Value Creating Service Systems

Outcome-based Contracts are NOT the same as solutioning

2012-01-05T14:29:00.001-08:00

I've been told many times that outcome based contracts, such as flying hours, power by the hour, availability etc. are actually solutions-based contracts. (more on outcome based contracts at my previous blogpost here)

It's not.... so I thought l'll blog about the difference. Much of these insights come from my research in OBC so if you want the papers, check out my academic site

1. Diferent capability. Ability to achieve outcomes on Outcome based contracts means a capability to co-create, partner, collaborate and work together with your customer (see blogpost on value co-creation). That means you recognise that you need to keep your customers engaged and working with you and you develop your capability to do that. Solutions imply a passive customer. When you deliver 'a solution' it implies you do everything, and everything is under your control and the customer stays as a passive 'consumer'. Companies that don't really know how to collaborate, co-create and partner often prefer solutioning. Why? Because they want everything under their control. Co-creating and partnering is hard because they lose control. The ability to achieve outcomes on OBC is therefore a different capability from solutions. It's a capability of managing customer autonomy and complexity.

2. Different system. The system of solutioning is complicated. The system of achieving outcomes is complex. Complicated systems often means there is a central 'command and control' to achieve a solution. Complex means parties are autonomous and collaborating to achieve an outcome (see blog post on complicated vs complex). Complicated systems are based on reductionistic engineering science. Complex systems are based on holistic and systems science. Two completely different ways of understanding, viewing and analysing the system. Complicated systems are usually closed systems where anything outside comes into the system through designed and pre-specified conduits for inputs and outputs and predetermined 'touchpoints'. Complex systems are usually open systems where, because of autonomy, allows for a freer flow of people and information. I must stress that there are often closed complicated-type systems within complex systems so the distinction is a logical one, rather than a physical difference. We have inherited a world where often managers use reductionistic science to carve out the 'problem space' and solve it in isolation which can create more complexity from unintended consequences elsewhere in the system so its hard to tell the line between complicated and complex (there usually isn't one).

3. Paradox of solutioning is that the more you provide 'solutions' and relegate your customer to a passive role, the harder it is for you to please your customer. The logic is that an engaged customer is a happy customer because you respect their autonomy and yet able to manage the cooperation. Wanting your customer to be passive is like wanting your child to be passive and you provide everything for a child. it usually doesn't make for happy children.

4. Sometimes more expensive. Solutioning is sometimes more expensive than OBC. Why? Because to provide the 'solution' a provider need to price resources where ideally, some of these resources should not be provided by the provider but by the customer, because the customer, at the use end, has more updated information. For example, say you provide a security service for a house. If your customer wants 'incident-free' as an outcome, it goes beyond just patrolling the grounds or cctvs. It is also knowing when there may be a particular event in the house (e.g. a celebrity visit) where the event could attract security incidents. Your customer knows it but you may not. Not knowing it may make it costly for you as you need to overprovide or be overly cautious. If the customer is also responsible for the risk, the total cost of the outcome may come down. Of course, OBC could also be more expensive sometimes because of cost of cooperation/engagement. Hey, its a capability right? It's not meant to be easy.

5. Complex outcomes vs functional complicated outcomes. Some outcomes are impossible to be 'solutioned'. For example, if you may be able to provide the 'solution' of constructing a 'village' (build houses, townhall, parks, roads etc.), but you can never provide a 'community'. that can only be co-created. Similarly, many emergent properties of systems e.g. family, experience are co-created and not 'solutioned'. So if you are outsourcing a service of your firm be very careful what outcome you are outsourcing. I see firms specifying functions to be outsourced and then becoming very unhappy because they got the outcomes wrong. Its easily to think the world is about functions. Often the outcomes we want are complex outcomes and not complicated functional outcomes. Specifying only the complicated functional outcomes for outsourcing is the most common problem I encounter because it underestimates the reduces the full outcome of the 'outsourced' element to only a function when that element was achieving more complex outcomes when it was part of an internal division.

6. Variety. Solutions and reductionistic engineering science in systems are really useful when there isn't much variety in the system i.e. in the context of customer 'use' of your service, there aren't many anomalies e.g. the experience of a flight. In such cases, a fully systematic system could be put in place where almost every contingency have been covered. When you have a customer in an enclosed cabin, there isn't really much else s/he needs except sleep, eat, drink, entertain (which is why I always think they dont want to give us internet access). In systems where customer 'use' of a service could have high variety e.g. a resort hotel, trying to 'command and control' the experience could end up with the customer disengaged. Be careful how you try to limit variety because not only do you end up not co-creating value, you engineer a disengaged customer. 'Variety' is double edged. It means more work for you but also an opportunity to create a better experience.

So in short, outcome-based systems are not 'solutioning' systems!

-- Posted from my iPhone

New Year gripes on Top Tenners

2012-01-04T03:23:00.000-08:00

Alright, alright since everyone is in that kind of a mood where new year predictions, and top tenners abound, I thought I'll blog mine. Here are my top six gripes about the top ten things that most top ten lists are talking about in 2012

1. Big data will just be fad of visualisations. Until analytics sort out HOW macro level visualisations can actually make individuals do things differently (micro level interactions), it will fizz out. The key is EMPOWERMENT and big data gives us visibility, but not empowerment i.e. it does not tell us how the individual entities can CHANGE the phenomenon, or how the phenomenon could be co-created, rather than merely described. Don't for a minute assume that the system is the aggregate of the one; when you decompose a system, you get the fallacy of decomposition i.e. what is good for the one, may not be good for all, and what might be overall 'good' for a system could be a false optimal because it may create perverse incentives and adverse selection at a micro-level. This micro-macro aggregation and decomposition issue has been around for as long as economics and systems theory and it is the reason why there is no real link between macro economics and micro economics (did you really think that macro economics derived from micro economics? stylized facts do not a theory make...ok ok I'm being harsh). I just worry that big data empowers the wrong sets of people - people who use it to manipulate, command, control and direct without any wish to empower, co-create and engage. Be careful the firm that talks co-creation but uses big data.....

2. Social networks grow older, more serious, less fun. Maybe you haven't noticed it but I have. Young people are starting to move out of facebook, twitter, google+. its become an 'old persons' thing now. My girls say 'Facebook is what your parents use'. Corporates, advertisements, privacy issues have taken all the joy out of social networking for the young. To the young crowd, gaffs, faulty privacy settings, faux pas - they are all part of the entertainment of social networks. Now its all 'check your privacy', 'make no mistakes', 'don't click on this', 'predators out there', 'whom to add' 'whom not to add' 'watch for spam' 'mark zuckerberg cannot be trusted with your data' - adults (and I mean adults in the logical sense and not the age sense) have a wonderful way of killing everything that is enjoyable (and risky of course) to the young (and young at heart like me ;p). I'm not saying we should let our children be stalked by pedophiles or give our data to zuckerberg. I'm just saying that our cautious attitudes are killing social enjoyment on line and many are leaving in droves. 'Corporatisation' is also making social networks an adult platform now, so this is all becoming all too serious. implications? well, we know the young are the derring-dos, the ones that try new and different things. They throw cows, act audaciously, say too much, show too much but resulting in more interesting interactions - adults are just. so. boring. and. careful. My pet theory is that for young people, the more they have on their network, the more they interact; for the adults, the more people on their network, the more scared they are about revealing too much about themselves so interactions reduce, which of course does not do well for the health and life of the network and I think its starting to happen already. so I predict a slowdown of ideas and innovation on such platforms. bring back the brave, the young and the risk-takers - we need you for the excitement! if not - every social network will become a linkedin. imagine how boring that is. I feel like throwing a cow at someone right now but that would be too old. the young have moved to 9gag and beyond. sigh.

3. More firms will fail. Not really a prediction, because with the 'lack of growth' and 'economic stagnation' (see gripe no. 5), one would expect it but its why they fail that I think is interesting. My prediction is that more firms fail because of more firms coming into the market and squeezing the old firms out of new opportunities. The firms that fail are those that think that the world is still the same, and they underestimate how quickly they need to be more agile and entrepreneurial, or how fast they have to seize opportunities. Have you noticed how many people talk about 'change' and 'innovation'? That suggests a systemic problem. 'have you also noticed how many firms start initiatives and committees on change and innovation? that suggests what they think is the solution. Folks, change and innovation is not the same as productivity and efficiency. the usual way of 'managing' it is usually the first step towards killing it. of course i am not suggesting we dont 'manage' it. i am only suggesting that we take too many of our old tools and hope that all the problems are still nails and screws. But the market is a marvellous thing. New firms, new entrepreneurs will carve the way and they may even collaborate with more forward looking old companies. I like to ask companies 'so how are you not changing today?' or perhaps 'how are you impeding innovation today'. 2012 will (I hope!) see the battle against traditional 'management' and more 'intervention', 'self organisation' and intrapreneurship.

4. More intrapreneurs, less managers. I read this morning an article on a top business school crowing about where their ranking is on the worldwide MBA school list and I'm thinking, do I really want to shout about that? When so many firms, with managers educated by the world's business schools are not really performing well? Are they even in touch with what's happening around the world? I know the reply to this. Schools will say they teach specialist subjects such as strategy, marketing, OB, finance and its up to the managers to practice what has been taught, rightly or wrongly but I can't help feel, as a systems person, that there is something wrong when we teach business in piecemeal terms without giving an understanding of how its is holistically practiced. I mean, the medical profession also teaches in piecemeal terms (neurology, etc.) but they extol a healthy clinical education, a holistic education as part of the specialist knowledge and not separate from it. I think there is something wrong with business school education but that's an old refrain from me so I'll stop. I think 2012 will herald more intrapreneurs - I mean, why is it that CEOs get the big press? I would like to see 'Tom Jones - a normal working Joe - wins intrapreneur of the year working for 'tradfirm' - Tom Jones is credited for asking for a budget to buy out his whole team to spend 6 months as a 'subsidiary-within-a-firm' offshoot to improve the way the company's products are being delivered and used by their customers, improvements to service and bottom line more than paid for the budget...bla bla.... one can only hope. sigh.

5. Lower 'growth' in economies, but why does it not matter so much? I get irritated when bean counters equate 'consumer spending' with the 'health of the economy'. At a micro level, I used to spend £15 to do one thing now i can spend £15 on broadband and do 20 things so...... how are we calculating productivity again? oh, wait is it still a input-output firm production measure? of course it is - oh well, if we don't measure consumer 'productivity', I guess we'll never know. We are now getting much more for our money because value is increasingly distributed in systems, shared intelligence, information and knowledge is gaining currency on its own and we can actually buy less and spend less.... someone please work out a better metric. I really dont want to be told that revival of economies will depend on how much I spend. I would like to see more jobs out there but this whole produce-spend-produce leading to jobs is just becoming nonsense in a distributed, interconnected and co-created world of multiple 'currencies'. Here's an example. Lets say I work and earn £1000 a month. For my quality of life, I spend £800 a month with £200 savings. I now find, with this new wonderfully connected world, I can get the same quality of life with £600 a month with £400 savings but actually, I dont really want to work so many hours so I now work less, earn £900 a month, still have £300 savings and an even better quality of life. Measure that. That link between GDP (total of how much an economy produces and sells) and Consumer spending (how much we spend)? its called MY LIFE, or as Christensen likes to call it, my jobs to be done! and i could do it more efficiently and with less money!

6. Work and play gets even more blurred on social media. Google+ is so going to take advantage of this. It cant compete with facebook. or linkedin. or twitter so its going to start hugging corporates i'm sure. big firms are needing social media so much to improve connections and relationships within the firm and to incentivise innovation, change and intrapreneurship so i think we'll start seeing SAP circle, IBM circle and then it would mesh with personal circles. Then i want to work 2 days a week so i have a few other circles, and we talk about wine, work, children, and song. this is going to be fun. and boring. but still fun. and sooooo uncomfortable for many traditionalists. roll on.

sorry for the long post. its the new year and i ate too much so there is some spare energy to burn.

social CRM: some thoughts

2011-12-20T14:16:00.000-08:00

So there's been some buzz for awhile about social CRM. I must admit not to have read everything. Just bits and bobs over time but Michael Brito's blogpost about thought leadership in Social CRM (here) caught my attention. It made me aware that I have been doing so many seminars and talks on my research that I've forgotten the stuff I used to be teaching i.e. Marketing and how I've not really integrated the latest of my work with the bog standard stuff that used to be out there. I recently did one about the 4Ps (here), but thought maybe I should now tackle social CRM, and blog some of my thoughts about this changing landscape.

So CRM is some kind of systematic way of interacting with the customer but social CRM is more than that - its about engaging the customer in 'conversations' supported by a technology platform e.g. through facebook, twitter etc.

So here's what I'm thinking. First, your customer really hasn't changed much. If he has been using your product all these years, he probably is still doing the same thing. Except that suddenly, with twitter, facebook etc. your customer now has a voice. And you can hear them. And just because you can hear them, you suddenly decide its a good idea to have a conversation with them.

The real meaning of conversation, is what Milton Wright would say "an art or creation that two persons can give life to, or play with". In other words, conversations are usually interesting. Herein lies the problem with Social CRM. It's not. I mean, how can a conversation be interesting when the point of it is (as some sites have proposed) 'to assist firms to become more social, gain intelligence or harness customers as a resource'? That sounds really like having a conversation at a bar with an egoistical self centred self serving 'friend' you just met whose interest in you is all about how you can help him. ugh.

OKOK, not all social CRM are like that but if you trawl through the internet and ask about the examples of excellent social CRM, they generally fall into 5 categories. Here are the first 4: (1) feedback (2) damage control (3) promotion (4) brand identity. But guess what. It means that social CRM is just another marketing channel because those 4 are exactly a channel where firms connect and communicate with their customers - about the FIRMS, not about their customers. Nothing new there - certainly nothing new that SOCIAL CRM is contributing to thats not already available in OTHER CRM strategies. It's the usual firm-centric engagement.

What is really interesting would be the 5th example of excellent social CRM. That is around personalisation. This is where I think social CRM can really make a difference both to firms and to customers that is distinct from traditional CRM and marketing.

The idea of personalisation is that the firm can get personal with their customers, and start to socialise with them, building relationships. So let me tell you about how I am social. It's to do with my friends, my activities, my interests, my life. You want to get social with me? you've got to GET me. No, its not about pulling the conversation to what you want to talk about. its about what I want to talk about as well. its about my value creating context around your product, not yours. What do i mean? Well, let's say the department of motor vehicles wants to get social with me (why, I have no idea). Now, to the department, my car is 'transportation', which is around their categories of transportation i.e. bus, car, rail, planes. that's the government's value context. My car? my car is not in the 'transportation' value context. My car is in 'go work-go supermarket-fetch child' context. So if you want to get social with me about my car, you'll have to get social with me about what my car enables me as a resource in my micro context. So I think the biggest problem with firms when they want to embark on Social CRM is that the content around my context for social conversations may not be their content......mm... you can't blame organisations. they've just been brought up badly. ;p

There is a second aspect of social CRM that has also intrigued me about personalisation.

The firm is a macro system. I am a micro system. So conversations between me and 'the firm' is a bit odd. Its like me having a conversation with a crowd and expecting the crowd to have a single voice i.e. that person interacting with me. i mean, how does that work? I suppose that could work functionally like if I wanted to ask Mcdonalds how many countries they are in, or if I want to know the ingredients in my shampoo, I can tweet and ask and the 'disembodied voice' that tweets back is just responding to a query. But personalisation in social CRM is about conversations - that means its more than functional. It has social and emotional dimensions. I was at my garden centre recently and checked in on foursquare and said that I was having tea and scones. I got a tweet back from the garden centre to say 'mm... i would love scones right now and hoped i enjoyed it' or something like that which is rather personal and nice in a way but I didn't know if I was getting personal with my garden centre or with this person whom I don't really know. So how do I negotiate attribution in these social messages? are they my garden centre talking? or someone whose messages I do not attribute to my garden centre? Interestingly, I tweeted back about the banana scone not being very good and the 'garden centre' replied to say 'thanks for the tip'. clearly, I was NOT talking to my garden centre. So what does 'personalisation' mean in this case?

My thoughts are that social CRM raises a major issue for the firm. How is the macro-level firm formed from its (micro-level) employees? social conversations are held at a micro level, The paradox of social CRM is that successful micro social conversations may run contrary to the firm's 'so-called' macro culture and identity but if employees talk too much like how mr mcdonalds or mr ikea would speak, i guarantee you it would be a very boring conversation. Social CRM is an excellent an opportunity for firms to evaluate how their culture and identity are formed by their employees and if its their employees talking personally through social channels, it should also be them talking as well. The part is the whole. I get this feeling that a successful social CRM would probably happen when that happens. But I also suspect that command and control organisation types would hate it.

Jobs of the Future

2011-12-18T01:22:00.001-08:00

I have just read Stiglitz article in the Vanity Fair:

The link to the article is here

The phrase that I thought I'll blog about is:

"We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality."

Nicely said, Professor Stiglitz but a little too simplistic. As someone who works in value, new business models and service systems, I would of course agree with you that the future is in services and I am pleased you are highlighting this. However, I suspect that the way you think about services might not the way I think about services and I do take issue with the way you have oversimplified it. Let me elaborate.

I argue that this 'investing in services' is more complicated you think. You intimate that the solution is to throw a lot of money into investing in skills for services when I don't think anyone can even specify what those skills are. Services behave as 'wholes' and to say that investing in skills for services might as well be saying that we should in invest in skills for the economy - it doesn't mean a thing. There is also the fallacy of composition when you decide to say 'services' because these 'wholes' (service systems) don't behave like reductionistic manufacturing systems. What is good for a part is not necessarily good for a whole (I could stand up in a theatre to get a better view but that won't work if everyone stands up) - jobs where performance is held at an aggregated systemic level and working in the interfaces are a whole lot harder to specify, given that legacy institutional structures have not been designed to work in that manner. And service systems are evolving as well. Future of services include manufacturing, as the future of manufacturing is also embedded in services, so future 'services' are a hybrid of things (manufacturing) and activities (services). What jobs? What skill sets? I am a big fan of simplification, but not to the extent that promotes false hopes and misunderstandings. Your article makes policy makers think there is a simple fix-it, or that manufacturing is somehow different from services. Bad manufacturing IS different from services but excellent manufacturers (such as Apple) would see much more convergence between the two. Therefore, while I commend your emphasis on activities to improve society's well being, suggesting 'investment in services' creates a false dichotomy and allow economists and policy makers to opt out of dealing with complexity, interfaces, boundaries and interactions between manufacturing and services, and endorsing the fundamental flaw of atomistic, reductionistic economic science that got us into this mess to begin with.

PS on article

Economics need to move towards complex systems science, a body of theory and science of connections, as opposed to conventional economic theory, which is concerned with static elements and states. Its not much of a point to say that markets will be efficient in the end. The current business and economic environment, with all its upheavals, is in need of a greater understanding of evolution, transition, and its ascent/descent to order, disorder, or chaos. We are in urgent need of a new economic systems science.

-- Posted from my iPhone

The 4Ps in marketing - revisited

2011-12-04T09:32:00.000-08:00

I've been hearing a lot about how the 4Ps are dead, and how the 4Ps are alive and well so I thought I'll blog my version of 4Ps and join the debate.

The 4Ps are alive and well. But perhaps not the way we think about it. In a sense, 4Ps have always been rather firm centric - its about the price the FIRM charges, the place the FIRM sells its offerings, the product that the FIRM offers, the promotion that the FIRM has to undertake. So I thought I'll have some fun and turn things on its head..... in a co-creation sense of course. (if you need to understand value co-creation, check here).

1. Price

Yes, there is still money to be charged, but increasingly, 'price' is no longer a consequence of a sequential activity. Its not what I get for what I pay for anymore. I mean, how do pay for google, or facebook? or how do I really 'pay' for getting the nutritional attributes of food in the supermarket when i scan the barcode and read it off an app? There is money floating around somewhere but increasingly, the revenue is being distributed, just as value creation is distributed within the system. Also, it's not what the 'price' we give firms now, it's what we get back, as SDLogic will always say, we are resource integrators, we integrate resources and money is just another resource. But I actually argue further - that we are getting multiple outcomes for one 'price' - e.g. paying for broadband and a computer and then getting so many different types of outcome from social networking, surfing the net etc. so I would argue that the monetary system is becoming less and less relevant in achieving outcomes through systemic collaboration and distributed intelligence and information. My favourite theory is that money, because it is so generic a resource, is increasingly 'devalued' - so an outcome for outcome exchange (I walk your dog, you cook me a meal) has greater 'goodness' or 'value' than if it went through a market which is why as technology increases efficiency matching needs from connectivity, money may be increasingly irrelevant for societal happiness. Very far fetched, I know, but as a business economist, its currently my pet theory. I'll model it if I just had some time :(

2. Promotion

oo.... let's get a little creative here. Companies still promote - a lot. The ads on google, proximity marketing through foursquare; groupons etc. they are all there - just using a lot of technology. But there is a subtlety that many have not noticed. Instead of taking their products as given and 'promoting' their offerings, companies are starting to change their offerings too.... drug companies realise they are not just about medicine, there is nutrition, well being etc. so they are co-creating value in constellations that are not just about the physical, but about their meanings. From music (bands), to perfumes, firms are dematerialising their 'products' (see blog post on dematerialisation), co-creating value through identity, culture and families. the new world of promotion is not just about firms influencing customers, but customers influencing firms' offerings' design, and customers influencing customers through social networks and creating systems of shared values.

3. Place

You know where I am going with this from the previous promotion bit. Place is not just physical space of course, but virtual space. and its not about channels of purchase, its about channels of influences, experiences, meanings, symbols, and again, the firm dematerialising the product so that it can be in multiple 'places' in different forms, creating new and interesting business models. this is beyond plurality in channels or buying channels. this is the firm being the true organiser of value co-creation, and understanding what resource or information is needed for different channels.

4. Product

I am starting to sound like a broken record. but to quote previous posts, technology liberates us world from the constraints of time (when things can be done), place (where things can be done), actor (who can do what) and constellation (with whom it can be done). The PRODUCT, in ALL of that, can be better designed to allow when it can be used, where it can be used, who uses it, and with whom it is shared with. Requirements of the future is looking at technologies from quantum information to artificial intelligence, composite materials that are light to nano technology that create multiple forms of use value, we will start making things that connect better, that can be mobilised differently, can be sent differently and can be used across time and space.

So that's my quick take on the Marketing 4Ps.

And I can't wait for the future. Oh wait. it's here. :D

Dematerialisation and Density: New Business Models

2011-11-28T02:38:00.000-08:00

So I spent my last post on things in context which will now lead me to talk about how we create value in context. This is quite a complex post so bear with me.

Value is created through interactions, through acting on someone or something. We integrate resources available to us, available in context and available through the thing. These resources available in context allow us to enact out the value creating practices. These practices could be to realise what the thing is for (e.g. watch TV) or even to manipulate the thing itself and modifying it, not physically, but in terms of altering its function to what it can afford (enable) in context. A simple example would be to put a few books under the overhead projector to get it to project at the appropriate location (functional affordance) so the individual harnesses the book's material agency to achieve his outcomes. Another more complex example is the social and subtle battle between managers to locate the photocopying machine as far away as possible from their offices not because of noise etc. but the lowered social status associated with the office being closest to the photocopying machine (we've all been there before?)... you can read all about sociomateriality from Wanda Orlikowski's work.

So back to the point. We can harness the thing and people around us for resources to be integrated to create value but what is the value? In my earlier posts, I talked about emotional, practical and logical dimensions of value but value, to me, is some form of 'goodness'. We co-create value in use because it's good for us and we are better off because of it right? But being good for us may not just be functionally good, it could be some emotional good. So let me give you a very concrete example around a project we are in the middle of. This project can be seen here (EPSRC Co-production of Physical Products and Value Co-creation - Scalability in the Wild). The topic..... CHOCOLATE .......the BBC coverage of our work is here, the Telegraph coverage is here. Essentially, Exeter engineers have developed a chocolate 3-D printer which allows design and printing of chocolates as gifts. This is great. My job - what's the business model?

The answer is tricky because business model has to think about demand (i.e. what is the need fulfilled) as well as supply (how do we scale that fulfilment). The 3D printer isn't very scalable so if suddenly a million people wanted chocolates printed in their own customized way, there is no way that printer can do that. Also, chocolate is a complex product - hedonistic in many ways.

So what did we do? Before I tell you that, let me give you description of the thinking behind our chocolate project and explain dematerialization and density.

Dematerialization and density are the concepts introduced by Normann (2001) to illustrate the possibilities and opportunities to rethink the logic of value creation through reconfiguring value constellations. Technological development liberates us from constraints of time, place, actor and constellation in terms of value creation. We can separate information in terms of activities from physical world and assets and allow it to be easily moved about. This is one mechanism referred to as ‘liquification’. We can also separate activities from the well-defined existing time/space/actor units and assets (unbundleability) and then relink these activities, new time/space/actor units and assets (rebundleability) to create new value configuration. This is another mechanism of ‘dematerialization’ termed as ‘unbundeability’. Thus, dematerialization refers to the two mechanisms (liquification and unbundleability) to further promote rebundleability to create new densities (Normann, 2001). ‘Density’ is described as the best combination of resources mobilised for a particular context such as a particular customer at a given time and place. (summary above thanks to my postdoc Susan Wakenshaw. Tks Susan!)

With that description, here is what we did.

We went and conducted a series of interviews about what is so good about chocolate (consumption practices, ethnographical study). We found 10 major practices of chocolate and we also deconstructed the meaning and value of chocolate in these practices. Then we separated out the physical from the information. What does that mean? Out of the 10 practices, only 3 really needed the actual physical chocolate. The other 7 were practices that didn't really require the physical chocolate as a resource e.g. nostalgia, sharing - they required emotional, past memories to co-create some of the meanings but not the actual physical chocolate.

What we did next. We then separated the information of the chocolate (the 7) and are now creating a new website as a chocolate co-creation platform for individuals to co-create the meaning of chocolate. In other words, we are translating the physical practices of chocolate into virtual practices of chocolate. However, there are still 3 that need the physical so we have to ensure that the platform that enacts the 7 physical-to-virtual practices (pvp) interact with the 3 physical practices by having the chocolates designed and printed out on 3D and sent/eaten. But the business model has to make sure that the 7 pvps platform can be fully scalable while rationing demand for the 3 physical value practices (not so scalable). Not going to give you the gory details but it's really interesting for me who works in understanding value and using it to derive new business models. It is also interesting as we start moving towards greater connectivity and technology how we need to understand value creating systems and what value is created where, with whom and how, and more generic frameworks around it. We also have to think about recreating contexts, and resources that can be enabled in context by the platform. Fun stuff!

By the way, I need a whole community of beta testers so keep in touch on twitter and we'll let you know when it's up!

2011-11-21T02:51:00.001-08:00

Dematerialisation & Density: The Value of Things in context

We hear it all the time and I've certainly said it again and again. Value comes from use, value is in context but why is it we still hear firms talking about value as the money they get for their things, and we still hear how they firms 'add value' as though the things in themselves have value?

So I really want to blog it to set things right. It's also the first of a series of blogposts around Dematerialisation and Density because it leads up to my current research projects. So let's start.

THINGS HAVE NO VALUE IN THEMSELVES. repeat after me. ok. then you go back to business and start talking about getting more value from the things, keeping the factories open, keeping the jobs coming in and you have forgotten what you said. so let me join the dots for you.

THINGS HAVE VALUE BECAUSE YOU IMAGINE IT'S USE. so basically, its not the thing you value, its what you THINK the thing is going to do in your life. that iPad has no value, you are imagining reading a book, checking emails... you are attaching the use of the thing in the context of living your life that is of value.

so.....WHEN YOU IMAGINE ITS USE, YOU IMAGINE THE CONTEXT. so not only do you think about what the thing is doing in your life, you had an imagined scope of where and how and when the thing is used for (the context). that's why you think the thing is good. you are really thinking thing-in-context is good, which you believe means the same thing (wrong)

YOU IMAGINE THE CONTEXT IS CONSTANT BECAUSE THE THING IS CONSTANT. yup, so when you buy an iPad, the iPad doesn't change its form, get moody, or become a different iPad at different times so you believe the context of use can stay the same too........so when you buy the iPad, you are thinking about lying in bed, reading. when you're thinking of buying that apple, you are thinking about eating it in the next hour, the toaster and the warm toast etc. etc. etc. so when you're buying something, you're actually evaluating the value of the THING thinking that it is a THING-IN-CONTEXT

here's the bad news, firms don't manufacture context. they manufacture things.
and the good news? YOU 'manufacture' the context. and then magically, they come together and it is good.

that's co-creation for you.

but CONTEXT changes. context comes with contextual resources for you to be able to use, experience the thing. From simple contextual resources such as light to read, quietness to talk on the phone, to more complex 'emotional states' that lend resources such as mood (to enjoy a glass of wine), or composite combinational resources created by you and your environment, CONTEXT is not a simple concept. And context exist in layers as well - from a micro to a meso to a macro level (see Chandler and Vargo, 2011, Marketing Theory). Also, context is not external to you. YOU are part of the context. So is the thing. So the value creating system is YOU(ACTIVITY)-THING-ENVIRONMENT - that's context. change one, change all. change the 'goodness' created. change the value of the thing.

so what do firms mean when they talk about 'adding value'? well, ahem, they just assume you will do your part right? just like you thought the thing was constant and you decide to manufacture all sorts of contexts to use the thing, the firm thinks YOU are constant and they decide to make better stuff (we hope). and they call that adding value because they want you to pay more NOT because they are giving you more 'goodness' (how can they do that, when they dont control the context?). what firms DON'T often get is when they change the thing, they often change the context that you need to 'manufacture' as well. example. mobile phones morphing into life-enabling-thing.

why does this matter? The world of connectivity is starting to enable different contexts, we can now 'see' context better, measure better (you see me talk a lot about context in my research into systems and how we are collecting 'verbs' etc. as measurement of contexts, I have an EPSRC research project on contextual invariances in energy consumption and business model). also, you see the rise of data analytics because the visibility of experience and consumption is giving rise to a new strategic lever for changes in behaviours and society - strategies surrounding CONTEXT. you also see things and contexts interacting at design stages.

so... for all those who really want to know what is value, how it's created and why people buy at higher or lower prices etc...........IT'S THE CONTEXT S****D.....

lol, i've always wanted to say that. next blog post (soon i hope).... more on contextual value...I will soon come to dematerialisation but these are a series of blog posts that would lead up to it.

Complicated vs Complex Outcomes

2011-08-15T21:24:00.001-07:00

I've been asked some questions on complex outcomes so I thought I'll blog it. Question: whats the difference between complicated and complex outcomes/systems and what's the difference between performance and outcome-based contracts?

Some of you who are systems-inclined/educated people would know the answer to this. Here are a few examples of complicated outcomes:

1. Getting your baggage from London to Sydney

2. Designing and constructing a village/township

3. Brain surgery

4. Putting a man on the moon

Here are some examples of complex outcomes

1. Giving you a good experience from London to Sydney (customer experience)

2. Designing and creating a community

3. Health

4. Bringing up a child

Whats the same? Both complicated and complex outcomes have multiple components and entities. They also have many moving parts that interact. But the key differences between the 2 are (1) no 'mission control' (non-determinism) and (2) emergence

Let me elaborate on this. In brain surgery, the doctor is in charge. in putting the man on the moon, Houston is in charge. in getting the village/township up and ready, the town planner/architect is in charge. These are complicated outcomes but there they could be determined with good algorithms, calculations, specifications, implementation - and there is a command and control structure. In complex outcomes, there is no mission control. These outcomes are achieved because they are co-created, collaborative, interactive outcomes that emerged from the system. Yet, very often, these are the outcomes we want - customer experience, communities (think facebook), nationhood, a family.

Traditional science and engineering has taught us to reduce everything and then put them together to get the outcomes we want. That's good if we want complicated outcomes. Not so good if you want complex outcomes because in complex outcomes, the entities are autonomous (think of the recalcitrant child, or the villagers), and the outcomes we want require collaboration and co-creation without any explicit control mechanisms. We would like our children to co-create a family, we want the villagers to co-create the community but we dont have rights, controls or powers over their co-creation resources.

Moving to the commercial world, that's the essential difference between performance and outcome-based contracts. Performance is complicated. I can get the performance of a supply chain of an aircraft by putting together people (who follow processes), processes, assets, etc. and I can determine that performance by ensuring everything works smoothly so that the plane is available and 'fly-able'. However, I can't get the outcome - flight from london to singapore without the help of the pilot, the engine, the avionics - usually provided by different firms or even the passengers (who may be late); so the availability or 'fly-ability' of the plane is a complicated (performance) but the flight from london to singapore by a plane is complex (outcome).

Does that mean we cannot design for complex outcomes?

Ah, now we go into my world. This is the world I inhabit. Value creating Socio-technical systems for complicated performance and complex outcomes. There is interaction between the two of course and often you can't really tell between what is complicated and what is complex. Achieving complex outcomes may sometimes lead to achieving good complicated performance. And sometimes not. Sometimes achieving good complex outcomes could result in greater complication in 'output' performance or even reduced 'output' performance - think NHS whose targets are hugely 'performance' and not outcomes (don't get me started on metrics.... sigh). What this means is that sometimes complicated performances are aligned with complex outcomes. Sometimes they are not because complicated performances could result in perverse behaviours leading to poor complex outcomes. Example? Easy. Imagine measuring a doctor's performance based on how many people he treats. Worse metric in the world (but many healthcare people already know that). It incentivises the doctor to 'treat' and count the numbers treated rather than maintain good health and well being in the community (which of course reduces the number of people being treated). you get my meaning.

So the first thing to do with any system is to check what is complicated and what is complex. What is the value or outcome each actor/entity wish to get from the system, how do they co-create it and how is each actor/entity's co-creation aligned to the system outcomes. Is the system outcome complicated (deterministic) or complex (emergent)? how are the complicated performances aligned with the complex outcomes? How do they interact? What are the resources to co-create the complex? or complicated? are they human or material (stuff)? who are the 'actors' or 'entities' that integrate these resources that co-create that outcome? That is the heart of where my current work sits. And why SDLogic (Vargo & Lusch 2004, 2008) is a useful lens for such environments. Some of my current research into contexting, enabling platforms have actually made some advances so watch this space.

Oh, dont forget the very human tendency when we talk about outcome to only like to talk about the 'outcomes' we can control. It took me ages in a national library project to get them understand that their true outcome is their contribution and alignment towards achieving the nation's literacy (which they don't control). they preferred to talk about their outcomes as book browsing, lending etc (which they do control).

Increasingly, we see governments, firms, institutions trying their best to 'engineer' or 'specify' so that complex outcomes could be achieved. to them, i say - 'which part of emergence did you not get?' We have spent the last 100 years doing complicated rather well. We can pat our backs on putting the man on the moon, doing brain surgeries etc. We are now moving to a world where complex outcomes matter and this is a new capability. This capability uses different words. We can determine complicated outcomes. We can only enable complex outcomes. We can specify complicated systems. We can only intervene in complex systems. Often, the best way to think about whether a system is complex or complicated is to ask - 'what is the outcome'; 'is it achievable through a command and control structure' and if the latter is no, then it's usually complex.

What has happened in the last 50 years is that we've been trying to use deterministic tools to achieve emergent outcomes, essentially because those are the only tools we have learnt (systems thinkers are still a minority unfortunately). We treat complex systems like complicated systems. we try to design, specify, impose, dictate when we should be designing, enabling, intervening, stablising. The former is a different skill set and have a different set of tools from the latter. And before you think that we can treat all the world as complex, we need to factor in the fact that we have built 100 years of complicated legacy systems, often with some measure of success. The politics and boundaries of complicated legacy systems sitting within complex system/outcomes cannot be ignored. We do not have a clean slate to design systems for complex outcomes.

Yet, if we want communities (think about the London riots and how important the sense of community and engagement is as an outcome), nations, experiences, families, we have to be much much better at achieving complex outcomes, both in its understanding (research) and in its implementation (practice). Where do we start? Fund my research. ;p

The 5 Myths of Servitization

2011-07-06T13:59:00.000-07:00

It's been some time since I've blogged so I thought I'd better start before I get rusty.

Topic of the day. Servitization. I hate the term but for the life of me, I can't find anything else so I'm going to use it. Basically, this term comes from equipment manufacturing (economists would refer to this as production of durable goods) and the move towards more 'added-value services' (another term I detest) to achieve customer outcomes better. So .... the literature says that firms add value by selling consultancy, integration, education, blah de blah... so this is the phenomenon called 'servitization'. In fact, some firms are earning more revenues from selling such 'services' than they are selling the equipment itself so this means more revenue. Some studies have shown that servitizing is difficult and while revenues may be high, profitability is low and some studies have shown that servitizing is so difficult that many have failed. I thought I'll pen down some of my thoughts on this.

Myth no. 1

Servitization is an extension of your company's offering so who better to do it than the original manufacturer right? wrong. that's like saying i can't reach the pears at the top of the tree so I should grow my arm longer. Buy a pole, dummy. Achieving customer outcomes cannot be more different an organisational capability than the organisational capability to make equipment. The value of the former is achieving benefits for the customer through co-creation. The value of the latter is the transfer of equipment ownership. two. completely. different. value. and which would require different sets of resources, capabilities, flexibilities, you-name-ities. So the pole maker could possibly have a better chance of achieving outcomes (getting the pears) than you because your own set of resources (arms) would limit you. ok, maybe not the best analogy in the world but you get it right?

Myth no. 2

Servitization is about solutioning. Remember that your customer has been doing this job long before you tried to do it for them. They've realised your value proposition (equipment) through internal processes, internal education, usage policies etc. Except that nowadays you try to take over some bits of what they have done, call it a solution and sell it back to them. It could work. Strategic outsourcing has earned IBM billions so don't knock it but just make sure you can do it better and cheaper and don't moan about how hard it is. The part that some firms have become smarter at is understanding that it's not solutioning but co-creating because customers often have resources that are more appropriate than yours and collaboration for outcomes could work better (more profitably) than you taking over their job.

Myth no. 3

Service revenues and equipment revenues are different. There is a popular belief that firms should focus on service revenues and less on equipment orderbooks. Actually, equipment have become so d**n complicated that you need a rocket scientist on the customer end just to realise its use-value. To 'help' customers, firms selling complex equipment must therefore provide service. Therein lies one of the greatest moral hazards of the technology surge. Firms can make equipment that are impossible to use (in the name of great technology) then sell all the 'solutions' to ensure the customer can only get the full benefits if they help them. brilliant strategy. Of course, this is not all bad. After all, we have achieved some huge breakthroughs in technology. What it does mean, though, is that service and equipment revenues and resources dynamically interact - the specification of one necessitates the respecification of the other. For equipment customers, the next time an equipment salesman comes calling, check your resources to realise the equipment's use and before you are completely sold on equipment advances, calculate the cost of realising that use value internally. That's the hidden cost. Working with defence, I am reminded of the story told to me that 20 years ago, anyone can drive a tank. Today, you need an engineering degree (and we wonder why our defence budget keeps going up and up?).

Myth no. 4

Servitization is 'wrapping services around the equipment'. We've written on this actually (see Maull, Smith and Ng, 2011; Ng and Briscoe 2011). What we found is that when you wish to co-create value to achieve customer benefits/outcomes better, you cannot believe that your equipment is a sacred cow. I mean seriously - remember the value of the equipment is a transfer of ownership and the value of the combined service and equipment is achieving outcomes. Now if you want to achieve outcomes, sometimes, the way you have designed the equipment actually gets in the way. I'll give you an example. Say you are manufacturing an engine. You manufacture it in such a way that you can hand it over to the customer who will install it on their plane. You then provide service and support for the maintenance of the engine. Simple right? Then you find that the engine requires more maintenance and repair than normal and the costs of service goes up. It turns out that certain monitoring devices within the engine (e.g. device to monitor the health of engine component parts) are not coping very well with the heat within the engine. In fact, if what you really want is an outcome of consistent and reliable engine use, you would redesign the engine such that these devices are on the plane and not in the engine but the plane doesn't belong to you. So the design of an engine for transfer ownership is not the same design of an engine to achieve outcomes. So its not so straight forward that you can 'wrap' service around equipment. What you 'wrap' is dependent on the equipment itself. You could have much more cost effective service if you designed the equipment for outcomes (see Myth no. 5 below).

Myth no. 5

Servitization is not profitable because it requires more human resources and capability and that is just not scalable or easily replicable. Here, too, our research has given some insights and this is related to myth no. 4. Remember the example I gave about the engine? What it means that maybe (and this is just a maybe) that the reason why your service is not very profitable or scalable or replicable is because you designed the equipment wrong, resulting in the need for more skilled human resource that may be less scalable or replicable. This is what Icall the paradox of servitization. The increase scalability, replicability and profitability of the service may not rest in the service but on the equipment around which the service supports. Equipment which are better platforms for co-creation (think iPhone) and which are able to absorb greater customer variety of use, either through modularity or clever engineering design, require not only lower skills and knowledge from your service employees but also less of such resources. In other words, the equipment itself could require redesign for more scalable and efficient service activities. This would eventually translate to greater margins and if you could by some miracle, actually make it easier for customer resources to realise the use value of the equipment as well, you could get better prices and higher demand as well. Now THAT would be the right way to 'servitize'.

One of the reasons why an SDLogic (Vargo and Lusch, 2004, 2008) approach is so useful for 'servitization' (there's that word again) is that it allows one to see the system as a competency for outcomes, whether achieved through equipment or the firm's people or the customer. Service is competencies for competencies and an SDLogic lens allows one to see the equipment competency, the human competency and the customer competency in a way that can help us make better decisions on where the competencies could be material (equipment) or human or even from the customer depending on variety absorption, scalability, replicability etc. Also, through this lens, bringing in external entities (other equipment or team integration or outsourced partner) in a multi-actor network is now framed as a outcome competency decision as well as a marginal revenue/marginal cost decision for a set of outcomes for all stakeholders. Making all competencies endogenous (i.e. up for change/amendments) instead of assuming a piece of material equipment is sacred, is the way forward to better design of the service system. There's more work to be done!

A primer on viable systems model

2011-01-09T12:33:00.000-08:00

I've had requests to do a quick primer on viable systems so I thought I'll pen this here, as well as elaborating a little on my earlier post. Since this blog is about value-based service systems I think I need to explain systems a bit better. Earlier, I have explained systems thinking but now I will explain viable systems because it is foundational to value-based service systems.

So here's the primer, my style. Viable systems came from Stafford Beer (1960s) and like all the great systems thinkers out there, Beer was a real genius even when he was not sober. Actually, I kind of see the pattern here - geniuses tend to drink. which of course is my excuse for drinking. next time you see me with too much to drink remember i'm practicing at being a genius ;p

More about Beer here

Beer spent a lot of time studying systems, the interconnectedness of it all so here's a summary:

A viable system “is a system with an identity and purpose which is, in principle, capable of surviving its appointed time, whether definite or indefinite” (Leonard in Beer, 1994:347). Basically, if you think about ANY system, it is able to sustain itself and be 'viable' because there are 5 systems.

system 1: the core transformation (the purpose of the entire system)
system 2: regulation/tactical - interface between system 3 and 1
system 3: operations planning, control/audit - this system sets the rules, resources, rights, responsibilities – interface between 4/5 and 1/2
system 4: management (and R&D), strategy, environment scanning (for adaptability)
system 5: policy: usually board of directors (decisions on what the entity of the system is, balance demands from all parts, steer the organisation)

So if you think of the human body as a viable system, then (taken from Jon Walker - brilliant website on VSM in layman terms click here):

SYSTEM 1: All the muscles and organs. The parts that actually DO something. The basic activities of the system. The KEY TRANSFORMATION (in my world, the value proposition)
SYSTEM 2: The sympathetic nervous system which monitors the muscles and organs and ensures that their interaction are kept stable.
SYSTEM 3: The Base Brain which oversees the entire complex of muscles and organs and optimises the internal environment.
SYSTEM 4: The Mid Brain. The connection to the outside world through the senses. Future planning. Projections. Forecasting.
SYSTEM 5: Higher brain functions. Formulation of Policy decisions. Identity.

You must realise now that the reason we die (i.e. become non-viable) is because one system fails. That is a key point. ALL viable systems MUST have ALL 5 systems to REMAIN VIABLE (this is a strong statement as my good friend Roger would say).

It's a very good way to think about the firm. What cybernetics and VSM does NOT tell you, however, is where to draw the boundaries.

So my natural biasness will draw the boundary on value - not just any value mind you - the value that is co-created with the customer to achieve customer benefits (hey, this is a value-based service system blog -what do you expect?). So here comes the immediate problem. At the narrowest of system boundaries, the firm produces something and the system's purpose is to have a high quality 'thing'; and if you broaden that boundary a little, the customer is in the system co-creating value with the firm and the system's purpose is to achieve customer outcomes. An example would be helpful so let's say I manufacture helicopters. I could have been viable all this while coz I make good helicopters. I know the customer uses it and co-creates value but it's not really my problem because the contextual use of the helicopter isn't going to hugely affect how I design and manufacture the helicopter because as a firm, I've become a viable entity just making helicopters. So although value co-creation happens, I have drawn a boundary such that my 'environment' (what is exogenous) is the customer, the contextual uses. Customer inputs into my system is usually through predesigned feedback mechanisms. The resources that inform the key transformation (i.e. manufacturing the helicopter) and the metasystem that manages, control and guide the policy of the firm are all surrounding this key transformation - manufacturing.

So let's say competitive forces have come in and it's no longer enough to make helicopters. The customer wants to make sure these helicopters are 'usable' and any failure of the helicopter has to be immediately rectified. The firm now has to say - my core transformation is no longer making helicopters, it's to repair them when they're faulty. The firm still doesn't have to understand value co-creation and can still treat the customer as 'environment' because the value is 'pulled' by the customer on the basis of need.

Now let's say it becomes more competitive and the customer now wants to buy availability of the helicopter, not the thing itself. The system immediately demands a redrawing of boundaries - because if availability is the value proposition of the firm, what is it the firm is DOING? making stuff is one thing, but delivering a value proposition of availability means understanding the contextual variety of use, making sure there are parts on standby on shelves to minimise possible down time, even redesigning the helicopter so that it might be easier to change parts, or cater to greater variety of contextual use without downtime. this would immediately imply that the resources for the core transformations before and after the new boundaries are different, as is the metasystem that controls and manages it. This is a serious threat to viability because the firm may not be equipped to deal with changes in resources and the metasystem. More importantly, 'the environment' is now the context and the customer has moved into the system boundary of the firm (previously both customer and context is 'the environment'). This means the customer is a recursion in the system as well as a transformation through which the firm needs to deploy a different set of resources.

Now let's take the most extreme - the helicopter is being purchased for its outcomes i.e. what they do e.g. how many soldiers or supplies it ferries. oh - oh, the firm now has to redefine what is 'environment' and what is in the system. if the firm is committing to outcomes, every possible context is now within the firm's boundaries. the firm has to think about redesigning the helicopter and supporting activities in the system for every possible use. that hypervariety is going to be a real challenge and can quite easily threaten the viability of the system. Here's another example of changing the core transformation:

customer paying for an airtanker (http://www.airtanker.co.uk/) refuelling their jets themselves vs customer paying for 1000gallons of fuel per minute from the provider (with increased price if the time spent decrease). For the provider? very. different. system. with very. different. resources. and very. different. management. of the system. Viability? No one really talks about it. It's like 'sure, if you can manufacture an air tanker, it's easy-peasy asking you to provide 1000 gallons of fuel in mid-air'. And when the firm don't do it well, marketing people say its not being customer-centric enough, it needs to change to co-create value etc. etc. but they don't really tell you how. Someone once told me it's easier to get a manufacturer of mobile phones to make tractors than for them to co-create mobile phone outcomes. Some manufacturers have become seriously unviable trying. I'm sure you know who I'm talking about.

My colleague once asked me if I had any sagely advice to give to Nokia. In my most 'sage-like' way ;p I said 'try not to think of yourselves as a mobile phone. try to think of yourselves as being a 'life-enabling-platform'. Of course, that's hard. because they have always been a viable firm as a phone manufacturer. now you're asking them to be something else. Apple had it good (resource and viability-wise). it was never a phone.

So that's my simple primer. Yes VSM doesn't give enough understanding of interactions, emergence and co-creation but it's a great start to develop the thinking and the research in a systemic way. So much of our own research (and solutions) are reductionistic. We do research in marketing, or strategy or CRM or something or another and pretend that the insights we have developed are able to apply without some efffect elsewhere (marketing solve marketing problems etc. etc.) but if we are to be truly systems researchers and systems practitioners, we cannot provide solutions and insights without saying something about the systemic effects of our insights. That is the challenge of systems researchers. The VSM helps us stay true to systems thinking and help us say something about the narrow bits of knowledge we give to firms and we can show where the knowledge we propose would sit within the VSM of the firm. As someone who believes in the power of service dominant logic to improve organisational effectiveness to co-create value with the customer, I am compelled to use SDLogic in tandem with VSM because it helps me sympathise with the challenge of transitioning from Goods dominant logic (due to the systemic and viability disruption it create). Yet, the mere visualisation of such disruption through VSM helps firms understand that disruption and allows researchers and consultants alike to develop paths towards effectiveness. That has to be better than just badgering the firm to death about customer centricity.

Value and Viability: A viable systems way of transitioning to a service-dominant logic

2010-12-21T14:04:00.000-08:00

A lot of this blog deals with value and the way a firm delivers its value proposition for the customer to co-create value. So if you think about it from a service dominant logic point of view, resources of people went towards making or delivering a value proposition and the resources of customers go about realising the value proposition through co-creation to achieve outcomes right?

The reality, as they say, is always a little more complicated. So let's use my favourite example of a phone. The idea is for a customer to be able to talk to someone so the old value proposition was a switchboard with an operator and you pick up the phone in the house, tell the operator who you want to call and the operator connects you and you talk to the person (and hope the operator is not listening in).

That value proposition consisted of the phone in your house, a switchboard operator, a switchboard, a network of phones. The resources of the firm went about delivering that value proposition to allow the customer to co-create value by knowing when to call, whom to call, the number to call. oh - and don't forget the customer has to be at a particular context/location (home) to make the call.

Today's similar value proposition is a mobile phone. pick it up, make a call, talk to someone - in whatever location/context he is in. what has changed? the value proposition of the firm has clearly changed. it used to consist of resources of people+materials+equipment and it has become material+equipment only with the people resources embedded into the material/equipment. in co-creating value, the customer resources has also changed. it used to be 'talk to the operator to connect you', it has now become 'key presses on a mobile'. End to end, it is still competencies for competencies (SDLogic style) but the dynamics of the middle has changed. The dynamics of the middle is often referred to as the market system but from my perspective, it is about boundaries of the market system and the viability of an organisation.

Let me explain.

Say the organisation in the old value proposition world was providing a really really good value proposition. it had thousands of operators, calls were put through quickly and efficiently and the network integrity was good and with good capacity. That means the CORE TRANSFORMATION (CT) of the firm (i.e. what the firm DOES to ensure a good value proposition) is functioning well. It also means all the resources of the firm were configured optimally, effectively and efficiently. From a systems perspective, if means that CT minus 1 (all resources) are supporting CT well and CT plus 1 (all governing/policy/auditing/managing) are managing CT well. A viable system is when CT-1 and CT+1 are doing its job to support CT and whatever the shocks in the environment, CT+1 is able to manage by supporting it with other/more resources from CT-1. Homeostasis is achieved.

Now you go up to the firm and say you've got this new invention that basically automates everything and you don't need operators anymore. You say that customers get better outcomes if they can call whenever they want even when there isn't an operator. The logic is sound, the outcomes are better, customers co-create value for better benefits so this is good right? only snag is - your entire organisation has had resources supporting CT and your board, your departments etc. have been managing CT and CT is now going to change into something else. In fact, the change in CT is pretty drastic. the firm who was a network provider with thousands of operators is now going to be a factory making mobile phones.

In viable systems, there is an O for operations (which is where the CT sits), an M for the metasystem that governs O and an E for the environment (see pic). Together, they define what the boundaries are and most importantly where is the boundary for E as this defines the viability of the firm (ability to achieve homeostasis) as this boundary determines what is outside and what is inside. IF the CT changes, what was previously the environment could now be a resource and the metasystem could be managing something completely different.

In essence, this is what is happening today with technology convergence that mixes customer resources (to co-create) with the firm's value proposition. It is happening because, thanks to SDLogic, we tell firms to see themselves as a cog in a wheel of co-creating value-in-use. Yet, to do so, it becomes harder to tell what the firm's value proposition is, what is the environment, what are the resources to configure (especially if they include customer resources) and what should the metasystem be managing. In other words, to achieve true customer centricity and value-in-use, more is needed than just the will. To walk the talk, structural CT changes are needed. More importantly, if the firm doesn't get it right, it could cease to be viable, even while it's motivations are good. Customer centricity and achieving value in use is beyond traditional marketing and requires marketing to engage fully inside the firm.

So for me the transitioning from a goods dominant logic to a service dominant logic is understanding where the old boundaries are (usually delivering a value proposition that is some exchange value or a tangible product) and moving them to new ones (value-in-use or outcomes). It would then require the reconfiguration of CT, CT-1 and CT+1 for a core transformation that includes co-creation. It requires a careful transitioning programme to realign CT-1 and CT+1 as CT changes to maintain the firm's viability because delivering value-in-use means a much more open, agile and flexible system (nature of E and variety is very intrusive) which in turn requires a relooking at the nature of resources in CT-1 and the nature of firm's governance in CT+1 even while CT deals with a hybrid of old and new value propositions.

Someone asked me why do I take a viable systems approach instead of, say, a resource based view etc. of the firm. The viable systems model (VSM) is the most robust model of a system, be it a human body, an organisation or an economy. It specifies the conditions through which a system can be viable, and can remain viable. Many of the midrange theories (including RBV approaches) tend to be formed through GD lens. Moving from GD logic to SD logic requires going back to fundamentals and VSM is a pretty good fundamental to go back to. Unfortunately, like all systems approaches, they never tell you where the boundaries should be drawn. I draw systems boundaries around contextual value-in-use. But of course, as a value-based systems researcher, I'm totally biased ;p

Facebook.. tsk

2010-08-14T17:48:00.000-07:00

I'm interupting my usual academic ramble to blog about facebook, business model and system.

Don't get me wrong. Unlike the many social network bashers out there, I absolutely love facebook. I use twitter and linkedin for my professional life and facebook for my personal and social life.

Here's how I co-create value on facebook:

I update my status at least once a day, to a max of 3 times. I have 30+ family members over 4 continents and it's the means through which I keep in touch with their children, events and general life and they can keep in touch with my life. I have a further 200 friends all over the world and I am grateful that everyone bothers to update and keep in touch as well so we form a good community. We share photos, joys, pains, irritations from big events (such as graduation, births etc.) to menial stuff like what we ate for lunch. We share youtube links, photos and jokes from the downright ridiculous to those that get you on the floor laughing. My three girls (2 teen and 1 adult) are all on facebook as are my mom and dad and my aunts.

Our interactions keep us connected. Some of us just play farmville. Some are just stalkers. Some are too shy to say anything, some (like me) often say too much. Some post political links and opinions and others upload mobile photos from where they're travelling. When my husband created an 'eggs'-plosion because he forgot he was boiling eggs in the kitchen, the photo was online within minutes and family from various parts of the world commented on it. I have 500+ photos online and with my iPad, I pull them down to show photos of my house, kids, garden etc. when I visit family who don't have facebook accounts. The interactions can be many and menial, few and life-changing or a combination. All in all, it makes us all log in at least once a day. The combination of interactions surrounding the big and the menial happenings in our daily lives result in various emergent properties in a social network system - community, comfort and serve to generate further activities outside of the online world and make the world a lot smaller.

What of privacy? There is an old saying - we are only afraid of inventions that happen after we're born. hydrochlorofluorocarbons are in your fridge but we don't seem to cringe when we go to the kitchen. Radio was harmful when it was first introduced. I'm not trying to underplay privacy issues. Rather, I am saying that everything in the world is dangerous if you don't know how to manage it. A hammer, nails - all very dangerous. But we're not threatened by them. We know how to keep it out of reach of children and use it safely because we have the skill set to manage it. So facebooking is a 21st century living skill set that you need to acquire to co-create value in a social network. And if you acquire that skill set, you acquire resources (knowledge) to make wonderful things happen.

What is this skill set?

First, managing privacy.

I have 4 privacy levels - limited profile for people I don't know well; acquaintances for those I know but aren't close. normal for... well, normal friends; close and family friends for the 'inner circle'. With 53 photo albums, my friends have various access rights to view some albums but not others e.g. As an academic, I have public albums viewable by all and family albums viewable by inner circle only. I even have information that is available to 'everyone' and is 'google-able' (horrors!). I don't think everything should be private nor do I think everything should be out there. The skill is to know what information should be private or public depending on what benefit you can get from it. It may sound complicated but its as complicated as learning to programme a VCR back in the eighties and as a 21st century skill set, I believe I have it. Do you?

Second, managing time

How much time do I put into facebook? To many of my friends, they think I spend too much time. Actually, I don't. Usually I am on fb for my downtimes - at airports, waiting for the next appointment, in trains. It can be a distraction (so can my hubby but I'm not getting rid of him) but you just manage it because the benefits are there. Does it require some discipline? probably... i mean do we require discipline to not reach for that third/fourth/fifth glass of wine?

Third, managing effort

I upload photos, comment of friends statuses (statii?).. I have downtimes (when I'm on online once a day) and uptimes (on all day). More importantly, I cajole, persuade and badger other friends and family to come onto facebook because it is the community and interactions that matter - not the size of my network. So my effort is to keep my page active and to badger others to keep theirs active.

So the currency of facebook isn't money. I don't pay money for it. Yet I do ' pay' for it in effort, time and privacy so as to attain the joys, connectedness, company from my friends and love from my family. At the loneliest place in the world (i.e. airports), I am still connected. If you see a woman smiling at her iPhone in the middle of an airport, that would be me - seeing the latest photo of my nephew, or laughing at a link posted by my daughter.

Note that the three skill sets above are the (operant) 'resources' I put in to co-create value. There are revenue model implications here if fb wants to charge a subcription because they would then be making me add a fourth resource - my money; mmm....you can, but you need to think about how.

Which of course leads me to the facebook business model. Which is? capitalising on the size of the network which in turn generate the eyeballs and click throughs on ads. Are you feeling something is not right? of course...here's where the problem is.

Misalignment of value in the Business Model

Think about google. What is the value of google for a user? Ads and information that is tailored for my needs as precisely as possible when I use the search engine. How does google make money? through ads and information tailored more precisely for the customer's needs. See the match? The value I co-create with Google is the same value Google is deriving revenues for (even if paid by advertisers).

Facebook? the value I co-create above is obviously NOT the same value Facebook derives revenue for. Sure, if I get more people onto facebook I get a bigger network which is great for facebook - but getting people onto facebook is for me a means to an end. I don't really get a whole lot of value from just getting my friends on facebook. I get it when they interact with me. So obviously, there is a whole misalignment of the value I co-create and the value facebook derives revenue from.

This misalignment poses a huge challenge on the viability and sustainability of facebook as a system. At it's current state, it is barely viable, even though the network is growing. Long term sustainability becomes an issue. I have seen many companies who don't recognise that the customer value from their offering is not the value they derive revenues from. It usually ends tragically. An organisation core competence must come from its capability to effect core value transformations which are the same transformations that is co-created with customers and which are valued by the same customers. The alignment becomes valuable for revenues to the extent that customers may not even have to a penny for it. While there can be revenues from other sources (as it is for Google), primary revenue should come from that alignment. Until facebook achieves alignment of core value transformations, it's unsustainable, at least, from my point of view.

Emergent Properties

This value that I attain from facebook is an emergent property. It's community, it's perceived connectedness, it's company - all of which are emergent from interactions. If you've been reading my blog you would understand that you can't determine emergent properties - merely intervene where it could catalyse, faciliate and enable the system to achieve the properties. And how does facebook do that? asking you to click through more targeted ads. wow. really? actually, i would argue they are NOT interested in the emergent properties. they just want more eyeballs - a bigger network - more, more, more! someone should tell them about roman empire...which part of hearts and minds did they not get?

Also, emergent properties, systems and interactions are a new science. i guess i can just call them uneducated. but again, if they don't get their act together, big systems can fail. big time.

OK, so what should facebook do (aside from hiring me that is, but I'm too busy facebooking, sorry..)

Focus on transforming information - not just harness information - facebook spends too much time with the analytics guys and not enough with value guys. If they know how to assist facebookers in transforming their information better, they would have a much more robust revenue model.

Focus on enabling quality interactions - it's not the people ...s****d! it's their interactions! Quality interactions generate quality information and great emergent properties. Help your facebookers transform interactions and information and you're on the right road.

I decided to write this blog (and give fb some free advice) because this morning, something happened that p****d me off. My darling nephew, only 7 months old, had a facebook page. It was my sister who created it because she wanted to keep her identity separate from his. I visit this site often as my sister would update his activities, teething problems, crawling, smiling. Loads of photos and videos and i love it. 'Marcus is feeling cranky this morning'; 'Marcus misses his dad who is away for the weekend'.... it was a wonderful way to watch Marcus grow up. I show it on my iPad to family as well. All of us family around the world love the page.

Facebook closed it this morning because you need to be 13 and above to have a facebook page. I understand why. With the number of nasties stalking the internet, we need to protect the young and vulnerable. But shutting it down? could you not create a better mechanism design for this that protect privacy but allow for interactions? Well, fb would probably think - nah... we should just close him down coz he's not going to click on any ads and he's not going to generate more friends, and we can show we care about the vulnerable users.... as long as fb has this current business model, they will continue to struggle with privacy issues and business model sustainability...this is because misalignment of value transformations would result in decisions made that would change the dynamics of value in the system ..

From my read of facebook, these guys probably have a good idea how they became successful (analytics will tell you that) but are completely oblivious to why..... without understanding the core value transformations that made facebook what it is today they would need to be very careful what they tweak, because a system that spirals upward can easily spiral downwards (think myspace) if the interventions are wrong and if you focus on the wrong transformation. Facebook - listen and learn and for heaven's sake, give me my nephew's page back!

How to innovate in value co-creation - part 1

2010-07-27T04:03:00.000-07:00

I have just finished writing the paper for the Forum on Markets and Marketing - the meeting in Cambridge with Bob Lusch and Steve Vargo entitled 'Value Co-creation in Complex Engineering Service Systems: Conceptual Foundations'. Don't be put off by the word 'engineering' in the title. the paper is intended to integrate the engineering service research and the management service research streams. In the paper, I had 5 propositions and I thought I'll expand on each managerially in my blog because my blog would probably explain it better than a dry academic paper. (and it IS dry - starts with philosophy and ends with engineering design.... enough said). Also, I do think the 5 propositions set the stage for innovation that is value based.

So... on to proposition 1

Proposition 1: A perfect system for the co-creation of use-value makes endogenous all co-creators use-values.

Yikes...where do i start.

If you've been following my blog, you should have read all about co-creation and use value (http://value-basedservicesystem.blogspot.com/2010/02/value-in-use.html) and (http://value-basedservicesystem.blogspot.com/2010/01/value-co-creation-and-service-systems.html). You would need to read those to understand this post.

lets say, very simply, a firm is in the business of producing cups. so the CEO will say, what do customers want from cups? lets do market research. needs analysis. requirement analysis. focus groups. dance the salsa...la di da..

you come up with a spec list.

1. cups should have handles

2. it should hold x ml of fluid

when you brainstorm on the research you realise - wait, some people want hot beverages, some people drink a lot, some people drink very little, some people want it pretty, some people want lids/covers etc. etc. so you go to the marketing department and say - find me the segment of market i should target if I made cup type A, cup type B, cup type C and so on.... and tell me which should be my target market segment...so the clever marketing chaps do their rocket science and comes up with ta-da! cup type A would give you £A in revenues, cup type B gives you £B revenues and then you sit down and make a decision on which cup types you can make, how many types and how to make them as efficiently as possible. That was how the world worked.

Marketing folks like to match the type of person with what they buy. so you buy a pretty cup type B and they say - aha... woman age X of this type of behaviour and lifestyle would buy cup type B because they are concerned with selling to you. Actually, I would like many types of cups for many different uses and different contexts. So, mr marketing, my cup-using behavior is actually more important than my myers-briggs score (not that you use it)...also, my cup-using behavior is driven by whom i'm with, what time of the day etc. etc. so .....could you go design and make a multi-context cup please?

firms don't, and i'll try to explain why.

My training now tells me I have to use a mathematical word so forgive me. What that whole process above says is that value has been determined exogenously. This means it's OUTSIDE the use and co-creating system. it means the firm has decided to determine what the value is, make it and then deliver it. it means that when the cup is used by the customer, it can no longer be changed (its exogenous remember?).

but wait. how do i really value my cup? when i take my cup to the garden, i want a lid to keep the bugs away. when it holds water, i want more of it and when it holds expresso, i need less of it. so what I value about my cup is use-value i.e. a cup that understand my context of use which can change but if my use-value is not endogenous to the firm's, how would they even think of designing a cup for my ever changing context?

they don't. instead, it's easier to exogenously determine use-value for many contexts and construct their value propositions around them. so they produce many different cups. of course they go through the whole process of determining value. they call it a 'value-driven approach' (*irony*) and its step one in the lean handbook - 'first determine what the customer values'......(i will blog about about this in the next post)

its the world that has existed because we don't interrogate our assumptions. because its just easier to make different cups to fit different contexts. but by doing it that way, the determination of value will always be exogenous to the use of value and when use-value is co-created, which is contextual. firms are fixated on the idea that one has to come first. so value determination and specification is exogenous to use. So when I co-create value with a cup i.e. use it to drink stuff etc. etc. I am actually co-creating with a value proposition of a firm that have already decided and determined what I wanted from this cup and in what context and I, as user of cup, would then co-create value when I am in the context that has been predetermined... meaning, I make sure I, in my own world and own system 'fit' the cup context that has been predetermined. that is why i buy many cups. because i have many contexts of cup use. and dont even get me started on contextual emotional value-in-use.

but it doesn't have to be like that. especially if you're thinking of innovation. .

why dont firms look at use value as endogenous? because traditional marketing looks at exchange value and choice and once you choose, they aren't really very bothered with the different contexts on how you use the thing (because you paid for it already). So they push the problem (and risk) of contexts to you. Let you decide what your most common context is and let you choose which cup to buy.

but that's a little unfair. in return for my use-value of a cup, i give you, the firm, money. so you get money, i get cup. but my use-value of the cup is limited to the contexts you predetermined whilst your use-value of the money is... oh wait.. infinite in context (don't you just lurrve the acontextual use-value of money? ha ha..). So mr firm, i am actually probably quite happy to give you more money if you could give me greater degrees of contextual freedom of my cup. In fact, we could design a perfect system of co-creation where you give me different cup for every context i might want a cup and I could pay you a lot of money for it. let's just call it a multi-cup carrying butler.

a perfect system for value co-creation is when every co-creator's use value is endogenous in the system. the firm's use value (money, which has use-value across infinite contexts) and your multi-contextual use-value of the thing. It probably is too expensive but hey, a great starting point to think about innovation and its a great way to think about the role of technology. and it's starting to happen as well.

take a good look around you. there are some companies out there who no longer make value exogenous to use. simplest example is the phone. it used to be a phone. to talk, to communicate. today, its not a phone anymore. yes yes they call it a smartphone or somethingphone but it's become a platform onto which you can use it for whatever you need at the context you wish to have. so my iPhone can be a compass at the context where a compass suddenly became necessary. its not just technology driven. its a mindset change in understanding use-value and contextual co-creation in design and delivery - the understanding that value is always use-value within changing contexts and value propositions do not have to be exogenous in the co-creation process.

so where's my smart cup?

Value-in-use and exchange value

2010-07-02T06:36:00.000-07:00

I've been meaning to blog about this for some time now because I get asked this question a lot. What's the relationship between value-in-use and exchange value? Everyone is talking about value co-creation but what about price (exchange value)?

I think maybe because I've actually written an entire book on pricing of services that I seem to get asked about this. Rather than say 'well, I'm covering that in my second edition which is coming out next year', I thought I'll blog about it. Much of it I've already covered in the book although I don't explicitly use exchange value and value-in-use (I will in the next edition).

Service dominant logic and many of the gurus in management have been talking a lot about value co-creation right? that it's experiential, phenomenologically derived and co-created between the individual and the firm either directly through activities and interactions or indirectly through a good, or an item purchased from the firm. I give quite a number of examples of this on the lecture circuit, as well as the potential opportunities for innovation surrounding this concept. So value-in-use is the value in context, experienced by the customer. However, this often happens after purchase, or at least, after the contract to purchase. That means there is a separation of time between purchase and the experience. This happens whether you buy a phone, beer, TV, stay in a hotel or go to the gym. At the time of purchase, you haven't experienced it yet. You may not have any idea what that experience might be like,..... but you are asked to buy. at a certain price.

So..... at a certain price or exchange value, the firm is asking the customer to do a few things at the point of purchase.

First, the firm is asking the customer to imagine what the co-creation experience might be like. That's uncertainty no. 1 for the firm in pricing - I call this the uncertainty from a lack of imagination (economists call it bounded rationality see Herb Simon). Example: If you're trying to sell a concert ticket, your customer will not pay if he has no imagination for what it might be. £100 an hour is now worth... maybe £50 because of your customer's lack of imagination? ouch..

If this is his/her repeat purchase, it's a lot easier BUT the context of experience might still change. That means the context/state of the experience may still change even on repeat purchase. I call this the uncertainty of context. Example: your concert is perfectly well imagined BUT your customer doesn't think the weather is going to be good. A discount of £70 to persuade him/her? more ouch..

Also, the value from the experience is co-created - meaning it depends on the resources of the firm in its proposition, but also the resources accessible to the individual to co-create that value. This is the uncertainty of resources. Example: Your customer has a great imagination and the weather will be good BUT he thinks he may not have time on that day. £100 an hour is now worth £30 or less? even more ouch...

Finally, the fourth uncertainty - that of the uncertainty from cognitive discounting. Remember that exchange value (price) is at the point of purchase and value-in-use is at the point of experience? And that there is a separation of time? Well, finance people are well acquainted with the notion net present value and cognitive discount is principally the same. We discount the value of the future value in different ways. The gradient of the discount changes for different people - those who are more risk averse may discount more, the income effect (how expensive is it) may change that gradient as well. I actually mathematically modeled spot and advance prices in a paper last year where I investigated capacity effects of the firm as well and the role of refunds. (click here for it).

These four uncertainties contribute to a valuation risk at the point of purchase - meaning that the person's idea of value-in-context or value-in-use will not just be what is promised by the firm (through advertising and promotion) but contributed by all these four uncertainties i.e. exchange value carries the risk from these four uncertainties inherent in value-in-use.

Often, the firm only like to promise what they can deliver - which usually mitigates the uncertainty of firm's resources in co-creation for the customer. There are a few more uncertainties in there though - mostly from the customer side. And firms wonder why they can't get the price they want.

All that said, exchange value (price) bears very little resemblance to value-in-use after all that. In layman terms, from a value and value co-creation perspective, don't think your price is necessary a good reflection of your offering.

Emergence and Customer Experience

2010-06-05T14:05:00.000-07:00

You have to forgive me for this post as I'm moving into much more complex ideas and articulating it is a challenge.

In my last post, I discussed the notion of variety in a system and the fact that delivering contextual value means inviting a whole lot of customer variety of contextual use into the system. This may render the system to be non-viable as the firm isn't able to absorb it. Either that or the firm attenuates the customer variety of use contexts which may result in an unhappy customer.

In some of my work, I am beginning to see that customer experience is emergent (I posted this earlier but will expand on it here). What do I mean?

1. Emergent properties of a system are properties that exhibited at the system level, which does not exist at the component level. That is the very nature of customer experience. Customer experience does not sit with the firm, or the customer. It emerges from the interactions between the 2.

2. Emergent properties exist because of the interactions. This means that interactions themselves are an asset, a unit of analysis. In a system of A+B+C, the '+' between A and B and the '+' between B and C (could be different interactions) hold the key to the emergence. Customer experience is a result of interactions between the components. Thus customer experience is an emergent outcome, even while a system is tasked to deliver functional outputs.

3. Emergent properties is the reason why a system is greater than the sum of its parts. That is why even when functional value is delivered (or not), customer experience still exists. It is emergent from the system. It makes the system greater (or not).

4. Emergent properties can not be deterministically designed (its emergent... doh)

So back to my ATM example.

Case A. You walk up to an ATM and you want to withdraw £200 and you wish to have 20 £10 bills (value of the ATM in context). You know you cannot get an ATM to do that so you attentuate your own variety and live with the 10 $20 bills that came out. You get a functional output you're not that satisfied with but you live with it. Your customer experience is just so-so (come on, its an ATM machine!)

Case B. You decided to go the teller to withdraw £200 and asked for 2o £10 bills.

(a) The teller smiles very nicely at you and say 'sorry sir, but i just don't have that many £10 bills today. But if I did, i would certainly give it to you!' You leave the bank again with a functional output you're not that satisfied with, but you had a nice experience.
OR
(b) The teller gives you a surly look, pulls open a drawer, counts the bills and gives it to you and continues to chat with the teller next to her, ignoring you. You leave the bank with a functional output you're satisfied with, but didn't have a good experience at all.

There are two thoughts here (and this stems from some of my own research). First, functional value seem to be a different construct from customer experience. Secondly, both constructs are achieved differently. Functional value could be achieved through deterministically designing a service and delivering on outputs. Customer experience, however, can only be achieved through a system of interactions resulting in emergent outcomes. By implication, delivering to FV could result in satisfaction (or dissatisfaction) but its the interactions that result in CE. That means the system that delivers functional value is not the same system that delivers customer experience.

Some firms do think that if they deliver functional value accurately and all the time, they would have happy customers. They probably would. But they may not have designed the interactions to have good customer experiences. That means they probably have designed only half the system. Or they could have accidentally delivered good interactions. Or they think that designing to functional value and to customer experience is the same system. It's not. One is deterministic, the other is emergent.

A final note on variety, to tie it back to my first paragraph of this post. Customer contextual variety is not necessary a bad thing. In fact, I would say the variety existing in customer contextual value is an opportunity for the firm to improve customer experience, since it means having interactions. A customer whose contextual value has little variety (e.g. taking the same bus every day) probably doesn't have much to say about his/her experience. So the greater the variety of contextual value, the more a firm has to design for both functional value and interactions with human resources (since human resources can absorb variety best), and the greater the opportunity for a great customer experience. I might just write a paper about this some day.

So, the bottomline is that a system can only be greater than the sum of its parts if you factor in the interactions. So my current fascination is on interactions. My work now is building a taxonomy of interactions, developing the notion of interactions as assets (within a collaborative system). With a taxonomy of interactions, we can discover what interventions can impede or facilitate what type of interactions (since interactions drive emergence, and since emergence can't be deterministically achieved, we need to work on interventions). Some might call this the co-creation of value. But in this work, I avoid the co-creators or the value that is co-created. I am interested in the 'combustion process', the 'chemical reaction', the 'glue', the 'interstitials', the 'dark matter'. And yes, you can call me mad.

Designing for value and outcomes - dealing with variety

2010-04-16T11:47:00.000-07:00

I've been hearing this a lot nowadays... engineers, computer scientists, designers, organisation science... all telling the world we must design for value. So you then go in and check how they actually do it and in almost all cases, you hear them start with 'understand what the customer needs'. or 'find out what the customer wants'. In engineering, it's about specifying the customer requirements.

In a world where the product is a tangible one, it would probably be ok. But in the case where the 'product' is a combination of physical asset and intangible human activities, this has to be a major challenge. I'll give an example. Checking in at an airport. Our 'needs' in checking in may be quite consistent if we travel frequently. so there may be some pattern to this. Yet, if tomorrow i decide to travel with the family (perhaps with my baby nephew in tow), those 'needs' change. the value of the airport service is now perceived differently and experienced differently. The context has change and the value of some of the airport services to me has changed. Bear in mind this isn't the same as the market segmentation problem because market segmentation typically talks about buyer types and buyer profiles. in this case, its use-types and use-profiles which are usually not a description of an individual i.e. one individual could have several use profiles. In the extreme, an individual could have infinite use profiles.

So... when you design an airport or a complex system, how do you design for context variety? how should variety be designed in terms of processes and a system architecture to better 'serve the customer'. Which customer is this? the customer that has the baby or the same customer that is the frequent flyer?

In my previous post, I discussed endstates. When a firm wants to deliver endstates or outcomes, it immediately inherits customer variety. You have no choice. How can you claim to deliver me outcomes if you don't also immediately promised me these outcomes at any of my experiential state? How can you claim to deliver me value-in-use if you don't immediately inherit all the various contexts of my 'use'? Do you even know the various context of my use? I get annoyed when firms think 'outcome-based' contracts or performance is a marketing spiel. The reality is that designing and delivering outcomes is a lot more challenging than firms realise.

Traditionally, when designing goods or equipment, the context of use by the customer does not change the delivery system quite immediately e.g. how a customer uses a TV, a car or a cup does not immediately change the design and manufacture of the TV or car (although may serve as inputs and feedback for future design). In service activities, customer ‘use’ of an activity in a context has a direct impact on the design and delivery of the activity, which makes it a challenge for the firm to decide how much variety to tolerate in its initial design and resource inputs.

I'll give you an example. Say I want to withdraw £250 from an ATM machine. On that day, I would like to have 10 £10 notes (instead of 5). That's a contextual use variety that the machine cannot tolerate. I know that, so I attenuate my own variety (Ashby's law says only variety can absorb variety) by living with it. I don't get what I want but I know an ATM can’t deliver it anyway so I'm not necessarily unhappy. Let's say, on that same day I decide to withdraw the £250 from a bank teller and request for 10 £10 notes. Will I get it? Well, it depends on the design of the service isn't it? If the teller absorbs my variety, that's 3 minutes additional time to serve me. Efficient process designers don't really like that. In aggregate this would have an impact on resources. Alternatively, the teller can tell me politely that this is not possible so my variety is attenuated. Interestingly, I get the same outcome as the ATM machine but in this instance, I am not happy. You now get a feel of the depth of the problem.

So how much variety should a firm tolerate? how should a service be designed for variety?

(Phil Godsiff, our PhD student at the institute and who has decided to dedicate his research life to variety, has written a nice paper on variety in the latest issue of service science here)

Contextual value is therefore a moving goal post. it doesn't mean it can't be designed, it just means you can't design with the assumption that value is static. Because if you do, you are making a whole load of assumptions around the context that you probably didn't realise. what we need is intelligent design. that means a redefinition of 'service excellence' to mean the ability of an organization to deliver to moving contextual value goal posts. that's a tough one. see next post.

Actually, I believe the problem is more than merely variety because we need to understand where customer experience sits in all that. As a lead in to my next post (and a reminder to self), I will blog next about variety, emergence and customer experience in a system.

outcomes, competitive advantage and sustainability

2010-03-10T21:09:00.000-08:00

I thought I'll share some of my thoughts about the work I'm doing in outcome-based contracts.

Outcome-based contracting (OBC) is a contracting mechanism where the firm is tasked to deliver outcomes rather than merely assets or activities. This is the case for Rolls Royce “Power-by-the-hour®” contracting for their aerospace engines, where the continuous maintenance and servicing of the engine is not paid according to the spares, repairs or activities rendered to the customer, but by how many hours the customer gets power from the engine.

It's not really easy, if you think about it. Imagine buying a power drill but only paying for holes in walls. Imagine English lessons being paid by how many English words come out of the student's mouth. There is the determination challenge (which outcomes?). There are measurement challenges (how do I measure the outcomes?), there is the revenue challenge (how do I pay for these outcomes?), there are skill challenges (the teacher needs skills in psychology, or counselling to get the student to be motivated to learn, rather than just teach). But overall, it's a nice idea. I've written an exec briefing on it so you can check it out here.

They are many types of outcomes of course, and it really depends on how far up to endstates you want to go. But its important to start from the ultimate end state. Customers won't tell you of course, because they probably are not sensitized about their endstates. It took us half a day (using a particular method we developed) of triangulating information of various employees before the National Library Board (Singapore) endstate was finally revealed - Literacy of the Nation. It might sound so obvious now but believe me it isn't obvious when you start to think about contracting and procurement of books on the basis of achieving literacy. Remember, a system endstate comes from both customer and firm and when a customer contracts, they are often not sensitized to their roles and their resources to achieve the endstate. Did you ever realise, when you drink coffee at the cafe, that you have the resource of being able to smell and taste to realise the endstate of 'good coffee'? you probably just think the cafe's good right? Now you see the problem when you talk to customers about endstates.

Well, that's where we always have to start from - the ground zero of endstates. Probably not measurable but its the axis on which proxies and measurements further down the endstate ladder are developed and the axis is crucial because all proxies and measurements have to consider the incentives, alignments and mechanism design of the parties involved in achieving outcomes. But then I get too technical so lets move on.

To me, the pursuit of outcomes and the capability to derive the right outcomes and how to achieve them is the pursuit of capability for value co-creation. Can you guarantee the 99% of IT systems even if a user could stick a virus infected usb stick into his computer? can you guarantee a clean washing load even if the user abuses the machine? The challenge of value co-creation is the challenge of managing/changing behaviors and integrating resources of the customer. Not many companies are up to the task. In fact, most firms would usually say 'well, we cant help it if they killed the system/dont know how to use it/dont know when to use it/abuse it'? They draw a strong boundary of what is us and them. It then gets relegated to 'high risk'. end of story. Well, imagine if your competitor can.

Here's a picture for you. If a firm can't achieve end states, they are basically saying they dont have the capability to manage a crucial system resource - the customer. To achieve desired endstates (see pic), the resources to achieve them is less dependent on the firm's resources and more dependent on customer resource (size of arrow depicts the level of resource to achieve which stage). Solve that, and you'll be dancing to outcome-land. Solve that, and you'll become a better English teacher, a better organization.

If you can't, this means that you have failed to understand what resources are contributed by both customers and the firm in order to achieve the benefits realized within the customer experience. Only by understanding the resources contributed by both parties in value co-creation can we achieve the best outcomes for customers in the target market, at the lowest costs. The substitutability of resources contributed by the firm, by the customer, and by technology must therefore be evaluated not merely from the cost perspectives, but with the possibility that it could also lead to better outcomes, resulting in the firm being able to either increase price or demand for the service. How's that for competitive advantage.

Why are outcomes important? Remember the English teacher and the change in skill set so that she can be more effective for student learning rather than teaching? Outcomes changes the boundaries of the firm. It shifts the boundaries of what is service, as that rendered not only by people but also by assets (see service dominant logic). It shifts the skills sets and capability of the firm (and therefore increases risk) and to get the firm to focus on effects of what they make/do and the effects of what customers do in combination for achieving endstates. It redraws a system to focus on joint system capability of customer and firm – rather than drawing a boundary and sub-optimizing. It makes all parties think of a better re-configuration of resources and substitutability of resources. For a UK economy that has lost so many jobs in manufacturing, it refocuses us to think about the future capability and skill sets that sits in our companies, indeed all companies to achieve outcomes and endstates of society, whether its living longer in our homes, or effective washing loads.

Most importantly, it shifts the focus from manufacturing/production to complex service systems – human, processes, assets – to achieve outcomes/effects/endstates call it what you will. If engines to fly longer - even if every component would have changed after 10 years, we would stop the make-buy-consume-break-buyagain model of production. If washing machines could last forever even it could change colour, component etc. along the way because the revenue models support it, we would be on a road towards a more sustainable future. If we worked hard to get our firms to develop capabilities to achieve outcomes, we make them motivated to innovate and outperform each other to achieve better outcomes and higher endstates of customers. That's a future that is surely worth working for.

Value-in-use

2010-02-20T16:13:00.000-08:00

I've recently returned from the New York, where I was visiting for a month. During the month, my iPhone was on wi-fi and I rarely used the data roaming. However, I did forget to turn my auto data-roaming off. So when I got slapped with a £560 bill I decided to use this as an example to illustrate value-in-use and how the concept is not as easy as it seems.

When we use the word 'use', we immediately think of physical use like using a car, a stove, a TV. Actually, the word 'use' is much broader. The better word is of course 'consumption' but even then, with consumption, we conjure images of an activity of some sort. Not necessary. As I have explained before, a ferrari sitting on your driveway gives you value-in-use even if you are not driving it. This is because you are still consuming the benefit of the ferrari on your driveway - the status and pride it gives you. So when it comes to emotional value, value-in-use is derived from the consumption of the emotional attributes of the good or activity. A piece of art, an antique on your mantel - these give people great pleasure and such pleasures are still value-in-use because every day the piece of antique sits there, you are consuming it.

It gets a little more complicated and less obvious in certain offerings. In the case of my telco service, my iPhone did not 'use' the data service in New York (whether directly or indirectly through roaming). I was on the house wifi. Yet, one can argue that I did 'use' it, because the mere provision of availability of use by the telco is of value to me. In this case, one must differentiate between the actual use of the data and the use value of the availability of the data.

Let's try another example. I work with the defence industry and one of the most used words in maintenance and service contracts is availability e.g. delivering 85% availability of a missile, or some other equipment. If I were to promise you the availability of a piece of equipment, it doesn't matter if you use it or not - my job is to make sure that all the parts are in good condition and the equipment works.

'Use' would affect the availability of course, so if I 'use' it badly, the parts would fail often and this would make repair more frequent and threaten availability (and therefore the design and delivery of the service - one of my papers on value co-creation in outcome based contracts actually discusses this) but the point I'm trying to make is that as a customer, availability for use is of value, even if i don't actually use it (of course, i have no intention of educating my telco on this - I only asked for my money back since i did not use it :p).

Still not convinced? Think about the servicing and support of a nuclear weapon to achieve value-in-use for the customer. It is the availability-for-use of the weapon that is prized and paid for. We all hope it would never actually be used.

So pop quiz - what's the pricing, design and delivery of 'availability-for-use' as value and how is this different from 'actual-use' value? There are huge pricing implications in this (and for me personally, a £560 question). Think hard about this and you would really be pushing the boundaries of pricing, value, design and delivery....

Systems thinking, Customer Experience and Business Schools

2010-02-07T12:43:00.000-08:00

At business schools, knowledge is firmly discipline specific. Strategy, Marketing, Operations Management, OBHRM, Finance - each discipline is a component in the knowledge of business.

When businesses were making cereals, cars, computers and lamps, the disciplinary components and the domain knowledge embedded within them were quite amenable to being transferred to students (MBA etc.) in a component fashion. The old Porterian value chain, value stream and value mapping were reasonably effective in practice, and there were clear boundaries between customers and firms. So students could learn marketing, OBHRM, ops mgt, strategy etc. as discipline/component knowledge and then go out into the world and apply them. From a systems perspective, the interactions between components, even in practice, were sufficiently weak (although still there) and it allowed firms and business schools to construct departments and disciplines respectively to some degree of success.

As we move to service, my argument is that it all starts breaking down. Although we like to imagine there is still 'a service' delivered to a customer like there is a cup and a lamp, the truth is that this 'service' has very fluid boundaries. Customer 'touchpoints' are many and they are part of the co-creation process, indeed, that is the experience of the service. In the goods dominant world, our 'experience' with what we buy was private. How we use the TV, enjoy the oven or eat our cereal didn't have anything to do with samsung, belling or kelloggs. In the service world, our 'experience' such as banking, maintenance, telecommunication includes contact with the firm, whether directly or indirectly. As business schools, do we have the necessary knowledge to help practitioners deal with this?

As an illustration, I asked a provocative question in twitter, and asked the same of my colleagues in operations management. Who is responsible for the customer experience? In the case of tangible offerings (goods), customer experience is entirely in the customer's hands. For intangible offerings, customer experience, from a systems perspective, is an emergent property. So you think as a firm, we can make a very good TV, we should be able to 'make' a very good customer experience right? Think again. The knowledge to make a good TV profitably (six sigma, lean and all) is not the same knowledge as delivering a good restaurant experience profitably. The former is very much a 'click and play' integration of non-interactive component based knowledge. And a good TV is not an emergent property. It is a property of manufacturing and we can control it to such a great degree that we have terms such as six sigma to measure the logical value of the TV. Customer experience is an emergent property of a system of interactions with the firm, with other customers etc. etc.

So let's ask some rather basic questions about this emergent property.

Who is responsible for customer experience? The answer is, of course, everyone and every discipline, but we know what happens when we say everyone - it basically means no one. Just like public goods. No ownership means no one will do anything about it. Business Schools haven't even come round to discussing this yet - simply because no discipline owns the problem, the problem doesn't exist right? Ops discusses the process of delivery, but does not go anywhere near the psycho-social aspects of the customer experience. Marketing will discuss psycho-social aspects to death, but won't go near the actual delivery of what has been promised (seen as an ops domain). OBHRM still treat employees as though they are assets to the company, rather than valued by the customer. Strategy is still living in the Porterian world and has not even yet acknowledge that the new resource within the firm is that of the customer's. The best part is... here comes the punchline... if we had all the knowledge of marketing, ops, OBHRM, strategy and finance, we assume they would somehow all came together to have the knowledge to deliver a customer experience - plug and play right? (like the community example below?) No....... Sigh. You know what is scary? Customer experience is what the customer pays for, the source of firm's revenues.... we are in so much trouble...

How should the customer experience be designed? This is a tricky question. It is clearly not fully an adaptive system, unlike swarms of bees or other ecological systems. The firm clearly does design something. So we are looking at a system that has some aspect of deterministic structure, but- I will keep arguing this - the deterministic structures do not determine the emergent property of customer experience - it determines a secondary component that interacts with the customer to arrive at that emergent property. If any firm thinks they can design customer experience, they are dead wrong. What they can design, though, is how the system could be regulated, stabilized, and design interventions for better adaptation to customer consumption behaviors (for more on such tools, read up on cybernetics).

What is the knowledge required to design and deliver customer experience? Now this is interesting. If you've read my previous post, my criticism of component based understanding is that they implicitly assume elements of the whole are the same when examined independently of the whole as when they are examined as a whole. So if you take a service business as a system inclusive of the customer with the emergent property as customer experience, are business schools teaching the right thing by teaching component based knowledge as though they can be learnt without the interactions with other disciplines/functions in the system they need to function in? Is our disciplinary knowledge wrong as more offerings in the service economy become more integrated and more complex? I don't think I'm that much a heretic. To say that it is all wrong would be too drastic. There are some good tenets of component knowledge in there but disciplines have to get out of feeling too full of themselves and the 'legacy knowledge' they hold and start teaching component and interactive knowledge. Business schools are missing the parts of the component knowledge that really really need adapting for systems thinking to understand service.

And just in case you're thinking practice is where integration happens and what they (students) need to learn are the theories back in the business school, I would suggest you go back to my systems post again. Component level theories could be wrong if interactivity within a system is not factored in. In the old days, I would agree that disciplinary knowledge can be learnt in school and our students go into the firm and integrated all they knew with what they did and it helped. In the modern economy, some of the component knowledge could set them back. We are just simply not giving our students enough knowledge to operate in the modern economy.

I'm in the midst of writing a book on my learning development from practitioner to academic - a 14 year journey from a CEO running a cruise line with a turnover of USD250m to a Professor on research projects. Given that this rather autobiographical account is probably of interest to an audience of 1 (and I don't even count my husband), I'm doing it as a hobby. But I find it interesting as I write because I realize much of my transdisciplinarity comes from a practice legacy. I believe business schools have not developed enough pedagogical tools to harness practice experience into theoretical domains, particularly around business as systems. I believe, as baby boomers retire, many practitioners could help business school academics learn the art of transdisciplinarity - not in practice, but in theories - just as I have learnt it. But the politics of academia would most likely push them away (after all, they do come from 2 different power bases and each base is a threat to the other). Still, even as a lone voice, I will keep trying. Wish me luck.

Systems thinking and outcomes

2010-01-31T06:33:00.000-08:00

I'm going to talk about systems. We tend to use this term so casually that we forget that it really requires a big change in the way we think. What do I mean? well, let's start from the beginning and use an example of a community.

You move into a village and you really like it. On weekends, people go to the village green, have picnics, everyone knows everyone else and they welcome you as a local. Someone knocks on your door and tells you that your headlights are on, and they invite you to a party at the village hall. You think, wow, this is really nice and you become part of the village, the unwritten 'norms', the friendliness, the sense of ownership and responsibility to your neighbours and other villagers.

The village becomes popular and more houses get built. Pretty soon, 8000 people become 10,000 and then 30,000 and in a short span of 10 years, you suddenly feel the village has lost its community feeling. There's graffiti on the walls, no one smiles much anymore and there are hardly any village get togethers. What happened? was it because there is more antisocial behavior from the young? is it because of the size? it's easy to say 'well, we went from 8000 to 30000, that's what happened' but that's not a reason. what is it that held a community together at 8000 that cannot hold at 20,000? what if you had to design a village, a city and a community? how would you do it?

Community, is a typical example of an emergent property. The scary bit about emergent properties is that its the property of the whole, and only exists as a whole, not a property of the component bits. you can throw people, pond, playground, houses, village hall, shops and schools together but that does not make a community. community is about the interactions between the components. In other words, its not about people and playground and houses and shops but the word and in between those words.

Health is an emergent property too. It's about our diet, our fitness, our genes, our lifestyle, all interacting with one another. How do you design health? or community? the scientific thinking we've been taught is so component based that i can bet you're thinking... ok... let's see what components go into that system and design it accordingly. er... no...emergent properties cannot be deterministically designed (it's 'emergent'?)That's the problem.

System thinking is not intuitive. Our scientific education have taught us to be reductionist in that the division of a complex problem into separate components is acceptable and that the elements of the whole are the same when examined independently of the whole as when they are examined as a whole. Think about the way we go through our lives - the whole 'plug and play' mentality has made us troubleshoot systems by taking out bits at a time, look at it, change it, fit it back and expect things to work. This is fine if the linkages between the components are weak but disastrous if the linkages are more important than the components - the case of a community.

Systems thinking is important in understanding VALUE and OUTCOMES because it radically changes the way we think and we really have to start thinking in this way. The world we are currently operating in is becoming more complex, where components cannot be analysed on its own, but within their ‘whole’, as the interactions between components are key to achieving system level outcomes. Our world is evolving towards complex systems where offerings are interconnected. The nature of the interdependencies are accelerated by technologies moving towards convergence resulting in the involvement of multiple stakeholders and multiple customers all contributing resources into the system and paying for different facets of the system and deriving different benefits. Emergent properties such as community, health etc. are starting to be key outcomes to society and yet because the design is not one of cause-and-effect, is not one of modularity (plug and play), we need to think differently. During the industrial era, outcomes were achieved with inventions such as steam engine (transportation), TV (entertainment) and these are designed and produced in a reductionistic, component-driven way. Our future in the modern economy wants critical systems-based outcomes such as community, sustainability, health and yet the knowledge to achieve such outcomes is still so lacking.

A final word about emergent properties. If you don't know what caused the emergence, they can be very fragile. Sometimes the wrong interventions disrupt the entire property. i like to use newscorp's monetization of myspace (see economist article here) as how their intervention is destroying the myspace community. The economist attributes it to the neglect of technology. my opinion is that it goes much deeper than that. the emergent property of community in myspace was a result of interactions between users. myspace just never knew how the outcome was achieved and what resulted in that emergence. They now run the risk of ruining that property for good (i happen to know a little about newscorp and I gather that they really want to develop their own content for the community, rather than have the community develop the content. good luck). And I dont buy the 'ubiquity first, revenues later' argument either for developing online communities. The community can go down at 6m, 60m or 600 million if the interventions are wrong.

Online communities give the illusion that we have data for all the interactions - online right? so we can get loads of data, the kind of data we couldn't get from a village community. right? maybe..... but the science and thinking is still the same. systems thinking is to think about interactions and emergent properties (and from the design angle, its about interventions and feedback (see comments in my blog post below on nokia and value). Quite different from component-based design that we're used to.

Value Co-creation and Service Systems

2010-01-26T07:58:00.000-08:00

I am finally going to post the reason why this blog is called value-based service systems but I have a few final words on value co-creation.

To reiterate, the concept of value co-creation surround the idea that firms do not really provide value, but merely value propositions and it is the customer that determines value and co-creates it with the firm at a given time and context best for the customer achieve the outcomes they want. So a firm’s product offering, whether they are goods or activities, are merely value unrealized i.e. a ‘store of potential value’, until the customer realizes it through co-creation and gains the benefit. As I mentioned previously VCC implies customer resources to realize the value become central towards achieving end benefits.

We are seeing value co-creation gaining a more prominent role with healthcare (with greater customer empowerment), with mobile telecommunication and the internet (with user generated content), education (with self study courses). That is the world we're going towards. Customer resources as central to value, benefits and outcomes.

Actually, I like to flip it around. Think about yourself as a 'firm'. You would ordinarily do everything yourself but that would be hugely inefficient and impossible. So you would 'outsource' certain aspects. Take an extreme view - you could drink water from a tap but that is not effective so you buy a cup to hold the water to drink it. You have just outsourced that function to a cup. So all goods and services are offerings to make your life better, more effective and improve your quality of life. I like to say this to the NHS - 'your service is an interruption to my quality of life. How are you interrupting me today?' - it gives an 'outside-in' perspective and if you read some of the VCC literature (Payne, Gummesson, Prahalad), they talk about the need to balance out the system to understand VCC better - Evert Gummesson calls it 'balanced centricity'. (By the way, for UK people, Evert is coming to Cambridge and London on 11/12 Mar so let me know if you'd like to attend his seminar.)

So if you think about the customer as a 'firm', you will understand VCC as a partnership with shared resources. Steve Vargo has a real nice paper out on 'It's all B2B...' forthcoming in the industrial marketing management. Really a good read. So as a 'customer/firm', what are our resources? There is currency in our time, our ‘eyeballs’, our effort, our loyalty and all type of resources accessible only to us which we can trade off with money (price) and firm’s propositions - all to co-create value. But do we know how to measure this VCC? or price it?

The answer, I think, means we need to extend the logic a little further coz most of us who come from the cause-and-effect world, the Porterian 'value chain' world, don't necessarily look at the right unit of analysis to find the answer.

It's nice to think of the firm and the customer in partnership, sharing resources, co-creating value and then think of the price the firm can charge for the service (that includes customer resources) and then try to compute customer long term VCC-informed value, VCC-informed customer equity and the like. It's nice to think of it like that because we can see the cause, and the effect, and it makes it all nice and neat.

The truth, like life, usually gets a little bit more complicated.

In today's world of outsourcing, firms' value propositions can sometimes be a network of propositional value e.g. server farms from Amazon, social media from facebook, search engine from google, all work together in one click, or on one web page. On top of this, content can sometimes be from other customers, so consumption (and the realisation of value-in-use) is derived from multiple customers consuming and providing value propositions with the firms. This is starting to get really murky.... and it's not just online either - whether you're talking about an airport, transportation, olympics, value is being co-created in systems now, by multiple stakeholders - customers, suppliers, firms. In such systems, it’s hard to tell who’s the provider and who’s the customer. Also, who pays whom for what is also unclear. The future resides in a service system of resources proposed, consumed and value co-created by a web of stakeholders, including customers themselves, all of whom have something to gain and something to give to the system.

What is cause, and what is effect? And when you really can't tell cause from effect, what technologies should we use? As a social scientist, an economist, a consultant, this problem intrigues me. Yes, and this is the reason why this blog is called value-based service systems. The interplay between processes and outcomes within a service system which are non-linear and multi-directional in nature suggests that our current instruments of analysis may not be as effective. Miller and Page (2007) calls it, “understand running water by catching it in a bucket”. The future will see the development of more dynamic system level tools, with the system as a unit of analysis in measuring value co-creation, stakeholder (including customer) equity... think about how this could work for hybrid public-private sector collaboration.. which of course leads to ..........ta-da! my NHS project starting this April.

But I will talk more about systems.......

Value Co-creation

2010-01-24T15:30:00.000-08:00

So finally I come to the subject most talked about in contemporary discussions on value. Value Co-creation.

Here's the way I teach it to the MBAs. I ask them to go to a cafe and with 'new eyes' (ala Kuhn), evaluate the experience by critically looking at all the attributes (features) of the cafe. They go out, have nice coffee/tea, come back after 45 minutes, notebooks in hand. So I go on the white board and on the right hand side I ask them to give me the outcome of the experience (value). I wanted the emotional and functional outcomes so they will say 'relaxed', 'feel good', 'got updated on the gossip', 'chilled', 'cosy and warm'. Then on the left hand side of the board, I ask them to give me a list of all the attributes of the cafe. This part is easy. they usually say 'music', 'ambience', 'good coffee', 'not crowded', 'good seats', 'good heating'. Between the attributes and the outcomes, I create a blank column and I ask them a simple question - how the hell did 'ambience' become 'chilled'? how did 'music' become 'relaxed'? They usually look puzzled, and not understand. Until I say - 'what if you can't hear'? would 'music' still lead to 'relax'? what if you are there to sort out a problem with a girlfriend, would 'ambience' still lead to 'chilled'?

They suddenly realise that they have completely forgotten their own role in creating that experience. That they, as customers, co-created the value with the cafe. They realise that for attributes to become outcomes, they realise the value proposition of the cafe to achieve benefits. And more importantly, and this is a key point - they needed to access their own resources to co-create that value whether these resources are their ability to choose the right company to go to the cafe, or even their basic resource of being able to see, hear and feel. The customer designed themselves and their context so that they can co-create value with the firm.

It's fun to watch the penny drop. The looks on their faces are priceless. I honestly believe I teach for that moment. But being smart MBA students... they get it and when they do get it, they fill up that middle column with lots of very interesting things about themselves and their resources to get the left hand side attributes over to the right hand side outcomes. Makes me cheer...

Back to the previous point. In essence, it's a lot about whether the customer is able to access the resource to achieve the best benefit and whether the firm takes for granted what the customer is able to access. BMW i-drive. Have you tried it? In its early days, you could sit inside the state-of-the-art BMW and feel really stupid because you don't know how to work it (they've tried to make it easier but I haven't tried it recently). In my world, you just didn't have the right resources to co-create value. So the best value proposition in the world (iPhone) is useless if you didn't know how to use it. And it would give you the greatest value if you did. 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 need to co-create value? And to achieve what types of outcomes?

Oh, just to clarify. Value co-creation isn't co-production. Co-production is helping the firm shape its value proposition (users helping nokia with the next phone, or better software, or even a better cafe). Value co-creation is bringing in your own contextual resource to achieve the beneficial outcomes with the firm at the point of consumption/experience (remember, we are still talking about value-in-use?) There is a difference.

So pop quiz... how does one co-create emotional value? what resources are needed by the customer? and what's the value proposition of the firm? what fun...

Segmentation by Value

2010-01-22T15:42:00.001-08:00

It's amazing how people just LOVE to label people, things, and box them up to neat little packages and expect everyone to fall nicely into place. So Gen NEXT are the younger ones, vs GEN X, the thirty somethings vs baby boomers.. but what do they MEAN? What do these labels say about what they value in the services and goods they purchase and consume?

If a firm has to design for value, it has to design for the segment of customers they want to target, and you would need to know what is the value upheld by the target segment. The cardinal rule of marketing 'you can't sell to everyone' still hold true today.

Segmentation in Marketing is as old as segments exists. In the old days - everyone stayed in their boxes (or so we are led to believe). If you stayed in a certain location, it said something about you, which class of society you are, which brand of cereal, juice or clothing you'd buy. Segments neatly fell into nice demographics, income and social classes. And by inference, marketers knew what each segment would value from a good or service and the firm could design and deliver accordingly.

Of course that is no longer true... today, it's really hard to box people up. This then leads to how hard it is to cut the market up into segments for firms to target. How should markets be segmented? Marketing has leaned towards behavioral segmentation, which is close to value segmentation but the focus is still on purchase segmentation vs consumption segmentation. In the mobile phone world, most firms have given up on traditional segmentation and now segment on value-in-use e.g. phone users are 'Life Jugglers', 'Technology Leaders' or 'Simplicity Seekers' (see Economist article)

If you want to think about how mixed up segments can be, just take me, for example. I declare my age, where I live and what I do for a living to Yahoo and for fun, I turn on Yahoo radio to see if they 'get' me. They run ads on kitchen towels and toilet paper. My facebook ads are about weight loss (maybe they should ask me my weight), skin care and credit ratings. Such is the extent of their sophisticated data mining software.

To be honest, I'm pretty hard to box up. I've got 3 kids and my eldest is in university. But I'm much more into social media than my girls. I use linkedin, twitter and facebook (facebook is all personal with very defined privacy settings), and I play MMORPG/PvP, with a level 42 defender. I'm glued to my iPhone and my laptop. Yes, I'm a geek. Worse, I'm a geek mom/gal of the bossy variety. But I also play golf to a handicap of 25, drive a BMW 318, own a house, am a consultant and an academic. On top of that, I cook for the family. Maybe the kitchen towels and toilet paper isn't far off the mark after all.

Understanding Value Part 3

2010-01-22T08:11:00.000-08:00

And if life cannot get more complicated, let's talk about expected and perceived value.

I use the example of buying mobile phones... don't you just love it when they ask you if you want 500 minutes and 500 texts or 1000 minutes, 100 texts etc. etc. etc. when you buy mobile phone packages..? Yes, OF COURSE I know how many I need. I know for certain I texted 236 times last month and can foresee needing to go up to 268 texts next month..! And why dont you ask me when I need to text as well? mmm... let's see... 215pm, 340p, 5pm and only on tuesdays and thursdays....

Get real... If I truly can predict this, I might as well predict the lottery. What I pay for is really the availability of use. The idea that IF I need it, it's available because NOT being available is a terrible thought and being availability at a more expensive rate is a slightly less terrible thought. Human beings seek to minimize costs (and maximize net value i.e. benefit minus costs) even if the benefit is in the future. So when we decide to BUY, ie. at point of contract, we weigh the EXPECTED VALUE in the future and decide how much to pay NOW. When we actually consume the service, we develop a PERCEPTION of the value and we compare that to what we expected when we purchased. And then evaluate if we want to renew the contract. Could there be a more efficient way of doing this? Of course! Mobile phone companies are hopelessly inept at designing contract mechanisms for information revelation. It's pay-as-you-go (prepaid) or contract (pay monthly)....there are so many ways they could increase revenue if they knew better how to incentivise segments to reveal their use patterns - in mathematical terms, we are no where near the pareto boundaries for the most efficient contract. Want to know what is a good pareto optimal pricing design? look at the oyster card and learn.....or read my book.

Understanding Value Part 2

2010-01-20T14:21:00.000-08:00

While value is contextual and temporal, it is also multi-dimensional. Work by Hartmann (value theory), Haglund (who attempted to validate Harmann's work) and Mattsson (who brought the thinking into service research) is conceptually interesting although philosophically challenging. If you want to go further back (and get your brain tied in philosophical knots), GE Moore talks about the science of value. For me, who like to keep things simple, value has emotional, practical and logical dimensions (that's Jan Mattsson's words, not mine).

If you don't believe in emotional value, take a look at your watch. If it's worth anything more than £10, you bought it for emotional value because if you truly only bought it for functional reasons, you wouldn't have bought any watch above £10. So the ferrari that is sitting in my driveway (I wish) gives me great emotional (ownership, status) value even if I don't drive it. Practical value is 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, it must be a correct tape measure i.e. the measurement on the tape measure must be accurate. If it's a hotel, you want it to have a bed, a bathroom, i.e. logical value is about objective standards.

What is interesting to me about these dimensions of value is not merely that they exist, but from an organization's perspective, many firms just do not design and deliver all dimensions of value to the customer. Often, they reduce it to some six-sigma of practical or logical value but to be truly able to deliver value to the customer, the organization must be able to deliver all dimensions of value, not merely one or two. This is hard, because design and delivery of services often do not design and deliver emotional value because the transformation required to deliver that value is the transformation of the customer itself. I discussed this in my recent paper (submitted to Management Science and to La Londe Service Conference). Question then: How should we design and deliver emotional value? We could, of course, go back to Marketing and talk about brands but marketing usually talks about creating the brand and do not usually talk about delivering on the brand promise....operations management? the ops chaps would run a mile...strategy? strategy organizes the firm, they don't get their hands dirty with delivery... have I made the case for transdisciplinarity yet? When you truly line value towards design, delivery and evaluation, you can really see where the gaps are...

Next up: Perception and expectations of value

Understanding Value part 1

2010-01-18T06:54:00.001-08:00

Quite a lot of people have asked me about the concept of value. So I thought I'll pen down some of my thoughts. I'm actually in New York now helping my sister with her new baby and it's 9am, poor parents are exhausted and sleeping and I've got an infant sleeping on my chest as I type this on my iPhone. I mean, if you can't blog on your iPhone with a baby on your chest, what's an iPhone for right?

Back to value. I see the world in terms of value. Value drives everything we do. We buy stuff because we value them, we collaborate because there is value in the collaboration. We marry, have kids, do smart things and stupid things because at that point in time, we felt there was value in doing them. If you subscribe to the views of Richard Dawkins book (selfish gene), we even sympathize and empathize because we see value in them. I don't subscribe to it because I think it's internally inconsistent but that's another story.

There have been many scholars researching into value. Woodruff, Zeithaml, Payne, Haglund - a simple google scholar search will give you loads. What I hope to pen here is a condense version of many years of work in value. I have to stress, that I am not attempting to discuss value according to the meaning, interpretation and how it's constructed Internally - I leave it to the social constructionists and structuralists for that. Rather, I shall be crass and state that, as a business economist, I am interested in value the way it can be captured in an exchange, monetarily or otherwise. This does not mean I believe in value as exchange value. Value to me is always value-in-use. But I am interested in how use value translate to exchange value. There is a subtle, but important difference.

CONTEXTUAL AND TEMPORAL VALUE
Value is contextual (state dependent) both in terms of when we consume it and when evaluate it (to buy). This means it depends on the state of the world at the point of use. I value the USE of this iPhone right now in this context because I would be bored to death lying here with baby on chest otherwise. Between 10 to 6 last night when i was asleep, I did not value the functional use of the iPhone but I valued it's AVAILABILITY for functional use, which is a use-value as well, but an emotional use. I know I'm tied to my phone. How sad is that.

But when I BOUGHT this phone, I might not have envisaged this particular context or all contexts where I would have valued the use of my phone. Indeed, the context in which I purchased my phone would have influenced the price i was willing to pay for it at that time. It also means that I have to imagine the future use value contexts to develop a present value of the phone. My book covers this in more detail and the latest Journal of product and brand management paper where i modelled advanced demand goes into more theoretical and mathematical detail on how firms price for such value.

Up next (baby stirring): Value has emotional, practical and logical dimensions; Value is perceived on use, expected on purchase and evaluated on recommendation or repurchase

Location:Lefferts Ave,Brooklyn,United States

Exeter PhD Scholarship

2010-01-17T10:42:00.000-08:00

Those who are following my blog might be interested in Exeter's scholarships:

http://admin.exeter.ac.uk/academic/scholarships/search/scholarship.php?id=416

There are two major themes that are in line with my work - Value, and the interface between strategy, operations and marketing; and of course healthcare.

Essentially, the student would get a stipend of £13290 per annum and a waiver of the fees. It's a good opportunity to get into the service research space with a team of researchers in service system, service operations and service marketing. Andi and Rog are the editors of IJOPM and we have a huge interest in service systems research.

If there is interest to work with me, then please read the research section of my website at

http://people.exeter.ac.uk/icln201/research/index.htm

I have a different philosophy from some of my colleagues in the UK on PhD so if you are interested to work with me, make sure you read this!

Nokia and value

2010-01-12T14:07:00.000-08:00

This article intrigued me:

http://www.economist.com/businessfinance/displaystory.cfm?story_id=15213843

Being a close follower of developments in UGC (User-generated Content), the notion of value in handsets seem to have evolved. Functional value (making calls, communication), social value (texting, status), emotional value (style, look-and-feel) and now the value from content generated by externalities - UGC. Delivering value that is evolving is clearly a challenge for Nokia. Where Apple stumbled into UGC quite by accident through the iphone (talk to people in O2 in UK - they can tell you how unexpected it was), Nokia is now having to design to that value. How do you design for a value that is clearly an emergent property of a complex system of user interactions? a complex system, by its nature, is complex because the property exhibited by its components (the parts) is not the same as the property exhibited by the system (the whole). Can emergent property be deterministically designed? Is that not a contradiction?

The only way I see a system can be controlled is through interventions. The focus on Nokia should be to design the interventions, rather than trying to design the components. Yet, I see their focus is still on components - the perennial myth that if I get the components right and stick them together, the system would function beautifully. Sorry, Nokia, you would get Terminal 5. Focus on the right unit of analysis. It's the system, s*****!

Assembling the team

2010-01-08T14:05:00.000-08:00

In my conversations with Addenbrookes Hospital, I mentioned that I would like to pull together a team so I've been busy the last few weeks assembling the team.

Team building is one of the things I've been doing these past few years. It's quite an art I realise because unlike corporate life, you don't just hire people with the right skill sets. Team members are basically those who are enthusiastic about the research and they could be potential PhD students, consultants, practitioners, academics, postdocs and many of them may not be directly funded by the project. Also, there could be institutions interested in this research as well so pooling resources is key to team building and one has to be rather enterprising to pull like minded stakeholders (and to know where pots of money are located) to construct a good team.

So... once I get a project, I think about who else might benefit from this - which company, institution? if they contributed funds to complement this project, could it fund a postdoc/phd student/fellowship? What would they get in return? What are their expectations? Can we meet their needs and get the funding to fund a bigger team and create opportunities for new researchers? Pooling the funding can create marginally higher resources than the cost to deliver everyone's expectations (yes, that's me thinking like an economist). So if I got money from ESRC, I will try to get money from a company, the school, anyone who could potentially benefit from the knowledge.

Then there are the individuals. Often i have people who email me or in my travels meet others who are interested to get involved in my research. Some are potential students who are smart, experienced but have no funding to do their PhD. Others want a change in career. There are usually a few criteria to be a team member of a project. First the individuals must get something back for themselves personally. That usually means data for a PhD, experience, learning from the research, opportunity to get access to good data for publication etc. Second, the individuals must give something to the project. That means they must have a skill that the project can use - a methodology, knows all the literature, has experience in the industry, has project mgt skills, is him/herself an expert in a complementary field etc. So bringing in the individual would mean a win win for the project and the individual. Third, of course, we must be able to get along. As the project gets long, the third point is really important. There must be trust between team members as mistakes and misunderstandings are bound to happen. Sometimes the difficult thing is to find the money. Sometimes it's to find the right individuals.

For this project, I've found 2 who are suited (they haven't joined me yet so I'm using initials till they do)

SS - new PhD student - S is a consultant, runs his own firm and crazy enough to pack up his family and move from Denver, Colorado to the UK to study with me. He has great enthusiasm for service research. He's expertise as a consultant and his conjoint methodological abilities would be useful for the project. I'm at the stage of finalising Sid's funding (a PhD student requires £23k funding per year and £69k in total to fund).

WM - postdoctoral researcher. WM and I have been discussing her doing her postdoc with me so this project would be ideal to sink her teeth into. She is postdoctoral and has written academic papers so she would be helpful in getting the literature together, helping me write the reports for the work. In the process, we hope to gather good data to publish in tier 1 journal, something that would greatly boost her career.

I'm in discussion with Addenbrookes and the Clinical school on visitorship status for both of them so that they can be based in Cambridge working with me.

I expect to have a team of 2 or 3 working on this project.

ESRC/NHS Public Sector Placement Fellowship confirmed

2010-01-08T13:32:00.000-08:00

I guess starting off with good news as one of the first blog entries is a good start for a blog.

So I received the letter today from the ESRC. It was a simple letter, deceptively obscuring the challenge the project entails but then only very few people knew how challenging this project would be. Most academics just take on these projects as a way to access data and milk it for all its worth. Me? I had to find an impossible problem to solve.

My interview was with Professor Patrick Sissons (the Regius Professor of Physic - the oldest chair in Cambridge - check this link), Professor Jones (forgot his first name) and Stephen Davies (Exec Director of CUHP). We chatted about the work, they were most puzzled about my 'researcher-at-large' status i.e. being full time employed by Exeter yet based in Cambridge for 3 years (it's a long story) but they were the 2 most inscrutable people I have ever met. I couldn't tell if they liked me or couldn't wait to see the back of me. Patrick chatted about Singapore - links with NUS are strong in Cambridge I gather.

Oh well, so I got it and on reflection, what did I get myself into? Well, the challenge is this - Cambridge University Health Partners (www.cuhp.org.uk) is a collaboration of University of Cambridge and NHS and the collaboration is funded by government. Each party has its objectives - for Cambridge University, it is research and education, for NHS it is patient care, new treatments and betterment of society. It is assumed that a collaboration such as this would of course be fruitful.

But how do you measure multi-stakeholder collaborations where the system has emerging outcomes and individual stakeholders have their individual outcomes? In short, what is the performance criteria for multiple-stakeholder, multiple-outcome systems? Here's an extract from the proposal:

In collaborating, stakeholders’ value propositions are realized by other stakeholders within a service system. This implies that the stakeholders that receive and realise value are just as much a part of the service system as the stakeholders that propose the value as both parties contribute the resources accessible to themselves into the system to achieve the outcomes. Yet, it is important to develop system-level measures to evaluate the overall performance of the system as well as to ascertain what should be the parameters for system performance. In short, where the ‘whole’ should be bigger than the sum of its parts, what should be in the ‘whole’, how should the ‘whole’ be measured and for what type of outcomes. This is important for stakeholders of the ‘whole’ such as government, who could fund the collaboration, or society, its beneficiary.

Impossible problem right? I have six months to solve it. Why do I do this?

Comments from research colleagues:

From Bob Lusch:
I read over your proposal and it is quite ambitious and needed. In fact if you look over the attached PDF on a fortcoming essay for the Converse Awards (in honor of Len Berry) you will see I challenge Len and others to study the health care service ecosystem. Probably only the last half of the essay is of relevance...the first half comments on Len as a scholar...which was part of the aware ceremonies. In your research you need to pay more attention to resource integration and how this unfolds over time and the fact that it is not so much outcomes or performance but processes and performing. This makes the challenge even more difficult...but that is what you are used to. Think about it in terms of the individual...it is not how you have performed but how you are performing and this never stops or does reseource integration...which consists also of resistance removal...since use of a potential resource is often prevented by resistances. Also consider some of the ways to use digital technology and the electro magnetic spectrum to build in sense and respond capability; thus capturing processes and performing.

I like the focus on fuzzy set logic...you might have Steve send you some of his work on social judgement theory and latitudes...which have some nice ties to fuzzy math.

Keep up the good work it makes our work easier.

From Steve Vargo:
I am not so much rolling my eyes as shaking my head --in amazement at what you find to tackle...and always seem to pull off well.

I think your stakeholder-alignment thesis, which came across so effectively in your performance contracting work, and seems to be at the core here also, has potential as a major breakthrough for research and practice. The "wicked" problem is of course in the assessment. I think Bob is correct that the critical focus is more on the resource integration (and dynamic context) than the resources (which only gain resourceness in given contexts) but I also agree with you that you have to identify some boundaries if you are going to create metrics to move beyond "perspective" and communicate on a common unit of analysis At some point however, the focus probably needs to return to the dynamic processes if the alignment notion is to be fully pursued. In the meantime, what you have proposed has the potential to make a major step.

Congratulations on your continuing great work and success. Keep it up and let us know any way we can assist.

I think Steve is politely calling me crazy. I do admit being a sucker for wicked problems and the access to great data would help the team and I publish in better journals....besides, if I can work with a bunch of engineers, I can surely work with medical researchers...... right? no, don't answer that.

New blog!

2009-12-21T03:10:00.001-08:00

I have so many streams of research I thought I'd better blog it before I forget them!