Business models have been around for years in one form or another. How can you use them effectively to use support plans for business transformation or outsourcing?
What is a Business Model?
A Business model brings together a high-level view of the whole business that addresses:
- The proposition to its customers.
- The revenue and charging approach, what it charges for, what it gives away.
- Target customers and the channels to market.
- Internal assets and activities that it uses to deliver products and services.
- The costs and drivers of these.
Why Construct a Business Model?
The nature of business is dynamic and involves many flows. You can engage a business model to make these clear. Any model is a simplification of reality. Your purpose in creating one may include one or more of the following:
To inform a decision – Assessing interactions and outcomes, make comparisons, assess costs and risks. Such a decision includes the sourcing of services.
To communicate and lead – Tell the wider community what is proposed and why. A good model can greatly assist story-telling.
To prompt and question – Clarify the current state to identify opportunity for improvement.
Because reality is so complex and obscure, it is nigh impossible to see the wood for the trees. You can clarify the bare essentials of relationships by stripping the organisation’s complexity to the bare essentials. So, your choice of what is to be kept in the illustration and what is to be left out depends upon the nature of the question before you.
The early application of business models was in addressing questions such as:
- What would be the effect on the organisation of the acquisition of company X?
- How should we accommodate this expected change in the marketplace?
- What do we need to do to bring a new product range to market?
The winners will be the ones that can adapt their businesses to the new environment. In order to do that, you have to understand how your business model works. You have to understand the drivers of profitability, how those drivers will change in the new world and where you need to modify the business model.
Antony Jenkins, CEO Barclays1
The Form of a Business Model
You can express a model in many forms. Sometimes you will choose pictures, stories (orally communicated), numbers, or the written word. The choice should be based on the needs of the audience at the stage of proceedings. There is a time and a place for multi-sheet spreadsheets and micro-point financial analysis, it is not in public communication.
For long, outsourcing has been based on propositions of standardisation, specialisation and labour arbitrage. They are still important as aids to cost containment. For a CFO concentrating on cost, assessment and selection weighted this heavily. Your COO may argue for the quality of fulfilment, focusing on the confidence that the promised service levels will be maintained. The head of sales may talk of expanding territory and market reach. Your senior staff will want periodically to review what is sourced and whether the model best reflects their strategy.
Recent Developments
Disruptive change has always been present. Common perception and historical analysis show that this is accelerating exponentially.2 Take the example of the written word: Our forebears moved from the monk’s script through the Chinese printing press to moveable type; We coped first with digital composition then the nigh redundancy of the printing press in the move to the web and the mobile app.
One of the aspects that is different and new is the development of the infrastructure necessary to support eCommerce.3 Many of the long dreamed-of tools are now widely available. This has transformed the ease and speed with which you can assemble inter-connected networks and alliances and madke them work. This has the down-side of eroding competitive barriers at a terrifying rate. There is a premium on agility and speed of delivery.
Latest thinking emphasises not who is the first to market, but who is the first to get the business model right. The market punishes those who launch without the ability to deliver. You can improve the odds of your being the first to succeed by drawing on the capability of partners who have already solved critical issues. Many start by building links for one product / service offering. Should the partner prove themselves capable, they can win a greater share of the available business. In a connected world it is no good being an exceptional island; being picked by the winning team is what is valued.
The Role of Trust
Many markets are largely un-regulated or rules are rapidly evaded. Customers can be vicious and unforgiving of a breach of trust. The market, particularly as expressed on social media, will flock to the new and fashionable and desert it in seconds if trust is breached. This injects a terrifying edge into the selection of partners. If a supplier in some distant land leaks our customers’ data, we shall suffer horribly. Yet many of the most innovative have the fewest robust processes and safeguards. The choices are far from easy. Forming the right relationships and drawing on them effectively are vital to success. The end-to-end delivery and customer experience has to be fast, reliable, secure and to demand the minimal effort from customers to use it.
Design to Win
Throughout my time as an employee of suppliers of outsourced services, a vital element was to seek opportunity to add value to the proposition through enhancing the revenue side and delivering customer service. This is nothing new in sourcing services. It is now even more important. The ability to influence the revenue side is frequently far more than that of the cost side, making this now of vital importance in selection. It is right for assessors to be sceptical of claims and to reflect this in weighting, but not to the extent of negating them. Engage a good advisor to assure the rationality of your scoring and to ensure that the winning supplier’s claims are reflected in selection and contract. There is no place here for salesmen’s hyperbole that is disconnected from the service and agreement.
The Impact on Value
The influence of technological change is vast. A recent study reported the following for local government’s transaction costs:4
£8.62 Face to face
£2.83 Phone call
£0.15 for a web transaction.
Capacity for Change
The challenge here is the shortage of people with the skills to manage the migration of channels. The effect of making such a change is huge for retail sales levels and for Councils seeking to cope with reduced central government allocations. Neither can achieve comparable results by tweaking current practices or by asking suppliers to shave margins. For retail banks and utilities, the challenge is currently that of regaining their customers’ trust.
For those considering a fundamental transformation, it is vital to work out the implications for customers, selling, marketing, channels, delivery fulfilment, production and a host of internal and sourced services, incentives, processes and systems. A business model can support such evaluation in an organised manner, and then go on to aid communication to those involved on “what is in it for me?”. This becomes an important foundation for delivery through a coherent business transformation programme.
What a Model Looks Like
Every organisation working in the field has its own particular flavour and template. The good ones share many characteristics. I currently favour the template below, which has the advantage of being developed by a community of experts and is strongly graphical. It is depicted below:
Business Model – Source www.businessmodelgeneration.com
In the above the cells have the following meanings:5
CS – Customer Segments. An organisation serves one or several customer segments.
VP – Value Propositions. It seeks to solve customer problems and satisfy customer needs with value propositions.
CH – Channels. Delver value propositions to customers through communication, distribution and sales channels.
CR – Customer Relationships. Establish customer relationshipsin each customer segment.
R$ – Revenue streams. Revenue streams result from value propositions successfully offered to customers.
KR – Key Resources. These are the assets required to offer and deliver the previously described elements….
KA – Key Activities. …by performing a number of Key Activities
KP – key partnerships. You may outsource some, keep others in-house. Acquire others elsewhere outside the enterprise
C$ – Cost structure. The business model elements result in the cost structure.
A blank canvas
The figure is a blank template. Use it to receive and structure the thoughts of a group convened to gather input on the current and future model options. Select members of your group for diversity and the quality of their input. The facilitator must be familiar with the frameworks, but the content should come from those who know the customers and the business. “Experts” from one discipline or another should not be allowed to dominate proceedings. The chief expertise sought is a combination of market and company functions. The completed model illustrates the interactions and relationships between the elements.
Building Insight
The process of designing such a model is highly collaborative and creative. The initial stages are free-flowing and seek wide experience. Once you have generated a number of candidate future models, you will need to becomes more analytical as you move on to assess the quality of each. This is where scenario and numerical analysis come to play. Many teams find that the best outcome is achieved by some combination of earlier models. So beware of becoming fixated on a particular model too early. The process of validation includes the development of plans for making the change from the current state. A model is useful only if you can build it into your business. Similarly, if it requires qualities in a partner that are absent from the market, something needs to change.
Some time ago, I was working with a large organisation that was planning a transformation centred on a change from the exclusive use of face-to-face service delivery to include phone and web service. The programme manager had assumed that his scope excluded any change to IT services, which provided minimal phone and no web facilities. Our review plugged the gap in his programme. The previous provision could not credibly achieve this, requiring external augmentation that had a significant effect on the business case for change. It is much quicker and cheaper to spot such omissions early on.
The Influence of Customer Experience
“Customer Experience” is a perspective that has had influence for several years. Frederick Richhard noted the effect of customer effort upon loyalty in forming the ideas that led to his proposal of the “Net Promoter Score”.6 The process of examining and designing a process for Customer Experience is to identify customer effort, both direct and indirect, and seek to minimise this, whilst maximising pleasant interactions. Redundant effort includes steps such as customer service staff validating a caller’s identity multiple times. Customers will resist change if it results on greater effort for them. When you are evaluating a proposed new business model, use the perspective of customer experience as one of those applied during your validation.
Global customers can easily search the world for suppliers, extending their available choice. Bots search the web to generate price comparisons. One of the few sustainable barriers to competition will be relationship, based on providing superior value. Analytics provides high levels of insight into customer behaviour for those with the skills to listen and interpret what is heard. Processes for delivery must have high levels of integrity to assure quality.
Conclusion
A business model is a useful tool in the armoury when a major change of approach is being planned. It can help to identify the interaction between components and ensure that the right things are being done in the best way. This is of value in the process of sourcing services and many other decisions. In major change, it ensures that the high-level picture is coherent and provides the boundary conditions within which lower-level definition may proceed confidently. This is vital to the success of business transformation and where partners are sought to take the business forward.
All models are wrong but some of them are useful.
George Box, Statistician
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A version of this article was first published in Outsource Magazine and is reproduced with permission.
References
- Credit Restorer, Interview with Lawrie Holmes, Financial Management Magazine April 2014 ↩︎
- Why the West Rules For Now – The patterns of history and what they reveal about the future. Ian Morris. Profile Books 2010. ↩︎
- The eProcess Edge, Peter Keen & Mark McDonald, Osborne / McGraw Hill 2000 ↩︎
- Digital, What is in a name? SOCITM. 8th April 2014. ↩︎
- Business Model Generation. Alexander Osterwalder & Yves Pigheur. Wiley 2010. ↩︎
- The Loyalty Effect – the hidden force behind growth, profits and lasting value. Frederick Reichheld. Harvard Business School Press 1996. ↩︎
