Determining Value Co-Creation Opportunity in B2B Services: Karuna P Joshi Murthy Chebbiyam

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Determining value co-creation opportunity in B2B services

Karuna P Joshi

Murthy Chebbiyam

CSEE Department
University of Maryland, Baltimore County
Baltimore, MD, USA
kjoshi1@umbc.edu

IBM
IBM Research
New Delhi, India
mchebiyy@in.ibm.com

Abstract In Business to Business (B2B) IT outsourcing


contracts service providers have to demonstrate value
continuously to retain client loyalty. However, sustained value
can only be co-created by both service providers and clients
though a collaborative process. This process of jointly creating
value is termed value co-creation. In this paper we present a new
technique that we have devised to identify the opportunities for
value co-creation based on priorities for value drivers in an IT
enabled B2B services contract. We illustrate this technique by
applying it to the IT Helpdesk service.
Keywords- services; value co-creation

I.

INTRODUCTION

Business to Business (B2B) outsourcing of IT Enabled


Services (ITeS) has significantly matured over the last decade.
While services providers have improved their capabilities
through several innovative approaches like operational
excellence, delivery excellence, quality improvement program,
etc.; a wide gap still exists in the outcome value derived by
clients from these relationships. The service providers also face
challenges in realizing continuous value from the existing
contracts due to competition and market conditions. Managing
client relationships in a way that creates unique value for the
client has become one organizational capability [19] by
which organizations can create sustained competitive
advantage. The supplier who can maximize value creation for
the client is most likely to be successful in keeping the
business. Also with rising resistance to business process
outsourcing, IT service providers are increasingly focused on
retaining and strengthening their client relationships. In the
same way, clients are concerned with strategic sourcing and
categorization of their supplier relationships.
In an outsourcing contract, the client typically expects
value from service provider after the relationship matures. The
perception of value begins only at a certain relationship
maturity stage when the value opportunity is provided by the
client. Until then the value from view point of provider does
not translate to acknowledged client value; rather translates to
better quality of service and informal value acknowledgement
[13]. Under these conditions, there is a limited understanding
of the mutual organizational processes, competencies, and
which drivers are crucial for how value is co-created jointly by
the parties. According to traditional business practices it is
risky for both supplier and client organization to engage in
cooperation because of difference in priorities to manage the
contract.

Co-creation is a value creation process in which suppliers


and clients engage in interactions to exchange knowledge and
resources in order to co-create value [2][7]. Co-creation
involves numerous interactions and can be thought of as value
cycles rather than Porters traditional linear value chain
concept [5]. Prahalad and Ramaswamy [7] state that the use of
interaction as a basis for co-creation is at the crux of our
emerging reality. As the client organization participation
becomes the center of value creation, both stakeholders (i.e. the
client and service provider) need to understand the process of
co-creation. The process of value co-creation can be described
in four key building blocks; dialogue, access, risk assessment
and transparency [7]. Service providers are the interested
players in this game of value co-creation and want to exploit
the opportunity more in B2B relations. The real challenge is to
convince clients to actively participate. Some professional
service firms have established formal initiatives to educate
their clients on the value of servicing a knowledgeable client
[14].
While there has been some work done on value co- creation
in services, no one has attempted to quantify the process of
value co-creation by the service provider and client on the basis
of their priorities and the parameters or value drivers it depends
on. In this paper we propose a technique to identify the value
co-creation opportunity in service delivery by prioritizing the
value drivers. This technique helps to identify the expected
value based on priorities and determine which drivers of value
should the two parties concentrate on to improve the overall
value in the relationship.
In this paper, we also provide an illustration of our
technique by applying it to the ITeS / Helpdesk service. This
technique is however generic enough to be applied to any
service vertical. Section II details the related work in value cocreation. We describe our technique in section III and illustrate
it with our prototype study in section IV. We conclude in
section V with our ongoing work.
II.

RELATED WORK

The existence of tangible relationships between business


organizations has been observed in a range of studies over the
past two decades [1]. The research on relationship marketing
argues that instead of a transactional view based on marketingmix, dyadic relationships between business buyers and sellers
(B2B) are important in explaining the service outcomes [2].
Another stream of literature discusses theories and models in
outsourcing relationships from the Information Systems (IS)
discipline. This again emphasizes the notion of partnership and

integrates power political, social exchange theories to


understand the drivers for outsourcing success [3]. Finally, the
inter-disciplinary stream of service science [4] literature
focusing on Service Dominant (S-D) logic [5] conceptualizes
relationship as nested within networks of relationships and
occurring between networks of relationships. These networks
are not static entities but rather dynamic systems, which work
together to achieve mutual benefit (value co-creation) through
service provision [6]. Co-creation is the result of a positive sum
relationship between two or more businesses, which
collectively create value by providing access and transparency
of information, engaging in dialogue, and sharing of risks [7].
In B2B IT outsourcing relations service providers (supplier)
need to demonstrate value to their clientele on a continuous
basis to retain client loyalty. Suppliers existing organizational
capabilities as recognized in the resource-based theory of the
firm form the basis on which all the current and future value
activities of a firm must rely [11]. However, supplier can only
facilitate value creation, create the resources or means to
enable clients to create value or realize value [8]. It means the
clients capabilities are equally important for value creation in
B2B relations. In most cases value is co-created by both
players though collaborative process. This involves access to
mutual resources and capabilities as well as the coordination of
activities [16].
In many B2B relationships value co-creation may be
created as one time initiative based on short term business
benefits to one or both players. But the challenge is to make
value co-creation as a strategic intent. According to Porters
[17] theory on strategy and strategic positioning, striving for
operational efficiency does not suffice in the highly
competitive global market. Operational efficiency is something
that every company can achieve and duplicate and thus does
not serve as a basis for building competitive advantage.
Companies need to find strategies that give them long-term
competitive advantage. Value co-creation is one such initiative.
While supplier will be the lead player in this game of value cocreation and will want to exploit the opportunity. The real
challenge is to convince clients to actively participate. If a firm
is looking for innovation effects, inter-firm relationships are,
from this point of view, more effective than the development of
internal activities and capabilities, performed with a firms
idiosyncratic framing [12].
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III.

PROPOSED TECHNIQUE

To compute the value co-creation opportunity, we begin by


defining and documenting the value metrics from both supplier

and client point of view. An offering may actually provide


superior value - but if the supplier doesn't demonstrate and
document that claim, a customer manager will likely dismiss it
as a marketing puffery. Customer managers, increasingly held
accountable for reducing costs, don't have the luxury of simply
believing suppliers' assertions [18]. Groonos [8] defines value
facilitation, value co-creation, and sole value creation (or value
realization) as the three main phases in the value generating
process. Based on this we propose Supplier Capability,
Strategic Alignment and Client Capability as the criteria for
value co-creation in B2B services. We next identify all the
input metrics that are tracked to manage the service contract in
IT outsourcing.
It is useful to describe value production though a
continuum expressing simultaneously the level of complexity
involved and the time horizon of value realization, value
spectrum [11]. Based on this concept we defined value
outcome in B2B services as Transactional Value (lower end),
Business (contract) value (middle), and Strategic value (higher
end). Transactional value is achieved by improving upon
processes involved in day-to-day functioning of the contract,
for instance improving upon the system performance or
response time. Business value is influenced by long term
factors involved in the duration of the relationship, for instance
cost savings, ROI etc. Strategic value is attained by taking the
relationship to the next level, for instance the scope of the
service providers role is increased when the contract is
renewed.
We build a hierarchy of the input metrics to identify the
value drivers. The value drivers are classified under each value
criteria. The criteria for value and drivers are prioritized on
their level of importance. One can use any of the Multi Criteria
Decision Analysis (MCDA) tools that are available. For our
study, we applied the Analytic Hierarchy Process (AHP)
proposed by Saaty [9]. We next map the drivers to the
(outcome) value measures and estimate the expected value
outcome by adding the overall priority of the value drivers. We
derived the expected value measures for the suppliers and
client separately. The expectation gap is the difference between
the priorities allocated by the client and those allocated by the
suppliers. Next we assess the current practices of value drivers
and estimate the practiced value measures. This can be done by
surveying the current setup or by mining historic data
maintained for the service. Opportunity to co-create value is
the difference between the value measures expected by the
stakeholders and value measures that are in actual practice. If
this value is positive, then opportunity exists for value cocreation. On the other hand, if the difference is negative, the
relationship is already in a mature state and co-creating value.
The basic assumption of our work is that, organizational
priorities (both client and supplier) for value drivers influence
the outcome value. We have defined value outcomes in line
with value spectrum stated in [11]. Transactional value,
Business Value and Strategic value are the objectives for the
value co-creation process. Due to the multiple objective nature
of the problem, we have used the AHP [9] methodology for
decision making process. AHP is designed for situations in
which ideas, feelings and emotions affecting the decision
process are quantified to provide a numeric scale for

prioritizing the alternatives. We have used the concept of


priorities driven actions of both client and supplier organization
for value co-creation. While priorities are driven by strategies
they are highly influenced by feelings and emotions and AHP
could be an appropriate methodology to assess relative
importance of drivers using multi-criteria decision making tool
for value co-creation.
Also, we have proposed the hierarchy for value co-creation,
which includes the criteria for value co-creation, respective
drivers and practices that influence the value outcome. AHP
methodology facilitates formalization of subjective decision
process owing to the hierarchy structure. Through clear
understanding of the problem through dividing in to subproblems, it ensures consistency of decision judgment.
Comparison may be made by team involved in process and
sensitivity analysis may be performed before final decision
[20]. For pair-wise comparison in AHP a survey methodology
is illustrated in [15].
IV.

EXAMPLE: VALUE CO-CREATION IN HELPDESK


SERVICE

For our pilot study, we concentrated on the IT Helpdesk


service provided by IBM, India to its clients in the
telecommunication domain. We detail the steps that we took to
identify the value co-creation opportunity in these contracts.
Step 1: We began by determining the value measures for
our study. We compiled a list of value measures tracked by
IBM, and the industry specifically in the Helpdesk domain. As
explained in section III above, we defined value outcome for
Helpdesk services as Transactional Value, Business value, and
Strategic value.
Step 2: We defined the value criteria based on value cocreation definition and through interviews conducted with IBM
teams providing services and project management teams from
client organizations. As stated above, for a Helpdesk service,
the value criteria were identified as Client Capability, Supplier
Capability and Strategic Alignment.
Step 3: To identify the metrics that can be applied for value
creation, we compiled a list of over 150 metrics tracked by
IBM and the industry. We considered only those metrics that
track value to the organization. We grouped the 150 metrics
into 40 groups based on the functions they tracked. These were
identified by us as the second factor metrics or practices in the
relationship. We next built a hierarchy of the input metrics by
further grouping the 40 second factors into 13 groups based on
the value they tracked. These 13 groups were identified by us
as value drivers. We classified the value drivers under each
value criteria defined in step 2 above. Table I lists the
classification of value criteria and value drivers. Tables II, III
and IV list the practices for the value drivers.
TABLE I.

MAPPING THE VALUE DRIVERS TO VALUE CRITERIA

Value Criteria
Strategic Alignment

Value drivers
Partnership,
Knowledge Management,
Flexibility,
Communication,

Financial Management
Client Capability

Supplier (Service Provider)


Capability

TABLE II.
ALIGNMENT.

VALUE

DRIVERS

Value driver
Partnership
Knowledge
Management
Flexibility/agility
Communication
Financial
management

TABLE III.

AND

PRACTICES

FOR

STRATEGIC

Includes practices like


Risk/Reward Sharing ,
Strategic Direction & Intent,
Trust and Integrity
Innovation,
Cross learning environment,
Structured KM process and tools
Receptiveness to Ideas,
Designing Customized Solutions, Deploying
Open source applications.
Inter-office Communication, Management
Outlook sharing ,
Reports/ Dashboards
Contract Management,
Employee/Labor cost,
Equipment/Assets cost

VALUE DRIVERS AND PRACTICES FOR CLIENT CAPABILITY

Value driver
Organizational
Proficiency or
competency
Employee Proficiency or
competency
IT System and Security in
the Client's organization.
Self Service

TABLE IV.

Client organizations proficiency,


Self-service,
IT systems and security of client,
Employee proficiency,
Agent proficiency,
Supplier organizations proficiency,
Supplier's IT environment,
Service Quality (Solution Accuracy for
Helpdesk service)

Includes practices like


Global exposure,
Market penetration,
Defined Goals and Objectives,
Reusability of resources
Client's Learning Curve,
Flexible Hours,
Employee Empowerment
State of Art Technology,
Data Management and leakage prevention,
Integration with external systems
Ease of Use of the self service application,
Remote access capability.

VALUE DRIVERS AND PRACTICES FOR SUPPLIER CAPABILITY

Value driver

Includes practices like

Supplier Organizational
Proficiency or
competency

Experts in Domain/Technology, Global


exposure,
Market penetration,
Headcount productivity, attrition, Efficient
Resource Management
Domain Expertise,
Service Level Agreement Attainment,
Flexible Hours.
State of Art Technology,
Availability/Uptime,
Integration with external systems
Reliability of predefined solutions (or
knowledge bases), Service Levels ,
Resolution excellence

Agent Proficiency or
competency
IT System and Security
Service Quality
(solution accuracy for
Helpdesk service)

Step 4: To prioritize the value criteria and drivers on their


level of importance, we created simple questionnaires using
Microsoft Excel spreadsheets. We requested various supplier
teams in IBM and their corresponding clients to fill out the

questionnaire and prioritize the drivers based on their


professional experience. Figure 7 illustrates the survey
questionnaire for prioritizing the expectations of the value
criteria. Figure 8 and figure 9 are images of the survey
questionnaire we created for determining and prioritizing the
actual practices in the supplier and client organization. We took
the average ranking of all the responses by service providers
and their clients and applying the techniques of AHP
(described in section III) identified the priority of the drivers.
Step 5: We mapped the value drivers with the outcome
metrics based on the input metrics of the driver and it is listed
in Table V below. We calculated the overall weightage given
to each value outcome by the supplier and client. Figure 1
illustrates the AHP tree that we created to calculate the
outcome measures expected by the supplier. Table VI
illustrates the value of the outcome measures expected by the
Supplier. The supplier expects that Strategic value will be the
key outcome of their relationship with the client. Figure 2
illustrates the AHP tree that we created to calculate the
outcome measures expected by the client. Table VII lists the
calculation of these expected value measures. The client
expects Business value will be the key outcome of their
relationship.

+.51*.46 = 0.625
Business

0.07*.33 + 0.14*.33 +.06*.21 +.5*.21+ .46 = 0.646

Transactional

.14*.33+.07*.33+.21*.21+.23*.21+.14*.46 +
.23*.46 + .12*.46 = 0.387

Step 6: Assess the current practices of value drivers and


estimate practiced value measures
We surveyed the clients and suppliers to determine which
value drivers were being currently practiced in the relationship.
The survey assigned value 0 to a driver which was not
practiced and 1 to a driver that was practiced in the
relationship. Since the organization didnt have any priorities in
practice, equal weightage were allocated to all drivers.
Figure 4 illustrates the practiced value drivers and the
ranking for the practiced value measured based on current
practices in the contract. Table VIII lists the calculations of the
practiced priorities for the various value measures.
We measured the overall priority of the value drivers by
multiplying its priority with the priority of its parent value
criteria.
TABLE VIII.

TABLE V.

MAPPING THE VALUE DRIVERS TO VALUE MEASURES

Value
Measures

Value drivers

Strategic

Partnership, flexibility, communication, supplier org.


proficiency, client org. proficiency, IT systems and
security of client

Business

Communication, Financial Management, Self-service,


client org. proficiency, and all drivers of Supplier
Capability

Transactional

Knowledge Management, Employee proficiency,


Communication, Agent proficiency, Client's IT System
and Security, Supplier's IT environment, Service
Quality

From the two results, it is obvious that there is an


expectation gap between what value the supplier and the client
want from their relationship. Figure 3 illustrates this
expectation gap.
TABLE VI.

OVERALL PRIORITY OF THE VALUE DRIVERS ACCORDING TO


THE SUPPLIER

Value Measure

.418*.71+ 0.113*.71 + 0.092*.71


+.368*.125+.294*.125 +.245*.161 = 0.564

Business

0.092*.71 + 0.103*.71 +.185*.125 +.368*.125+


.161 = 0.368

Transactional

.274*.71+.092*.71+.153*.125+.294*.125+.271*.16
1 + .159*.161 + .325*.161 = 0.437
OVERALL PRIORITY OF THE VALUE MEASURES ACCORDING TO
THE CLIENT

Value Measure
Strategic

Value Measure

Supplier Ranking

Strategic

.33*.20+.33*.25+.33*.25 +.33*.25 = 0.313

Business

0.33*.20 + .33*.25 + .33*.75 = 0.396

Transactional

.33*.25 + .33*.25 + .33*.25 = 0.231

Steps 7: Opportunity to co-create value can be measured as


the difference between the Expected value measures and the
Practiced or Observed value measures. Table IX lists the value
co-creation opportunity that exists for our Helpdesk study.
Once we have identified the value criterion that presents the
most opportunity of value, we identify the value drivers that
will influence this value. Figure 5 illustrates the opportunity
from the clients perspective and figure 6 illustrates the
opportunity for value creation from the suppliers perspective.
In the figures the drivers colored in red are the ones where the
most opportunity for value co-creation exists. In this example
the opportunity is in strategic value for both client and
service provider. Hence, both of them can co-create strategic
value through collaborative strategies and efforts on the
related drivers.

Supplier Ranking

Strategic

TABLE VII.

PRACTICED PRIORITY OF THE VALUE MEASURES

Supplier Ranking
.29*.33+ 0.36*.33 + 0.07*.33 +.5*.21+.23*.21

TABLE IX.

VALUE CO-CREATION OPPORTUNITY

Value Measure

Opportunity per
Client's expectation

Opportunity per
Suppliers expectation

Strategic

0.312

0.251

Business

0.25

~0

Transactional

0.156

0.2

V.

CONCLUSION AND ON GOING WORK

REFERENCES

The seven step process that we have developed helps to


identify value creation opportunity for service provider
(supplier) and the client. Once both players have identified the
value creation opportunity, then we can determine the cocreation opportunity from the common expectations. As
illustrated in section IV, both the service provider and the client
identified strategic value as the common measure that they can
co-create. In case there is no common opportunity then it
indicates that there is a mismatch in the priorities of the two
parties. In such a scenario the gap in the priorities should be
resolved before any value co-creation steps can be initiated.

[1]

As part of our ongoing work, we have also applied this


technique on three other B2B accounts in IBM. One of the
challenges we faced was in getting the client organizations to
participate in this study since they perceived it would need
significant effort on their part. However, initial workshops and
one-on-one sessions that we have conducted for this technique
have received positive feedback. Both the service providers as
well as service clients are now excited to participate in these
value co-creation workshops. We continue to analyze the
results of the survey and provide feedback to the stakeholders
on improving their relationship by concentrating on the value
drivers that will provide the most opportunity in value cocreation. Our future plan is to apply this technique on many
B2B contracts so as to get a baseline measure for the priorities
for value criteria and value drivers which can then be used as a
benchmark by service providers while identifying value cocreation opportunities.

[5]

As part of our ongoing work, we are also calculating the


practiced priorities for drivers with defined weightage. In
addition to surveys, we also plan to data mine the helpdesk data
maintained by the service providers by using a data mining
tool. Association rules that will be generated by the tool can be
used to determine the importance given to a metric in the
existing relationship. This will help determine weightage given
to the value drivers in practice.

[2]

[3]

[4]

[6]

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[9]

[10]
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[15]

We also propose to introduce collective action non-zero


sum game theory to influence both service provider and client
to participate in the value co-creation initiative.

[16]

ACKNOWLEDGMENT

[17]
[18]

The authors would like to thank Mr. Shashwat Sharma who


developed the survey questionnaires and helped us analyze the
survey results. Authors also wish to thank the GTS group in
IBM for participating in the pilot for this technique and helping
us refine it.

[19]

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Figure 1. Expected value co-creation (supplier) measured using AHP.

Figure 2. Expected value co-creation (client) measured using AHP.

Figure 3. Expectation gap

Figure 4. Practised Value

Figure 5. Value creation opportunity from clients perspective

Figure 6. Value creation opportunity from Suppliers perspective

Figure 7. Survey questionnaire for expected priorities of value drivers

Figure 8. Questionnaire for practiced value drivers for supplier and client capability

Figure 9. Questionnaire for practised value drivers for Strategic Alignment

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