There is a well-known concept developed by Ronald Coase around organisational boundaries being determined by transaction costs.
This concept stated that organisations are faced with three decisions.
To make, buy or rent.
In some scenarios, it makes sense for organisations to own and operate assets, or conduct activities in-house, however, at other times you could seek alternatives from the open market.
When seeking alternatives from the open markets the key factor can be the transaction cost.
The transaction cost it’s the overall costs of the economic exchange between the supplier and customer with the objective of ensuring that commitments are fulfilled.
In the context of Service Strategy, why is it important to understand this concept?
In the current shift towards cloud computing, the service transaction has now drastically been minimised in cost. It’s critical to understand this.
I often think of this like catching a fish, let me explain.
It takes time
There are costs that will be incurred when attempting to catch that fish.
In Service Strategy the costs can be calculated as the time taken to find and select qualified suppliers for goods or services that are required.
The right bait
Proven fishermen will always be asking the question “what bait works here”. So when putting together your service strategy make sure you know who you are considering in transacting with. Knowing the track record of your provider is crucial, ask around you will save yourself a lot of time. I’m quite dumbfounded when I hear of customers ‘still’ transacting with suppliers that no longer provide any real value. More time spent transacting in the excuse basket than providing the outcome that the customer is after. Particularly when it comes to delivering services.
Certain bait attracts certain fish
If you are considering the leap to Cloud computing, find suppliers who are proven in this area. It’s not like the traditional on-premise managed service computing model. It has changed, go with providers who are working in this space and have been for a considerable period of time. For example, they get what right sizing is and how crucial it could be to your cost model.
How many hooks and sinkers are you prepared to lose?
Governance is the costs of making sure the other party sticks to the terms of the contract and taking appropriate action if this turns out not to be the case.
Governance is fundamentally an intertwining of both leadership and management. Leadership in the sense of understanding the organisation’s vision, setting the strategy and bringing about alignment. Management in the sense of how we actually implement the strategy. Setting the budget, working out the resources required and so forth.
It’s crucial that your Cloud Enterprise Governance Framework has these qualities, for example, a policy is formally documented management expectations and intentions which can be used to direct decisions and ensure a consistent approach when implementing leadership’s strategy. In the cloud-climate where change is constant, you need to be in a position to respond with greater agility. Your governance framework has the ability to move between the two.
Once again do your homework. Find out what their Cloud Computing Service Model entails. Roadmaps, framework, fundamentally what approach they take. It’s crucial that they have this in place in order to succeed.
So what does it take to get hooked?
The actual answer to how you become instrumental is by clearly understanding your service transaction. The net effect will be brokering real value.
This, in turn, is likely to lead you to as prevailing conditions change, boundaries of the firm contract or expand with decisions such as make, buy, or rent.