Service Providers

Types

There are three types of service providers:

1. Internal Service Provider

2. Shared Services Unit

3. External Service Provider

Internal Service Provider

ISPs are service providers that are dedicated and often embedded within, an individual business unit. The business units themselves may be part of a larger enterprise or parent organization. Business functions such as finance, administration, logistics, human resources and IT provide services required by various parts of the business. They are funded by overheads and are required to operate strictly within the mandates of the business.

ISPs have the benefit of tight coupling with their owner- customers, avoiding certain costs and risks associated with conducting business with external parties. Since ISPs are dedicated to specific business units they are required to have an in-depth knowledge of the business and its goals, plans and operations. They are usually highly specialized, often focusing on designing, customizing and supporting specific applications or on supporting a specific type of business process.

ISPs operate within internal market spaces. Their growth is limited by the growth of the business unit they belong to. Each business unit (BU) may have its own ISP
The success of ISPs is not measured in terms of revenues or profits because they tend to operate on a cost-recovery basis with internal funding. All costs are borne by the owning business unit or enterprise.

Shared Services Unit

Functions such as finance, IT, human resources and logistics are not always at the core of an organization’s competitive advantage. Hence, they need not be maintained at the corporate level where they demand the attention of the chief executive’s team.

Instead, the services of such shared functions are consolidated into an autonomous special unit called a shared services unit (SSU). The model allows a more devolved governing structure under which SSUs can focus on serving business units as direct customers. SSUs can create, grow and sustain an internal market for their services and model themselves along the lines of service providers in the open market. Like corporate business functions, they can leverage opportunities across the enterprise and spread their costs and risks across a wider base. Unlike corporate business functions, they have fewer protections under the banner of strategic value and core competence.

They are subject to comparisons with external service providers whose business practices, operating models and strategies they must emulate and whose performance they should approximate, if not exceed. Customers of Type II are business units under a corporate parent, common stakeholders and an enterprise-level strategy. What may be sub-optimal for a particular business unit may be justified by advantages reaped at the corporate level for which the business unit may be compensated.

Type II can offer lower prices compared to external service providers by leveraging corporate advantage, internal the autonomy to function like a business unit, Type II providers can make decisions outside the constraints of business unit level policies. They can standardize their service offerings across business units and use market-based pricing to influence demand patterns.

A successful Type II service provider can find itself in a position where it is able to provide its services externally as well as internally. In these cases they are both Type II and Type III service providers.

In these cases it is important to make a strategic decision to provide services both externally and internally and to set up the appropriate governance and management structures. This is not just a case of delivering existing services externally.

External Service Provider

ESP is a service provider that provides IT services to external customers. The business strategies of customers sometimes require capabilities readily available from a Type lll provider. The additional risks that Type lll providers assume over Type I and Type II are justified by increased flexibility and freedom to pursue opportunities.

ESPs can offer competitive prices and drive down unit costs by consolidating demand. Certain business strategies are not adequately served by internal service providers such as Type I and Type II. Customers may pursue sourcing strategies requiring services from external providers.

The motivation may be access to knowledge, experience, scale, scope, capabilities and resources that are either beyond the reach of the organization or outside the scope of a carefully considered investment portfolio. Business strategies often require reductions in the asset base, fixed costs and operational risks, or the redeployment of financial assets.

The experience of ESPs is often not limited to any one enterprise or market. The breadth and depth of such experience is often the single most distinctive source of value for customers. The breadth comes from serving multiple types of customer or market. The depth comes from serving multiples of the same type.

From a certain perspective, ESPs are operating under an extended large-scale shared services model. They assume a greater level of risk from their customers compared to ISPs and SSUs. But their capabilities and resources are shared by their customers - some of whom may be rivals. This means that rival customers have access to the same bundle of assets, thereby diminishing any competitive advantage those assets bestowed.

How to Define Services?

Below are the steps which we need to consider while defining our services:

1. Define the market and identify customers

2. Understand the customer

3. Quantify the outcomes

4. Classify and visualize the service

5. Understand the opportunities (market spaces)

6. Define services based on outcomes

7. Service models

8. Define service units and packages