strategy+business

ONLINE MAY 2, 2011

THE ESSENTIALS FROM BOOZ & COMPANY

Service Operations
as a Secret Weapon
Effectively managing service operations is crucial to controlling
labor costs and improving customer satisfaction. By addressing six
drivers of performance, executives can go a step further — turning
their service operations into a key source of competitive advantage.

BY HARRY HAWKES, CURT BAILEY, AND PATRICIA RIEDL

 THE ESSENTIALS FROM BOOZ & COMPANY
www.strategy-business.com

Service Operations
as a Secret Weapon
Effectively managing service operations is crucial to controlling labor
costs and improving customer satisfaction. By addressing six drivers
of performance, executives can go a step further — turning their service
operations into a key source of competitive advantage.
1
by Harry Hawkes, Curt Bailey, and Patricia Riedl

M any companies have successfully transformed

their manufacturing, R&D, and other busi-
ness functions, improving their performance
while stripping out cost. Yet far fewer have optimized
their service operations, even though they can have an
business is a retailer trying to optimize sales floor cover-
age, a hospital seeking to improve care delivery by bet-
ter allocating nurses and beds, a hotel working to speed
up check-in times, or a manufacturer delivering techni-
cal support in global markets, the leaders of the organi-
outsized effect on customer acquisition and retention. zation must rigorously and holistically manage the
When service levels and costs are properly balanced and factors that affect service delivery and costs.
optimized, they can deliver a substantial and sustainable
competitive advantage that competitors will find hard to Six Principal Drivers of Service Quality and Cost
match. Service operations leaders must be in a position to iden-
By their nature, service operations are often labor tify and capture opportunities for improvement. To
intensive and complex to manage. Repetition and con- help, Booz & Company has developed a framework
sistency, typical hallmarks of excellence in service oper- that encompasses the main factors determining the
ations, can work against a company that is trying to quality and cost of service.
achieve step-change improvements in processes and 1. Product and process design. The foundation for
behaviors. Additionally, executives across many indus- high-quality, cost-effective service operations is estab-
tries are finding it increasingly challenging to keep serv- lished far upstream of the point of service delivery —
ice costs in check (especially labor costs, the single during product design or, in the case of services compa-
largest cost component of any service operation) while nies, process design. Design affects quality and total
maintaining service levels. Recent technological service costs in significant ways. In particular, it can
advances — for example, self-service kiosks commonly reduce service costs early in product life cycles by reduc-
found in airports, banks, and hotels — have helped ing defects, and it can reduce total service costs by
improve overall productivity, but technology is only one shrinking the time it takes for a product to move from
part of the solution. infancy to a stable, mature stage.
Designing a tailored set of service models based on Streamlining product architectures and configura-
customer segments is a prerequisite for providing the tions, for example, can have a beneficial effect on
desired services without overspending. Whether the service. One computer equipment company saved on
 www.strategy-business.com
Harry Hawkes Curt Bailey Patricia Riedl Also contributing to this article
[email protected] [email protected] [email protected] was Booz & Company Senior
is a partner with Booz & is a partner with Booz & is a principal with Booz & Associate Vikas Bhalla.
Company based in Cleveland. Company based in San Company based in Chicago.
He leads the firm’s global Francisco. He focuses on She works with consumer
operations and performance operational performance packaged goods and retail
improvement practice for the improvement in the clients on labor optimization
media and entertainment healthcare industry. and supply chain improvement
industries. strategies.

repair, order processing, and technical support costs Service operations leaders analyze usage patterns
simply by installing its largest hard drive in every unit and consider them in light of corporate targets, such as
sold. market share and revenue goals, to ensure the proper
Analyzing quality at the product level can also help service coverage. One company with a large and active
discern problems that can lead to higher service costs. mail room undertook such an analysis and discovered
By uncovering notable differences in mean time that misalignments in its service coverage resulted in
between failures (how often a product breaks) and mean unnecessary idle time at some times of the day and
time to repair (how long it takes to fix it) between prod- backlogs at other times. By realigning coverage with
ucts developed internally and those developed by a third demand, the company was able to process incoming
party, another computer manufacturer was able to take demand within the agreed-upon service level, as well as
steps to close the gap by improving design and techni- reduce labor costs by decreasing coverage during slow
cian training for the inferior products. periods. This change enabled the company to increase
Embedding remote diagnosis and repair capabilities overall productivity, and improved customer satisfaction
in products and processes can simultaneously reduce — resulting in increased revenues.
service costs (right part, right place) and enhance cus- 3. Service network structure. Over time, as business
tomer satisfaction and loyalty. and economic growth rates vary, mergers and acquisi-
2. Service-level labor requirements. Typically, labor tions occur, and companies change their product mix
is the largest cost in service operations and a key driver and market focus, service costs can get out of whack.
of customer satisfaction. Matching service requirements Management layers become excessive, processes become
to customer needs, desires, and expectations is job num- less standardized, workloads no longer align with
ber one. Some customers may want a lot of hand-hold- staffing levels, and unnecessary facility expenses are
ing, whereas others may be content with self-service incurred. Sometimes it is necessary to rethink how a
options, for example, bank ATMs, grocery self-check- service delivery network is structured. One service
outs, and automated tech support online or via phone. outsourcer was maintaining two separate organizations
Matching customer expectations with the service deliv- to provide hardware installation and repair in the
ery method increases revenue and simultaneously lowers same geographic areas. This model had enabled fast
the cost-to-serve. response in the past, but as the volume of service
www.strategy-business.com

requests declined, partially owing to design and quality 5. Workforce management. The productivity of
improvements, it made more sense to consolidate the employees is a major consideration in all service opera-
two organizations. tions. To optimize employee productivity, decision
The efficiency of service operations also tends to makers need to first calculate the total labor hours they
vary greatly among geographic locations. By putting in need in each location, either in a bottom-up manner —
place the proper tracking and reporting processes, com- by identifying labor drivers and creating a model for
panies can smooth out variances and improve service determining task times and frequencies — or in a top-
performance overall. Alternatively, companies can use down manner, one based on comparisons of operational
shared-services models to significantly reduce overhead performance to labor hours. Either method works, but
costs. the bottom-up approach offers an additional benefit in
Outsourcing will often produce short-term cost that it allows labor hours to be more easily adjusted as
savings, but if it negatively affects customer satisfaction input drivers change. For example, one company creat-
and the company’s competitive position, outsourcing ed a detailed model, based on unique store demand pat-
can be counterproductive in the long term. The right terns, to calculate the necessary staffing required to
mix of sourcing balances low costs and service quality in manage its truck tire service centers, generating a 12
a way that enhances a company’s competitive advantage. percent savings in labor costs.
4. Service process management. Service processes Once labor hours per location are determined,
are rarely static; they change in response to the needs of management can consider how the hours should be
the business and its customers. This being the case, they apportioned between full-time and part-time employ-
need continual monitoring and adjusting to keep costs ees, and how these employees should be scheduled to
in check and ensure their ongoing effectiveness. meet customer demand and fulfill operational activities.
Continuous improvement is a widely accepted idea, but For example, when one hotel studied its check-in
in many companies, the culture does not easily support process, it discovered that many guests were experienc-
it. Further, service processes need gatekeepers who have ing check-in waits of more than 20 minutes. A signifi-
decision rights for process changes and are accountable cant number of guests waited so long that they said they
for their performance. did not intend to stay at the hotel again. However,
Meanwhile, companies can look to identify any with the addition of just five part-time employees surgi-
process steps that can be standardized across customers cally inserted during peak periods, a small additional
and geographies. Process standardization (and automa- expenditure within the hotel’s budget, more than 90
tion when possible) can reduce labor requirements and percent of guests could be checked in with less than a
enhance customer satisfaction. For example, one region- 15-minute wait.
al hospital reduced the wait time for new admissions 6. Measurement and compensation. Unfortunately,
from four and a half hours to one and a half hours by few service operations and companies have sophisticat-
standardizing the admissions approval process. ed performance measurement and compensation struc-
 www.strategy-business.com
tures. Most fall into one of three groups: those that track Bhalla, and Nicholas Buckner, Booz & Company white
metrics in a consistent way at all levels, but have not paper, September 2010.)
aligned their compensation systems to the metrics; those
that track metrics, but use inconsistent definitions Brass Tacks
across levels; and those that don’t track metrics at all. Service strategy success always comes down to execu-
Nonexistent, inappropriate, or inconsistent measure- tion. As service operations leaders approach the quality
ments result in missed improvement opportunities, the and cost challenge, they should pay particular attention
inability to understand whether process changes are to the first two drivers: product and process design and 4
working, and ineffective decision making. service-level labor requirements. Too often, these drivers
Meanwhile, most service organizations, especially are overlooked because they must be activated in the
in the retail sector, are drowning in data and collecting design stage of products and processes: a stage in which
more every day, yet are still thirsty for insights. To over- service managers traditionally have not participated.
come this problem, companies should identify the data The remaining four drivers — service network struc-
that is most relevant to the performance of their service ture, service process management, workforce manage-
operations and ensure that it is properly collected and ment, and measurement and compensation — are the
used. It is important to collect nonfinancial data, such levers that service leaders can pull to improve the quali-
as customer profitability and customer satisfaction, as ty and cost of existing operations. Savvy service leaders
well as key financial and operational indicators. recognize the interconnected nature of these four driv-
The next step is to align compensation and ers and approach them in an integrated and holistic
reward systems with desired employee behaviors. By manner.
clearly defining compensation and rewards, and com- High-quality, cost-effective service is essential to
municating the metrics that determine them, service corporate success, but it is particularly challenging to
operations can stimulate employee motivation and pro- achieve. Defining unique customer segments and mod-
vide the clarity that people need in order to change their els to profitably serve them requires frequent analysis.
behaviors. Service workforces tend to be large and have high
Further, service operations managers should work turnover rates; they are difficult to mobilize. Service
with HR to take a more proactive role in establishing processes are complex and often dependent on the con-
and managing compensation and reward systems. They sistent execution of many detailed steps. And big, dra-
should recognize that tenured workforces come at a matic solutions to excessive costs are rare. Nevertheless,
higher cost that often cannot be justified in terms of companies that take a measured and comprehensive
performance; a lack of salary caps and compensation approach to delivering service can improve their bottom
bands can create wide variations in cost among similar- line and gain a hard-to-match competitive advantage in
ly skilled employees; and market-based salary reference the marketplace. +
points are often inflated and thus serve as a poor guide
to compensation. To address the problems that result
from unsupported assumptions, companies can act with
varying levels of aggressiveness to reduce labor costs.
Levels of reduction will depend on internal and external
factors that include individual performance, salary
benchmarks, the financial condition and goals of the
company, and labor supply conditions. (See also
“Retooling Labor Costs: How to Fix Workforce Pay
Structures,” by Harry Hawkes, Albert Kent, Vikas
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