Revenue streams, customer segments and value propositions.

This past week I had some correspondence with a Hub member about aspects of business design and business models in the government context. I thought I would share some of the thoughts. The correspondent was having difficulty dealing with the financial components (cost structures and particularly revenue streams) in mapping the business model of an organization that provides services internally in the government.

It is a fundamental principle of any complete business model that revenue steams are tied to a client segment and a value proposition. Money doesn't just magically appear, so it is necessary to understand the dynamic that drives the any organization's revenue base, whether they are government, non-profit, public or private sector. This principle applies to all businesses / organizations.

I have done a few projects with government departments and agencies. I have used the BM canvas as a basis for projects involving strategic planning, business SWOT, innovation, and problem resolution. I have worked with organizations at a business line level, branch of a department, department and multi-department levels, and with budget lines of a few millions of dollars to ~$42B whole of government programs. So, I would confirm that the approach does work, and work very effectively with the public sector - government context.

I would also maintain the government sector, as I have experienced it here in Canada, has a few characteristics inherent to this context. First, and foremost, is the inability or the reluctance to see themselves operating as a business. It has been my experience that most government agencies have a tendency to define themselves by what they 'do' rather than the 'value' they create for their clients. This is usually accompanied by an over-developed focus on process management to the detriment of the understanding they are, for the vast majority, a solution based business, not a manufacturing business.

For those organizations that provide services internal to the government, e.g. procurement or HR, there is often confusion over who the clients really are. The doctrine of most government operations is their clients are the citizens whose money they are spending. This is a fallacy when it comes to internal services. The clients of any business are the people and organizations who you are helping to 'get their jobs done'. For internal services, the clients are the departments and agencies who deliver programs to the citizens. These are the clients whose job is being supported and whose problems are being solved; not the citizens.

The discussions of the revenue component are always interesting. The most common issues here concern the lack of recognition of the source of the revenues for the organization. Sometimes organizations will charge a fee for services, but for the purposes of this discussion let's put that stream aside. Because most government organizations are funded through appropriations they have a tendency to take the revenue source for granted and not include it the business model, or even include it as a Key Resource rather than a Revenue stream. When working with government organizations I ensure the they includes the fund source as a separate client segment. For the department, the funding client (in Canada) would be Parliament and the current government. Within the department, the senior management responsible for strategic direction is the client the branch or business line must treat as a revenue generating segment. There must be a value proposition specifically identified for the funding client.

The funding client, and the value proposition specific to that client, are usually missing in the business model of government businesses. It is important to understand the value that any government organization brings to the funders. One can then separate out relationship and document that business model, often to understand the raison d'etre for the organization. 

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