Friday, January 1, 2010

Customer Value Management and IT Outsourcing

Welcome 2010! This decade is going to see a great shift from value-neutral to value-based IT outsourcing trends…

The last two decades encompassed huge opportunities to software service providers. IT evolution and cost-effective onsite-offshore operations offered stability and growth in the areas of Software Maintenance and Support, and Sustenance Engineering. Service providers played in a value-neutral way looking at the opportunities alone to reap benefits. Over the years the competition has grown to a global level. Under these circumstances, Customer Satisfaction Surveys failed to assess the relative performance in a competitive world and hence to understand customer values. Customer Value Management (CVM) is an emerging art and science – it is a way of thinking coupled with a set of techniques and methods that anyone in business can use to decide where to expend time, energy and money to create value for customers. Mature disciplines such as consumer electronics, telecommunication and automobiles focus immensely on Customer Value Management to delight and retain customers.

Software Engineering is a maturing discipline. The focus on CVM in Software Engineering is too low compared to other mature disciplines. Offshore Software Service Providers realized the demerits of ‘one-size-fits-all’ approach during the post-Y2K era and took the first step by means of defined organizational structures or business units based on verticals and horizontals to provide focus on domain-specific as well as technology-specific customers. Strategic initiatives of Software Service Providers during the mid-90s focused on the adoption of process maturity models (such a, ISO and/or CMM) and enrichment of skills with professional certifications (such as PMP). These initiatives focused on standardizing organizational software processes and strengthening the delivery arms. However, for more than a decade, the contribution of such initiatives to Customer Satisfaction as well as the overall success of the Offshore Project Management could not provide consistent results across projects.

Software service providers go with their Unique Selling Points (USP) and Value Propositions to win new business relationships. Seldom do they focus on answering the following questions.

1) Do we choose the right set of values?
2) Do we manage our business processes to deliver the values we promised?
3) Do we communicate the values we offered to the customer and understand customer's perception?

Customer Value Management is all about this focus. Do software projects deliver software as well as customer values? The answer is not a definite 'Yes'. In many cases unfortunately, the answer is a definite 'No'. This is due to the mindset of businesses that deliver software - the mindset that treats software as a technical commodity executable on a piece of hardware to satisfy user requirements. As the competition gets truly 'Global' this mindset will transform towards value-orientation. Delivery Management community will work towards managing customer values effectively.

Obviously, cost effectiveness as a singular value proposition will lose gravity. Cost pressures will continue to exist. Increasing number of service providers will move their operations to cost effective geographies. Organizational focus on cost effectiveness and cost cutting measures will become ubiquitous. Worldwide blended rates will emerge.

Surveys show that when customers slip from ‘Highly Satisfied’ to ‘Satisfied’ (the ‘Slippery Slope’ syndrome) they do limit existing relationships to low-end services with the current vendor and seek new providers for value-added high-end services. For example, in banking industry customers who are just ‘Satisfied’ with the current bankers keep their relationship to maintain a savings bank account and open new accounts with other providers for high-end services. This is a classic scenario that could happen and restrict players from growing up in the value-chain in our industry. Unless the current service offerings are value-centric, existing customers will never ‘Pull’ a provider to offer high-end services or succumb to any ‘Push’ to buy additional services. In fact, service providers do go with ‘Value Propositions’ to customers and sell their services. This was the first step taken by service providers towards value-orientation during the current decade –‘Going with Value Propositions’. This partially answers the first question – ‘Do we choose the right set of values?’ In reality, the industry has a long way to go in choosing the right set of values, in managing business processes to deliver such values, and finally, in communicating the values delivered to understand customers’ perception. CVM is the way to go in order to evolve a value-based delivery model and hence to stay ahead of competition.

Incremental & Evolutionary Development Methodologies will become a dominant factor of delivery models. Software Application Development and Maintenance has undergone a major paradigm shift from traditional waterfall life cycle to iterative and incremental life cycle. Incremental and Evolutionary Development Methodologies (for example Agile Methodologies and Lean Development) have proved to be successful. The trend will continue and there will be many adopters of such methodologies to ensure early deliveries, high quality and effective risk management. The need of the hour in software development is to plan for early and continuous delivery of high-quality software along with the flexibility to respond to changes and provide better visibility and predictability to the customer. Time-to-market and budget constraints put tremendous pressure on Global Delivery Models in meeting this need.

Foundation of critical resource pools at customer-centric locations will become a necessity to attain competitive advantage. Customer-centric locations will provide competitive advantage to position critical resources to offer high-end service offerings such as Consulting Services and Package Implementation. Businesses will strive to hire resources in order to overcome cultural and linguistic barriers. There are two dimensions to this foundation – a) Establishing critical operations close to customers for value addition and b) Exploring worldwide locations for business operations, talented resources and operational efficiency. With cost effectiveness being the basic ingredient the ability to compete globally will make these two dimensions the key strategic options to establish effective delivery models. Service provides operating from a base country with sales forces across geographies will have to provide value-addition to its existing as well as potential customers by forming ‘expert teams’ consisting of domain as well as technical expertise to increase their ability to respond fast to market situations. This will become a necessity to be a true ‘Global’ player in the industry.

The significance of relationship will surpass the power of branding when it comes to business continuity with existing customers. This will limit the power of branding in business continuity and entrust enriched customer relationship as the strategy to retain and grow businesses. Branding will prove to be advantageous in entering new accounts and attracting new talents. When it comes to ‘Retention & Continuity’, ‘Relationship’ will play a key role in global competition. Customers will create and sustain business relationships purely based on value offerings. Branding and market dominance will never bias a relationship or business continuity in the competitive world. Rather value offerings and business relationships will add power to branding.

Services offerings will get wrapped around innovative value-based alternatives that provide for Flexibility, Risk Mitigation, Business Continuity, Partnership Opportunities, Technology Leadership and Relationship Commitment. The last decade was predominantly full of opportunity-based value-neutral selling. Delivery Models were SLA driven with contractual bindings. Though this trend will continue to exist, the next generation will see different kinds of value-based alternatives.

Focus on Employee Skill Building will mature further to ‘Value-Based Competency Building’ (VBCB). Global competition will transform businesses to strategize on Value-Based Competency Building. ‘Value-Based Competency Building’ will address contemporary challenges in building competencies specific to Verticals or Horizontals. This will enable businesses to establish the basic foundation for effective Customer Value Management. ‘Value-Based Competency Building’ will become a critical aspect of Human Resources Development and Planning. Global players will evolve VBCB to establish a strong foundation for their delivery models to improve quality of deliverables and to reduce project costs.

Partnered Delivery Model will emerge as a new trend. To build a successful Value-Based Delivery Model’ the new generation will see the trend of ‘Partnered Delivery Model’ where Service Providers will establish partnerships to enable value-addition to their system. Partnerships will emerge in the areas of Resourcing &Competency Building, Employee Care, V&V Services, Package Implementation and Technical Writing. Matured industries such as consumer electronics and airlines operate with partners who supply both products and services. In these cases the delivery system operates by consuming products and services from partners to optimize internal value creation and hence to exceed customer expectations.

Value-Based Software Engineering (VBSE) originated by Berry Boehm will become a catalyst in IT services industry and Value-Based Process Frameworks (VBPF) may evolve as well – both of these will become the building blocks delivery models. VBSE is currently maturing among the academia and research communities. It is going to reach practitioners in few years from now. It focuses on both monetary and non-monetary values and explores ways to infuse value orientation in each and every activity of Software Engineering starting from Requirement Analysis to Verification & Validation. The VBSE agenda includes Requirement Engineering, Architecting, Design and Development, Verification & Validation, Planning and Control, Risk Management, Quality Management, People Management, and Principles and Practices.

Adoption of Quality Processes will upgrade to Value-Based Process Optimization and Process Tailoring (VBPO &PT). Quality Processes and Process Model will upgrade to include value definition, measurement, corrective action and optimization. Process Areas will include key value elements to practitioners and Process Tailoring will help them the right set of key elements are add new ones to ensure successful deliveries. This is a potential area of research and practice in the industry.

An organizational level CVM initiative will be the first step to create awareness and develop CVM skills in the organizations. Implementation of CVM will require an experimental approach on a selected set of projects of business units and customers. A customer’s view on the market depends on various factors including the maturity of the market, value-offerings, and supply. This is true for a vast majority of the customers of any industry. Cost effectiveness alone cannot survive businesses that are stronger in value-neutral organizational or process maturity frameworks. Organizational Value Orientation and CVM in IT Services Industry are in their infancy. As of now, less than a handful of organizations have started moving in this direction. The next decade is going to see a great shift from value-neutral to value-based IT outsourcing trends.

  1. Bates Collin, Forget the value of the customer to you and think about your value to the customer, Customer Management, September/October 2003
  2. Boehm Berry, Value-Based Software Engineering: Overview and Agenda, University Of Southern California, Computer Science Department, February 2005
  3. Boehm Berry, Turner Richard, Observations on Balancing Discipline and Agility
  4. Favaro John, When the Pursuit of Quality Destroys Value, IEEE Software, May 1996
  5. Gale T. Bradley, Introduction to CVA – Trends in Customer Satisfaction, Loyalty and Value, Customer Value Inc.
  6. Highsmith Jim, Cockburn Alistair, Agile Software Development: The Business of Innovation, September 2001
  7. Minseong Kim, Sooyong Park, Value-Based Requirement Analysis of Product Families: A Goal and Scenario Oriented Approach, Department of Computer Science and Engineering, Sogang University
  8. Poppendieck Mary, Principles of Lean Thinking
  9. Shirhattikar Gautam, Future Winners and Losers in Global Outsourcing, CHAZEN Web Journal of International Business, Winter 2005
  10. Terdiman Rita, New Dynamics in the Application Outsourcing Marketplace, Gartner Inc Article Top View, 30 January 2003

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