In an era where many manufacturing firms are considering migrating towards services (think of IBM), or at least “servicizing” their product (think of Rolls Royce and their famous “power-by-the-hour” contract), it may be a good idea to step back and evaluate how service firms compete.
A distinguishing feature of services is that customers provide significant inputs into the production process. Sometimes, these inputs are the customers themselves, who jointly participate with the provider in the service delivery.
For instance, the value generated through a consulting engagement may depend on both the client bringing her intimate knowledge about the problem and data and the consultant bringing her knowledge about methodologies and frameworks. Similarly, the quality of a tutoring session depends on both the tutor's effort at explaining a concept clearly and the student's effort at trying to assimilate it.
Why does it matter? Because many service firms are currently facing an unprecedented set of reengineering opportunities, as our colleague at UCLA, Uday Karmarkar, already suggested 10 years ago in an HBR article. The development of information technologies and the easier access to global markets have indeed enabled service firms to explore novel ways to involve their customers in their production process.
Our research suggests that service firms may adopt one of the three following business models:
- Collaborative service, which relies on a close interaction between the service provider and the client. A classical example is the consulting engagement that brings together consultants and clients to work on a problem and transfer knowledge.
- Service factory, which relies on the service provider working independently. Think about a Business Process Outsourcing (BPO) engagement where the consulting firm manages a client’s process offshore with limited interaction with the client.
- Self service, which relies on the client working independently. Think here about online consulting tools, such as McKinsey Solutions, which is a growing segment of the consulting business, as highlighted in a recent HBR article by Clayton Christensen and his co-authors.
Each of these three delivery models is based on a different value proposition, which may need to be fully embraced to yield results. While a collaborative service configuration fits better complex services, where comprehensive solutions need to be tailored to meet a client’s needs, service factory and self-service configurations fit better standard offerings, with predictably efficient deployment of efforts. While the key value proposition of collaborative services is to foster interaction effectiveness, the key value proposition of service factories and self-services is to realize transaction efficiencies. Among standard transactions, the value proposition of service factories is to relieve the client from performing non-core tasks whereas the value proposition of self services is to enable the client to make choices of her own and reduce transaction costs.
Service firms must often make strategic decisions about how they want to involve their clients in their production process. Consider for instance the impact of information technologies on higher education. Should a university embrace information technology to adopt a collaborative service configuration to ``flip the classroom'' and use class time to truly engage with its students? Or should a university be a service factory and specialize in publishing Mass Open Online Courses (MOOCs), perhaps with only distant interaction with its students, as do Coursera, EdX, or Udacity? Or alternatively, should a university act as a self-service platform, offering its students access to talks, internships, and third-party generated course modules, similar to the University of Phoenix, for which more than 460 CEOs, 188 CFOs, 90 CFOs, and 1,754 presidents have contributed to the content of its business courses?
Similarly, is the purpose of servicizing a business to enable the client to do more with a product (self-service), to relieve the client from performing the maintenance of a product (service factory), or to collaborate with a client to identify new cost saving or new design opportunities (collaborative service)?
There is no room for compromise here: Attempting to be everything to everyone will inevitably lead to failure. Firms must make conscientious decisions about what they want to be.
Is there any way to break the trade-off between efficiency (self-service, service factory) and effectiveness (collaborative service)? Maybe. Service firms can unbundle their service offerings and think about how to best deliver each component. Ultimately, we are back to Henry Ford’s old idea of (dis-)assembly…