ITIL v3: The use of Resources and Capabilities


Service Strategy introduces an interesting pair of complementar concepts: Resources and Capabilities.

Straight from the book we have:

Resource: A generic term that includes IT Infrastructure, people, money or anything else that might help to deliver an IT Service. Resources are considered to be Assets of an Organization.

Capability: The ability of an organization, person, Process, Application, Configuration Item or IT Service to carry out an Activity. Capabilities are intangible Assets of an Organization.

People are at the same time a Resource (in the sense that people are frequently instrumental in delivering an IT Service) and a Capability (people carry out Activities…).

The productive capacity of a service provider dependes on how Capabilities use (develop, deploy and coordinate) Resources. This added value can be seen as having a positive effect on… the resources and capabilities of the receiving Customer (thus, in turn, increasing his productive capacity to achieve business goals).

Maybe in a bit too simplistic way we can say that capabilites take time to build up whereas resources are relatively easy to acquire (a bit like when we buy goods – if we the money and the resource is available, then we can have it fast).

So, capabilities are generally harder to copy by competition (thus should constitute a positive difference) and help service providers gain advantage on the market space they’re going after.

People are then, from these definitions, the ultimate Asset on every organization. Why? Because they’re flexible, work well with uncertainty and can use all other types of resources and capabilities (more on that on the Appendix B from the Service Strategy ITIL v3 core book).

In a way not that far from what Blue Ocean Strategy advocates, an organization can be successful by creating a set of distinctive, hard-to-replicate capabilities that deliver a customer experience hard to replicate. The challenge is to get the right balance between resources and capabilities, by fulfiling a Customer need with a cost-effective set of connected capabilities and resources to satisfy those needs. An example from Blue Ocean: Cirque du Soleil does it by offering a new kind of show aimed at adults by having the capabilities to provide shows with a story, sophistication, blend of arts and at the same time being more effective on resources by letting go the expensive animals and attractions a traditional Circus offers).

Sources:

Section 3.2.1 from Service Strategy for a good introduction, Appendix B, Section B.1 also from Service Strategy.

Blue Ocean Strategy by  W. Chan Kim and Renée Mauborgne

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16 Responses to “ITIL v3: The use of Resources and Capabilities”

  1. Noema Says:

    The Cirque du Soleil is nice example. Thanks for sharing.

  2. rumagoso Says:

    You can read more about the Cirque du Soleil (references Blue Ocean Strategy too) with this excellent Fast Company’s article: http://www.fastcompany.com/magazine/96/cirque-du-soleil.html

  3. Cary King Says:

    Sorry, can’t agree that people are an asset. They can certainly be a valuable resource.

    Asset is a term of art used by accountants. Let’s let them define assets.

    In the U.S. we stopped defining people as assets in 1865. Can’t speak for the rest of the world.

  4. rumagoso Says:

    Carry,

    It’s the first time I’ve had a comment like that – here goes my best effort on this:

    We’ve also have issues here with the translation of, for instance, Resource to Portuguese language when referring to people (precisely because it has got a bad interpretation of looking as if we’re treating people like an object). Heck, the Portuguese word “colaborador” (literally someone that works with you) makes me think Second World War and those people that worked with the enemy without any of their own people knowing about it. But it is routinely used to refer to someone working for a company.

    I now realize Asset may lead to that kind of interpretation on other cultures. That word was used when I started writing that post and wanted to derive the importance of People right after literally reading Resource and Capability definitions that come from the official ITIL v3 Glossary. Editing made it look odd later on that post.
    Asset is a term that in this context captures all (human and non-human) involved in delivering services. There may be a better word for that – I am open to suggestions. Me too, I don’t like that word – it just does not get the true meaning of it. Sometimes we need new words. Or there may be already one for this. Anyone?

    Be well,
    Rui
    P.S. – Put here because this part is not about Service Management. It’s about Human Rights. Regarding 1865, we did ended slavery in Portugal around 1761 (it’s true it took way longer in Brazil, a colony back then – until 1888). Unfortunately, Portugal helped starting it during the 15th Century Portuguese exploration of the African coast. Still today we have slavery going on in too many places and for too many people (people traficking, prostitution from East Europe and Southeast Asia, child labor… the dark list is endless).

  5. ITCFO Says:

    Cary,

    You say the U.S. stopped defining people as assets in 1865 as if it was a virtue. The principle constraint upon treating people as assets is the measurement problem.

    Accounting practices which refuse to treat people as assets have distorting effects. As the American Accounting Association has publicly stated, assigning all the people expenditures to the expense category presents an expense that is unverifiable as deserving expense status. Thus if it is possible to implement valid and reliable measurement techniques for human resource costs, they should be treated as assets to avoid distortion of net income.

    The decision to capitalize an investment in human assets depends on the degree of uncertainty in the specific situation. While it may not always be useful to capitalize human assets because the future benefits may be too tenuous, such circumstances should be viewed as the exception and not as the general rule. A policy to do otherwise is to create problems for investors who attempt to value an organization.

    In fact, an entire branch of accounting (HRA: Human Resource Accounting) deals with these challenges.

    Europe was early in acknowledging the problem (1960s) and was aggressive in evolving accounting practices in the 1980s with the advent of the knowledge worker. While American accounting (as well as IP, patent and trademark laws) was slow to respond, I do believe GAACP allows four possible methods of presenting investments in human assets in corporate financial reports: in unedited pro forma supplementary financial statement, a statement of intangibles, integrated into conventional financial statement, and in the president’s letter.

  6. ITCFO Says:

    Sorry, meant GAAP not GAACP.

  7. ITCFO Says:

    I just remembered an illustrative example of an American industry that zealously uses HRA and counts its people as assets: Professional sports.

    In the United States, the professional teams’ financial accounts quite often incorporate values for the employees on the balance sheet and is amortised over a period of time, instead of expensing costs such as professional development.

    This works mainly because of discrete and measurable player transfer costs. But there is still some variability in the reporting of human resource value, ranging from the capitalisation of signing and transfer fees through to player development costs or valuations.

    Of course, there is debate about the merits of this method but these are the same debates about intangibles in general. More recently, there has been worldwide movement towards recognising acquired identifiable intangible assets at fair value in the financial statements. So why not include an organisation’s human resources?

  8. Cary King Says:

    I have three separate concerns.

    First, the obvious political insensitivity of referring to people as assets. Notwithstanding the Professional Sports exception, where individuals may not work except under contract, people are, generally, free to move to another organization. The individuals are a valuable resource, not an asset owned by the organization.

    Second, the term asset is a long-standing term of art for the accounting profession. The various professional accounting organizations around the world (IASB, FASB, etc.) have an interest in defining these accounting terms. I believe that IT should leave well enough alone and let them do that. Just like I believe IT should not redefine manufacturing or science terms.

    Third, and most importantly, IT must improve the clarity of communication with our customers. As Charles Betz writes in his new book, “IT has a reputation as a bottomless cost sink run by people who caan’t explain what they’re doing (especially why they cost so much), can’t deliver what they promise, seem to feel contmpt for their customers, and appear to have no understanding of business concerns.” I don’t know how right Charles Betz is, but I do know that there is, at least a little bit of truth in his assertion.

    Many IT organizations report to the senior financial officers within companies – perhaps a majority of whom are, or were, accountants. At a time where IT should be improving clarity of communication and increasing their customer-oriented communication, it makes little sense to co-opt a traditional term of art from another profession and make it less even less useful by redefining it even broader.

    On a separate note, I think it is best if we’re careful about our adoption of “good practices.” ITIL, whether v.2 or v.3 is a very useful guideline. But, it is closed “standard” never opened to broad vetting. It is inevitable that the small group of individuals who wrote it will have made errors in judgement or expression. Quoting ITIL, in any version, as though it has been annoited as a definitive document is unwise – ITIL is only definitive if you work in the British government.

    Individual organizations implementing service management will do better to carefully analyze their situation related to “good practices” such as CobiT, Lean Six Sigma, IAITAM, ITSMBOK, etc. as input rather than adopting just one of those “good practices” – ITIL whole.

  9. rumagoso Says:

    Yes, the way to go – and that takes more effort – is to check against the multiple practices around and then take what applies best to our own organization’s reality. But for that there’s a need to know them and I do feel that explaining them to a broader audience, with real examples whenever possible, is something we all could have but: it takes time, it’s harder and… ITIL for one is a great buzzword nowadays (Lean is also…). And, like Jan Van Bon reminded us in a IT Skeptic’s comment, ITIL is a reference model, not an implementation model.
    http://www.itskeptic.org/node/205#comment-1628=

    So, I’m all for more people showing us how to do it (or at least in what ways can we approach it). Well, doing it for free, is still not that frequent… There are some good books (I’m letting myself give it a try with Charles Bez one – we do need alternatives and more) and other good sources of wisdom. In the end, we can’t do it like just following a cooking recipe (even cooking as it’s own subtleties…) and it’s not a pure science – like people management (again, IT Skeptic as something on that http://www.itskeptic.org/node/418)

  10. ITCFO Says:

    Cary –

    “First, the obvious political insensitivity of referring to people as assets.”

    Why is this insensitive? Is referring to people as expenses any more/less insensitive? This is a red herring.

    “Notwithstanding the Professional Sports exception, where individuals may not work except under contract, people are, generally, free to move to another organization. The individuals are a valuable resource, not an asset owned by the organization.”

    In accounting, ownership or equity is not a necessary criterion for a resource to be an asset. Nor is it necessary to have contractual or otherwise legally enforceable access to the resource for it to qualify as an asset.

    “Second, the term asset is a long-standing term of art for the accounting profession.”

    As far as “long-standing term of art” goes, that isn’t quite accurate. There is an ongoing debate and continued refinement among CFOs and accountants as to assets. During the 1990s, for example, the Chief Accountant to the Securities and Exchange Commission felt compelled to weigh in with his opinion: http://cob.isu.edu/boesrich/acct631/Articles/What%20Is%20An%20Asset.pdf

    The matter continues to be debated, as it should. The world has changed too much to rely on opinions from 1865. ITIL’s treatment of assets is in keeping with current accounting practices.

    “Third, and most importantly, IT must improve the clarity of communication with our customers. As Charles Betz writes in his new book, “IT has a reputation as a bottomless cost sink run by people who caan’t explain what they’re doing (especially why they cost so much), can’t deliver what they promise, seem to feel contmpt for their customers, and appear to have no understanding of business concerns.” I don’t know how right Charles Betz is, but I do know that there is, at least a little bit of truth in his assertion. “

    These sorts of subjective statements can be made about most areas of a business, including CFOs and accountants. ITIL’s distinctions between Resources and Capabilities improve – not lessen – clarity.

    “… it makes little sense to co-opt a traditional term of art from another profession and make it less even less useful by redefining it even broader. “

    Please explain. I can found no contradiction.

    “… it is closed “standard” never opened to broad vetting. It is inevitable that the small group of individuals who wrote it will have made errors in judgement or expression.”

    If we take the OGC at its word (I doubt they are lying), the number of reviewers involved in the vetting process was quite extensive (in the ‘000s) and spanned many geographies. Though more isn’t necessarily better, this type of vetting is more extensive than many other frameworks.

  11. ITCFO Says:

    Postscript: After sending a query to US-based CFO/CIO colleagues, here are further real life examples of US companies who account for people as assets:

    – A US bank (w/$20B in assets) applied HRA to measure the *true* cost of replacing tellers for ATMs.

    – A US financial services firm deployed practices to measure the value of human assets (not just expenses) acquired in a corporate purchase in order to determine the amortization of human capital for tax purposes.

    – A US aerospace firm uses HRA practices, originally prompted by a desire to measure the value of executive time saved when corporate aircraft were used in lieu of commercial aircraft.

    – A $500M US distributor implemented HRA in order to quantify the true cost of employee turnover.

    – A US-based accounting firm deployed practices for an operational system of accounting for the value (not just cost) of its human resources.

    I suspect CFOs are better served by CIOs who are up-to-date on the treatment of people as assets.

  12. ITCFO Says:

    Post Post-Script:

    Cary,

    I believe I just figured out your reference to 1865. Are you referring to the end of the US Civil War? And, by implication, comparing slavery with accounting for people as assets?

    If so, then this discussion has been disingenuous at best. If this is simply a grind against ITIL then try http://www.itskeptic.org. I imagine you’ll find the response you are seeking.

  13. Cary King Says:

    Readers may interpret for themselves from the proposed IASB standard.

    http://www.iasb.org/NR/rdonlyres/8049CA20-8EA4-4E9B-BBDD-1988CEB6D78E/0/WSSAGENDAPAPER1A.pdf

    Pertinent parts:

    An asset is a present economic resource to which an entity has a present right or other privileged access.
    An asset of an entity has three essential characteristics:
    (a) There is an economic resource.
    (b) The entity has rights or other privileged access to the economic resource.
    (c) The economic resource and the rights or other privileged access both exist at the financial statement date.

    15. Economic resources include: inventory, plant, equipment, mineral deposits, patents, goodwill, rights to receive services, cash, claims to cash, and ownership interests in other entities.

    Readers can decide if that includes people as the “ultimate asset” or not.
    Readers can decide if they feel that, as “at will” employees, their organizations should consider them an economic resource to which the organization has “rights or other privileged access.”

  14. Visitor Says:

    Cary –

    I think ITIL’s take on Resources and Capabilities is on very solid ground. The foundations for its definitions and materials go as far back as 1937 with Ronald Coase and his famous paper “The Nature of the Firm” – for which he won a Nobel Prize in economics.

    Edith Penrose, another famous business thinker, published a book in 1959 called _The Theory of the Growth of the Firm_. In it she advances Coase’s ideas with contemporary business practices and introduced the earliest definitions for Resources; effectively giving the world the “Resource Based View” (RBV) of the firm. Fifty years later it is the leading paradigm of strategic management.

    Finally, in 1993, Raphael Amit and Paul Schoemaker published another famous paper called “Strategic assets and organizational rent”. This paper focuses on the linkages between the resource-based view of the firm and organizational implementation issues. It connects the concept of Strategic Industry Factors at the market level with the notion of Assets at the firm level – and decomposes Penrose’s definition of Resources into what strategic management now calls “Resources and Capabilities”. You’ll notice ITIL cites this paper.

    There are many, many, more contributors to RBV but these are the most frequently cited.

    As far as accounting goes, I notice the IASB paper is a *proposed* definition for assets – published in 2006(!). Doesn’t that refute the notion that the definition of asset is, as you put it, a “long-standing term of art”?

  15. ITCFO Says:

    The deeper I look into the accounting definition for asset, the further it looks to be from “a long-standing term of art.” “Contentious” and “work in progress” appear to be more apt descriptions.

    The Board of the IASB, for example, updated the definition as recently as last month (Oct 22):
    http://www.iasb.org/Current+Projects/IASB+Projects/Conceptual+Framework/Meeting+Summaries+and+Observer+Notes/IASB+and+FASB+October+2007.htm

  16. Cary King Says:

    I wrote, “the term asset is a long-standing term of art for the accounting profession.”

    The proposition being that IT should not redefine the term, or broaden it, for its own use; that accounting should do so. The principle to be applied is that, as a service provider, it is wiser for IT to adopt the terms of its customers instead of changing those terms to fit their own biases.

    Long-standing = of long duration. Websters says traces to CE 1531 – I call that long-standing – you may not.

    Term of art = a term that has a specialized meaning in a particular field or profession. Used by the accounting profession.

    QED – long-standing term of art.

    I did not, at any time, suggest that the term asset was “well settled.” It is not. Feel free to describe it as “contentious” or as a “work in progress.” Just do not imply that I ever suggested the term was “well settled.” I did not.

    I do not consider the U.S. Constitutional Amendment 13 a red herring – lacking in candor – since exlusive rights or ownership is central to the definition of asset. Ownership of humans is prohibited within the U.S. by this amendment.

    I did not take issue with the resource/capability construct.

    As before, people are a very much a valuable resource to our organizations. Human Resources Accounting is, indeed, a valuable tool to help management evaluate the costs of recruiting, hiring, compensating and training employees. The vast majority of employees with the U.S. are “at will.” I do not know the regularity of applying them to the financial statements as assets.

    To answer your question, “So why not include an organisation’s human resources?” I take absolutely no position on this whatsoever. It is, as you pointed out, the accounting profession’s argument to have.

    My point exactly.

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