Complicated vs Complex Outcomes

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

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

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

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

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

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

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.