are built in. Due to this, accurate cost models are usually extremely difficult. The other challenge at this stage is misunderstandings/clear requirements being specified. In some of the large defence contracts the early stage decisions/understanding of requirements were attributed to causing later delays and cost overruns. Development/Assessment – Here the concepts may include solutions to meet the customer requirements which could be via, air, land vehicles etc. The key requirement being for the concept to meet the military need (capability) within an acceptable cost and a reasonable time frame. As part of this due to the long life of products where some sub systems may include for example new technologies, risk is also considered and a procurement strategy decided upon. At this stage the cost models can incorporate greater detail, as some of the technologies have been selected and prototypes examined. Demonstration – At the demonstration phase the cost models can utilise proof of concept costs and future manufacturing expectations for the solution. Here the risk is being reduced as a demonstrator of key technologies and interfaces is produced. These findings can also enable the cost models to incorporate actual results/costs and not just theoretical expectations. The emphasis is on demonstrating the interfaces to illustrate that the solution’s ability to produce an integrated capability. Manufacture – When the manufacturing phase is underway the emphasis is to maintain delivery on time and on budget, whilst ensuring the capability is delivered. At this stage the cost models can be very detailed as the design is complete, the manufacturing process selected and the volumes known.

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Fig. 9.3  Balance of cost expenditure for the lifecycle phases

In-Service – The In-Service phase of the lifecycle is when the capability has been passed to the customer, e.g. land vehicles to operate in cold and harsh terrain. It is at this point that the predicted in-service costs and reliability are compared with what actually happens. The cost models will also be used to ascertain ways in which the in-service costs can be reduced. The cost models can utilise maintenance expertise, feedback to the concept design for failure and real in-service data to inform future concept designs and cost models. Disposal/Re-use – This stage is where the safe and efficient re-use/disposal of equipment occurs. The cost models on actual re-use/disposal will enable feedback into the concept design to assist in future decision making. For example, design for re-use/disassembly/disposal at the concept stage may reduce the costs encountered. Cost models can incorporate expected costs for disassembly etc. However, this cycle assumes that the outcome is a product and not a service. To overcome this, the defence community have examined the use of a cycle called CADMIT. Where the ‘M’ is described as migration and the ‘T’ means termination. http://www.aof.mod.uk/aofcontent/tactical/ppm/content/lifecycles/cadmit.htm. So, how would you model the cost of a service. In at Fig. 9.2, everything appears well spaced out and equal. However, in reality much of the costs associated with a defence capability are at the in-service stage (Fig. 9.3) up to 75% (Clark et al. 1999; Asiedu and Gu 1998). The next section presents a scenario for you to assess and decide how you would predict the service costs for a product.

9.6 CADMID How would you model the cost for avionic displays? Figure 9.4 depicts an example of an avionic display. The displays are used by pilots to assess the status of the aircraft e.g. altitude, speed, fuel. The display units consist of both mechanical and electronic components and naturally have to be readable and in working order. Your company supplies one of the display units,

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enlargened in Fig. 9.4 and is proposing to enter a service contract with the ­customer. Scenario C, in Sect. 9.1 ‘You wish to design and manufacture the product and be paid for availability’. The questions to be addressed are How would you predict the cost of such a unit? What should you charge? Some of the issues you will need to consider are that the cost estimate may have to include the management of these long-life low volume products, which have a through life of 30+ years (both civil and defence) and various sub-systems. Based on what we know about these systems how do you predict the expected through life cost and in particular how do you estimate the cost of in-service? The key features and challenges include: • Limited data at the concept design stage relying on best ‘guesstimates’ for cost predictions. • Due to long-life of the products many design changes occur – how can you predict these at the concept design stage? • Impact of technology refresh on the system/artifact – how do you predict the cost of these for a long-life product? The three previous bullet points all relate to uncertainty in terms of design, technology etc. An example of how the technology has changed in the last 20 years is described by Monfret (2009). He describes the use of Cathode Ray Tubes (CRTs) and how the avionic systems have, since the early 1990s been upgraded to Liquid Crystal Displays (LCDs). These are now incorporating LED backlights to improve reliability, colour etc. Currently research is investigating Organic Light-Emitting Diode (OLED) technology. Kopp (1998, 2005) also describes trends in display technology, illustrating how the market is driven from innovation and advancements in the display sector such as televisions. From these trends you may decide that:

Fig. 9.4  Avionic display sub system

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• You can predict when technology will be ready for use within avionics. • You can estimate when design refresh will occur. • Based on historical data, you can estimate expected repairs. Using historical data you can undertake trade-off analysis in terms of increasing reliability and initial costs to availability costs/repairs required.

9.7 How Do You Model This Uncertainty? For all of the information provided the results are still uncertain. Some will be aleatory uncertainty (i.e. part of the system and not changeable unless you alter the system) and others will be epistemic uncertainty mainly due to the lack of knowledge, complexity and imprecision. To model this in your cost models you may place weightings to represent technology readiness ranges to indicate a range of costs (Cheung 2009) or probability analysis to represent Mean Time Between Failure. Many people use three point estimates, most likely, best and worst case scenarios. However, this is not always enough and some researchers are proposing the use of probability bounds analysis (Goh 2010) to represent the imprecise probabilities that occur. This would allow the decision maker to have further detail to assist in their decision making. For example with a standard PDF, you may calculate that there is a 90% probability that the cost will be less than £20 million. However, using probability bounds you may know that there is a 90% probability that the cost will be between £19 and 21 million.

9.8 Conclusions This chapter has presented some of the challenges for modelling through life costs. A review of the current approaches to TLC have been described as well as an introduction on the impact of costing in terms of providing a service. The main points to understand about estimating for long life products are that the design always changes; technology is refreshed; capability demands change over time, obsolecense occurs and you have to try and account for all of these things when predicting costs. In summary, know your data and assumptions, understand the strengths and weaknesses of your model and build in uncertainty.

References Acquisition Operating Framework (2008) http://www.aof.mod.uk/ Asiedu Y, Gu P (1998) Product life cycle cost analysis: state of the art review, Int J Prod Res, 36(4):883–908 BBC (2008) MPs criticise rising 2012 costs, BBC, London

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Bradley M, Dawson R (1999) Whole life cost: the future trend in software development, Software Quality Journal 8(2):121–131 Cheung WM, Newnes LB, Mileham AR, Marsh R, Lanham JD (2007a) A study of life cycle costing in the perspectives of research and commercial applications in the 21st century, Proceedings of the ASME International Design Engineering Technical Conferences & Computers and Information in Engineering Conference, IDETC/CIE 2007, September 4–7, Las Vegas, Nevada, USA, DETC2007-34425 Cheung WM, Marsh R, Newnes LB, Mileham AR, Lanham JD (2007b) Phase 1 interim report for research project Cost Estimating for Low Volume Long Life Products in Electronic Defence Systems, Current Cost Systems, Evaluations and Industrial Survey, Contact Dr L Newnes – [email protected] Cheung WM, Robert Marsh, Linda B Newnes, Antony R Mileham and John D Lanham (2009) Standards and inference of design information in through life costing of innovative defence electronic products Proceedings of the Institution of Mechanical Engineers, Part B – Journal of Engineering Manufacture. ISSN 0954-4054, Vol. 223, No. 2, pp. 169–181, February 2009. DOI 10.1243/09544054JEM1315 Clark G, Piperias P, Traill R (1999) Life-Cycle Cost/Capability Analysis for Defence Systems, in Proc. of the Simulation Technology and Training Conference (SimTecT), Melbourne, Australia Cole RJ, Sterner E (2000) Reconciling theory and practice of life-cycle costing, Building Research & Information 28(5/6):368–375 COSYSMO (2007) http://www.softstarsystems.com/COSYSMO.htm, last access May 2008 Davis N, Jones J, Warrington L (2003) A Framework for Documenting and Analyzing Life-Cycle Costs Using a Simple Network Based Representation. Proceedings of Annual Reliability and Maintainability Symposium 232–236 Ehlen MA (1997) Life-cycle cost of new construction materials, Journal of Infrastructure Systems, 3(4): 29–133 El-Haram MA, Marenjak S, Horner RMW (2002) Development of a generic framework for collecting whole life cost data for the building industry. Journal of Quality in Maintenance Engineering 8(2):144–15 Eurostep (2008) http://www.eurostep.com/ Followell DA (1995) Enhancing supportability through life-cycle definitions, Proceedings of IEEE Annual Reliability and Maintainability Symposium, Washington DC, USA Golorath (2008) SEER http://www.galorath.com Goh YM, Newnes LB, Mileham AR, McMahon CA, Saravi ME (2010) Uncertainty in throughLife Costing?-Review and Perspectives, Engineering Management, IEEE Transactions on, 57(4) pp. 689–701 Rolls Royce (2007) http://www.rolls-royce.com/investors/reports/2007/Downloads/RR_AR_2007. pdf, accessed May 2009 Hochschorner E, Finnveden G (2003) Use of life cycle assessment methodology in the acquisition process of defence materiel. Totalforsvarets Forskningsinstitut Isograph LCCWare (2007) LCCWare Technical Specification http://www.isograph-software. com/_techspecs/lccwaretechspec.pdf, last access May 2008 Kawauchi Y, Rausand MA (2002) new approach to production regularity assessment in the oil and chemical industries, Reliability Engineering and System Safety 75:379–388 Kopp (1998, 2005) Thin Film Transistor Liquid Crystal Display Technology. http://www.ausairpower. net/OSR-0398.html http://www.mod.uk/DefenceInternet/AboutDefence/CorporatePublications/AnnualReports/ MODAnnualReports0708/ (2009) MOD accessed May 2009 ISO 15686 (2007) http://www.iso.org/iso/en/CatalogueListPage.CatalogueList Monfret (2009) Seeing is Believing, Aerospace manufacturing 18–19 http://www.aero-mag.com/ issues/may09/PDF/AM_May09_Electronics.pdf National Audit Office (2005) http://www.fgould.com/files/Solutions_Solo-6-WLC.pdf, last access May 2008

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NAO (2007) Ministry of Defence: Major Projects Report (Vols I-III) 2007-2008 ISBN: 9780102951486 Newnes LB, Mileham AR (2006) A proposed method for cost estimating for low volume infrequent electronic products, Proceedings of the 13th International Conference on Concurrent Engineering (ISPE CE 2006), September 18–22, Antibes, France, IOS Press Nicolini D, Tomkins C, Holti R, Oldman A, Smalley M (2000) Can target costing and whole life costing be applied in the construction industry? Evidence from two case studies. British Journal of Management 11:303–324 Price R (2008) True Planning. Systems, http://www.pricesystems.com Rush C, Roy R (2000) Analysis of cost estimating processes used within a concurrent engineering environment throughout a product life cycle 7th ISPE International Conference on Concurrent Engineering: Research and Applications, Lyon, France, July 17-20, Technomic Inc., Pennsylvania USA, pp. 58–67 Sandberg M, Boart P, Larsson T (2005) Functional product life-cycle simulation model for cost estimation in conceptual design of jet engine components. Concurrent Engineering: Research and Applications 13(4):331–34 Seo KK, Park JH, Jang DS, Wallace D (2002) Approximate estimation of the product life cycle cost using artificial neural networks in conceptual design. International Journal of Advanced Manufacturing Technology 19:461–471 Susova GM, Petrov AN (1997) Markov Model-Based Reliability and Safety Evaluation for Aircraft Maintenance-System Optimization. Proceedings of IEEE Annual Reliability and Maintainability Symposium, pp. 29–36 Ugwua OO, Kumaraswamya TMM, Kung F, Ng ST (2005) Object-oriented framework for durability assessment and life cycle costing of highway bridges, Automation in Construction 14:611– 632 UKMoD (2008) http://www.mod.uk/DefenceInternet/Home/ Ullman DG (2002) The mechanical design process, 3rd Edition, McGraw-Hill Higher Education, London Weber C, Werner H, Deubel T (2003) A different view on Product Data Management/Product Life-Cycle Management and its future potentials. Journal of Engineering Design 14(4): 447–464 Xu X, Chen JLQ, Xie SQ (2006) Framework of a product lifecycle costing system. Journal of Computing and Information Science in Engineering 6(1):69–77

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Chapter 10

The Practitioner View Ian Smart, Stuart Bestwick, Neil Jarrett, Richard O’Conner, and John Gurnett

Several leading practitioners who are currently helping organisations transform to successful service providers have created the following chapter. They have extensive experience between them in the public and private sectors and offer excellent insight into the ‘how to’ for effective sustainable, service imple­mentation.

10.1 Creating the Message1 The burning platform shows us why we need radical change and the blueprint shows us what it looks like. The challenge is so big that it’s beyond what we as leaders can change on our own. Everybody needs to understand it and get behind it. We need to communicate all the time so that we maintain a shared vision of our future; one that will sustain us through the tough decisions that we will need to take. We must also make our organisation ready for change. We must understand and then build the capacity and capability to succeed. Only then can we mobilise to deliver. Often when we think about transformation we do what we have mostly done before. We think about new structures and infrastructures – shared management, shared services, outsourcing, new computer systems. We want to jump straight on the vehicle for delivery. We should remind ourselves that it is easy to create these new structures without changing the thinking and behaviour we need to make the change sustainable. In real transformation, collaboration is just one ingredient in the recipe. The full menu will require change to the way people think about, design and provide services. We must mobilise all the intellectual assets across our organisations to create services that focus on prevention, reduce demand and provide only what our communities need and value, right first time, every time. Smart

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Change to organisational structures and ICT will still play a big part, but it will be how our people think, work and behave that will underpin the coming transformation. Our decisions about what and how to do things must follow a deep understanding of what our communities and service users most need us to do. This type of change means that we must use all the intellectual resources we have to achieve more with much less. We will need our people to be active and willing participants. To make this happen this we will need to help our people to understand and share in the ownership of the problems we all face, so that they have a reason to change what they do. Leaders will need to create a shared vision of the future, one that is based on commitment not compliance. Your shared vision will need describe a detailed picture of who the organisation will serve and what it will look like. Being ‘excellent’ is great ambition, but it’s not a clear enough description for most people to grasp and make real. A shared vision will only be sustained if you make it clear for everyone who needs to understand it and continually reinforce it with enthusiasm and commitment. In periods of radical change, only those organisations and people that think and behave flexibly, are adaptable and more productive will excel. To be successful we need to tap into our people’s ability to understand the problems they experience and to allow them to innovate and develop solutions. Our current management structures, with their historic and cultural roots in command and control, will not serve us well in the future. In the old world managers did the thinking and staff did the doing. In the new world leaders will need to develop a more enabling style, less inclined to want to be on the pitch and more inclined to stand on the side cheering their side along. Empowered people and teams will be essential in tomorrow’s police services. But, and it’s a big but, many of our managers and staff do not have the tools and the guiding principles to deliver what we will need. We have developed and invested in talented professionals who understand the technical aspects of their work but who may lack the necessary understanding of managing productivity. And increasing productivity will only help us if we are rigorous about realising the gains – ‘cashing’ the efficiency through redeployment of people to do more in areas of higher priority for our communities and service users, or reducing the numbers of people we employ. In the future we will need to shift people’s thinking from seeing just their part of the organisation to seeing the whole. In a public sector environment social problems are rarely within the gift of one organisation to solve and therefore our challenge is to better understand the customer and see our organisations in the context of their life events and journey. Systems Thinking will be another driver of transformation in the future. The challenge with our current thinking and approach is that we often think that cause and effect are close. We should try to stop short term thinking because it always costs more in the long run. Part of the problem is the sort of performance feedback loops we create. The performance management compliance frameworks, in which we have invested heavily, could be of little use in the future because they are focused on outputs. We need to understand the cause and effect relationships that link activities with outcomes and remove any delays in reporting. We need performance management frameworks that are decentralised so that our people have their finger on the pulse of what they do locally.

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The best organisations understand this. In one global technology company the business analysts have developed a system model that shows, amongst other things, the statistical relationship between staff satisfaction, operational productivity and the resulting customer satisfaction. Business intelligence and knowledge management of this kind should become a core competence.

10.2 Leadership During Service Transformation2 Whenever an organisation embarks on a fundamental redesign of its services, the role of leadership plays a significant part in the successful implementation, as it will inevitably involve a degree of transformation. If you are introducing new ways of working or principles such as Lean it will usually challenge existing management styles, culture and performance management as well as requiring different relationships between suppliers, customers, management and staff. Many organisations overlook this and embark on a programme that is flawed from the beginning. The Executive Board of the organisation often appoint someone to ‘Lead’ the programme and then try to manage the transformation from the comfort of their office. In doing so they underestimate the size of the challenge and absolve themselves of their responsibility in making the change happen. The challenge is so big that it’s beyond what the leaders can change on their own. Everyone involved needs to understand the reason for the change, the impact on them and their role in making it a success. Approaches such as Lean involve a bottom up approach to redesign, based on direction and support from above. In a growing market, where the improved efficiency is redirected to improved quality or capacity, this virtuous circle is easy to sell to the staff involved. They can see the benefits of improved customer service through better use of resources. In the current environment getting buy in to the transformation is particularly difficult. Both for the public and private sector, improved efficiency is inextricably linked to the need to reduce cost and in service industries this will mean jobs. The staff involved need a compelling reason to contribute to a bottom up approach of service redesign that puts themselves or colleagues at risk. Although not an exhaustive list, I have set out below some common issues that can have a significant impact on successful transformation.

10.2.1 Provide the Vision I believe the role of the Leader is to provide a vision for the organisation that sets out what it is trying to achieve, why it is necessary, what the journey will be like, how the organisation will change and what the impact is likely to be. The vision

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provides the route map and reassurance for people and allows them to see their role. If there is likely to be an impact on people’s jobs it should also set out how the oranisation will support those involved. As it says in a certain book ‘Without a vision the people will perish’ (Proverb s 29 v 8).

10.2.2 Make Sure You Are Visible It is often said that people judge their leaders commitment to change 10% by what they say and 90% by what they do. The role of Leader is to inspire and empower and in doing so they release talent from those around them. This cannot be done from behind a desk and so they should commit the time to be involved, to communicate the vision and reinforce the change by demonstrating the right behaviours. Tim Leahy of Tesco understands this all too well: Leahy makes all his senior staff do it. Last year, 1,000 store managers worked in other stores and 1,000 staff from head office did the same … Leahy takes trading places to a different level. Each week he swoops on Tesco stores, wandering around, talking to staff and customers. ‘I don’t go to check on things. I talk to people – I can smell how things are’ he says.

10.2.3 Focus on the Priorities I often see organisations embark on transformation without weeding out some of the existing projects, activities and service responsibilities. It is an ideal time to take stock and weed out those activities or projects that do not contribute to the vision and as such will divert valuable resources. If change to the culture is required then you need to understand how the existing structure and systems reinforce it. In most organisations Budget = Power and if you start to apply systems thinking to the way services are provided then many budget holders will feel their power base is threatened. The existing performance management system, including how people are rewarded, will also need to be aligned to reinforce the right behaviours.

10.2.4 Communicate It is essential to communicate all the time so that you maintain a shared vision of the future; one that will sustain the organisation through the tough decisions that will need to be taken. There is too much reliance on passive communication such as Newsletters, email and intranet. These can only support face to face communication that allows discussion and feedback. Although this requires a significant investment of time, without it the message will not be heard.

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Communications is often seen as a separate activity and a plan is duly drawn up. It should be seen very much as part of the day job and included in every interaction. In this way you begin to live and breathe the message and it becomes part of the actions by which your people judge your commitment to the transformation.

10.2.5 Empower An easy thing to say, but more difficult to realise. Especially in an organisation that is used to the old fashioned command structure. One where managers think it is their responsibility to come up with the ideas and then tell people what to do;where those managers will feel exposed and threatened if they allow others not only to provide solutions but also have full ownership of implementation. Creating an empowered workforce is a two way street. It requires managers and leaders who are willing to allow and nurture it and people who are willing to try and exercise their freedoms. The managers must be prepared to give people the space to make mistakes and, in a risk adverse culture, do not themselves revert to type and impatiently interfere. That is why the performance management and reward systems are designed to encourage the new culture and behaviours associated with it.

10.3 The Essential Tools for Transformation3 The current drivers in public spending all relate to Value for Money. The Building Schools for the Future Programme, Public Housing and Highway Maintenance are all affected by the drive to reduce cost at the same time as maintaining quality and improving customer satisfaction. This means using less resource and money to achieve more and it can only be achieved through an integrated programme of continuous improvement. The Lean Sigma approach is a development of tried and tested methodologies from other sectors and provides a structured approach to an ongoing programme of change. It is a new concept to construction and it has taken some years for CWC to integrate these processes with the principles of Open Book Cost Management so that savings based on real costs can be identified. Quality management theory has existed in one form or another for a century (see Fig.  10.1). Historically the Japanese led the world in process improvement and ‘Lean’ manufacturing has led to principles that are employed throughout the world today. The construction industry has only really embraced quality theory in the last generation and the drive to change, pioneered by Sir Michael Latham, led to the establishment of CWC as a leading organisation in construction industry thinking.

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Fig. 10.1  The progression of quality

Bringing together leading academics and process improvement experts from the retail and manufacturing sector with a team of senior construction professionals has enabled CWC to create a unique model based on the tried and tested theories of ‘Lean’ and ‘Six Sigma’ but with the key added elements of cost management and involving people in change. The methodology is straightforward and involves working with a core team through a series of logical stages. By working collaboratively with Client staff there is a natural transfer of knowledge and Clients’ own staff will develop skills that may ultimately lead to formal qualifications; this can be a great incentive for participants. A lot of hard work and commitment is needed to make sure that the right things are being measured and analysed at the outset so that when improvements are made through a wide range of techniques the outcomes can clearly be seen. After a programme of several months a savings register identifies where and how processes have improved and shows their value. Ultimately the development of in-house capability and the continued commitment of staff makes the process sustainable so that public services continue to improve.

10.4 Engaging Teams for a Transition4 My perspective stem from the experience I have gained over 15 years of working with teams at all levels of a business and throughout the value chain when carrying out improvement activities ranging from redesign of the extended value stream through to ‘local’ process improvement. This has been across the range of business sectors. O’Conner

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First thing to say is that there is ‘more than one way to skin a cat’. In other words, one approach doesn’t fit all situations. Whilst there are many methodologies and structured approaches that can be followed, and in fact I give an overview the basic PDCA structure below, it must be realised that a key success factor for sustainable improvement, is how well the people in and around a process or system, are engaged in, and buy into the process of change. People are different and motivated by different things. When leading an improvement or transition activity you have to be prepared to flex your approach. Being too rigid in approach and not flexing approach to accommodate the softer people and psychological aspects of change, can often lead to a situation of disengagement. My comments therefore centre on the key factors related to ‘engaging teams for a transition’, and apply to teams engaged in change at any level of an organisation or position within the value chain. The following points are important factors to consider:

10.4.1 Team Composition It is important to involve staff from the process which is the focus of the improvement activity, as well as representatives from other processes or functions which are either a supplier to, or a customer of the process. A multi-discipline team (and multi-organisation if considering a supply chain improvement activity or extended value stream transformation), should be established, as this will enable any improvement or transition activity to be considered from multiple perspectives. Team organisation needs to be considered. Roles and responsibilities within a team must be clearly defined. Typically a team lead or ‘champion’ will help plan, co-ordinate, facilitate and manage an improvement team. If team roles are not clear and/or the team is not effectively led, then engagement in improvement activities may faulter.

10.4.2 Clarity of Purpose The need for change must be clearly defined. The transition or improvement activity may be part of an overall transformation programme where the organisation has defined a vision for the future, and/or it may be in response to a failure in the process, poor performance or changing market conditions that has created a ‘burning platform’. Whichever, it is important to clarify the purpose of the transition – why is it necessary, how does it fit into the overall strategy for the business, what are the objectives and expected outcomes, how will those people involved be supported in making the change. The use of a ‘Project Charter’ that clearly defines objectives, success criteria, time scales, etc and which the team sign-up to deliver, can help.

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10.4.3 Creating the Environment for Change The team has to feel as though their efforts in the improvement activity will be worthwhile, and that they have strong backing and support from senior management. This should not only be verbal endorsement, but ideally senior managers should be actively involved in the improvement activity. Where this is not possible, senior managers should help create the environment for effective change, and this includes providing the headroom for staff to be involved, empowering staff, putting in place the required support processes, and dealing with any ‘barriers to success’. Additionally, the team must possess the capability and capacity in the appropriate tools and techniques for carrying out an improvement or transition activity. Establishing a ‘common approach’ to improvement within the organisation will help engagement. Proven success and familiarity of transition processes used across the organisation will help team members accept and align to the process of change.

10.4.4 It’s About the Process Not the People Often poor or sub-optimal performance occurs because all of the processes within the overall system are not well designed, integrated or synchronised. Generally most people do not go to work to do a bad job. In fact many people will try to find the most efficient way for them to carry-out their role and related tasks. This is an important point to stress when engaging a team in an improvement activity, and is of particular relevance when it is necessary to get a quantifiable measure of process performance or where productivity appears to be an issue. Here, the time to complete a process would enable the level of process waste to be established and the level of potential improvement to be estimated. This should be sold as a study of the process, and not a time study. Work with the team, getting them to accept that by quantifying wastes, issues, etc, this will provide the ‘ammunition’ for change and help them prioritise where to improve first.

10.4.5 Create the Desire for Change Through all stages of a transition it is important to ‘enthuse’ the team. Whilst a ‘burning platform’ may be sufficient to motivate some team members, it is also important to put the need to improve into the context of the processes and tasks that the team carry-out. The use of relevant improvement examples and case studies will show to team members that the process which they will go through will produce improved performance and provide benefits for all concerned. Get endorsements from colleagues or peers, better still get colleagues who have already been through a similar transition activity to tell their story.

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Try to make the transition relevant to the team members, and use ‘language’ which they understand. At the start of a transition activity, work with the team to identify the how well the current system is working. Ask them who is their Customer, what does the Customer ‘value’ and what are the things within the system that prevent ‘value’ being delivered right first time in the most effective and efficient manner. Identify what are the things or issues which cause them to be inefficient. Aim to quantify these ‘issues’. Ask the team at this early stage what success might look like. Explain that by being involved in the transition activity, that this is their opportunity to deal with the things which cause them to be inefficient. Ask the team, if it was your business, what would change or improve? What would success look like? People become enthusiastic through success. So, aim to implement some ‘quick wins’ and where possible, improvements that resolve some of the issues or inefficiencies whish team members experience themselves. This may be as simple as providing the ‘right tool for the job’. By implementing a number of small but helpful improvements, the team should start to see that they can make a difference. It is also important to make improvement ‘fun’ and make sure that any success is celebrated.

10.4.6 Applying a Structured Approach Make sure that there is a clear and structured approach, which actively engages team members through all stages of the transition activity. Many different ­methodologies exist. A common framework for achieving sustainable ­improvement, and one which teams can readily follow, is the Plan-Do-Check-Act (PDCA) improvement cycle. Work with the team through each stage, getting members to collate and analyse data, identify and quantify issues and opportunities, prioritise improvements (quick wins, short, medium, long term – process improvements through to system re-engineering). Team members should be involved in the implementation of any improvements. The ‘new’ process needs to be ‘hand-held’ and any refinements made if required. Once the new process has been proven, team members should help create standard operating procedures to ‘standardise’ the process. The aim is to create ownership. Once in place, another useful way to engage team members is to establish an audit process, where members take it in turns to check whether the ‘new’ process is working to the defined standard. Through all stages, work with the team documenting outputs on flip chart to grow the transition story. This will help team members buy into and own any improvements. By quantifying improvements team members will be able to see the fruits of their efforts. Recognition of success by senior management is an important part of the approach. Not only because of the motivational impact this will have for team members, but also because the team need to see that any improvements will be supported through to successful.

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10.5 Project Management and Delivery for Service Industries5 Any project, the results of which are designed to provide either goods or services, needs some considerable thought and planning before starting the work of designing, implementing and providing an end product. It could be argued that this thinking and planning forms part of the project, though both political and cultural reality often considers that the project does not actually start until the ‘project launch’ gate is passed because from that point, what might be considered to be serious activity can begin. So there are five elements that must be understood, ‘sold’ to and agreed by all project team and stakeholders as part of the start up process. These are: • Agreed specification of requirements (subject to planning) – objectives/scope/ deliverables • Definition of method of delivery (which design will we pursue from a list of alternatives) • Business process – for project monitoring and requirements delivery • Organisation – program/portfolio/project/communications/ownership & responsibility • Identification and planning of constraints – time/cost/resources • Risks – to time/cost/resources/success of the project

10.5.1 Specifying Requirements The importance of a clear specification of requirements can’t be emphasised enough. It is the ‘womb’ from which all other aspects of the project including organisation, planning and implementation are ‘birthed’. So the following aspects of those requirements need to be considered: • Objectives: what are we actually trying to achieve – and in a service industry this needs to be quantified in specific terms of: • Level/quality of service • Focus group/target for provision of service • A definition of value – any expected return on investment/financial/environmental/cultural/social – e.g. if a better health service does not ultimately yield tangibly better health then there is no ROI and therefore no value • Scope: what are the boundaries/extent of this service? • How broad is this scope e.g. geographically, culturally, type & severity of the need being served? Gurnett

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Who, what and how will it serve? Who, what and how will it not serve? How do the ‘boundaries’ affect other interfacing parts of the organisation? Are there phases which embrace parts of the scope and not others? Is it part of the project to ensure sustainability?

• Deliverables: what are the required outputs for project completion? What will be the actual outcome/tangible provisions of this service, and what elements constitute its completeness? • Risks and assumptions: what are the known risks at this time? How might they be mitigated or managed? Are they worthwhile taking or should they be avoided? • Constraints: targets & CSFs for ROI, KPIs, time, cost, quality.

10.5.2 Definition of Design and Delivery Method How will we provide this service to meet the specification and standards required? This definition will emerge from a well constructed list of alternatives based upon research, feasibility and conceptual methodology. In principle, the greater the number of alternatives that can be identified, the greater is the likelihood of reaching an optimum solution. Alternatives should be weighed against success criteria, advantages, risks and constraints and the best selected on the basis of value, suitability, flexibility, and capability.

10.5.3 Business Process How will we actually do this? What will be the checks and balances that ensure consistency, quality, standards, safety, reliability, legality? How will we monitor progress to time, cost and quality and drive the project forward? What will the criteria be for passing the project to the next stage/phase and release of further funding and resources? It is important to optimise/trade-off elements of the process to: • Meet agreed metrics for these elements • Avoid driving time and cost into the project unnecessarily

10.5.4 Organisation How the project is organised should be dictated by the specification together with the availability of key stakeholders and resources to plan and implement the project.

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Firstly, is this in fact a portfolio or a program of projects contributing to a single business/service goal? In which case, one or more additional layers of authority may be needed above the several projects, to ensure adherence to overall business goals, process, and cross project communication. How else will the project be structured to ensure best communication and understanding of ownership, authority, accountability, availability and task performance demarcation? Will there be a steering committee of stakeholders? How much will the actual ‘customer’ be part of the organisation/communication & feedback?

10.5.5 Constraints Planning Elements of the planning of time, costs and resources should be considered before, during and following completion of the project specification and organisation. During the planning process, both specification and organisation are subject to change. The planning process will reveal areas of high and low, desirable and undesirable time, cost and resource commitment elements which will inevitably require trade-off. Planning (initially of timescale) should be done: • • • •

Following best practice project planning processes In as much detail as possible As early as possible With all parties present, including (where appropriate) all stakeholders and external agencies • Using proprietary software Constraints planning is an iterative process. It will not cease until the project ends, the specification and organisation also need to be constantly ‘available’ for formal adjustment as the project proceeds.

10.5.6 Risk Identification and Planning Some sponsors and stakeholders can choose to be unsympathetic to the likelihood and level of risks and can exhibit cognitive dissonance and denial when it comes to any kind of hazard planning for any project. This is in itself poses a huge risk. Threats to the success of the project need to be identified and declared as early as possible in the project lifecycle, further risks should receive similar treatment as they continue to emerge throughout the project. The following process of considerations needs to carried out for each risk: • Choice of strategy – manage/mitigate/move/ignore • Probability of occurrence – How likely/how quickly • Impact – on time/cost/quality/resources

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Capability – competence/time/budget/materials Plan of action – what/how/who/by when Monitoring – plan progress/results Communication – all of the above – to whom?

One additional word of warning is important here. In addition to risks which are largely quantifiable and can be planned for, there are also uncertainties. Most of these we cannot plan for though we may know that they may happen, but still there are some things that will occur completely unexpectedly. … there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. Donald Rumsfeld

10.5.7 Action and Implementation Throughout the project lifecycle we are ‘managing activities and risk within a process’. The business or project process, together with events both predicted and unforeseen, will therefore largely dictate how the project progresses. Despite due diligence employed in arriving at an agreed project specification and project plan, there is always an element of unknown factors. That is why it is essential to: • Maintain planning and updating routines to time and cost– especially since we can only plan what we know in detail at any given stage of the project • Continuously review requirements specification, scope and deliverables in the light of changes occurring • Identify, analyse, apply strategies and action plans to all emerging risks • Maintain good (defined) levels of communication across all elements of the project organisation Potentially a huge part of the project lifecycle is taken up with testing products where often stringent, multi-faceted tests are required to get a product to its desired standards of functionality, durability, reliability, safety, legal etc. These tests and the subsequent re-working/redesigning of goods are almost always conducted prior to launch, before any customer has had sight or use of the product. Once the product is launched, any ‘failings’ or dissatisfaction with the product can actually provide opportunities for new project s. These will launch enhancements, ‘new’ models and releases of the product ultimately generating further revenue. For both products and services the real test of how well they perform are almost always subject to the customer, environment, policies, operation and management of the organisations that are responsible for operating them. Some of these aspects are unpredictable, but in most cases they can be simulated prior to a product launch. Not so for many services. They can really only be tested once the service is being used, since they are reliant on one or more of the following unpredictable aspects which in most cases cannot be simulated well enough prior to some significant use or abuse of the service:

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Operator mood, behaviour, level of commitment Interpretation of how ‘good’ the service should be Customer demographics: geography, culture, ethnicity, background etc. Customer reaction Pressure of over demand Choice to not implement all of the service elements Degradation over time of service in one or more aspects or parts

It would be wise therefore to introduce a strictly planned and monitored Change Management phase to aid implementation and roll-out. So we might need to consider (preferably at the beginning of the project), is this part of this project, or is it part of the operational requirement for introducing a new/improved service? This is one reason why the project definition is so important. Was ensuring and proving that the system would operate under different, varying/adverse conditions part of this project brief or was it simply to design and deliver a service? What does deliver mean here? Projects are not generally remembered in the light of how they conformed to time and cost, but rather: • • • • • • •

How they were implemented How they were received by the user organisation How much change was imposed and how quickly How much the user organisation was involved in planning How much support was available from and for those implementing What was/is the customer perception of the service? How does it perform under pressure?

Poor implementation of e.g. a manufactured product can be hidden behind that product, since if it is good enough it will be well received. A service industry does not usually have that luxury. The psychological and cultural effects of a badly implemented service project on a user organisation would automatically reflect on the service provided and on the customer receiving it.

Chapter 11

Are You Being Served? Mairi Macintyre, Glenn Parry, and Jannis Angelis

This book came about as the growing community of practitioners and academics were progressing the area of services to new levels of understanding. Servitization was first introduced as the trend in which corporations offer fuller market packages or bundles of customer-focused combinations of goods, services, support, selfservice and knowledge. As production becomes increasingly commoditised in the eyes of the end user, companies have pursued value downstream through greater customer involvement and interaction. This change in business focus, and indeed strategy, has presented new challenges and opportunities to all involved with it. Throughout this book various elements of design and delivery elements of effective services have been explored and discussed in depth. We started by considering what was really at the heart of effective services, responses one can elicit from a customer or user of the service. We then traced the history and development of the service industry and the importance it has played in generating economic and social value. For the latter, the science underpinning service offerings is one that needs to consider the sociological context. IBM was presented as a case demonstrating how enterprises can successfully reinvent and transform themselves to meet the ever changing needs of its customers. The case shows how business offerings can change from a focus on products to services. It also illustrates that change does not happen easily or overnight. It takes time for the appropriate processes to develop and take root. Consideration is also given to the lean principles and techniques initially originating from Toyota. Lean service is a growing area of both research and application, covering relevant principles and techniques, and their implementation in a new contextual paradigm. The chapter explores how principles and techniques that have been developed for the efficient and effective manufacture of high quality vehicles may be adapted to fit within a service context.

M. Macintyre (*) WMG, University of Warwick, CV4 7AL, UK e-mail: [email protected] M. Macintyre et al. (eds.), Service Design and Delivery, Service Science: Research and Innovations in the Service Economy, DOI 10.1007/978-1-4419-8321-3_11, © Springer Science+Business Media, LLC 2011

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The ICI case study presents the value proposition of an enterprise, covering how it is designed, managed and presented to the market. The chapter provides an example of a company undertaking the transitional journey from product to service provision. From this servitization a range of tools are derived which may be useful in such business development. We then turned to the emerging discussion of experience or output oriented value propositions and the relationship between the two areas. This is an issue that can only grow in its importance as strengthened competition and budget constraints demand an ever increasingly sophisticated understanding of customer and end user value. Case studies exploring the complexity of deploying services were considered next. Service offerings frequently require the provider to go out the customer. Three cases were presented to illustrate the challenges faced by such value propositions. The chapter employs the cases to explore in further the complex theoretical and practical aspects of service delivery. As firms specialise and focus on their core competences, they must collaborate with partner firms to be able to provide product and service offerings. This is an important element, and to this effect the added complexity of multi-organisational service delivery was explored. This raises a particular challenge for managers, as they must take a holistic approach. They must see beyond their individual business units and company structures and manage the whole system as an integrated enterprise. It is this enterprise that in the end delivers the service experience. The following chapter considered the issue of service costing and pricing. The main challenges for modelling through life costs were presented and an overview of the current approaches described. We believe that the understanding of service costs is a challenging but critical issue for businesses, and one that will receive significant attention over the coming years. Throughout the book we have sought to provide a strong business focus, remaining pragmatic in the presentation of challenges and issues faced by energetic managers seeking to add value to their existing product offerings. We have presented solutions to challenges faced by those currently delivering services which hopefully may prove insightful. As an aid we have incorporated the experiences of a number of leading practitioners, which we hope generates further understanding of the service challenge – the illusive ‘how to’ – for public as well as private sector institutions. So what does the future hold for services? Service industries dominate the world economy today in terms of the revenue. However, most of the insights and best practice examples presented in the business and management domain, both academic and practical, have been drawn from the manufacturing sector. Currently many organisations, including successful large manufacturers, are making the transition towards becoming service providers – the process described earlier as servitization. This may be considered both as a systematic plan designed to achieve a particular long-term strategy as well as a trend.

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Will this trend continue? What are the indicators of a successful transition? Where does the value lie? How transferable are manufacturing concepts in realising value in the service context? We hope that this book provides a base camp for those interested in and keen to actively address these challenges. We also aim to help stimulate thoughts and reflections which will enable us to learn more about service in practice and subsequently develop new supporting theory, helping those engaged in the development of leading service businesses in the years to come. We hope that the development of understanding may enhance the value we all derive from our service experience.