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?
Tuesday, 27 July 2010
Friday, 2 July 2010
Value-in-use and exchange value
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.
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.
Saturday, 5 June 2010
Emergence and Customer Experience
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.
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.
Friday, 16 April 2010
Designing for value and outcomes - dealing with variety
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.
(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.
Wednesday, 10 March 2010
outcomes, competitive advantage and sustainability
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.
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.
Saturday, 20 February 2010
Value-in-use
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 using up something. 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' (or experiencing) 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....
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 using up something. 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' (or experiencing) 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....
Sunday, 7 February 2010
Systems thinking, Customer Experience and Business Schools
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.
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