Services participate in the creation of value in five different ways. It is useful to understand these different paths to value, as each has its own optimization techniques. I call these five types of value market value, business value, returned value, relationship value and replacement value.
Market Value
The simplest type of value to understand is the service’s market value. Services are made available and are delivered in market spaces that are of greater or lesser size. The market value of a service is the price paid for the service within a market space.
The price is influenced by many factors, including the historical amounts, the competition, the costs, and so forth. For new services, the price might be influenced by the price for a service that is being displaced. However, if the new service become successful, the price of the old service becomes largely irrelevant.
Normally, market value is measured per service act. However, it is possible to negotiate retainer payments for an unspecified or even unlimited number of service acts within a given span of time. For example, we do not generally pay per email delivered. We pay a fixed price, or nothing at all, for that service.
When a service provider and its customer are parts of the same organization, it is often the case that no price is fixed for the service. In this case, the market value may be determined based on the funding provided to the service provider. If that funding does not explicitly refer to the services provided, it may nonetheless by prorated to estimate the service’s market value.
Business Value
The business value of a service concerns the value of the service to the customer, in the context of the customer’s own activities or processes. It depends, in part, on the utility and the warranty of the service. However, the business value may be very highly leveraged by the use to which the consumer puts the output of the service.
For example, a service provider might offer an electronic messaging service. One consumer might use that service to send a message to invite a colleague to lunch. Its business value is therefore modest. Another consumer might use that service to submit a last-minute offer for a multi-million dollar contract. The business value of that message could be enormous, due to the way the business is able to leverage the service. And yet, the service act itself, as performed by the service provider, is identical in both cases.
It should be clear that the market value of a service is strongly influenced by the business value of the service.
Returned Value
The fact of offering and especially, delivering services return values to the service provider. Returned value should not be confused with market value. By contracting to deliver services, or by performing service acts, a service provider receives the price for the service, which is the market value.
But the service provider obtains another type of return on the investment it has made in its service system and the service acts. It gains knowledge about the marketplace, about the customers and about how to optimize the delivery of the service. This value is used, in turn, to develop strategies, to reduce costs, to improve service quality and to improve the positioning of the service provider in the market spaces in which it does business. What is more, the knowledge acquired may also have resale value. This, of course, is the basis for the business model where a service provider provides free services, but then sells or exploits the knowledge gained about the often unwary customers.
Relationship Value
A service consumer may obtain a type of value from a service other than the return value or the business value. This is the value of having a stable, profitable, comfortable relationship with a service provider. Service value based on the relationship between provider and consumer is probably the most complex type of value, with many facets.
The relationship value of a service is likely to evolve over time. When a consumer first contracts for a service, the relationship is largely theoretical and does not yet have any value (in most cases). As the provider multiplies the number of service acts performed, the relationship value develops and matures. It is positive if the service acts provide business value. But it can also be negative, if the consumer’s expectations are not met.
Relationship value is realized at the consumer by reducing the costs associated with finding and managing service providers. To the extent that it is positive, it allows the consumer to reduce business risk. A good example of this would be the value of a provider whose services are always available, just in time, to a consumer that also manages the flow of its activities in a just in time manner.
Relationship value may also accrue to the service provider. It may be accounted for as good will. It is the value of a good image in a market space, where numerous, prestigious organizations are counted among the long term customers of the service provider.
Relationship value is also critical to the service provider, especially in the on-line world of commerce. It is well known that the cost of obtaining a new customer often requires multiple sales before that cost of amortized. A high churn rate among a provider’s customers is indicative of low relationship value.
Relationship value can exist even when a service has no business value. We should remember that service relationships are not purely economic in nature. Daniel Kahneman has disabused us of the concept of idealized, rational, economic actors. In Thinking, Fast and Slow, he has amply demonstrated the psychological aspect to economic activity that puts the lie to “rational” economic behavior.
The anthropological aspect of relationships and their value has been studied in great detail. In his book Les Structures élémentaires de la parenté (The Elementary Structures of Kinship), Claude Lévi-Strauss analyzed the custom of a simple service regularly performed in southern France (at least, at the time of writing in 1949). Customers in bistros would perform the service of pouring each other a glass of wine, rather than simply pouring the wine for themselves. In terms of the net result of the service acts, the two cases are identical. The output is the same, the intoxication is the same, and so forth.
But there is a world of difference between the cases regarding the value of the service act itself. When you pour wine for your neighbor, a social relationship between the provider and the consumer is established, one that might not exist otherwise. By virtue of the service provided, the provider is positioned within a framework of social values and customs.
In some cases, a relationship may have a derivative value. Imagine the case where a service provider is the sole vendor of a service with a very high business value. As always, providers have a certain limited capacity. By establishing a relationship with the provider and by using up the capacity of the provider, a consumer thereby limits access to the service by the consumer’s competitors. The consumer thereby benefits by improving its market positioning.
Another second derivative of the relationship is the case where a very large customer leverages its relationship with the service provider to force ever lower prices. This, however, is a delicate game to play. It can quickly evolve into a win-lose relationship or even a lose-lose relationship.
Replacement Value
A consumer generally decides to use a service for one or more of a variety of reasons. These reasons boil down to:
- the consumer does not have the know-how required
- the consumer lacks the resources required
- the consumer prefers to use its limited resources for other purposes
- the provider can provide the service more cheaply or at a more appropriate quality than can the consumer.
The difference between the cost of providing a service internally (including the opportunity costs of internal provision) and the four types of value described above represents the replacement value of the service.
For example, suppose an organization wishes to decide if it should develop an internal capability to deliver a service or if it should outsource that service. The business value of the service would potentially vary according to the capabilities of the internal and the external providers to deliver a certain level of utility and warranty. The returned value would go to the organization itself if the service were in-sourced, but to the service provider if it were out-sourced. The relationship value could be similar, or could be very different for the two scenarios. The market value of an out-sourced service would be compared to the cost of internal provision plus a possible opportunity cost.
The replacement value of the service is equal to the difference between the sum of these values for each scenario. The net value could be positive, thus favoring the external provider, or it could be negative, indicating that internal provision would provider greater value to the organization.
Service value and goods value
It has become common to compare goods and services, only to learn that the more we analyze them, the more we realize that they are two sides of the same coin. It is not surprising, then, that goods have the same types of value as services.
Goods clearly have a market value, which is the price we pay for them. They also have a business value. As the service dominant logic school has shown us, goods are often bought in order to allow the consumer to deliver services based on them. And those same services are often involved in the creation of yet other goods. The returned value of goods is similar to the returned value for services. Indeed, the internal know-how of a goods manufacturer is often realized in terms of the internal services it provides to manufacture those goods. Finally, relationship value is just as applicable to goods as to services.
What service value is not
In common parlance, services are said to deliver value to customers. I do not expect that people will change the way they speak of services and value. But we should not take this expression literally. Value is not stockpiled at the service provider and then delivered to the customer, as if a service act were a form of virtual conveyor belt.
The principal value of a service to a consumer is its business value which, as we have seen, is derived from how the consumer uses the service. This use is largely out of the control of the service provider. The secondary value of a service to a consumer is the relationship value. This value is goes in both directions, toward the provider as well as toward the consumer. It is derived from the use by both parties made of their relationship, rather than something transferred from one party to the other party.
Interesting points. I think there is not enough discussion on the value of services and far too much discussion on the processes. I am writing an article about measuring service. The title is “For all important things in IT service management there is a simple metric which is wrong” (not published yet). It is very easy to measure useless activities but quite hard to measure value. This article shows an interesting view to the complexity of value.
I agree with you, Aale, when we are talking specifically about IT service management. Much of the advice found there is based on the assumption that if only we had the right quality management system, then all would be well. That assumption is highly debatable. At best, it is thinking about managing services at one remove from what is really important. At worst, it becomes a hugely expensive enterprise that promotes what John Seddon called the “management factory”, with little benefit to the consumers.
Good article. Defining value of IT services is indeed an immature topic and needs to be explored further. I like the idea of defining different type of value creation patterns of IT services. However I still would like to see how we can make this moreactionable…how can we apply these concepts for example in IT service portfolio assessments and roadmaps.
It would be good to think about value of a service throughout its life cycle e.g. we need to invest in a new IT service (from an investment portfolio perspective) for which a business benefit analysis will be performed.
I would like to create a kind of value map with all IT services plotted against the business services, technology risks, etc. to help decision making and continuous improvement. Or for example: we we measure how much value the application/service still provides to the business?
Also it would be good to link value of IT services to the value streams of the business (linking to business models).
Also some services are “foudational” for an organization such as E-mail. Difficult to define value for these type of services other than maybe the “market value”.
In addition there are a lot of IT services which are providing services to other IT services – these kind of infrastructure services provide basic capabilities such as network connectivity. How can we measure these chain of services? Do we need to identify a different value pattern for this? (e.g. value streams)?
Your point about value through the service life cycle is well taken, Rob. According to “classical” theory, there is value only during the service act itself. But according to my framework, the mere fact of conceiving of a service and implementing a service system may potentially have value of the type “returned value”. I say potentially, because it is really only the fact of having consumers and truly delivering the service that the returned value is confirmed.
The idea of value maps and value chains is pretty well established, even if many organizations are not yet at the point of understanding or implementing them. But, if you look at the technology stack used to implement, in part, a service system, each component of that stack is delivering a service consumed by other parts of the stack (it is not purely hierarchical). The service consumed by the customers is itself a consumer of a few of those higher level technical services. If you determine what I call the market value of each of these services, it gives a simple and rigorous way of calculating the cost of the “business” service.
Very useful perspectives Robert.
I was wondering about using them to analyze the difference between the following two situations.
1. Your neighbour asks whether you could help him erect a fence by supporting the posts while he hammers them in. You gladly comply.
2. Your neighbour offers you 10 cents to help him with the fence. You feel insulted and either decline or reluctantly comply.
Analysis:
Although ‘logic’ says that you’re better off (market value) with the second option, it’s clear that the relationship value suffers.
Your model only ‘allows’ returned value for the provider, but I would be inclined to say that it also applies to the neighbour (let’s call him Mr Spock): “Illogical, but I’ll have to approach that differently next time.” What say you Robert?
Thanks for this example, Mark. It will be particularly useful in working out the relationships among the various types of value – and relationships there are.
My assumption is that within a given marketspace, the market value of a service is relatively constant. But this does not mean that you always pay the market price for a service. In your two cases, the lowness of the market price of the service probably influences the attitude of the neighbor, in both cases. The business value of the service would also remain constant. However, the replacement value of the service – the comparison by the neighbor of rendering the service to anything else that the neighbor might prefer to do, becomes very important. For example, if the neighbor on the other side asked for help in putting out a fire, you would have a negative replacement value if you decided instead to hold the posts.
As for the relationship value, I think your example brings out the idea that the relationship value is strongly influenced by the frame or the context of the service. Being offered a cash payment for what ought to be a friendly, neighborly, exchange is unexpected. But so is being offered a service at a ridiculously low price, or for free. “You get what you pay for” becomes the dominant thought. In any case, it puts the relationship on a basis of mistrust.
Finally, you are right about the customer potentially getting returned value. Learning how to get the most out of a supplier is indeed part of the game. Thanks for bringing this out.
Robert, when you invited me to provide feedback, I’d hoped to see a post similar to previous ones. I’m a bit disappointed 🙁
My comment would be that this analysis is too much of a tunnel vision, or in simpler terms “If you have a hammer…”. By trying to force all relationship aspects into the term ‘service’, many other relationship types are ignored.
The same kind of analysis would be possible from a sociological, financial, communication, or entrepreneural perspective. If you follow only this one dimension, you force every other aspect into the tunnel.
Where all other respondents so far say “useful perspectives”, “well done”, etc., I’d rather say “Pity, why not keep it simple”. We already have more than enough problems to manage services as it is right now, and making service management more complex instead of more simple is – imho – the last thing we need. I understand that – from a consultant’s perspective – complexity is a great virtue. It boosts turnover. But I don’t think the customer is waiting for it.
Why not try a multidisciplinary approach? Discuss the analysis with other disciplines, and see how they’ve learned to see their own world. I bet it would be enlightning.
And why not take more of an outside-in approach? There’s more reason for that than just making Ian happy ;-).
I am not quite sure why you say I am forcing all aspects of a relationship into the discussion. I am quite sure that I am not. That being said, to that extent that any relationship has value, I would be hard-pressed to identify relationship aspects that do not influence that value.
As for an outside-in approach, I cannot imagine what would be more outside-in than the concept of business value, as I describe it. It should be clear that the provider must make efforts to understand what the business value of the service is, which should then inform the service offering.
You are perfectly correct about using an interdisciplinary approach, which is why I have brought psychology, sociology, anthropology and economics into play in the analysis. Another reader suggested that ethics, too, should play a role in defining value.
The question of simplicity is, of course, very important. Following Einstein, there are cases of being too simple. The ITIL concept of service value is an example. It simply fails to explain many of the types of value that we may obtain from services. So, before trying to enunciate a single, unified theory of service value, I think it important to articulate the types of value so we are clearer about the phenomena to be explained. Unification, to the extent that it is possible, may come later. To use an analogy from physics, before Franklin, we did not have a clear identification of electrical force and its various manifestations. Without Franklin, Maxwell could not have shown that electricity and magnetism where manifestations of the same force. Similarly, Einstein could not have attempted a unified field theory until the four forces of electromagnetism, gravity, the weak force and the strong force, were first identified. I note, too, that however much we might like to have the forces of the physical universe explained simply, they have resisted such explanations to date.
Thanks for enriching the pool of meaning for ITSM. In the formula V = Q / C, Value is the result of measurable Quality being divided by Cost. The inverse relationship between quality and cost is exploited constructively as profit margin. Whenever a service provider can get a client to define the client’s desired types and amounts of Q clearly and then quantify those measurements, providers may numerically demonstrate the V of the provider’s service measurably with this metric/formula. Q is completely dependent upon the customer’s preferences for the market, its business, work experience, etc. so providers who facilitate defining and communicating of customer preferences enable greater communication, appreciation, etc.
I do not see, John, how your formula can account for the value to a service provider of gaining the experience of delivering services. Nor do I see how the value of a service for a consumer has anything to do with the provider’s costs. If two providers deliver the same service and one of them has costs of 1 million, whereas the other has costs of 500 thousand, how does that change the value of the service for the consumer?
Robert, thanks for your publication. Seems to be quite interesting as it provides, let’s say, some new view on value types.
What I would like to see, perhaps, afterwards – the relationship between all those value categories. With other words it would be nice to analyze the in-depth categorization from both financial and non-financial perspectives.
Just to summarize my point of view on the subject and the publication from practical perspective as I work in real and quite complicated world.
Market value – seems to be directly financial category fixed at the point of time. It is old and usual.
Business value – I think it depends of the customer maturity, not only on IT service provider. This value category also can bу expressed in financial terms directly based on business processes analysis, based on demand and feedback (e.g. service desk reporting) trends. From my perspective it is different for external and internal providers because the priorities in fact are different.
Returned value – from my perspective seems to be knowledge or capability (ITIL term) – related value. I see it as a sort of secondary value as it can be expressed in financial terms indirectly. This value is extremely important for service provider differentiation.
Relationship value – I see it as rather psychological/communication value category. As such it is for me also a secondary value and can be expressed in financial terms indirectly. It is important for both customers and service provider.
Replacement Value – is rather a sourcing option value. It is well known in clearly described in many sources, e.g. ITIL Service Strategy. This is a complicated value as it is influenced by management maturity (capability) level, project management capabilities and market position of service provider.
I agree with your remarks, Tatiana. I hope to provide a synthesis relating the forms of value in the near future.
One of the issues regarding the financial analysis of value is that only market value, as I have defined it, can be determined with a high degree of probability. For example, when an organization seeks to sell a business line, or seeks to borrow money, the market value of the services provided, extrapolated over a certain number of years, is a common and acceptable calculation (albeit there is always a risk that the projected market value will not be realized). So we can only really estimate future market value as the probability that it will fall between two amounts. The same is true for the other types of value, but our ability to model those other types tends to be much more primitive. As a result, the estimations of those types of value will tend to have much lower probabilities and/or lie between values that are much farther apart. For example, you might be able to say that the expected market value of a service is 95% that it will be between 950’000 and 1’050’000. But the relationship or replacement or business value might only be expressed as an 70% probability that it lay between, say, 1’000’000 and 5’000’000. I hope that having defined these value types will help, in the future, to better calibrate these estimates.
This is an excellent article that explains very clearly where to look for service value – something that we are educated in realising as much bigger than the immediate outputs of a service – thank you.
The notion that business value is down to how the customer uses the outputs seemed counter-intuitive at first, but then I thought of a recent trip to Australasia. Had the airline flown me to (say) Alaska, the value would have been nil, even though it’s somewhere I wish to visit. By flying me to where I needed to be, I was able to attend a conference, network, make new friends and explore another country – the real value the flight facilitated.
Something that used to puzzle me in my manufacturing days was the financial practice of assigning a $ figure to value in-process scrap. The market value was minimal (salvage value) but the finance folk considered is significantly higher – somewhere between the cost to (partly) manufacture and its eventual market value. I did initially wonder if this was a sixth form of value, but when I thought about it from a service perspective, it made more sense. The flight that took me to Australasia stopped off at Singapore, an enjoyable flying experience that got me considerably closer to my destination and building relationship value. Similarly in service management, when we (say) pinpoint a problem’s root cause(s), we create returned value and relationship value; then again when we identify the fix, implement the fix, and so on and so forth. This is important to know as when driving improvements you can’t directly influence the outcomes (that’s another discussion in itself), but you can influence the in-process steps. Understanding the full value of each step helps us greatly in driving the right improvements.
Your point about intermediate value is well taken, Phil. As you say, accountancy has long recognized this for the manufacture of goods. Although people such as Reinertsen and Anderson have argued to the contrary, the intermediate value of the information that we create in services in not generally recognized. But this is precisely the point being raised by promoters of lean services. Work done that does not lead to useful output is waste, and that waste is being paid for by the service provider, not to mention the lost value of the work that could have been performed, had there not been that waste.
[The comment is the result of an exchange between Daniel and Robert. I have added clarification to Daniel’s posting to clarify who said what.]
[Daniel]
Comments from Daniel and then from Robert:
great post!
Thanks you and I am flattered. I also have some questions for you but will post these in a separate email.
Your post: very intellectual and I like the various breakdowns. It does make the assumption the reader is more than just aware so my questions are to help those not at your level. I also think your example for that service value type needs to be as early as possible in each section.
Market value: is it really the price paid or is it the benefit received over the price paid? What do you mean by “service act”? For me market value (to differentiate from Business value) is the benefit of having this product to service a particular group of businesses or users. Think of a product for the blind, email from anywhere but with 3rd part add-ons…. In other words the addition of this product to the market (niche or otherwise like UBER) is the benefit of opening up new products for businesses, users, etc. and leads to the others you mention.
[Robert]
To start, it is important to take the terms as defined and not try to reconcile them with other definitions that might exist for the same terms. Perhaps “market value” is not the best term for what I am describing. I recognize that others – yourself included – have other definitions for what is mean by market value.
That being said, no, market value is not the benefit less the price paid. The reason I refer to the price paid is because I think in terms of the question a service provider might ask, “I have a service to sell. How much can I get for that service in the marketspace where I wish to sell it?” The potential customers will then have to decide if the business value of the service is, for them, greater than the market value. If not, there is probably no good reason to buy the service.
I use the term “service act” as defined in the Adaptive Service Model. It is simply the act of delivering the service.
[Daniel]
Business value: spot on
Returned value: from whose perspective? From the business- user, then it is covered in Business value. From the business-creator then this is the price plus feedback to improve the product to continue to generate market value. Obviously you want to be a market leader and not have your product die or become non-competitive because you failed to continue to innovate.
[Robert]
I thought I made clear that returned value is principally from the perspective of the service provider. That being said, the question raised by Mark Smalley and posted on the blog does raise the issue of whether there is a returned value to the consumer that is independent of the business value. It might be tempting to lump every benefit for the consumer into business value. I want to restrict the concept of business value to the value obtained by the consumer in using the output of the service. There are other benefits to the consumer, too.
[Daniel]
Relationship value: to me more than simply cost. I like your system because it help me so lower cost may not negate its value to me but more features will be great and less will cause me to lose interest or desire. This value also allows the extension of a service outward: Apple created a phone which added value to businesses or customers which then allowed vendors to add apps which added benefits. Blackberry stopped and look where they are.
[Robert]
I thought a lot about the question of how a relationship may be of value to the consumer other than by reducing the consumer’s costs of managing suppliers. In the examples you give (and I am not sure I really understand them), I can see how a consumer might believe that maintaining a relationship with a certain provider would reduce risk. Now, if a company were to constitute reserves to protect itself against potential future risk, then lower risk would imply lower reserves, and therefore greater value. This is exactly what banks do when they are required to comply with the Basel accords regarding operational risk. The question is whether any organization really constitutes reserves in function of the risks of dealing with its suppliers.
Otherwise, the examples you provide seem to me to refer to business value, not relationship value. When a service is designed in an open way, such that add-on services from other providers are both possible and encouraged, I would count this under the rubric of the utility of the service, rather than the nature of the relationship.
[Daniel]
Replacement value: going back to Apple and Blackberry: sometimes it is just a better service and not cost that causes us to look at the new value and replace what we have today. Our changing needs etc.
[Robert]
My point is that the “replacement” of an internal service by an external service could be real or could be theoretical. Suppose an organization had no email service. Theoretically, it could define what it would want in an email service, identify suppliers able to provide that service and then compare the cost of using that supplier to the cost of developing, operating and maintaining the equivalent internally. By deciding to use an external supplier, the organization frees up the difference between the market value and what it would have cost were the organization to develop the service internally. The question of whether the supplier’s service is “better” or “worse” is automatically including in the calculation of what it would cost to do the equivalent internally.
[Daniel]
Goods value: not sure you are now over-complicating this but for me goods value is the price I am willing to pay (American view)
[Robert]
I added this little section as part of the ongoing discussion of what is difference (if any) between services and goods. It was not intended to delineate yet another type of value of services.
[Daniel]
Great breakdowns!
Interesting analysis. I think the most complex and longest value to obtain is the relationship value. To me this could be very fragile and if not maintain properly cost a lot to an organisation. It is driven by the business value of course, but not only. I would also say that one key element is the adaptability/flexibility of the service provided, with the idea in mind of both parties willing to move into a win-win collaboration.
Overall a very interesting article describing the complexity and multi faces of value
Robert thank you,
I will add a new category of value, reputation.
Indeed, in our interconnected world, reputation can be more important than the service offered.
Similarly to TripAdvisor, in an open market, we look all opinions to determine the validity of our consumer choices.
For IT, the market is often closed, even with a model “Bring Your Home Device”, the customer is captive of the organization providing the services.
Often the only means of communication of the customer on the quality of service is the reopening of an incident (if permitted .-).
With a good reputation, we walk on a wire:
– A perfect resolution = increasing reputation
– An imperfect resolution, reputation is ruined.
Finally, as we are very demanding consumers with service providers such as hotels or restaurants.
Do we offer the same quality criteria for our users?
I am assuming, Laurent, that the increased value of the reputation that you correctly indicate is a component of the relationship value of a service. As a provider continues to deliver the services desired by the marketspace, the provider obtains value by improving its reputation.
Robert, you have asked for my views, which are that I found this to be very thoughtful and carefully presented article but one that will sadly, I believe, have only a very limited influence on the thinking of the current ITSM world. The vast majority of recipient organizations seem to be struggling even to define and comprehend ‘service’, let alone ‘service value’. Nevertheless, that does not mean that service providers should not attempt to better understand the complex nature of the value their services represent and seek to influence their customers accordingly – and your definitions are an excellent starting point.
What a great discussion and article. Always insightful. My view of the value issue is that it is not constant at all. It is a calculation that is always being calculated. The customer/consumer/buyer/person wanting the service is always in evaluation mode considering if the service or produce is worth the cost. Something I gladly bought last week might no longer have value to me this week. The number of factors that go into the calculation are almost infinite although I would be a smart person could nail it down to a framework. Competitors, alternatives, availability of a work around and the hassle associated with any of those items would play into the calculation. But the point being that the calculation of value is an ongoing, always active, calculation – it changes moment by moment, day by day, year by year etc.
Great discussion and debate by all. Very insightful and thoughtful article and discussion.
You raise an interesting issue, Bill. I suspect that a service can be valuable in so many different ways, that our minds have difficulty grasping the systematic issues underpinning value. And so, we often think of value in terms of the most recent frame. An incident provides a frame, as does a change, a contract negotiation, a periodic review, etc. And so, one’s perception of value can readily change according to the most recent frame. That being said, organizations tend to counteract this psychological aspect by fixing scheduled, periodic reviews, such as budget exercises, supplier reviews, and so forth.
Question for Robert:
When you write: “Services participate in the creation of value in five different ways”. I wonder, what is the basis to set such number of value ways? Why five?
That’s a very interesting question, David. As far as I can tell, there is neither a psychological nor an economic basis for the number of types. What I have tried to do is identify the types of service value that can be obtained independently of the other types of value. I have come with up five types. But if there were four, or six, or ten, so be it. Let me be clear that I think all these types of service value are closely related. When I say they are independent, I mean that you can obtain one type of value without necessarily obtained any of the other types of value.
Agree with that, Value depends on what customer outcomes are covered by service, and that means a universo of options.
Greetings.
Perceived Value
If the Customer is right, and if they perceive value in what we have provided to them, then value has also been created.
I include this under business value, Oliver. I must say, though, that the commonly used expression, “perceived value”, leaves me somewhat perplexed. What do people really mean by “to perceive”? The common meaning of the term is to recognize, to be aware of. In other words, the value is real and the customer recognizes it as such. One must ask, then, if there is also business value of which the customer is not aware? But, I suspect that most people really refer to a “subjective impression” when they say “perceived”. In other words, they mean that value can be subjective, and not founded in objective, factually demonstrable results. Well, whether or not such value is real is an epistemological question already asked by Plato in The Theatetus, and not clearly answered since.
Hi Robert
Great article, great perspective on service and its potential value.
However, I would like to add another dimension to the definition of value. Perceived Experience!
The perceived value that one or many persons get from the service that has been provided. This experience/perceived value can vary widely depending on whom you talk to. It also depends on the Value Add items that were provided. This “experience” would make it hard to determine a true value for the service. We need to look at who, what and where and at what costs and to whom.
If we apply the value items to a very common service (outside of IT) like a flight between London and Rome what value is real and what items are perceived?
This is very basic service that will get you from A to B (hopefully safe). This is a repeatable service and is offered by a fair bit of airlines hence the market value is somewhat the same for all of them. However, the first Value Add item that changes the perceived Value is where you sit in the plane. On long Haul Flights the difference between economy-class and first-class could be as much as four times the financial value. The first class person could have had the worst experience ever as the smoked salmon dinner was not delivered to his/her liking. We could now see that the CEO of a company will make a decision based on his/her experience never to use this airline again purely based on experience.
The person in the economy class had the best experience ever as there was no previous experience to compare it to.
The same could happen with IT services and it is a person’s perception, possible value add and overall experience that will determine the value of the service to this person or even its value overall.
Tj
Your point is well taken, Tjeerd. I would qualify it in two ways.
First, although I know that the term “perceived” is commonly used in the way you use it, I would prefer to speak of objective and subjective experience. The simple reason for this is that the common meaning of the term “to perceive” means just the opposite of how it is often used, so the term is highly ambiguous.
Second, one could easily talk about the objective and subjective aspects of value for any of the types of value, not just what I call the business value (to which your example refers).
So, I accept the point, but rather than speak of yet another type of value, I prefer to generalize the idea and apply it to all types of value.
Hi Robert
Thanks for your reply.
I agree, the objective and subjective aspects of value now become a weighting factor that can be applied to each of the types as seen by an individual. This in itself now becomes part of a much more complex formula to measure value for a service as there will be the objective, subjective, tangible and intangible aspects for a service based on the number of observations or perception of this service by each individual.
Every human has a perceptual set, also called perceptual expectancy or just set is a predisposition to perceive things in a certain way.(1).
My base usage of the word perception or perceived is it’s true meaning
(Perception (from the Latin perceptio, percipio) is the organization, identification, and interpretation of sensory information in order to represent and understand the environment.[1] All perception involves signals in the nervous system, which in turn result from physical or chemical stimulation of the sense organs.[2] For example, vision involves light striking the retina of the eye, smell is mediated by odor molecules, and hearing involves pressure waves. Perception is not the passive receipt of these signals, but is shaped by learning, memory, expectation, and attention.)[]
This “perception” could severely distort the overall value of a service that is being provided and as such we need to pay attention to define “ the to be supplied SERVICE” as it relates to an individual, a group or an organisation as a whole in terms of their expectations.
Unfortunately IT seems to attract these paradigms as we struggle to define and value services to a wider audience.
(1) Weiten, Wayne (17 December 2008). Psychology: Themes and Variations. Cengage Learning. p. 193. ISBN 978-0-495-60197-5.
Congrats Robert, interesting perceptions.
I won’t repeat things already said !
Perception of value is key, so alternative ‘takes’ on value can add to a positive customer and provider experience
There is no doubt, Steve, that what we think we see and what we feel are often of capital importance to decision making, such as acquiring a new service provider or continuing to use a service (not to mention canceling one). My principal question is what happens when a everyone in a company is extremely happy with a certain service provider, but it turns out that they charge twice as much as anyone else and, as a result, the company’s own service are significantly undercut by the competition, leading to lost sales. Within certain limits, the balance of the subjective and the objective evaluation of service value is probably a cultural trait. But outside those limits, the objective evaluation is certainly going to hold sway.
I did not want this article to be specifically about the ITIL definition of “service”. However, as the imprecision engendered by ITIL continues to be an issue, let me be more concrete regarding the issue with ITIL’s definition. “A means of delivering value to customers by facilitating outcomes customers want to achieve, but without the ownership of specific costs and risks.” What we know from this definition is that:
a) a service is a type of “means”
b) a service delivers value and facilitates customer outcomes
c) a service obviates a customer’s need to manage certain costs and risks.
As for a), this is so vague that it is nearly useless. Almost anything can be a “means”.
As for b), given the imprecision of a), we are made to think of a service as a sort of bucket or pipe, filled with value, that the service provider kindly carries over to the customer. As an analogy, this is not bad, but as a definition, it is far too general. That being said, one main point of my article is that the idea of value being first at the service provider, and then brought over to the customer, is not correct.
As for c), while I fully agree that services may do this, the most common purpose of using a service, as opposed to doing it yourself, is that you lack the capabilities to do it, or the service provider can do it much better.
In summary, if you had no idea what a service is, it would be virtually impossible to imagine it correctly based on the ITIL definition.