European Management Journal (2008) 26, 289– 297

journal homepage: www.elsevier.com/locate/emj

Service co-production and value co-creation:
The case for a service-oriented architecture (SOA) q
Andrea Ordanini a,*, Paolo Pasini b a b

Bocconi University, Viale Filippetti, 9, 20122 – Milan, Italy
SDA Bocconi, School of Management, Via Bocconi, 8, 20136 – Milan, Italy

Available online

KEYWORDS
Service dominant logic;
Co-production;
Service management

Summary An emerging marketing management logic proposes a new perspective on service activities, which previously have been subject to a biased goods-dominant logic.
According to this new logic, customers always are co-producers of services and co-creators of value, not simple marketing targets, because they mobilize knowledge and other resources in the service process that affect the success of a value proposition. This article explores this key proposition, analyzing service co-production and value co-creation phenomena in the business-to-business segment and focusing on the case of service-oriented architecture (SOA) with an in-depth, qualitative analysis of two firms pioneering the implementation of SOA solutions.
Ó 2008 Elsevier Ltd. All rights reserved.

Introduction
Marketing literature and practice converge around the idea that, especially when it comes to services, customers play different foundational roles in value-creation mechanisms.
Marketing theory recently introduced the concept of the service dominant logic (SDL), according to which the customer is always a co-producer of value, not a target of that value, because he or she mobilizes knowledge and other req
Authors gratefully acknowledge IBM Italy for the financial support given through their ‘‘Service Science Award” programme.
Many thanks are also given to managers that provide time and valuable information during the interviews.
* Corresponding author.
E-mail addresses: andrea.ordanini@unibocconi.it (A. Ordanini), paolo.pasini@unibocconi.it (P. Pasini).

sources, and this effort influences the success of a value proposition. According to this view, the customer becomes embedded in the service offering and ultimately is responsible for the value added to the process (Vargo and Lusch,
2004).
Service firms hope to exploit these concepts, particularly in business markets in which customers take active, tangible roles. Professional firms fully understand the value of serving a knowledgeable customer, and some recently have established formal initiatives to ‘educate’ customers (
Anand
et al., 2007). Technology service firms also have launched new generations of service offerings based on strong modularization that can be managed directly by customers (Miozzo and Grimshaw, 2005).
Although influenced by the same guiding principle, that of a desire to enhance the service exchange, theory and

0263-2373/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.emj.2008.04.005 290 practice still remain disconnected. This is due to the distance between the academic need to abstract an emergent theory and the practitioner’s desire to drive forward a new and potentially rewarding business model into the marketplace. This article aims to bridge the divide through an exploratory analysis that investigates how customers actively contribute to service production and value generation within service dominant relationships.
Specifically, this analysis focuses on the adoption of
IBM’s service-oriented architecture (SOA), an example of new generation technology service, as implemented by two medium-sized firms: one of which produces goods and the other services. Through an in-depth analysis of these two cases, we carve out some exemplary instances of the co-productive role played by service customers. These theoretical conceptualizations are then linked to the day-byday managerial challenges faced by service providers and users in the business-to-business (B-to-B) domain.

Theoretical background: service co-production and value co-creation in the SDL
Co-production represents a central construct in service literature (
Zeithaml et al., 2006), such that the customer always plays an active role in the service offering. This conceptualization derives from a specific characteristic of the service provision, namely, that the production phase cannot be disconnected from consumption activity (Lovelock and
Wirtz, 2004). Service activity innately transforms the features of a person or a good, which means it is not possible to deliver a service without the active participation of the customer. This phenomenon is revealed in practical examples such as: if a passenger misses a flight and the seat remains empty then no service has been provided, and instead, the airline suffers unexploited capacity; likewise a hotel or restaurant would be similarly impacted upon; conversely, when a consumer chooses not to purchase a cellular phone or car, the consumption phase cannot happen, though production activity has already occurred.
The quality of a service exchange clearly depend upon the customer, in the sense that the way they, especially in a
B-to-B context, participate in the process determines the final service delivery and thus the level of satisfaction (Ernst,
2002). As such a firm does not share its business problems, strengths, and weaknesses accurately, a consultant may be forced to provide sub-optimal service—not because of its own deficiencies but because of poor customer participation. Similarly, a key element that doctors use to make accurate diagnosis is the information patient provides about his or her symptoms to those doctors. If the patient provides incomplete or incorrect information, the quality of the health service provided can be severely affected.
The concept of service co-production recently has been reconsidered and enhanced. The emergent SDL (Vargo and
Lusch, 2004, 2006) provides a new perspective that is rapidly gaining an established position in marketing literature.
It proposes a novel framework in which services represent the forefront of economic exchange systems. Management theory and business practice have long centred on a goods-dominant logic, but that logic may no longer be consistent with the foundational role of services in a modern

A. Ordanini, P. Pasini economy. According to the goods-dominant logic, services represent residual activities and/or peculiar (somewhat inferior) types of product. Value results mainly through manufacturing and other activities realized by the firm, and the customer is exogenous and destroys value through consumption. Conversely, according to the SDL, a service offers an application of knowledge and competencies for the benefit of another entity, which makes it the basis of any economic or social exchange. Services and goods are mere appliances to perform a service and can be considered, respectively, the direct and the indirect ways to transfer knowledge and skills during the service process (Vargo and Lusch,
2004). Moreover, the SDL places the customer centre stage, such that the customer is always a co-producer, and the enterprise delivers not value, but value propositions. The first proposition means that customer relationships constitute a service system, not simply market-based relations
(Stevens and Dimitriadis, 2005), because the customer firm integrates its own set of resources and competencies into any service process (i.e. service co-production). The second proposition relates to the first, but specifies that the value of a service exchange emerges within the economic sphere of the, because ‘‘it is not the service itself that is produced but the pre-requisites for the service” (Edvardson and Olsson, 1996, p. 1476). Only when the customer integrates their own resources may the process be completed (i.e. value co-creation).
In Fig. 1, we depict the service co-production and value co-creation phenomena in a framework that adopts SDL. In the remainder of this article, we explore these issues of service co-production and value co-creation in the context of
B-to-B information technologies (IT) services. Specifically, we investigate how a new generation of IT, namely, service-oriented architecture (SOA), can enhance the processes of customer inclusion and participation in service provision. Service-oriented architecture (SOA)
The SOA refers to a new generation of IT systems that possess particular features in terms of power and flexibility.
SOA is based on a modular foundation, such that the elements within the IT system can be composed and decomposed according to the different needs of business users
(Cherbakov et al., 2005). For example, business customers can create different IT solutions as required by different situations or contexts. The customer must play a central role during the planning and implementation of SOA systems, which should be ‘‘tailored” to the present and future needs of that firm. In such a system, the key aspect is not which set of technologies gets implemented but rather the services they render to benefit the activities of the business users (Erl, 2005).
We can define SOA several ways, according to different point of views. From a business angle, it represents a set of services that improve the capability of the firm to conduct business with customers and suppliers. From a technology angle, it is a new project philosophy characterized by modularity, separation of concerns, service re-uses, and composition, as well as a new programming method based

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Resources and competencies

Resources and competencies

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Figure 1

Service co-production and value co-creation according to the SDL logic.

on standards and tools that largely involve Web services.
Finally, from an IT management point of view, SOA provides a new way to conceptualize and design IT application portfolios. Both SOA and similar service platforms give a new meaning to the IT outsourcing phenomenon. Traditionally, outsourcing IT meant completely externalizing the technology activities to a third party to save costs and leverage the competencies of suppliers (Gilley and Rasheed, 2000). This strategy has its downsides: users lose control of technology applications, and providers tend to focus on standardized, rigid, broad solutions. In contrast, in using SOA, customers rely only partially on the provider for the service delivery and maintain their own sense of (and learn from) business applications of technology. Moreover, SOA providers offer more flexibility, which business customers may exploit to respond to various business issues.
On the basis of these elements, it seems clear that SOA fits well with the idea of service co-production, especially because of the key role that the business customer plays in planning the system and using/assembling different modules over time. Furthermore, SOA provides an interesting case of value co-production, because the potential contribution of the service system relates to how the customer firm uses it and how well it enhances the set of resources and capabilities of that business user. The analysis of the two cases that follow will shed more light upon the phenomena associated with SOA application.

Methodology
Given the exploratory nature of our approach, we employ a qualitative research design based on an in-depth analysis of relevant cases. Qualitative analyses primarily work well when the phenomenon under study is relatively new and/ or the purpose of the research is not to test hypotheses, but rather to increase knowledge of a phenomenon by generating new theoretical propositions (Eisenhardt, 1989). Our analysis roughly follows the procedure proposed by Eisenhardt for handling a qualitative analysis: define the content

of the analysis, select relevant cases, analyze the collected data, and discuss the implications.
With regard to content, we focus on understanding service co-production and value co-creation phenomena in the context of IT business services by observing how business firms implement SOA service systems. To select the cases, we consider that the set of investigated events should be relevant (i.e. significant for the topic under investigation) and follow a clear sampling logic. We choose IBM as a key service provider of SOA systems and select two early adopters that exhibit important features. First, one is a service firm (a bank), and the other is a manufacturing firm (a watch producer). This distinction enables us to determine whether service co-production and value co-creation differ according to the nature of the customer. Second, both cases represent firms with a dynamic growth path, which enables us to concentrate on a type of firms for which IT outsourcing traditionally has been problematic (Powell and Dent-Micallef, 1997).
Third, the two firms display different strategy configurations: one focuses on international expansion, whereas the other hopes to extend its product portfolio and distribution channels. Therefore, we can investigate service coproduction and value co-creation phenomena in different strategic contexts.
Methodologically, our analysis derives inspiration from the ideal of a continuous dialogue between academics and practitioners. Specifically, we use an iterative narration approach based on the constant interchange between grounded evidence and theoretical reasoning.
Primary information was collected during 10 semi-structured interviews with senior managers and project managers from Binda and Cassa di Risparmio di Firenze (CRF) – the two companies that implemented SOA service systems
– and IBM Global Value, and IBM Information Systems – the two units that acted as service providers. Each interview lasted approximately one hour and was tape recorded. Secondary archival data was provided by the organisations and employed to both gain additional information and verify some of the self-reported data.

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In terms of data analysis, we examine the focal cases according to the following steps:
– Determination of the business issues that led to the idea of employing SOA systems.
– Discussion of the SOA concept and structure in the firm. – Analysis of the implementation processes from an organizational point of view.
– Observation of co-production and co-creation phenomena. Case 1: Binda
The Binda group has been manufacturing and marketing watches since 1906, when it opened its first shop in a small town located in north-west Italy. Its strategy has always centred on the idea of creating a strong product brand portfolio. Since 1993, after the massive success of its Breil brand launch, the group has experienced continuous growth and shifted from a small craft firm to a multinational enterprise.
Today Binda owns several important brands and acts as a licensee for other key brands such as Wyler, D&G Time, and
Seiko.
The production of watches is almost entirely outsourced to Chinese manufacturers, though some (highest quality) products are manufactured in Switzerland. Sales turnover reached approximately 300 millions € in 2007. The ambitious strategic plan for the next five years raises internal and external organizational complexity to the highest level.
Three nodes are particularly challenging:
– Internationalization. At present, exports represent
29% of total turnover; the company’s goal is to increase this percentage to 50% in three years. Currently, Binda products appear in 40 countries, sold through local branches and a dense network of domestic retailers. The strategic plan aims to transform the organizational structure of the group by creating a holding that provides shared services related to institutional marketing, brands, and product development to all branches. Local branches have specific purchasing functions and financial units. Logistics and warehousing generally are outsourced to Italian and US partners. – Retail expansion. Binda distributes its products largely through specialized retailers, including 3000 points of sale in Italy, selected among the best jewelleries and watch shops, and 1500 points of sale abroad, spread across more than 40 different countries. The company hopes to boost its new direct retail channel, opening a set of directly owned shops and a network of points of sale managed through franchising contracts.
– Product diversification. The future strategy of Binda relies on the idea of extending its strongest brand
(i.e. Breil) to other products lines that may share the same ‘fashion’ meaning, such as sunglasses, perfumes, and leather goods. The production of these new products would be outsourced to both Italian and foreign partners.

A. Ordanini, P. Pasini
These complex strategic changes create a growing number of interactions that then become more complex with regard to managing information flows, both within the Binda organization and among partner firms in Binda’s network.
In the first case, greater flows are expected among branches and between each branch and the central corporation. In the second case, new flows may emerge when new distribution chains get integrated or new franchisees or manufacturing partners become involved.
Hence, Binda realized that such a change should induce another change specific to the IT service infrastructure.
For the information systems (IS) department, which consists of only nine people, this decision represents a further challenge. Previously, the company’s approach has been to decentralize all work required to meet the specificities of local markets (e.g. payment systems) and concentrate remaining efforts in the Italian headquarter (e.g. channel management, after sales service, quality management).
The system relies on different enterprise resource planning
(ERP) systems (procurement, sales, warehouse, and accounting), and three sales force automation systems (Milan for Europe, New York for the United States, Shanghai for
Asia). Local branches have no autonomous IS departments and fully outsource their IT. Such an approach is no longer sustainable in the presence of the radical changes expected in the strategy and structure of the group.
In response, Binda conceived of the ‘galaxy project’ that would implement a SOA platform on its business processes.
This project was articulated as follows:
1. Identify key business processes underlying the relational activities between headquarters and branches, between the group and the network of manufacturing partners, and between the group and the logistic network.
2. Decompose processes into key standard activities, on the basis of frequency, execution time, complexity, users’ roles, and so forth.
3. Implement IT architectures consistent with the map of processes/activities identified at the previous points, which allows Binda to govern the relatively complex information flows more flexibly and effectively.
4. Transform the current IT system, characterized by pointto-point connectivity, into a reliable new model, with a central enterprise service bus that governs the interactions among IT applications, the exchange of data in different formats, and the decision to ‘‘plug” or ‘‘unplug” different organizational units into the system.
For instance, Fig. 2 displays how a procurement process might be decomposed into single activities, which then may be recomposed according to the SOA logic. A series of basic requests, such as availability checks or warehouse management, may be shared by different organizational units, whether owned shops or franchising points of sale.
Related feedback about these requests—that is, information about goods availability or lists of shipped items—then gets shared and integrated into the IT platform. The platform acts as the enterprise service bus that works within SOA logic, because it can recompose and integrate single activities in a process according to the needs of the business.
When we apply the general framework of service co-production and value co-creation from Fig. 1 to the Binda

Service co-production and value co-creation: The case for a service-oriented architecture (SOA)

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Franchising

Owned shops
SHOP
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SHOP
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Franchisee
Franchisee
Franchisee

Purchase orders Availability

List of shipped items Enterprise
Binda
Bus

Check for availiabity

Warehouse mgmt
Incoming purchase orders List of shipped items

CENTRAL SYSTEM
(Binda Retail )

Figure 2

Process decomposition in the SOA logic: managing retail purchases in Binda.

group, we note that the customer (i.e. Binda) provides its own resources in the service provision process, such as knowledge of business processes, market experience and knowledge, and so forth, as Fig. 3 reveals. These resources combine with the technical resources and competencies of
IBM, especially those related to SOA platforms. After the services have been co-created, Binda employs them as necessary and integrates them with another set of resources and competencies, such as the company’s brand, logistic partners, distribution channels, new products, and so on.
This final combination leads to value-creation. Thus, this case shows that Binda co-participates to the service production process by offering a set of resources; it is also co-

responsible for the value generated from the application of those services to its own economy.
A further element that characterizes the SOA co-production logic is that IBM (IT service provider) does not apply a traditional structured methodology to implement the solution; instead, IBM and Binda work together during all phases of the project, including establishing a joint steering committee, a mixed project management team, and a larger set of people and processes that belong to both the firm and the IT provider (see Fig. 4). This choice fosters a reciprocal learning loop, because IBM continuously refines its capability to project and implement the SOA solutions in different business contexts (i.e. fashion industry), and Binda

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Knowledge of retail channel

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Figure 3

Service co-production and value co-creation in the case of BINDA group.

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Figure 4

The joint IBM/BINDA team for projecting and implementing the SOA galaxy project.

improves the knowledge of its key processes and activities, as well as the map of relationships that exist among them.
This approach provides a concrete example of what it means when both providers and users bring resources and capabilities into a service process; the value-creation process is a co-generated process.

Case 2: Cassa di risparmio di firenze
With the case of Cassa di Risparmio di Firenze (CRF), we consider a situation in which a service provider (bank) rather than a manufacturing producer applies the SOA solution. When CRF was created in 1998, its aim was to create a significant concentration or cluster of saving banks in the central area of the Italy. Since, then five local branches have been aggregated into the focal Firenze branch, each embedded in its own territory. Moreover, the group contains a set of autonomous organizational units focused on complementary services, such as leasing, factoring, insurance, and domestic loans, which enables CRF to offer its customers a wide range of services and solutions.
In addition, the CRF group has strategic partnerships with two leading players in the European financial market, BNP/
Paribas and Intesa/S.Paolo, and recently began an international expansion into Eastern Europe. Currently, CRF maintains more than 550 local branches (19 in Romania) and a portfolio of more than 1 million customers. The group activity falls along different distribution channels: private banking centres (22), business centres (35), and a network of more than 300 financial promoters and agents. The top management of the CRF group recently announced a growth plan for the next five years, with specific aims:
– Foster the continuous innovation of products and services. – Extend multi-channel strategies, especially by leveraging new technologies (Internet and digital TV).
– Simultaneously, improve flexibility and efficiency in customer relationships.
The plan clearly has several implications for CRF’s IS department and demands a radical change to sustain the more complex and articulated information flows among different units and organizations. For this reason, in mid-2007,
CRF conceived of its ‘territorial multi-channel platform’ project, based on the implementation of a SOA solution

for its business processes. This project required facility management services and management of new hardware; according to the interviewed managers, it was based on some basic principles:
– ‘‘Keep an eye on old habits”: Do not create new applications if you do not need new capabilities; identify redundancies. – ‘‘Restructure applications into services” to avoid duplications and give meaning to business processes.
– ‘‘Be patient” because building shared services requires time, analytical thinking, and mutual efforts.
To the CRF group, the SOA project should provide several advantages. First, the company hopes it will reduce total costs of ownership and the risk of technical obsolescence by eliminating peripheral servers and reusing software components. Second, it should increase speed and flexibility in the design and implementation of new activities and services across different delivery channels, because of the modularization potential. Third, it offers the possibility to upgrade or adjust the whole system in the presence of change, because of the SOA’s innovation potential. Fourth, for local branches, the project provides the opportunity to access a flexible, easy-to-use tool that enables them to manage customer relationships across 360°.
The SOA methodology implemented in this case covers both the modelling (strategy) and the architectural (implementation) phases (see Fig. 5). It may be articulated in three interconnected steps:
– Identification of services, components, and flows.
– Specification of services, components, and flows.
– Consolidation of realization decisions.
On the basis of this procedure, CRF and IBM (IT service partner) identified 250 basic services that mark an ‘average’ branch, and then more than 130 others developed within the alternative distribution channels. These services get decomposed into sets of basic components, which can be recombined according to business needs. Fig. 6 shows an example of how an apparently simple process—opening a bank account—can be decomposed in several basic activities.
After the business aspects have been componentized, they can be ‘covered’ by corresponding functional aspects, and the SOA solution acts to interconnect and aligns these

Service co-production and value co-creation: The case for a service-oriented architecture (SOA)

Figure 5

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Projection of the SOA platform for CRF.

OPENING A BANK ACCOUNT: BASIC ACTIVITIES
Browse
product catalogue Identify customer Collect customer document

Customer risk profile

Establish unique contact

Handle privacy procedure

Prepare contract Collect customer signature

Assign contractual conditions

Manage first deposit

Figure 6 Process decomposition in the SOA logic: opening a bank account with CRF.

two dimensions. According to several interviewees, ‘‘SOA allows for business and IT personnel to adopt a neutral language: interactions are facilitated not because one is forced to adopt the language or the codes of the other, but because both use a platform that translates and integrates two languages in one unifying frame”. Moreover, ‘‘it is not rare to see a marketing manager speaking about business functions and an IT specialist talking about system components while both are looking at the same issue”.
This case again provides an opportunity to apply the general framework of service co-production and value cocreation. Each party invests resources and competencies into the service process, and we can appreciate these interactions as assisting the process of service co-production or value co-creation. In this case, as Fig. 7 shows,
CRF provides not only its business experience but also IT resources and competencies that its IS department has accumulated. At the same time, IBM offers service provision not only in terms of its IT capabilities but also in the form of knowledge about banking operations that it had gathered from its previous consultancy activities. As in the case of Binda, CRF remains co-responsible for the value created from its use of the territorial multi-channel platform, because it relies on complementary business assets, such as new banking products and services, brands, distribution channels, and so forth.
Finally, as for Binda, we must consider the mutual effort made by IBM and CRF in the project phase. A consulting

committee composed of CRF top management, an IBM chief project, and the CRF executives responsible for key projects engaged in constant supervision of the territorial multichannel platform project (see Fig. 8). The committee takes responsibility for setting roles and tasks, planning and allocating resources, and control. Supervision of single sub-projects is delegated to an executive committee; each of these sub-project teams consists of a group of function analysts, a development team, a group expert in IT architecture, and a facility management team. Those employees responsible for specific banking products and services then connect to the related project teams.

Discussion and conclusions
Although based on exploratory research, our analysis conveys several interesting insights for both the further development of theoretical constructs and best practice in relation to the emergent service dominant logic field of study. First, these two cases provide concrete examples of some key SDL principles, which offer further evidence of the conceptualization of services as applications and exchanges of specialized knowledge between providers and users of a service. Our research thereby helps clarify the key constructs of service co-production and value-co-creation in the context of B-to-B services and offers new insights to this stream of literature (Ramirez, 1999; Vargo and
Lusch, 2004). Co-production means that the business customer must be open, in terms of releasing its existing knowledge base, with the service provider: the provider can only maximise the service exchange benefits with free and open access to the customers knowledge and expertise. Co-creation means that value, enhanced by the use of a business service, also depends on the resources and competencies that exist in the customer’s organization. The service provider contributes to the value proposition associated with the service (which has been co-created with the customer): exploitation of the potential only occurs when the value

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IBM

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Figure 7

Service co-production and value co-creation in the case of CRF group.

Consulting
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Functional analysts Development team

IT architecture experts Facility management team

Teams specialized on bank products and services

Figure 8

The joint IBM/CRF team for projecting and implementing the SOA territorial multi-channel project.

proposition is applied together with the resources and capabilities to the customer’s business processes.
Second, our analysis provides some insights into certain aspects of the IT literature, especially those streams that deal with architectures and service platforms. The cases show how SOA principles purposefully match the business process logic, creating a ‘‘neutral” language that helps align
IT and business domains. This neutral language also provides a means to interpret SOA as both a technology application and a business outlook. The cases of Binda and CRF offer several hints about a potentially fascinating perspective on new-generation services, such as SOA, as potential bridges over the logical distance between IT tools and business issues (Sabherwal and Chan, 2001). Properties such as modularization, re-use and flexibility move such services to the forefront of this challenging perspective. The cases also show that this bridge requires continuous, wide, and deep collaboration between the service provider and service user during all phases of the service process, from the earliest steps of projecting the architecture to the very end phases of specific implementation.
Third, the analysis provides some insights for practitioners. Our cases detail the implementation process of SOA solutions and how they might affect the current and pro-

spective management of business processes. To exploit the potential of these solutions fully, business managers should: (1) contribute actively to IT solution planning, not simply outsource key decisions; (2) reason ahead in terms of how solutions fit with or enhance the set of existing resources and capabilities; and (3) recognize that they are always responsible for much of the service outcome and the value created through its use.
As we have noted, this article summarizes exploratory research. We hope that the findings and recommendations might be reconsidered, extended, and challenged in further studies, with the aim of advancing knowledge in the service management field.

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Andrea Ordanini is Associate Professor in the Management Department at Bocconi
University, and Associate Director of the
Customer and Service Science Lab at the same University. He has been visiting professor at the University of California at
Irvine and at the London School of Economics. His research interests are focused on: service management, IT services, and firm’s competitive advantage.
Paolo Pasini is Adjunct Professor of Information Systems Management and Director of
Business Intelligence Observatory at SDA
Bocconi, School of Management. His main fields of research concern: IT innovation,
Business and Service IT-Based Innovation,
Business Intelligence and Decision Support
Systems, IT Strategy and Management.