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Many of the management tools and techniques used in service businesses were designed to tackle the challenges of product companies. Although they are valuable to service managers, they aren’t sufficient for success. In this article, Harvard Business School’s Frei explains why and urges companies to add some new ones to the mix. After years of extensive research and analysis, she offers an approach for crafting a profitable service business based on four critical elements: the design of the offering, employee management, customer management, and the funding mechanism.
Just like a product that’s going to market, a service needs to be compellingly designed, and management must field a workforce capable of producing it at an attractive price. Additionally, however, service firms must manage their customers, who do not simply use the service but also can be integral to its production: Because customers’ involvement as producers can wreak havoc on costs, companies must also develop creative ways to fund their distinctive offerings, by providing a self-service alternative, for example, or by offsetting expenses with operational savings.
A close look at successful service businesses—Wal-Mart, Commerce Bank, the Cleveland Clinic, and others—reveals that effective integration of the four elements is key. There is no “right” way to combine them; the appropriate design of one depends upon the other three. If managers don’t get all four pulling together, they risk pulling the enterprise apart.
Incumbents can fend off attacks from highly focused upstarts by becoming multifocused—that is, by pursuing multiple niches through optimized service models rather than trying to cover the entire waterfront with one model. Shared services within a firm (functions such as HR and finance) can help, since they will enable it to generate economies of scale and experience across models.
All successful firms must design a compelling offering and manage the workforce to deliver it at an attractive price. But service firms must do even more: deal with the frustrating fact that their customers can wreak havoc on service quality and costs.
For example, a customer dithering at a fast-food counter slows things down for everyone else waiting in line. An architect’s client struggling to clarify how a new facility will be used drags out the design process.
To tackle this challenge, Frei advises aligning four key elements of your business:
- What your service offering consists of
- How you fund the excellence you want to provide
- How you manage employees to deliver quality service
- What you do to help customers enhance—not erode—service
Get these elements pulling together, and none of them can pull your business apart—as service stars like Wal-Mart, Commerce Bank, and Cleveland Clinic have discovered firsthand.
The Idea in Practice
To consistently deliver service excellence, ensure that each of these four elements reinforces the others:
Service Offering
Determine how customers define “excellence” when it comes to your offering: Convenience? Friendliness? Flexible choices? Price? Identify what you’ll do to deliver that excellence—and what you won’t do. Example:
Commerce Bank decided to serve customers who prized pleasant, face-to-face service and convenience. It offers evening and weekend hours, buildings with high ceilings and natural light, and a fun contraption for redeeming loose change. Despite its relatively unattractive interest rates and narrow product range, its retail customer base has expanded dramatically.
Funding Mechanism
Think about how you’ll pay for the increased cost of the excellence you’re seeking to provide through your service offering. Possibilities include:
- Charging the customer. For example, Starbucks customers value lingering in the company’s coffee-house setting. To fund this inviting atmosphere, Starbucks charges a premium for its coffee.
- Spending now to save later. For instance, Intuit offers customer support service free of charge. It uses callers’ input to improve future versions of its software, so customers will ultimately need less support.
- Having customers do the work. For example, airlines’ self-check-in kiosks not only reduce costs; they also enhance the service offering by liberating travelers from long lines at staffed counters and by providing convenient tools such as seat maps.
Employee Management
Ensure that your workforce management activities (recruiting, selection, training, job design) empower employees to deliver the excellence embodied in your service offerings. Example:
Commerce Bank competes on extended hours and friendly service, not on low price or product variety. It knows it doesn’t need straight-A students to master its limited product set, so it hires for attitude and trains for service. For instance, it uses simple recruiting criteria, such as “Does this person smile in a resting state?” And it encourages employees to recruit people they see providing great customer service in other industries.
Customer Management
Articulate which behaviors customers must demonstrate to get the most value from your service. Then design your service specifically to foster those behaviors. Example:
To get customers using the new self-check-in kiosks, airlines ensured that travelers could complete the transactions with far fewer keystrokes than check-in personnel used to need. By contrast, retail stores that offer self-service checkout machines haven’t made using those machines easy for shoppers. Moreover, the stores expect shoppers to shoulder responsibility for fraud prevention by weighing bags during checkout. Result? Anxious customers avoid the machines.
As the world’s major economies have matured, they have become dominated by service-focused businesses. But many of the management tools and techniques that service managers use were designed to tackle the challenges of product companies. Are these sufficient, or do we need new ones?
A version of this article appeared in the April 2008 issue of Harvard Business Review.
All of the following are unfair claims settlement practices except?A) Failing to adopt and implement reasonable standards for settling claimsB) Failing to acknowledge pertinent communication pertaining to a claim.C) Suggesting negotiations in settling the claim
D) Refusing to pay claims without conducting a reasonable investigation
C) Suggesting negotiations in the claim.
Which of the following best describes the concept of company solvency?
Maintaining capital or surplus in excess of the required amount.
Which of the following endorsements is used by individual business owners who use company vehicles for personal use rather than purchasing a personal vehicle.
Employment practices liability insurance (EPLI) would NOT cover claims arising from...
The part of the insurance contract that describes the covered perils, and the nature of coverage of the contractual agreement between the insurer and the insured is called the...
Within how many days of requesting an Investigative Consumer Report must an insurer notify the consumer in writing that the report will be obtained?
If an insured bakery is sued because its marketing states that products of another bakery may not be safe, which coverage of a commercial general liability will defend the suit?
Personal and advertising injury liability
The Business Pursuits endorsement under Section II of a homeowners policy will cover all of the following EXCEPTA) bodily injury to the insuredB) all business pursuitsC) business liability
D) insured's activities
Which of the following terms refers to other insurance that is written on the same risk, but not on the same coverage basis?
The BOP liability cover at will pay for necessary medical expenses of others incurred within what maximum time period?
Bob was issued a temp insurance producers license 90 days ago. The license will expire in how many days?
When a producer was reviewing a potential customer's coverage written by another company, the producer made several remarks that were maliciously critical of that insurer. The producer could be found guilty of
Which of the following is NOT considered a residual market?A) State Property and Casualty Guaranty AssociationB) Joint Underwriting AssociationC) FAIR Plan
D) Assigned risk auto plan
State Property and Casualty Guaranty Association
In Oregon, how long does a producer have to notify the Director of a change in location or name?
If a HO policy is cancelled because of unpaid premiums, how much notice should be provided?
An insured purchases a Difference in Conditions policy. It may contain all of the following characteristics EXCEPTA) Flood and earthquake coverage B) Exclusion for named perilsC) Low deductible
D) No coinsurance clause
All of the following are other coverages included in both the broad and special form dwelling policy EXCEPTA) theft of personal propertyB) collapseC)breakage of glass
D) lawns trees shrubs and plants
Theft of personal property
Theft of personal property only can be included by endorsement
An insured has a personal property replacement cost endorsement under her homeowners policy. If an expensive painting and an antique chair are stolen from the insured's home, what will the insured receive on the claim under that endorsement?
Nothing
The personal property replacement cost endorsement excludes property such as art or antiques.
Which of the following is NOT one of the available additional coverages in the builders risk form?A. Fire department service chargeB. Pollutant cleanupC. Vandalism
D. Debris removal
C. Vandalism
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A restaurant is out of business for 3 days after Sally's automobile hits an electrical pole. The pole falls and hits the buildings, knocking out all electrical power supply. Which of the following is NOT covered under Sally's driver's auto policy?A. Lost revenue from the restaurantB. Damage to Sally's autoC. Damage to the restaurant
D. Spoilage of foods kept in storage
A. Lost revenue from the restaurant.
The business will need a business income policy to provide this coverage.
Assuming the insurer and the insured agree to the amount payable for a kiss covered under a dwelling policy, how soon after the insurer has received prof of loss must it make payment?
When an employee benefit plan pays the premium for a fiduciary liability policy, what provision must be included in that policy?
An insured intentionally did not disclose a material fact on an application for insurance. This would be considered
The Individual Named Insured endorsement under a Commercial Auto Policy provides coverage for which of the following?
The sole proprietor of the business and his/her family members.
Sally did not want to worry about coinsurance in her new insurance policy, but wanted the insurance to represent a fair valuation for her property. What provision did Sally most likely use to do this?
Agreed Value
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D. The insured wants to make suspicious increases to his or her coverage
B. The insured knowingly lied about he year the property was constructed.
The only way an insurer can cancel a policy midterm is if there has been a misrepresentation of a material fact or if the risk has changed substantially from when if was first insured.
Which of the following is NOT a characteristic of an incurable risk?
The loss must be catastrophic.
In order to be a pure risk, a loss must be due to chance, definite, measurable and predictable. But not catastrophic.
Which federal act provides benefits to injured civilians who are employed by the federal government?
Federal Employees Compensation Act
An insured has $5,000 of medical coverage on a PAP at the time of a covered accident. The insured and 2 passengers are injured. Medical treatment costs $7,000 for the insured, $4000 for the 1st passenger, and $8000 for the 3rd passenger. How much will the policy pay under the medical payments coverage?
An owner and operator of a commercial business has included a Business Income Coverage form with his CPP. When the business is severely damaged by fire, the business income coverage will will pay forA)Sales value production less the cost of raw stockB)Annual sales less the cost of merchandiseC)Loss of total annual salesD)Net Income plus continuing expenses of the business
D)Net Income plus continuing expenses of the business
In the even of a covered loss, BIC will pay those profits that would have been realized if there had been no loss and the expenses of the business that continue, even though the business is not operating.
How much is the premium for the dwelling under construction endorsement under the dwelling policy?
The average amount of insurance during construction
Rita drops off her wedding gown at Vicky's Dry Cleaners for the final pressing. The store's press breaks, so Vicky takes Rita's dress to her other store across town. On the way to the other store, Vicky is held at gunpoint unti lshe gives the man the wedding dress. What crime coverage form would pay for the loss of the gown in this situation?
Extortion - commercial entities
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D. It was developed to create equitable apportionment among worker's compensation insurers.
C. Participation in the Plan is voluntary
All insurers authorized to transact workers' compensation insurance must participate in the Plan. Failure to comply with the Plan is grounds for revocation of the insurer's certificate of authority to transact worker's compensation insurance.
All of the following statements regarding a boatowners policy are true EXCEPTA. Replacements for the boat listed in the Declarations are automatically covered, if the insured notifies the insurer within 60 days and pays the additional premiumB. Watercraft liability protects up to specified limits for claims against a "covered person" for damages due to bodily injury caused by a watercraft.C. Physical damage coverage is provided on an ACV basis
D. Perils are insured on a open-peril basis, providing that the insurer will pay for direct and accidental loss to the property insured
A. Replacements for the boat listed in the Declarations are automatically covered, if the insured notifies the insurer within 60 days and pays the additional premium
Automatic coverage is provided on replacements for the boat listed in the Declarations provided the insured notifies the insurer within 45 days and pays any additional premium required.
Producer A is prosecuted for a crime. He must notify the Director within what time frame after the initial pretrial hearing date?
Which of the following would NOT be covered as an additional coverage in Section II of a homeowners policyA. The broken leg of a guest who fell through a rotten set of stepsB. The insured's reasonable expenses in helping investigate a claimC. The insured dropped and broke the neighbor's borrowed punch bowl
D. Cost of ambulance service for a friend hurt on premises
A. The broken leg of a guest who fell through a rotten set of steps
The insured is legally liable because the rotten steps had not been replaced; therefore, Coverage E - personal liability - applies.