Types Of Service Providers

Internal Service Provider: It is also referred to as ‘Type I’ service provider. In this various business functions are owned by the business unit they provide services to. Strategy to govern or manage them is dependent on the business unit which owns them.

In the above figure, business functions IT, Finance and HR are embedded in ‘Business Unit’. These business functions are dedicated to the business unit only. Each of these functions caters to a specific need of the business and is the overhead for the unit they serve. They predominantly act as cost centre. The basic financial approach in managing them is to recover the cost.

Key concern for Internal Service Provider is that it can easily be outsourced to an External Service Provider or centralised as Shared Service Provider.

Shared Service Provider: It is also referred to as ‘Type II’ service provider. In this various business functions are owned by the Organization and thus shared across various business units. Strategy to govern or manage them is dependent on the organization. It provides a better economy of operations than Internal Service Provider. It should be noted that Shared Service Provider supports the Organization in gaining a competitive edge but itself is not the core business of the organization they serve.

In above figure, business functions IT, Finance and HR are at the corporate level. These business functions are shared by multiple business units – Business Unit A, Business Unit B and Business Unit C. Each of these functions caters to a specific need of the organization. They may act as a cost centre or profit centre depending upon the organization’s strategy. Generally they tend to recover cost as per the on-going rate in the market.

Key concern for Shared Service Provider is that it can easily be outsourced to an External Service Provider.

External Service Provider: It is also referred to as ‘Type III’ service provider. In this Organizations outsource their service need to one or more service providers, thus transferring the cost and risk associated with provisioning of the service to the service provider. It allows the organizations to focus on their core business. Since External Service Providers caters to certain services in which they have expertise in, they provide better service quality and economical services. 

In above figure, Service Provider A, B and C are External Service Providers having expertise in e-Mail, Payroll and HR services. They provide their services to multiple customers. They act as a profit centre. They enter into a contract for a certain period of time with their customers. They face severe competition and hence they have to provide better service quality at a lower price in order to retain their customers.

Since these services are not in the internal control of organizations, it poses a higher risk in terms of security, manageability and flexibility & adaptability to effectively manage future business opportunities.