Value co-creation through digital service capabilities: the role of human factors

2.1 Value creation and co-creation

The term value can be classified into value-in-use and value-in-exchange, which reflect the different ways of thinking about value creation (Vargo et al., 2008). The traditional view of value creation, linked to goods-dominant logic, is based on value-in-exchange in which companies create value usually through the exchange of products and goods (cf. Vargo and Lusch, 2004). Value-in-use is related to service-dominant logic where the roles of producers and customers are not distinct; thus, value is co-created (Vargo and Lusch, 2008; Vargo et al., 2008). Shifting the locus of value creation from exchange to use implies reinterpreting the notion of value – from one based on units of organizational output to one based on processes that integrate resources (Vargo et al., 2008), as seen in service production.

Service refers to the application of competence for the benefit of another: it involves applying competences, integrating the applied competences with other resources and determining the benefit (meaning value co-creation; Maglio et al., 2009). Value co-creation in services can be defined as a service system that is an arrangement of resources (e.g. people, technology and information) connected to other systems by value propositions (e.g. Spohrer et al., 2007; Maglio et al., 2009). In service systems, a company’s role in value creation and the proposition and provision of service is intermediary to the value co-creation process. A service system’s function is to make use of its own resources and the resources of others to improve its circumstances and that of others (Vargo et al., 2008). In value creation and co-creation, the roles of the company and the customer can be analyzed using the three spheres: provider, joint and customer (Grönroos, 2008, 2011; Grönroos and Voima, 2013). In the provider sphere, the company is in charge of the production process, which mostly involves the generation of potential value – or value facilitation. In this sphere, resources for customer use are developed, designed, manufactured and delivered without any direct interaction with the customers (Grönroos, 2008, 2011; Grönroos and Voima, 2013). In the joint sphere, the role of the customer is twofold: he/she co-produces resources and processes with the company and the jointly creates value with the company. Through direct interactions with the customer, the company may have an opportunity to engage with the customer’s value creation process and assume the role of a value co-creator. In the customer sphere, when there are no interactions, customers are engaged in independent value creation, using resources obtained from a company and those that are otherwise necessary and available to them (Grönroos, 2011).

McCormick (2013) explains that digital services play a critical role in how companies position their value proposition (McCormick, 2013). A new digital service can deliver embedded value to companies through the co-creation of services and products with customers, who represent a key value component. Chuang and Lin (2015) studied financial service companies in Taiwan, and showed that the impact of new digital services on company outcomes begins with digital service and cooperation capabilities, and that the complementarity between these factors positively influences new digital services. Further, they confirmed that new digital services exert a positive effect on value co-creation, thereby improving company value. According to Chuang and Lin (2015), digital service capability is deployed throughout a company and is integrated deeply with customer-based collaborative processes, leading to higher levels of cooperation and co-creation capability. They argue that companies using information technology-based services have more access to customer information owing to customer–company collaboration and interaction via the internet. Access to and integration of this information allows companies and their employees to better absorb information, coordinate with customers and collaborate with them to improve service delivery and tailor services to demands (Chuang and Lin, 2015). Thus, co-creation between customers and suppliers represents a critical component of service-delivery processes through which customers directly influence the development of both regular and digital services (Ngo and O’Cass, 2009; Chuang and Lin, 2015; Saunila, Rantala and Ukko, 2017).

2.2 Value co-creation and digital service capabilities

A digital business aims to change the existing business environment from a holistic and customer-driven perspective. This change is effected through digitization of processes and development of digital services (cf. Saunila, Rantala and Ukko, 2017). Digital service capabilities are connected with technological capabilities embedded in the process through which services are delivered and information is presented to customers. As Ba and Johansson (2008) showed, the technological capabilities embedded in digital service processes are the key factors that determine service quality and, ultimately, customer satisfaction. This finding links back to Teece and Pisano’s (1994) dynamic capabilities theory. They defined dynamic capabilities as the “subset of the competences or capabilities which allow the company to create new products and processes and respond to changing market circumstances.” Thus, competitive advantage is viewed as based on distinctive processes, shaped by the companies’ asset positions and the evolutionary paths it follows. As an alternative to competencies, Zollo and Winter (2002) identified operating routines as the foundation on which dynamic capabilities operate. They highlighted that dynamic capabilities are structured and persistent; using fragmented approaches to developing operations or creating value is not exercising a dynamic capability. Further, dynamic capabilities emphasize management capabilities and inimitable combinations of resources that cut across all functions (Teece and Pisano, 1994). These capabilities’ value lies in their ability to translate resources to value (Eisenhardt and Martin, 2000). As a key mechanism for organizational growth and renewal, digital service is implicitly central to this theory. Similarly, Chuang and Lin (2015) consider digital service capabilities as an internal driving force that enables companies to better understand its customers, improve its service delivery and respond to customer needs.

Further, dynamic capabilities theory is well-suited to the study of digital services for the following reasons. First, there is no special focus on technological resources. Capabilities are promoted, analyzed and developed by employees of the company. While the competencies and resources of the company matter, the individuals working in the company are the ones that create value. Second, dynamic capabilities are those that are able to extend, modify or create capabilities that are beyond the everyday competencies and resources. Especially in B2B setting, the digital services can vary; they can relate to products, service processes or even business models. Moreover, due to this heterogeneity, there is no general formula for how to create digital services.

To develop an understanding of the determinants of digital service capability, this study examines how a company’s orients its organizational activities in an attempt to develop customer value. Accordingly, digital service capabilities are divided into three categories: customer orientation, market orientation and service orientation (e.g. Lynn et al., 2000; Eng, 2008; Oliveira and Roth, 2012). These orientations can enhance a company’s service capability by enabling it to acquire knowledge about customers and other market participants, share that knowledge within the company, achieve consensus on its meaning and take steps to deliver superior customer value (Eng, 2008). Each of these categories of orientations is described below.

2.3 Human factors in value co-creation

As previously mentioned, in service systems cooperation is characterized by the relationships among people, service processes and physical elements (Tax and Stuart, 1997). This highlights the importance of understanding the barriers to developing digital service capabilities and the role that human factors play in creating value (cf. Cao et al., 2016). Human factors refer to the characteristics of individuals that affect how they function in an organizational context (Carmeli and Tishler, 2004a), and they may have diverse motivation, experiences and ability to manage relationships with other actors (Cao et al., 2016). Human factors may enhance a company’s dynamic capabilities, thereby contributing to the company’s ability to create and reconfigure resources to meet shifting demands and attain a sustainable competitive advantage (Carmeli and Tishler, 2004a). Interestingly, human factors have not yet been examined in the context of digital services, especially how they influence customer value creation from an organizational perspective.

The idea that a company’s members are the real source of its competitive advantage has long been acknowledged (cf. Pfeffer, 1994; Carmeli and Tishler, 2004a; Kuo, 2011). Previous studies have indicated that human factors are also important in achieving higher organizational performance (e.g. Carmeli and Tishler, 2004b; Hatch and Dyer, 2004; Saunila et al., 2015; Saunila, Rantala, Ukko and Pekkola, 2017). For example, Skaggs and Youndt (2004) found strong empirical evidence to indicate that factors such as customer co-production, customer contact and service customization are related to human factors. This suggests that the inclusion of human factors in the company’s strategic positioning produces positive organizational performance.

Human factors can be categorized into competence and behavior. Competence factors include knowledge, skills and abilities, whereas behavior factors include behavior control and behavior coordination (cf. Wright and Snell, 1991). According to Wright and Snell (1991), behavior control refers to inducing specific behavior in individuals working on independent jobs, and behavior coordination refers to coordinating individuals whose jobs are interdependent. Azim et al. (2010) have proposed a similar division between hard and soft skills, where the former refers to processes, procedures, tools and techniques and the latter to the skills used to dealing with people. Table II shows the division of human factor characteristics utilized in this present study.

3.1 Research strategy

As this study aimed to gain insight about the different human factor characteristics that are emphasized in the process of co-creating value in the B2B context, the qualitative approach was employed. As presented previous, human factors refer to the characteristics of individuals that affect how they function in an organizational context (Carmeli and Tishler, 2004a), and they may have diverse motivation, experiences and ability to manage relationships with other actors (Cao et al., 2016). In order to get depth understanding about these characteristics of human factors, the phenomenon was explored in real context and in face-to-face interviews with individuals from case companies. Qualitative case studies are used to gain an understanding of phenomena that have complex and multiple variables and processes (Yin, 2003). Single cases provide researchers with access to a situation that was previously inaccessible; therefore, the descriptive information itself is insightful (Yin, 2003). Another benefit of using case studies is that the methodology offers in-depth information on processes (Gummesson, 2000). The case study method is also an approach that enables a researcher to apply various qualitative and quantitative research methods, such as analyzing archives, conducting interviews or using questionnaires (Gummesson, 2000). The mentioned reasons were also the researchers’ motivation to utilize qualitative research and case studies as a research strategy of the study. Because of the exploratory nature of the present study, the case study method was deemed appropriate for investigating the importance of the less studied phenomenon in practice. The lack of existing theory on the different human factor characteristics emphasized when co-creating value through digital service capabilities also supported the use of this qualitative method. This study is guided by the principles of abductive reasoning, which is used to develop a theory by understanding and interpreting a phenomenon (Kovács and Spens, 2005).

With regard to the present case study, the review of the extant literature revealed a little practical knowledge about the role that the human factors of digital service providers play in creating value through digital service capabilities. For example, Voss et al. (2002) suggested that the phenomenon can be studied in its natural setting, because meaningful and relevant theory can be generated from observing and understanding actual practice. They also emphasized that the case method is useful when the variables are unknown and the phenomenon is not fully understood. In line with this, the present case study provides new, practical information regarding the role of the human factors of digital service providers. Finally, the study can be considered as a revelatory case (Yin, 2003); that is, a researcher involved in this study had an opportunity to observe and analyze a previously inaccessible phenomenon.

3.2 Case selection

As a part of providing digital products and services, companies are currently relying more often on outside service providers, and the trend seems to be growing (Davis et al., 2006; Haried and Ramamurthy, 2009). Levina and Ross (2003) stated that most research on IT outsourcing concludes that companies are utilizing outsourcing strategies because they believe that outside service providers can generate value and production cost advantages. According to Tsai et al. (2013), outsourcing represents a special case of sourcing activities in which companies’ make or buy decisions are related to the acquisition of business processes and digital services, as well as to the acquisition of software development from service providers (cf. Bardhan et al., 2007; Whitaker et al., 2010). Even though the role of customer’s company and the relationship between customer company and service provider have been topics of academic interest, the service provider’s perspective remains less studied. Levina and Ross (2003) increased the empirical-level understanding of service provider companies’ strategies and practices in one long-term, successful, applications-management-outsourcing engagement. One of the future research aspects suggested by the authors was to gain more empirical-level understanding of service provider companies’ roles and strategies when delivering value through digital products and services.

Based on the statements above, the current study examines and provides insights into the role that human factors of small service providers play in co-creating value through digital products and services. In order to understand the co-value creation practices in natural settings, two small digital service providers were investigated. These two companies were selected because both companies are typical vendors of the time but operate with slightly different business models. This is explained in detail in the next section.

3.3 Case descriptions

The insights are derived from two case studies of small, rapidly growing Finnish companies that provide digital services and solutions. Both companies are examples of contemporary IT companies that are pursuing the outsourcing of tasks, as well as outsourcing customer companies’ orders, and they also play an important role in the digitalization of traditional industrial processes with huge potentials for generating new jobs and economic growth. The basic nature of digitalization in service production is similar in both the case study companies. The digital service process is partly digital and partly physical at the front end. At the back end, all the services and solutions are offered in a digital format. The physical aspect of the digital service process highlights the need to understand the characteristics of human factors that are emphasized when co-creating value through digital service capabilities.

3.4 Data sources and collection

In order to get as in-depth an understanding of the phenomenon as possible within the case companies, different types of data collection methods were utilized. Table III presents the data used in this study. The primary empirical data for this study were obtained from eight semi-structured interviews. The interview questions were determined in advance based on prior literature, but the discussions were informal and were facilitated with supporting questions and comments made by the researchers. This enabled an in-depth understanding of the phenomenon under investigation. As our goal was not to achieve scientific generalization, theoretical concepts were used as templates with which to compare the empirical results (Yin, 2003). The aim of the interviews was to achieve an overall understanding of the value creation process and the role that human factors played in the process within the context of digital services. Specifically, the interviews attempted to increase the understanding of digitalization opportunities, the possible challenges created by digitalization, the value factors that the case companies based their business on, and how human factors were related to each company’s value creation process. All the interviews were recorded and transcribed to facilitate an in-depth analysis.

To increase the researchers’ understanding, secondary data were collected from observations at digital service capabilities workshops, and documentation from the workshops during the ongoing research process. The issues and themes for the workshops were selected beforehand, but the discussions were informal and facilitated by the researchers. Similar research processes were used in both case studies to ensure scientific transparency and repeatability. The actual process of collecting secondary data consisted of three main phases: clarifying the goals of development, clarifying the formation of the value through the provided services and solutions and the role that human factors played in them and synthesizing the development activities based on the defined goals in both case companies.

To arrive at the findings, cross-case analyses were conducted. The analysis was conducted with the help of three researchers. Research triangulation, as well as data triangulation, was used to analyze the content, after which a common interpretation of the results was discussed.

4.1 Human factors in customer orientation

The role of human factors in customer orientation was strongly highlighted at the front end of digital service production. Being able to create the best possible and the most suitable solution for each customer by delivering value through customer orientation was considered crucial in both case study companies. Employees, as experts in their fields (digital solution and service development) with different skills and roles, complemented each other and assisted in building the customer experience and co-creating value.

The ability and skills to combine and summon relevant elements from multiple places were highlighted. Many of the customers’ wishes and suggestions were in digital form and therefore easily controllable. The consequence of this was that employees sought more refined information. Aligning customer’s wishes and suggestions was identified as a challenge. Combining information from multiple internal systems was considered difficult. The challenge was not how to combine information but what to combine. For example, the managing director of a case company said:

There is so much information available, so much to understand what to refine. And we have many different channels from so many sources in small pieces.

The ability and skills to keep the customer informed were emphasized in interviews. For example, any problems in the automatic updating of software versions should be communicated immediately to the customer. The customer experience must be carefully heard and understood. At the point when problems arise, the customer should know what happened and why.

The behavior factors of the employees engaged in communication were also emphasized in the interviews. The ability to communicate with the customer in plain language was considered important. For example, a digital content developer of a case company said the following:

It could have been instructed that this is where you can speak in just a mother tongue. In some situations, you are afraid that the customer knocks on the other end, without saying that half of the contents went past now.

Another behavioral factor relating to communication was managing personal dynamics. Customers report a bad experience when they do not get along with someone, and this may lead to poor communication. For example, another digital content producer from a case company said:

It also pushes away communication, and in that sense the customer stays silent without saying that this is a problem and I would like to change the contact person or that the matter will be resolved.

The ability and skills to engage in face-to-face communication were highlighted in the interviews, especially in the front end phase of the larger projects. In very large projects, developing and understanding the big picture were perceived as difficult. The common perception was many aspects were difficult to express and reflect in the digital world and even more difficult to explain through digital channels. For example, an operative service expert from the case company indicated:

So that you’re face-to-face with that person or team, and you can go through the things and you can explain, and even draw and show. It’s quite different, I mean the communication, compared when you’re talking to someone over Skype.

A long-long lasting relationship with customers calls for the ability to build trust. Hence, to promote and support the human factor of customer orientation, both case companies agreed that companies should focus on creating a corporate culture that engages the customer in developing and constructing digital services and solutions and thus increase their trust in sharing information.

In particular, at the start a relationship, customers expect to know who they are working with. In fact, employees of the case companies explained that some trust needed to exist for a customer to establish contact through a digital channel. That is, a customer should have heard about the company from other sources. Customers’ trust levels were perceived to be high in situations where they did not know alternative solutions or solution providers to their problems. The ability to manage time was considered crucial in such cases. For example, a digital content developer of a case company said:

Yeah, it’s pretty often that we need to be confident that we can handle the situation and, usually, time is often a critical in the digital world, so if you want something, it’s usually pretty fast, meaning that things should have been done yesterday and we often say, really often, that time lag will come.

It, thus, enables digital service and solution providers more deeply to understand of what aspects customers appreciate in constructed solutions and makes it possible to co-create value.

The ability to support customers through a change process was also strongly highlighted in the interviews. This requires the ability to abandon old operating models and methods. Major resistance to change was noted, at least in the manufacturing industry, in digitizing materials such as service manuals and user guides that have traditionally been considered as physical objects. The ability to support customers through change processes is linked to the ability to increase co-creation and build a culture of openness. For example, the chief operating officer from a case company said:

Let’s say that we have been, I can’t say lucky, but we do not have coded a single line of our systems without it being done with the customer and for that reason, we know now that we have not been foolish enough to have developed a devious, functional system that no one can use then in their own activities.

Co-creation facilitates a culture of openness as well as trust. This is essential because the development of digital solutions requires considerable information about the customer’s internal systems and procedures and often open source coding, and such a culture enables it. Digitalization requires customers to change their old ways of working, and a service provider can play a major role in this change. The service provider’s experience gained from prior projects can go a long way in facilitating this change.

4.2 Human factors in market orientation

As the case companies operated in a knowledge-intensive sector and the employees were experts in their specific fields (digital solution and service development), the role of human factors in market orientation was not considered as strong and meaningful as it in the other digital service capabilities. Responses suggested that understanding of market changes primarily increased through interaction with customers and their production process.

The ability to constantly develop or innovate is especially important in a digital environment, because it is easy to switch providers. Interviewees in the study felt that constant innovation required actively seeking customer feedback on how things could be bettered. For example, sales skills should focus not only on the products but also the refining skills related to future development. Proactive seeking feedback was perceived as a desirable attitude whereas waiting for something to happen was considered the worst approach.

The ability to explore new possibilities was also highlighted. This pertained to finding new customers as well as new products and solutions. Interviewees identified that the ability to utilize tacit knowledge was instrumental to identifying new business areas and models, providing agile solutions to their customers and ensuring the satisfaction of the customers and themselves. This ability also helps in selling to other customers, who are likely to be equally satisfied. For example, a digital content developer of a case company said:

We will be left behind if we are doing the same all the time. We must provide the customer something they do not ask or understand to ask and it works so that they can give some way of directing what they want. We still have to move forward to offer them more than what it asks for.

Find external partners whose expertise could be exploited for developing digital service offerings were perceived as important. Employees agreed that this will allow the companies to serve entities and even aid the development of a completely new business. Understanding one’s own competence and the strength of one’s partners was considered an important trait. For example, a digital content developer of a case company explained:

The customer may have a pre-existing system in which we do not have a solid experience in our house. And it’s not profitable to waste a customer’s time to train a person, when we know that there is a neighboring guy who can help us here.

Thus, the ability to create and develop new products/services and enhance existing ones was realized through customer orientation. It was not based on the employee’s orientation toward the business environment but rather the strategic orientation of the company.

4.3 Human factors in service orientation

Service orientation was also emphasized in the responses. Both the case companies offered a complete range of digital services and solutions. The significance of human factors in co-creating value was evident not only in the development but also in the maintenance and updating of the solutions. Both companies improved customer value through personal contact after the actual service production phase. In both cases, this was considered to increase the customers’ willingness to participate in the process. Although the cooperation was mainly digital, highly personalized services are known to increase the importance of human factors in value creation.

For example, the need to empathize with the customer was highlighted in the interviews. This referred to knowing the person who used the delivered service. Interviewees believed that the actual internal development and update should be invisible to a customer. This could only be achieved by understanding the customer’s needs. For example, a digital content developer of a case company said:

I would see that we do not have encoders that are purely steering straightforward, but everybody here seeks to see or can see at some stage justifying their case always by the needs of their customer.

The customers should be treated as individuals and the best solutions for each customer should be identified. Such situations can be used to develop the best practices that can then be utilized in other customer relationships. The ability to sense the customer’s feelings is thus emphasized.

The ability to listen to the customer’s wants was also considered important. Before anything is defined, the first goal is to see what services are best suited to a customer. A digital content developer of a case company summarized:

We cannot, we do not sell you like here is a product, buy it […] but sell it so we will first ask you what you want.

Overall, this aspect refers to a solution provider’s ability to balance the customer’s wants and technical feasibility. Complex problems need to be identified in a timely manner, and increased cooperation and interaction with the customer must be solicited. A slightly negative feedback from the customer was perceived the most useful. While service providers test software, a good practice is also to let the customer test it. This works well especially if the customer has been involved in the development work, thus understanding and tolerating minor weaknesses.

The ability to monitor and understand customer behavior and utilization of the implemented solutions was also highlighted. This requires desire and interest from both the service provider and the customer. The ability to get real-time information on usage levels and times enables rapid development. In addition, qualitative information on user experience is needed, both for usability and proven benefits. This implies customers should be interested and willing to co-operate and co-create.