It is necessary to distinguish between different types of service providers. While most aspects of service management apply equally to all types of service providers, others such as customers, contracts, competition, market spaces, revenue,e, and strategy take on different meanings depending on the type. There are three types of business models service providers:
• Type I – internal service provider
• Type II – Shared Services Unit
• Type III – external service provider
Type I (internal service provider)
Type I providers are typically business functions embedded within the business units they serve. 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. Type I providers have the benefit of tight coupling with their owner-customers, avoiding certain costs and risks associated with conducting business with external parties. The primary objectives of Type I providers are to achieve functional excellence and cost-effectiveness for their business units. They specialize to serve a relatively narrow set of business needs. Services can be highly customized and
resources are dedicated toprovidinge relatively high service levels. The governance and administration of business functions are relatively straightforward. The decision rights are restricted in terms of strategies and operating models. Type I providers 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 Type I provider. The success of Type I providers 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.
Type II (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). This model allows a more devolved governing structure under which SSU can focus on serving business units as direct customers. SSU 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. 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 agreements, and accounting policies. With the autonomy to function as a business unit, Type II providers can make decisions outside the constraints of business unit level policies.
Type III (external service provider)
The business strategies of customers sometimes require capabilities readily available from a Type III provider. The additional risks that Type III providers assume over Type I and Type II are justified by increased flexibility and freedom to pursue opportunities. Type III providers 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, operational risks, or the redeployment of financial assets. Competitive business environments often require customers to have flexible and lean structures. In such cases, it is better to buy services rather than own and operate the assets necessary to execute certain business functions and processes. Security is always an issue in shared services environments. But when the environment is shared with competitors, security becomes a larger concern. This is a driver of additional costs for Type III providers. As a counter-balance, Type III providers mitigate a type of risk inherent to Types I and II: business functions and shared service units are subject to the same system of risks as their business unit or enterprise parent. This sets up a vicious cycle, whereby risks faced by the business units or the enterprise are transferred to the service units and then fed back with amplification through the services utilized. Customers may reduce systemic risks by transferring them to external service providers who spread those risks across a larger value network.
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