Wednesday, October 3, 2012

01-4 Define and explain the concept of internal and external customers Internal and external customers

Regardless of how consistently customers and consumers are treated, they are not all the same. There is a difference between customers who work in the same organization as the IT service provider, and customers who work for another organization.

Internal customers are people or departments who work in the same organization as the service provider. For example, the marketing department is an internal customer of the IT organization because it uses IT services. The head of marketing and the CIO both report to the chief executive officer (CEO). If IT charges for its services, the money paid is an internal transaction in the organization’s accounting system – i.e. not real revenue.

External customers are people who are not employed by the organization, or organizations that are separate legal entities, that purchase services from the service provider in terms of a legally binding contract or agreement. When the service provider charges for services they are paid with ‘real’ money, or through an exchange of services or products. For example, an airline might obtain consulting services from a large consulting firm. Two-thirds of the contract value is paid in cash, and one-third is paid in air tickets at an equivalent value.

Dealing with external customers 

Many IT organizations who traditionally provide services to internal customers find that they are dealing directly with external customers because of the online services that they provide. It is important that the service strategy clearly identifies how the IT organization interacts with these customers, and who owns and manages the relationship with them.

 It is very important to note that both internal and external customers must be provided with the agreed level of service, with the same levels of customer service. The way in which services are designed, transitioned, delivered and improved, however, is often quite different. Table 3.1 shows the major differences between internal and external customers.
Table 3.1 Differences between internal and external customers

Internal customers
External customers
Funding for IT services is provided internally – so IT is a cost that needs to be recovered.
In commercial organizations the internal customer has to use the IT service to generate revenue which has to cover the cost of the IT service and all other costs.
Many internal IT service providers fail to quantify the cost of individual IT services and link these to external revenue sources. These service providers risk the situation where multiple internal customers demand services from a limited pool of staff and technology, believing that they have already ‘paid’ for them through central IT budget allocation. The resulting competition for IT resources can be damaging to the organization’s ability to achieve its strategic objectives. In non-profit or government organizations the IT service has to support activities that will ensure that donors or government budget bodies allocate funds to the organization, which are used to cover IT and other costs.

External customers fund the service directly in the form of revenue. IT becomes a generator of income for the organization. The cost of the service, plus a margin, must be recovered from the customer.
The ability to provide service to multiple customers is funded by the incremental revenue obtained from each new contract. As revenue increases, so too does the funding for staff and technology to provide the service.

Link to business strategy and objectives

The service provider has the same overall organizational objectives and strategy as its customers. Ideally, the service provider and customer work together to deliver external services and optimize operational efficiency and effectiveness.
The term ‘customer’ is used to ensure that the business outcomes are placed first, and that the service provider prioritizes its activities appropriately, but the term ‘colleague’ may be more accurate in describing how two internal groups are related to one another.
It is helpful for the service provider to understand what outcomes the customer wants to achieve, so that the service can be properly designed to meet the expected levels of performance and functionality. This will ensure customer satisfaction and retention.
The objectives and strategies of the service provider and the customer, though, are different. The customer’s objectives are set by their executives and are appropriate for their business. The service provider’s objective is to sustain its business by providing IT services. The service provider and customer are typically in different businesses, otherwise they would be competitors.

The cost of service is the primary driver. It is possible to build a ‘profit’ margin into services, but this is always subject to enterprise financial management policies.
The aim of providing services to internal customers is to provide an optimal balance between the cost and quality of the service – to support the organization in achieving its objectives.
The cost of the service is normally not disclosed to the customer. The price of the service is the primary driver.
In a commercial organization, the service provider must ensure that the price of the service is higher than the cost of the service. The aim of the service provider is to maximize profitability while still remaining competitive with pricing.
In non-profit and government organizations, the aim of providing services is to achieve the objectives of the organization while covering costs – partially by donations or taxes, and partly by recovering some portion of the costs from the customers.

Involvement in service design
Service design is dependent on enterprise policies, resource constraints and expected return on investment.
Customers tend to be involved in detailed design specifications, often covering both functionality and manageability of the service – since both of these impact the level of investment required.
Where a customer purchases pre-defined services they might be asked for feedback about their experience, which is used to improve the service design. If each service is designed for each specific customer, the focus is on the functionality of the service, and the price to ensure that it performs to expectation. Customers may get involved in design work during needs-based and demand-based positioning. Otherwise customers typically do not get involved in design work and the service provider does not typically get involved in calculating the customer’s return on investment.

Involvement in service transition and operation

Customers are often involved in building, testing and deploying services. Changes have to be assessed and authorized by customers as well as IT managers.
Customers are involved in defining deployment procedures, mechanisms and schedules.

Customer involvement in change management is clearly documented in the contract, along with clauses about how changes will impact service pricing. Requests for change are assessed by the customer in terms of impact and price.
Customers are generally not involved in detailed design and testing of services, and have little visibility into the processes whereby these are managed. Involvement in deployment is usually carefully scripted, and customers are trained in how to execute their deployment activities.
Drivers for improvement
Improvements are driven by impact on the business, specifically optimizing the balance between cost and quality and the ability to help business units meet their objectives.
Improvements are also aimed at improving the way services are designed, delivered and managed. Customers are often involved in the detail of service improvement plans, as they have skills which could help IT become better service providers.

Improvements are driven by the need to retain customers that contribute to the profitability of the service provider, and to remain competitive in the market. Changes that impact pricing
and profitability drive measures that reduce cost while providing competitive service levels. Customers are not often involved in defining and executing service improvement plans, instead focusing on the expected results. How the service provider achieves those results is generally not important to the customer.
At the same time, it should be noted that customers can be involved in defining service improvement plans – especially where a relationship with the service provider (typically outsourcer) is in difficulty.

The difference between internal and external customers is a theme throughout this publication, and the differences between them will be referenced and described in more detail in various contexts.

Can a customer ever be wrong?

Customer service training has touted phrases like ‘The customer is king’ and ‘The customer is always right’. Well-meaning IT service providers have taken these phrases to heart, only to find their organizations in some difficulty because they delivered the exact service that their ‘customer’ requested.

The reality of the situation is that there are circumstances in which the customer is not right, or in which the customer ceases to be a customer. A customer ceases to be a customer when they refuse to pay for a service, or if they require the service provider to do something illegal, or when they use the service for illegal purposes. For example, shoppers become criminals when they steal items from a store.

IT management becomes an accessory to fraud when it follows directions from a customer to destroy certain records. IT is negligent if it agrees to provide a service that is contrary to its business objectives, or damaging to the profitability of the business (even if a customer told them to do it).

There is another very important distinction between internal and external customers here, and that is what factors get taken into account when deciding whether to deliver a new service. For example, a customer is involved in sensitive and confidential research and development work. They require that all processing be performed in a secure data centre, which has to be built in a virtually inaccessible location that they have identified. This is an extremely expensive requirement, and will require the service providerto make several new investments.

The service provider initiates an investigation and discovers an alternative location that meets all the customer’s requirements, and is just as secure. The alternative would reduce the costs of the new service by 25%. The customer insists on going ahead with the original plan. Is the customer right?

The answer is not simple, since there may be other factors involved. If the customer is an external customer, however, the service provider will probably sign the contract and then start designing and building the new facility. This new service requires significant investment, but if the undertaking is legal and possible, and if the customer is willing to pay enough for the service provider to make a profit, it looks like a good opportunity. The key here is that the end result is based on external revenue being generated from the customer.

If the customer is an internal customer, the service provider has a responsibility to question the decision in more detail – since they are both responsible for the money that will be used to make the investments. It is money that belongs to the organization they both work for, and is not revenue. What business outcomes will this investment drive, and how will this specific location achieve these objectives more effectively than the cheaper location? In this case the service provider has an important check-and-balancerole to play, while the customer is required to demonstrate what the return will be on the investment, and to justify to senior management why the cheaper alternative is not acceptable.

In addition, this distinction imposes responsibilities on the internal customer. The customer is responsible for providing the appropriate funding for the required level of service. They are committed to not using external competitors as long as the services are delivered as required.

Important note on customer service 

ITIL Service Strategy is not suggesting for one moment that IT organizations should start to question the idea of good customer service. Customers, whether internal or external, are the reason a service provider exists. A responsible IT service provider should do everything within their power to ensure that services are appropriately agreed, funded and delivered to ensure customer satisfaction. However, a responsible service provider also performs due diligence when agreeing to provide the service to a customer, to ensure that it is a legitimate request from an authorized person. If a due diligence exercise is not possible, a responsible service provider may well specify that they have not carried out ‘due diligence’ (often because the customer is not able or willing to provide sufficient access to information and time to achieve true due diligence, or is not willing to fund a true due diligence exercise). It should also be noted that it is the legal responsibility of the customer to ensure that local laws are obeyed. This becomes an issue with items like local storage, e.g. data protection legislation varies from country to country and it is often the client, not the service provider, who is responsible in law.
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