Business planning for network services: a systems thinking approach.

As demand for online network services continues to grow, service providers are looking to meet this need and avail themselves of business opportunities. However, despite strong growth in demand, providers continue to have difficulty achieving profitability, customer churn remains high, and network performance continues to draw complaints. We suggest that strategic business planning for network services would benefit from a systems thinking approach that analyzes the feedback effects present in the underlying business process. These feedback loops can be complex and have significant impact on business performance. For instance, while the size of a provider's customer base depends on price and network performance, network performance is itself dependent on the size of the customer base. In this paper, we develop a planning model that represents these feedback effects using the finite difference equations methodology of systems dynamics. The model is validated by showing its fit with essential characteristics of the underlying problem domain, and by showing its ability to replicate observed reference mode behaviors. Simulations are then carried out under a variety of scenarios to examine issues important to service providers. Among other findings, the simulations suggest that (a) under flat-rate pricing, lowering price to increase customer base can hurt profitability as well as network performance; (b) under usage-based pricing, lowering price need not necessarily lead to a larger customer base; and (c) in addition to price, the customers' threshold of tolerance for performance degradation plays a significant role in balancing market share with profitability. We briefly present a prototype decision support system based on the systems thinking approach, and suggest ways in which it could be used to help business planning for network services.

(Online Services; Systems Dynamics; Business Performance; Decision Support)

1. Introduction

Networks are playing an increasing role in business, social, and political activities, fueled in part by growth of the Internet. The worldwide growth of the Internet coupled with development of user-friendly browser technology and standards such as XML (POET 1998) has led to intense interest in its use for electronic commerce (Rao et al. 1998, Keeney 1999). The Internet has also had significant impact on educational, social, and political activities worldwide (Hauben and Hauben 1997, Petrazzini and Kibati 1999). It serves as a forum for discussion of societal issues and as a means of delivering government services. It is not surprising to find that the demand for network services has exploded and is predicted to grow rapidly through the near term (Hoffman et al. 1996).

On the supply side, Internet Service Provision (ISP) has become a significant business activity attracting a variety of vendors and technologies (Lange 1998, Riezenman 1998). The quality of service and price tends to vary across providers, and these factors have a significant effect on customer satisfaction. (1) Of the roughly 4,000 Internet service providers, few are showing any profits, operating margins are getting tighter, and competition is increasing (Fattah 1998). While flat-rate pricing--"all you can use for $19.95"--may attract more customers, many ISPs do not have the financial strength to invest in new capacity to accommodate this growth in customer base. Smaller providers often face a dilemma--grow the customer base but remain unprofitable, or stay small and achieve profitability. Even large providers like Netcom and AOL face similar pressures.

The preceding observations are suggestive of the complex interactions that characterize the underlying business process. A few examples of specific interactions follow. For instance, low prices attract more customers, which generates more network traffic. As traffic levels rise, network performance drops, inviting customers to switch to competitors. To improve network performance, however, the provider must invest in additional capacity, but the lower prices have a negative impact on its ability to pay for capacity. In short, while customer behavior, network performance, and financial consequences may each be easy to characterize in isolation, there is feedback and interaction among them. This complicates the business-planning process considerably, and makes it much more difficult to gauge the impact of management decisions on business performance. An integrated view is therefore needed to gain a better understanding of the business process underlying network service provision. If such a view can be captured in a computer-based model, it can also provide the basis for ongoing decision support (Swami 1995, Tumay 1996, Liles and Presley 1996).

In this paper we develop a basic business model of network service provision using the finite difference equation methodology of systems dynamics. Because the emphasis is on capturing key interactions in the business process, individual structural components are represented in aggregated form. Simplifying assumptions and aggregations will be noted as the model is described in detail. The distinctive features of the model are: