Value Facilitation as Antecedent of Service Provider Profitability

Value Facilitation as Antecedent of Service Provider Profitability

Alexander Bogislav Herzfeldt (Technische Universität München, Garching bei München, Germany), Eugenia Rastorguev (Technische Universität München, Garching bei München, Germany), Christoph Ertl (Technische Universität München, Garching bei München, Germany) and Helmut Krcmar (Technische Universität München, Garching bei München, Germany)
DOI: 10.4018/IJSSMET.2016100105
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Abstract

The cloud service market has seen a tremendous growth in recent years. Consequently, more and more service providers have entered this dynamic market, turning it into one of the most competitive markets in modern IT industry. With the market becoming mature, providers that focused on growth strategies in the past, however, need to shift their attention to profitability now. Based on a qualitative study with 14 cloud service experts, the authors explore the relationship between cloud service provider profitability and value facilitation, i.e., the capability to build up resources in advance of future customer engagements. The authors' results indicate a positive relationship between cloud service profitability and value facilitation, which gives valuable insights for both researcher and practitioners and how to design cloud service offerings.
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1. Introduction

Cloud service is based on an IT deployment model that offers virtualized IT resources in terms of infrastructure, applications and data (Böhm et al., 2009; Rindos et al., 2014; Tiwari & Joshi, 2015). In recent years, cloud service has become a hype and more and more customers make use of cloud-delivered IT resources. In Europe, one out of every five enterprises was using cloud computing services in 2014 (Eurostat, 2014) and market researchers estimate that this number is likely to grow to reach a market volume of about US$ 127bn in 2017 (Global Industry Analysts, 2015) and that “by 2018 more than three quarters of workloads will be processed by cloud data centers” (Cisco Systems, 2014).

For providers, however, offering cloud service leads to a number of challenges (Böhm et al., 2009). Cloud service providers need expertise with regard to the technical infrastructure and the management of a service-oriented business model. Consequently, cloud service providers need to understand customer business needs and IT infrastructure concepts to design service in a way that allows the customer to easily integrate the service in their business processes. At the same time, cloud service needs to feature characteristics such as pay-per-use pricing and easy scalability. Customers want to pay less for cloud service than for traditional IT service designed for a single customer.

From a provider’s perspective, cloud computing is a difficult market for two reasons. First, the advantages of cloud services, namely flexibility, scalability and cost reduction, are mainly realized by the customer, while incurred risks are shifted to the provider. This is especially true if, for example, performance and availability is guaranteed through service level agreements. Second, the market environment itself is highly challenging. With the technology maturing but the market still growing, cloud service providers face strong price competition and are threatened by new market entrants.

This leads to the situation that providers that focused on growth strategies in the past, need to know shift their attention to profitability. Indeed, studies show that some cloud service providers are highly successful in terms of profitability while others lag behind (Velten & Janata, 2012). When reverting to literature, we understand from the concept of value facilitation (Grönroos, 2008; Grönroos & Ravald, 2011) and the resource-based view of the firm (RBV) (Wade & Hulland, 2004), that successful organizations need to build up resources in advance of future customer engagements. As stated by Grönroos (2011), providers facilitate the process of delivering the service to and operating the service for the customer. Value facilitation is defined as “developing, designing, manufacturing and delivering resources […] to make it possible for customers to create value” (Grönroos, 2008) and thus precedes the actual value co-creation process which is the rendering of the service to the customer.

In this paper, we investigate the effect of building up resources in advance of future customer engagements as antecedent for cloud service provider profitability. Our research builds on the value facilitation concept as well as on the resource concept from the RBV. We design a study to understand how facilitating value co-creation by building up resources in advance to future customer engagements impacts profitability. The study is carried out as exploratory qualitative research based on 14 interviews with cloud service project managers, cost experts and board members from ten different organizations.

Having set the focus of this study, our research objective can be summarized by the following research question:

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