Professional Documents
Culture Documents
Value Co-Creation
Mark Smalley
White paper
February 2019
1. Contents
1 Abstract 03
3 The IT Renaissance 04
4 Digital transformation 06
6 Summary 17
7 References 18
9 About AXELOS 20
The digital enterprise places high demands on IT. Value has to be co-created quickly. Technology makes it
possible to do business differently, and even to do different business. It is crucial to understand the value of
IT, and to know how to articulate that value.
Digital business has non-trivial implications for the IT capability of an enterprise. It changes the operating
model, in other words which resources are needed and how they interact. A major topic is centralization
and decentralization of IT and the effect of these options on effectiveness and efficiency. It is important
that the operating model is based on co-creation of value by both service provider and consumer to realize
actual value from IT investments.
Digital transformation is needed to change how the organization uses IT, and IT transformation to change
how IT services are provided. Digital transformation and IT transformation are major parts of the digital
roadmap.
This publication is primarily intended for the IT service management practitioner, manager or consultant
who is looking for a way to develop digital capabilities. The publication describes:
This strong statement frames the challenge that this paper addresses. It pinpoints the need and context
for change, specifically the strong demand from the digital enterprise. It also highlights the challenge itself:
transforming the IT operating model or, in other words, radically changing the way we work with IT. It
focuses on organizations that are IT-driven, rather than those merely supported by IT.
The paper defines the loosely-used terms digital enterprise, digital operating model, and digital
transformation. It offers guidance on digital transformation and the design of the digital operating model.
Finally, and significantly, this paper reflects what many practitioners currently feel: that, slowly but surely,
we are radically changing how we work with IT, normalizing it, making IT a more productive place to work.
3. The IT Renaissance2
3.1. COMPUTING’S CORE CHALLENGE IS STILL HOW NOT TO
MAKE A MESS OF IT
Ever since the IT industry emerged, the challenge has been how not to make a mess of it. This challenge
has proven daunting. Only the inexperienced (or the remarkably lucky) will be unaware of the intrinsic
difficulty of software development and the painful vulnerability of operational information systems. Although
the industry has grown in mastery, seemingly ever-increasing demands and complexity have maintained
the challenge. When big IT projects fail, they fail in a much bigger way than non-IT megaprojects.
Viewed from the developers’ perspective, however, IT operations is perceived as the bureaucratic ministry of
business prevention. Segregation of duties is intended to introduce functional tension, but in many cases,
this has gotten out of hand. There may be an illusion of control, but the situation is dysfunctional. There
is a persistent conflict at the core of almost every IT organization, one so powerful it practically preordains
horrible outcomes, if not abject failure. Because of diametrically opposed targets, (make changes quickly
versus make changes carefully), development and IT operations are in a state of constant battle, with IT
service management practitioners in the middle.3
These changes should not be seen in isolation. They are manifestations of a more enlightened way of
working with IT. Major change is needed to respond to the demands of the digital enterprise, and IT is a
strategic component of its business model.
The information derived from these information systems is mostly used within the organization for
internal decision-making. This is the primary function of information: to reduce uncertainty. The value
of information is only realized when people, organizations or technology act on decisions that have been
illuminated by information.
This statement contextualizes the value of IT: return on IT investment is realized only when people,
organizations or technologies act on decisions that have been improved by information derived from
automated information systems.
The concept of ‘done’ is commonly used by application developers. The Scrum community defines ‘done’
as having produced “potentially releasable software increments”. In DevOps circles this has been extended
to ‘released to production’. This extension is still insufficient when viewed from an end-to-end perspective.
It is no good having released the required functionality if the user uses it poorly, interprets the data
incorrectly, takes the wrong decisions, or fails to act on good decisions. “But that’s not our responsibility,”
says the centralized IT department, “it’s the organization’s responsibility”.
This illustrates the concern with business/IT alignment. The word alignment is significant: it emphasizes
and assumes the existence of two separate entities that need to work in unison. The difficulty is that
the performance of the business unit is measured against effectiveness whereas the targets of the IT
department are centred around efficiency. This disparity can be a legitimate organizational construct to
In the past, when the computer was a scarce resource, the business had to be taken to the computer. But
in the digital age, where there is less distinction between the roles of business and IT, it is wiser to take the
computer to the business, and to focus on the convergence of the business are IT. The IT part might be less
efficient, but the business benefits outweigh the costs. The emphasis is shifting from the cost of IT to the
value of IT.
The value of technology comes from a new approach to business introduced by new possibilities within IT.
In the digital enterprise, IT is an integral part of the organization’s products and services, and the way their
customers and other stakeholders engage with the organization.
The value of information and IT in the digital enterprise is therefore more directly related to sales volume
and prices than to the traditional benefit of efficiency.
In the digital enterprise, IT significantly informs and influences the organization’s business. A working
definition for digital enterprise is “an enterprise in which IT is strategic for its business model”. When is IT
strategic? A pragmatic delineation is that when IT is on the board’s agenda, it is strategic: if it is not on the
agenda, they have more important concerns. It is as simple as that.
4.5. IT TRANSFORMATION
It is useful to make the distinction between digital transformation and another, often misunderstood term,
IT transformation. Where digital transformation changes how the organization uses IT, IT transformation
is about changing the way IT systems and services are developed, deployed, operated and supported.
The distinction is between what and how. They are interrelated: digital transformation places much higher
demands on IT, often triggering IT transformation. This is not always the case but, in practice, digital
transformation and IT transformation go hand-in-hand. Nevertheless, it is good to make the distinction
between the two.
The potential value of IT investment and digital investment is determined at this stage. This is where the
functionality (fitness for purpose, also known as utility) is defined. Utility is what determines the potential
value. The non-functional requirements (fitness for use, aka warranty) are also determined, but these do
not add to the potential value of the functionality. Warranty ensures that the potential value is not adversely
affected by outages, poor use, etc.
This stage is about research and development. New digital products and services are envisaged and
evaluated in terms of profitability. Both the substantive quality of the products and services, and the timing
with which they are launched, are crucial for gaining and maintaining competitive advantage.
The sooner a potential investment is envisaged and evaluated, the sooner benefits such as competitive
advantage can be realized.
It is also important to continually evaluate investments after they have been justified and approved.
Whether they are in development or are in use, there may be better options for investment.
The sooner IT services and IT-related products are delivered, the sooner the value can be realized. An IT
service is, for instance, a website that customers can use to order products. An example of an IT-related
product is an app for which customers pay a fee. Note that the term product refers to both services and
goods, and, in the service economy, usually a combination of both.
One way of delivering more quickly is to break down the service and product into a series of deliveries
of small increments. This enables the user to realize value earlier than waiting for the whole service or
product.
The potential value of IT investments and digital investments can only be realized when the services and
products are available for use. Fulfilment of the non-functional requirements provides warranty and reduces
the risk that issues will adversely affect the value of the service or product.
Increasingly, information systems rely on so many components that behaviour cannot be predicted or
guaranteed. Failsafe systems are an illusion. The organization must prepare for inevitable and unexpected
failure. The emphasis is no longer on a long interval between failures; it is on restoring the service quickly
when the issue occurs. This reduces the disruption to business operations.
Return on IT investment is only realized when people, the organization or technologies act on decisions
which have been improved by information derived from automated information systems.
The users have to understand the IT services, information systems, and information, as well as
understanding their use in the context of business processes. Not only should they understand the
functionality well enough to use it appropriately, they also need to be able to correctly interpret the
information in order to improve decision-making. Finally, these decisions have to be acted upon. Only then
is value realized.
High velocity delivery is often associated with risk-taking. From a commercial perspective, it may be
necessary to take risks. Paradoxically, the biggest risk an enterprise can take may be not taking enough
risks. Nevertheless, risks must be justified, and there are internal rules and external regulations that need
to be complied with. The governing body must be assured that their directives have been followed.
IT operating models and digital operating models can be based on the same generic structure as an
operating model for the enterprise. However, they have their own specific characteristics. For instance,
The Business Model Canvas is often used as a frame of reference for creating a business model.
This reference model comprises nine buildings which fall into the following four categories:
Figure 6 Components of the Operating Model Canvas in the context of the Business Mode Canvas
In the Operating Model Canvas, the key activities, resources and partners in the Business Model Canvas
are deconstructed into six elements: processes, organization, locations, information, suppliers, and a
management system, which can be abbreviated as POLISM:
zz Processes: how the organization co-creates and delivers the value propositions to the customers or beneficiaries. The
sequence of steps required to deliver goods or provide services is called a value stream. If the value propositions differ
significantly from each other, there may be multiple value streams. The value streams (or ‘processes’) form the heart of
the operating model. ‘Process’ is used in a looser sense than a set of predetermined activities. It refers to more loosely-
defined case management and patterns of activities that emerge in complex adaptive systems.
zz Organization: how the people who do the work steps in the value stream map are structured (in teams, departments,
etc.), and how supporting activities such as finance, HR, and IT complement the structure. It describes the responsibilities
for activities, and the different skill groups that execute the work, their accountabilities, decision rights, plus the culture
that governs and motivates each skill group.
zz Locations: where the work is executed (from country and city to building and floor) and the required assets.
zz Information: the information and the information solutions that support each process. Business ownership of information
solutions are also defined.
zz Suppliers: the outsourced work and the transactional or collaborative relationship with each important supplier.
zz Management System: the calendar of processes, meetings and scorecards for planning, target-setting, decision-making,
driving improvement, and managing performance.
Depending on the context in which the operating model is created, it can be described at a high level
The enterprise’s products are likely to be a combination of services and goods. As such, it is important
to consider service-dominant logic when designing operating models. Service-dominant logic considers
the operating model as the dynamic configuration of the resources of the service provider and the ser-
vice consumer. ‘Resources’ here is used in the broadest sense; they can be human, physical, logical (e.g.
algorithms), information or financial. ‘Dynamic’ is an important word in this context because it emphasizes
the need for the flexibility to adjust to unexpected circumstances on-the-fly, the dynamic configuration of
resources. This differentiates it from the need to follow predetermined processes which are more appropri-
ate for the manufacturing of goods in a low-variability environment. It is crucial that the operating model
addresses how the service consumer participates in the co-creation of value.
zz IT processes
zz IT organization
zz IT locations
zz IT information (that supports the IT processes)
zz IT suppliers
zz IT management system
The important topic of governance of IT is addressed in the IT organization and IT management system.
In IT operating models, particularly models for centralized IT departments, the value proposition is typically
the catalogue of IT services that are offered. The diversity of the IT services will often be reflected in the
diversity of value streams (processes). For example, IT services based on a third-party ERP system will
have a different value stream to IT services for a website that have been developed and operated by the
enterprise itself.
There is an important relationship between the operating model of the part of the enterprise that consumes
IT services (e.g. a business unit), and the IT operating model that describes how IT services are provided.
In the operating model of the business unit, the information element can be regarded as the interface with
the IT operating model. A significant part of the information element is provided by the value proposition in
the IT operating model. When the business unit and the IT department are separate organizational entities,
there are also two distinct operating models. However, when the IT function is an integral part of the busi-
ness unit, when business and IT are converged rather than aligned, then it may be better to converge the
operating models. This might mean utilizing two different views of the same operating model if the distinc-
tion between ‘business’ and ‘IT’ is still relevant and useful.
Because the digital enterprise places higher demands on IT, the digital operating model is designed to
address these specific demands:
Figure 7 Context for digital operating model design. The letters H, P, L, I and F represent the five kinds
resources: human, physical, logical, information and financial.
These five forms of digital demand influence the choice of the enterprise’s resources (human, physical,
logical, information and financial) and how they are configured, including how they work with the
resources of providers and consumers. The digital operating model describes these resources and how they
are configured to co-create value.
Digital operating models translate digital demand into a design for IT in a digital enterprise. The digital
operating model has an architecture in terms of the elements that form the digital operating model and how
they are related to each other. The Operating Model Canvas can be used as an architecture or reference
model, proposing the use of processes, organization, locations, information, suppliers, and a management
system as elements with which to create the design.
It is tempting to see these as four planned sequential, unidirectional and circular steps, each of which is
formally completed before the next step starts:
Design is particularly messy in the beginning when requirements are ambiguous or unarticulated. It
is tempting to attempt to adopt best practice that has been applied successfully elsewhere, but that is
usually a recipe for disappointment. Taiichi Ohno, father of the Toyota Production System (the precursor of
Lean), wisely said “You have to think for yourself and face your own difficulties instead of trying to borrow
wisdom”. Even though other organizations’ experiences are a useful source of inspiration and reflection, it
is better to focus on discovering an effective way of working for the organization’s specific circumstances.
As such, guidance regarding digital operating models should not promise an end product that can be
‘implemented’, but instead should offer a way to make sense of the mess.
Change often has unexpected positive and negative consequences that trigger revision of design and
sometimes strategy. Some operational incidents require strategic intervention. Change happens organically
during operations, creating a gap between operations and design. In real life, progress is a mix of planning
and emergence.
Digital operating model design is therefore not an isolated activity but something that is intertwined with
strategy, change and operations.
6. Summary
In digital enterprises, IT drives the business rather than just supports it. This places higher demands on the
organization’s capabilities for:
The significance of IT as a core business capability has consequences for the IT operating model. For
example, it is more effective and preferable when IT activities are decentralized and embedded within the
various product lines or lines of business. Value co-creation between service provider and consumer is
another key concept; value from IT investments is only realized when people act on decisions that have
been improved by information derived from automated information systems. This implies a shift from the IT
function as a subservient order-taker to a role as equal co-creator.
The digital operating model describes the key resources and how they are dynamically configured to
respond to the inherent unpredictability of complex systems. The digital operating model is therefore
designed for both planned and emergent digital capabilities. The digital operating model informs digital
transformation and IT transformation. Digital transformation changes the way the organization utilizes
the potential of IT, and IT transformation radically improves the way IT services are provided. Digital
transformation and IT transformation are separate but interrelated topics: digital transformation often
triggers IT transformation. Some change is planned and other change happens organically during
operations. So, in real life, progress is a mix of planning and emergence. Digital operating model design is
therefore not an isolated activity but something that is intertwined with strategy, change and operations.
2 Rob England (2015) The IT liberation movement – an IT Renaissance, [25th February 2019]
3 Gene Kim (2013) ITSM and DevOps are not at odds, http://www.thinkhdi.com/~/media/HDICorp/
Files/White-Papers/devops-kim.pdf [Accessed 25th February 2019]
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