Business models for shared services

During my work, I have become more and more involved with shared services. Given my focus on business models, my interest is in understanding the business logic behind shared services.

Firstly, we have to address what we mean with shared services. Shared services can be defined as “The concentration of company resources performing like activities, typically spread across the organization, in order to service multiple internal partners at lower cost and with higher service levels, with the common goal of delighting external customers and enhancing corporate value” (Schulman et al., 1999).

An initial orientation on the business model of shared services has brought me to two core considerations for service provisioning in organizations. The first consideration is related to the centralization/decentralisation discussion that is quite common in organizational literature, for example in relation to the IT function. The preliminary proposition is that shared services combine the benefits of both approaches while circumventing the disbenefits, see the following link for a nice example.

The second consideration is the hierarchy/market discussion that is quite common in economic literature. An alternative for this is the insourcing/outsourcing (make-or-buy) discussion found in supply chain and purchasing literature. The preliminary proposition here is that shared services provide control (and internal capabilities) on the one hand and the discipline of the market (and a customer focus) on the other.

Note that, while we start with the optimistic mindset that shared services can provide us with the 'best-of-both worlds,' there is also the risk of 'worst-of both-worlds.' This provides the starting-point for research into how shared services can live up to its promises?

Business Model Mind Map

This picture presents Osterwalder's Business Model Canvas as Mind Map. Mind mapping can be used to generate a number of alternatives for the different elements without thinking too much about the relations between the elements. This is more prominent in the canvas itself.

Critical success factors for business model innovation

Okay, you have a fantastic idea and managed to translated that into a superb business model design. The hard work is done, or not?

The need for deconstruction

Business model innovation, as a form of radical innovation, requires ‘creative destruction’ that challenges the certainty of current core competencies and revenue stream in favor of uncertain future competencies and revenue stream. This requires vision and risk-taking, something that is often discouraged by corporate incentives and institutional arrangements.

The ability of to execute

Translate a high-level business model into a more detailed operational model and implemented that model in a way that stays consistent with the original concept. A few small compromises here and there (in particular, in performance indicators and incentive schemes) can easily result in a flawed business logic in the operational processes.

Challenge you own innovation

Do not get too attached to the first idea or implementation, how good and promising it may seem. Built in feedback loops and monitor early warning signals to explicitly challenge your original concept and be willing and able to completely change it, if required.

Note that this kind of explicit learning is facilitated by a consistent implementation of the original concept, as described above. Otherwise, it is unclear how to interpret feedback, is it caused by the original concept of by the implementation.


The role of timing

You cannot be too early, but certainly not too late.

New book on business model design and innovation

Soon the new book of Alexander Osterwalder et al., Business Model Generation, will be out. Find out more about the book on the special website. Read also more on the creation process of the book and the launch event at his blog.

What is interesting about the book is that it not only addresses business model design and innovation, it also practices what its preaches. Alexander initiated a community that co-created the book (with a membeship fee increasing with the membership numbers) and cut out the intermediairy (the publisher in this case).

Towards a business model definition

Coming up with a good definition is hard, and for a body of knowledge as immature and abstract as 'business model' thinking (logic? theory?) it is even harder. Two particular, related, problems I have come across are:

1. Whether a definition refers to a business model of an organization (actor) or of an initiative (network).
2. Whether a definition refers to a (more or less) abstract innovation logic (e.g. open), or to offering and delivering a specific value proposition.

Trying to reconcile this, here is an attempt to define what a business model is and what this means for business model management.

A business model describes the value rational for the application of resources by one or more business actors. A business model can be described from the business actor and/or the business initiative perspective. A business actor can participate in one or more business initiative. A business initiative can involve one or more business actors.

From the business actor perspective, the value rational comprises the fundamental value logic of a business actor. From the business initiative perspective , the value rational comprises the value creation, configuration and capture of a business initiative.

The core challenge of business model management is to ensure that the value rational is viable and sustainable. This requires governing the value rational, aligning the value rational at a moment in time (including nourishing synergies and handling conflicts), and evolving the value rational over time.

Early 'business model' models: Drucker's Theory of Business

In an earlier post, I described Humphrey's 'team action management' (TAM) business performance model as an early 'business model' model. Another model in this series is Drucker's 'Theory of the Business', which is described in his thirty-first HBR article (Sep 1994).

Drucker's theory of business consists of three parts: (1) assumptions about the environment of the organization, (2) assumptions about the specific mission of the organization, and (3) assumptions about the core competencies needed to accomplish the organization's mission.

Moreover, Drucker addresses four specifications of a valid theory of business:

1. The assumptions about environment, mission, and core competencies must fit reality.
2. The assumptions in all three areas have to fit one another.
3. The theory of business must be known and understood throughout the organization.
4. The theory of business has to be tested constantly.
   

IBM study: Three ways to innovate your business model

An IBM study into business model innovation (Mar 2009) reveals three primary types of business model innovation: (1) industry model innovation, (2) revenue model innovation and (3) enterprise model innovation.

The study is based based upon an examination of 35 cases. It also which models generate success and which seem easier to implement. It concludes that with a sound strategy and strong execution, any of the paths can lead to success.

Early 'business model' models: Humphrey's TAM

Most of us will know different frameworks or models for business models, like Osterwalder's business model canvas, Weill & Vitale's e-business models, Bouwman et al.'s STOF model, Gordijn's e3-value, etc. Most of these frameworks and models are relatively recent. Are there similar frameworks and frameworks from the past?

During a search for SWOT analysis, I came across a framework from Humphrey (see here). A further search on Humphrey brought me to his 'team action management' (TAM) business performance model (see here).

TAM describes six inter-related areas which have to be developed simultaneously for a business to be successful:

1. Products & services: what are we selling?
2. Process: how are we selling it?
3. Customer: to whom are we selling it?
4. Distribution: how does it reach them?
5. Finance: what are the prices, costs and investments?
6. Administration: how do we manage all this?

Another interesting fact about Humphrey is that he was a strong advocate of involving all employees in business planning and, therefore, promoted a systematic approach to produce and achieve a plan to accomplish a specific result, in a specific time, to a specific budget while working with a group of people.

Freelusion: The illusion of free

I keep wondering how many people still do not understand that "There Ain't No Such Thing As A Free Lunch." Mostly, we pay indirectly for all these free product and services as in the "razor and the razor blade" approach. Ever wondered why for many products and services the actual production costs are only a fraction of the price? Who pays for the advertisements on "free" news sites? So every time you see an advertisement of one of the products you buy on a web page, consider yourself to be a paying customer. ;-)

What can be the case is that some end up paying the lunch of other. This is model that has been around for a long time and people may be quite willing to do so, as, for example, is the case with charity. But one may wonder how sustainable this, as a commercial model, is in the long-term.

For example, many people have been buying "high-quality" paper newspapers. Nowadays, those who do not care about this kind of quality read their news "for free" online and may be paying for it via their car insurance. So, this will ultimately require that those who do value these "high-quality" newspapers have to start paying the actual costs without cross-subsidizing and they may pay either via their subscription or via their car insurance. So, the internet may in fact be making people pay for what they actually consume!

Business model experimentation

A while ago, I wrote about business model experimentation as one of the requirements for Business Model Management (see this post). It is advisable to experiment with new business models first, to test them and to try out different models and variations. One of the advocates of business model experimentation is Chesbrough in his discussion of open business models.

In a recent HBR article (Feb. 2009) titled 'How to Design Smart Business Experiments,' Davenport argues that managers should follow a more rigorous approach to business experiments. He promotes decision-making based on scientifically valid, quantitative methods made possible by new, broadly available software and some straightforward investments to build capabilities. Davenport also states that the scientific method is not well suited to assess a major change in business models. It is more suited for strategy execution than strategy formulation.

Still, I am already looking forward to seeing paradigm discussion emerge in the board room. ;-)

Service Innovation and Business Models

Western economies are highly dependent on service innovation for their growth and employment. An important driver for economic growth is, therefore, the development of new, innovative services like electronic services, mobile end-user services, new financial or personalized services. Service innovation joins four trends that currently shape the western economies: the growing importance of services, the need for innovation, changes in consumer and business markets, and the advancements in information and communication technology (ICT).

See the publication in the business model book for mobile services here.

Design Trade-offs for Electronic Intermediaries

Electronic commerce offers intermediaries new opportunities for facilitating the transfer of information, goods and services between business customers and suppliers. Designing exchanges is a complex undertaking because of the many design options on the one hand and the diverse, and sometimes conflicting, interests of customers, suppliers and the intermediary to be considered on the other. Our research provides constructive support for balancing interests beyond simple prescriptions like 'creating win-win situations.' We developed an exchange design model and patterns focusing on trade-offs for electronic intermediaries based upon four in-depth case studies.

See the publication in Electronic Markets here.