Making Internal Services Market Driven Sandra Vandermerwe and Douglas Gilbert Sandra Vandermerwe is a faculty member in international marketing and services at the International Management Institute, Geneva, Switzerland. Douglas Gilbert is an internal consultant for the Agro-Divi- sion of Ciba-Geigy,Basel, Switzerland. The authors are grateful to the Societyfor World- wide Interbank Financial Telecommunica- tions (SWIFT)for their contribution to part of the research for this project. Internal services must be run like external services to keep companies competitive. A s many companies search for ways to compete more effec- tively in today's markets, managers are giving increased atten- tion to internal services--and with good reason. Internal services such as infor- mation technology are becoming capi- tal intensive and massively expensive. Internal R&D is proving to be the life- blood by which corporations must continue to innovate to survive. Some internal services, such as personnel recruitment, are important leverage points: when well managed they help corporations excel, but when badly run they can be utterly destructive. Finally, internal services account for an ever higher proportion of product costs and turnover. Recent estimates for industri- alized countries show that internal ser- vices made up approximately 50 per- cent of total product cost in the 1960s. By the 1980s, that figure had risen to al- most 70 percent. Until recently, too many firms have made internal services stepchildren-- staff centers considered necessary but costly and unproductive. This attitude carries a huge opportunity cost. Valu- able managerial time, talent, and ex- pense are wasted dealing with the wrong issues: "who" is spending "what" on internal services and how to contain and control them, instead of how to use internal services to improve market share and overall profitability. In this article we take a look at tradi- tional approaches to internal services. We then present what we call a market- driven approach as a more effective alternative to those traditionally taken. Our analysis and recommendations are based on a literature review and the experience and opinions of 300 execu- tives interviewed using mail question- naires and personal and telephone in- terviews. The respondents are located in Europe, the U.S., Canada, the Far East, Japan, and Australia, and work in manufacturing and service companies operating internationally. TRADITIONAL APPROACHES L ittle has been published specifi- cally on internal services. What is published, along with our research, suggests that there are dis- tinct premises firms form about man- aging these services. Such premises define the roles and relationships of internal providers and receivers, what they focus on, the kind of information flowing between them, and the serv- ices that are ultimately produced and delivered. We have grouped the approaches into three categories: the accounting approach, the organizational approach, and the operational approach. It is 83