International Journal of Service Industry Management

Content and measurement of productivity in the service sector: A conceptual analysis with an
illustrative case from the insurance business
Ismo Vuorinen Raija Järvinen Uolevi Lehtinen
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Ismo Vuorinen Raija Järvinen Uolevi Lehtinen, (1998),"Content and measurement of productivity in the service sector",
International Journal of Service Industry Management, Vol. 9 Iss 4 pp. 377 - 396
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Management, Vol. 1 Iss 1 pp. 46-64 http://dx.doi.org/10.1108/09564239010002847

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Raija Järvinen, Uolevi Lehtinen, Ismo Vuorinen, (2003),"Options of strategic decision making in services: Tech,
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 08509dd1 4/9/98 11:59 am Page 377

Content and
Content and measurement of measurement of
productivity in the service productivity

sector
377
A conceptual analysis with an
illustrative case from the insurance
business
Ismo Vuorinen, Raija Järvinen and Uolevi Lehtinen
School of Business Administration, University of Tampere, Finland

Introduction
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During the last decade, the significance of service industries to the prosperity of
modern economies has been widely recognised (Allen, 1988; Charles, 1993;
Grönroos, 1990; Johnston, 1988). In the business disciplines, the issue of service
management has attracted increasing interest amongst scholars (especially
among the Nordic School of Services, see Gummesson et al., 1997). According to
these authors, the line of reasoning has for too long been dominated by the logic
of manufacturing operations. Owing to the specific nature of services, a
different strategic approach is called for in the case of service management (e.g.
Wilson, 1988).
The concept of productivity is deeply rooted in the context of mass
manufacturing, and this may be the main reason for the prolonged neglect of
the productivity issue by writers on service management (Adam and Gravesen,
1996; Adam et al., 1995; Holmlund and Ravald, 1992). However, the importance
of productivity management in the service industries is widely accepted in the
literature (e.g. Gummesson, 1993; van Biema and Greenwald, 1997; Wilson,
1988). While comparing productivity between service and manufacturing
operations, one of the basic claims has been that the special characteristics of
services demand a more holistic approach including a customer-orientation to
productivity (Blois, 1985; Grönroos, 1990). More specifically, several researchers
(e.g. Giarini, 1991; Grönroos, 1990) have argued that quality and productivity
cannot be dealt with separately in the case of services. However, many authors
still apparently regard them as separate concepts (e.g. Brignall and Ballantine,
1996; cf. Heskett et al., 1994). Consequently, there seems to be a growing need for
a thorough analysis of the productivity concept in the context of services.
The current debate on service productivity is in its infancy, and it is for this
reason that we must begin from the basics. We believe that the introductory International Journal of Service
step is to elaborate the conceptual underpinnings of service productivity. We Industry Management,
Vol. 9 No. 4, 1998, pp. 377-396,
have to decide first what we are trying to capture before making any attempt to © MCB University Press, 0956-4233
 08509dd1 4/9/98 11:59 am Page 378

IJSIM measure (cf. Gummesson, 1992), and a meaningful definition of service

9,4 productivity has to keep the concept analytically distinct from related concepts
like efficiency and effectiveness. After the elucidation of the productivity
concept itself, it is reasonable to take a second step by discussing the
opportunity for operationalisation in the form of measurement. Initial
operationalisation efforts are usually bound to the measurement of the
378 phenomenon at a certain moment in time (i.e. static measures). The third step in
the elaboration process might be to make the formulation a dynamic one; this
would be achieved by contemplating the possibility of cause-effect relationships
(e.g. Collier, 1995; Heskett et al., 1994) and by pondering over the possibility of
enhancing service productivity over time (e.g. van Biema and Greenwald, 1997).
The last-mentioned aspects are of particular interest in the management of
productivity within the service sector.
The purpose of this article is to elucidate the concept and measurement of
productivity in the service sector. We will focus on the first two steps in the
above elaboration process, that is, the productivity concept itself and its
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operationalisation at a certain moment in time. Hence, we will not extend our

analysis to the measurement of the dynamics of service productivity.
Consequently, it is not our aim to cover the issue of productivity management in
the following analysis, although some topics related to it will inevitably come
up in our discussion.
The productivity concept deals with the economic performance of a firm. We
may differentiate between the operational and financial performance of a
service firm – the former being based on the real process (from inflows of
factors of production to outflows of services) and the latter on the monetary
process (inflows and outflows of money). In this respect, the service
productivity concept adopted in this article focuses on the dimension of
operational (real) performance. However, we will briefly deal with the
relationship between operational and financial performance while discussing
the measurement issue.
We will demonstrate our approach, and especially the dimensions of
productivity, through a case study of the second largest insurance company in
Finland, The Pohjola Insurance Group, offering the entire spectrum of
insurance services. Because our empirical data cover only a single case, it will
be used for illustrative purposes. Our reasons for selecting the case from the
insurance sector are as follows. First, the insurance industry has often been
considered quite complicated, because it is the one that markets the most
intangible of intangibles of all service industries (see Majaro, 1982; 1985), i.e. a
piece of paper called an insurance policy to protect a policy holder. This makes
a sharp contrast to the conventional manufacturing business and its approach
to productivity. Second, mergers around the world within the insurance sector
and between insurance and banking companies are questions of the day to
achieve economies of scale. As a consequence, the whole industry is now
changing its operations towards more efficient action, which we find extremely
interesting from the viewpoint of productivity. Third, in Finland, this sector has
 08509dd1 4/9/98 11:59 am Page 379

been able to act in the protected domestic markets and to avoid stiff competition Content and
until Finland’s EU membership in 1995. The years of recession at the beginning measurement of
of the 1990s were a pilot lesson about the non-existence of everlasting growth in productivity
the entire sector. These lines of development make the insurance sector a
current topic from the viewpoint of service management in Finland. And,
finally, there emerges the issue of access: one of the co-authors has been
employed by the insurance company in question. This allowed us to use both 379
various kinds of data collection methods (including direct observation) and an
insider view in the interpretation of the material gathered.

The content of service productivity

Regarding the economic evaluation of the performance level achieved in the
production process, productivity, efficiency and effectiveness are three of the
most frequently mentioned criteria. The concept of productivity has been rooted
in the production function approach describing the relationship between factor
inputs and product outputs (Vehmanen, 1994). Productivity has come to be
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interpreted as the ratio between output and input. In this way, productivity is
conceptually defined as distinct from the value measurement of the monetary
process.
Efficiency and effectiveness are usually treated as related but separate
concepts. Efficiency describes the degree to which an activity generates a given
quantity of outputs with a minimum consumption of inputs, or generates the
largest possible outputs from a given quantity of inputs (e.g. Anthony, 1965).
Effectiveness, in turn, indicates the ability to attain a goal or a purpose.
Effectiveness relates the output to the goal(s) set for the operation, whereas
efficiency relates the output to the resources used (input). Efficiency is about
doing things right and effectiveness is about doing the right things (e.g. Adam
et al., 1995).
There exists a clear distinction between effectiveness and productivity:
effectiveness is tied to the ability of the organization to attain its specified
objectives, whereas productivity concerns the relationship between outputs and
inputs. Hence, increasing productivity is not a sufficient condition for
enhancing an organization’s effectiveness. In fact, productivity may be
increased at the cost of effectiveness in meeting the goals set for the
organization (Blois, 1985).
Efficiency is a common but loosely defined concept in the business
disciplines. It may be seen as a quantitative (technical efficiency) or a value
(economic efficiency) concept (e.g. Vehmanen, 1994). Technical efficiency may
be considered synonymous with productivity as a ratio between output and
input, although efficiency has sometimes been defined as the inverse to
productivity (i.e. the amount of resources used to produce one unit of output, see
e.g. Etzioni, 1964). When efficiency is defined in value terms, one tries to make
compatible the effects of various input and output factors in the production
process (cf. Amey, 1969). This interpretation has led to formulations in which
efficiency is seen as costs per product.
 08509dd1 4/9/98 11:59 am Page 380

IJSIM Technical efficiency and productivity may be defined as distinct concepts by

9,4 taking the standard of comparison as a frame of reference (Uusi-Rauva, 1987):
in the case of a productivity ratio, the aim is to compare the output-input ratios
across units and time, whereas in the case of an efficiency ratio, the comparison
is made against a predetermined standard or ideal. If a meaningful
interpretation can be given to ideal performance, it is reasonable to perceive an
380 efficiency ratio as an indicator of the extent to which actual performance has
achieved the ideal level (overall efficiency) or the best observed performance
(observable efficiency, cf. Frei and Harker, 1995).
According to the basic principle of economic rationality, the purpose is to
achieve a given result with the minimal resources, or to get the maximum result
with a given set of resources. However, it is very difficult to talk about the
maximum level of performance in the production of services. Hence, we will
elaborate the economic evaluation of service operations on the basis of the
concept of productivity.
Because of its origin in manufacturing, the conventional definition of
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productivity may be regarded as narrow and value-laden (cf. Adam et al., 1995).
It is our conviction that productivity in the context of services has to be
interpreted more broadly than in the traditional sense. More specifically, we
include quality in the analysis of the productivity of service operations (cf.
Grönroos, 1990; Shaw and Capoor, 1979). At the outset, we define service
productivity as the ability of a service organization to use its inputs for
providing services with quality matching the expectations of customers (cf.
Järvinen et al., 1996).
The quantity and quality dimensions of service offering cannot be treated in
isolation. Due to their interrelationship, it may be impossible to separate the
impact of a service process on conventional productivity from its impact on
service quality. Hence, both the quantity and quality aspects must be
considered together to provide a joint impact on the total productivity of the
service firm. We simply call it service productivity and it may be presented as a
general formula:
Quantity of output and Quality of output
Service productivity = –––––––––––––––––––––––––––––––––
Quantity of input and quality of input
The holistic view underlining the interaction between factors has its
advantages and disadvantages. In the light of the views expressed in the service
literature, this formula seems to cover the key success factors of a service firm
(e.g. Grönroos, 1990; Gummesson, 1993; McLaughlin and Coffey, 1990). Without
taking an explicit stand on the mathematical form (additive, multiplicative,
exponential, etc.) of the above formula, we will elucidate our concept by a more
detailed analysis of the factors inside the formula.

The quantity aspect

Regarding the quantity aspect of service productivity, the input factors of
services are the same means of production as in manufacturing: raw materials,
 08509dd1 4/9/98 11:59 am Page 381

labour and capital. Owing to the labour-intensiveness of service production, the Content and
productivity of many service sectors has been labelled as very low compared to measurement of
manufacturing operations (Charles, 1993; Wilson, 1988). As a consequence, productivity
many service providers have invested heavily in technology as a substitute for
labour; e.g. automated teller machines to replace bank tellers, self-service
insurance policy machines to replace clerks (Levitt, 1972). The service
industries have also been identified as the biggest buyers of the new 381
information technology (Charles, 1993). This raises a crucial issue in the light of
the service productivity concept: has the enhancement in labour productivity, as
a result of heavy investments in technology, been achieved at the cost of capital
productivity? We underline in our formula the need to gauge the formation of
productivity from a holistic point of view. Decisions made to enhance service
productivity should not be based on partial productivity measures.
The output, volume or amount of service offered, may first seem to be a
straightforward issue. When the service offered consists of a single component
or of a number of standardised components which allow cloning and mixing
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across a wide range of applications, the volume of service may be easily

determined (cf. Quinn and Paquette, 1990). In contrast, the output may consist
of highly customised services (as in the case of a unique service package), and
the definition of the service output becomes a more laborious task. This task is
often complicated by the intangible nature of services.
The relationship between inputs and outputs in terms of service volume is
often seen to be problematic due to the lack of storability of services (Blois,
1985). A strategic decision for the service provider is the acquisition of
resources in order to generate enough capacity to match the demand for the
service. As such, this strategic choice is volume-oriented. However, from the
customer’s view, the volume of the service output is hardly a significant issue
because the customer usually buys only one unit of output (e.g. a haircut) or one
package of services (e.g. a holiday tour). The customer is therefore inclined to
give priority to service quality instead of quantity. Yet, the actual volume of
operations is determined by the variation of demand over time (McLaughlin,
1996). As a consequence, the productivity ratio of service operations may vary
greatly from one time period to another, provided it is measured as a quantity
ratio. Hence, due to the variation in the amount of the total demand across time,
the service provider has to solve two basic problems related to the quantity
aspect: capacity size and capacity scheduling (McLaughlin et al., 1991).

The quality aspect

The quality aspect is a dimension that is difficult to define objectively. In the
case of manufacturing products, the quality dimension has usually been
operationalised as conformance to specifications and as actual product
performance (McLaughlin et al., 1991). However, this notion of quality has been
regarded as inadequate in the case of services. According to Gummesson (1992),
there is a humanistic quality approach, at the one extreme stressing customers,
personnel, leadership and culture, whereas at the other end lies a technical
 08509dd1 4/9/98 11:59 am Page 382

IJSIM approach concerning operations management, statistics and methods of

9,4 measurement. Gummesson divides quality into services, tangibles and
software, but he stresses the importance of a total service offering. Lehtinen and
Lehtinen (1991) talk about physical quality, interactive quality and corporate
quality, and, on the other hand, about process and output quality. As our
formula suggests, we divide quality into input and output dimensions, which
382 are parallel to Lehtinen and Lehtinen’s latter division of dimensions. Drawing
on the above notions, the output consists of a total service offering in terms of
quality, and the input includes both tangible and intangible elements.
The output in the form of quality is what the customer in fact pays for, which
is to a large extent intangible and may be difficult to quantify (Adam et al.,
1995). Service quality is generally defined as customer perceived quality which
stresses the individuals’ assessment of the value of the total service offering (e.g.
Gummesson, 1994). Grönroos (1982; 1983) describes perceived service quality as
the difference between expected service quality and experienced service quality.
This has a link to the gap model (Parasuraman et al., 1985; 1994) and other
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service quality models (e.g. Bitner, 1990; Bolton and Drew, 1991; Oliver, 1993).
On the other hand, Berry et al. (1985) divides service quality into two types:
regular services, and handling of exceptions/problems to ensure that
appropriate procedures are taken to deal with inevitable failures (see also
Johnston, 1995). We accept customer perceived quality as the basis of our notion
of service quality.
When purchasing services, customers’ attention is often limited to a small
number of tangible inputs (Zeithaml, 1984). Physical environment – buildings,
offices and interior design – affects customer beliefs, attitudes and satisfaction
(Bitner, 1986; Zeithaml and Bitner, 1996), and provides an opportunity to tell the
“right” story about a given service (Berry, 1984). Matters such as how contact
personnel dresses, articulates, writes, designs and presents proposals are
likewise not without meaning (Levitt, 1981; 1983). Tangibilising the intangible
is important, because customers do not usually know what they are getting
until they do not get it (Levitt, 1981; 1983).
As intangible input, the service personnel represents the service, the
organization and the marketers in the customers’ eyes (Zeithaml and Bitner,
1996). The quality management of personnel includes such things as
motivating, managing information, training, career planning, and recruiting
and retaining of right people (Normann, 1991; Zeithaml and Bitner, 1996). It is
true that service business is personnel-intensive, meaning that quality supplied
to the customer is essentially a result of the way personnel perform (cf.
Normann, 1991). Schneider (1980) shows that both employees and customers
will experience more positive outcomes when the organization operates with a
customer service orientation and management supports it (see also Blois, 1989).
This may be linked to the external service value within the service-profit chain
by Heskett et al. (1994), which describes employee satisfaction as the underlying
factor in the formation of customer perceived quality.
In addition, there are attempts to include customers in the service providing
organization, at least on a temporary basis (Gummesson, 1994; see also Handy,
 08509dd1 4/9/98 11:59 am Page 383

1990; Lovelock and Young, 1979; Quinn and Paquette, 1990), which provides an Content and
opportunity to utilise customers as free inputs to increase productivity from the measurement of
viewpoint of service provider (Ojasalo, 1997). Furthermore, functional
organizational plans have tended not to work as well in service organizations,
productivity
partly because of difficulties in predefining end product variables and
standards for services (Shaw and Capoor, 1979). Therefore, it can be concluded
that the way customers perceive service and how service production and 383
delivery are organized cannot be considered in isolation from each other.
The other important intangible element is service culture, and, by
participating in the production process, customers influence and even create
perceived service culture (Lehtinen, 1986). High levels of intangibility call for
image building and maintenance to attain reliance based on reputation and
subjective impressions of the service (Cowell, 1988). In the long run, image
depends mainly on what the company actually provides, but in the short run,
image can be used as a tool for the creation of new reality (Normann, 1991).
Today, many service operations are heavily dependent on information
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technology (IT). Customers, while interacting either with a contact person or a

machine, have an interface to computers: a bank teller processes the
transactions through a computer while a customer watches, or customers
themselves use automated teller machines (cf. Gummesson, 1992). Normann
(1991) sees five reasons for utilising IT:
(1) reducing costs by substituting service officers for IT (see also Levitt,
1983);
(2) standardising services;
(3) increasing availability, e.g. through automated 24-hour branch offices or
machines;
(4) linking customers tightly into the service system; and
(5) affecting customer and personnel relationships and behaviour (see also
Zeithaml and Bitner, 1996).
Figure 1 summarises our view of the content of service productivity concept.

SERVICE PRODUCTIVITY

QUANTITY QUALITY

OUTPUT INPUT OUTPUT INPUT

• Labour • Customer • Tangible elements Figure 1.
• Service Volume • Raw materials Perceived • Intangible elements The content of service
• Capital Quality productivity
 08509dd1 4/9/98 11:59 am Page 384

IJSIM The measurement of service productivity

9,4 From the viewpoint of measurement theory, the representativeness of a chosen
measure becomes a crucial issue. In the social sciences, this is usually evaluated
through two basic criteria: validity and reliability. According to Kerlinger
(1973), validity and reliability are the operationalised counterparts of the
criteria developed in mathematical measurement theory (see also Mock, 1976).
384 Validity is usually seen to encompass both the reliability criterion and freedom
from systematic bias.
Our concept of productivity covers the basic criteria of evaluation within
service operations: both quantity and quality are deemed significant among the
writers on service management. As such, it seems to offer a valid representation
of the economic dimension of service operations. From the viewpoint of
reliability, the problems of measurement may be stated as follows:
• How can the quantity of inputs and outputs be measured?
• How can the quality of inputs and outputs be measured?
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• How can the interrelationship of different output and input factors be

operationalised?
These problems come close to the dimension of complexity of inputs and
outputs in service productivity measures, which is part of the classification
scheme outlined by McLaughlin and Coffey (1990).
Considering the volume of inputs and outputs, rather direct measurement
seems to be possible in many services. The quantity of inputs, for example, may
be operationalised as the number of employees or labour hours, or as the
number of hours the service is available to customers. Likewise, the output
measure may comprise the number of customers or customer contacts, or the
number of transactions or actual service hours. However, due to the
heterogeneity of inputs and outputs, a transfer to value measurement with the
help of unit prices has been offered as a common solution to generate an
economically meaningful ratio (cf. Amey, 1969). Consequently, we may have to
content ourselves with a surrogate measure based on monetary measurement
(e.g. turnover per the total monetary value of inputs) to combine the volumes of
inputs and outputs in a meaningful way (cf. Ojasalo, 1997).
The subjective nature of the quality of inputs and outputs presents a tough
challenge to reliable measurement, and this is exacerbated by the interpretation
of quality from the customers’ point of view. The gap-model operationalisation
is based on the idea of comparing customer experience with customer
expectations (e.g. Parasuraman et al., 1988; the SERVQUAL). In general, the
systematic use of customer feedback is a vehicle to operationalise the
measurement of service quality. Even though customer satisfaction may be
difficult to measure directly, more indirect ways are available as surrogate
measures. Empirical studies usually support the hypothesis that satisfied
customers do not usually give any direct feedback to the service producer,
whereas dissatisfied customers are tempted to give voice (see e.g. Järvinen
 08509dd1 4/9/98 11:59 am Page 385

et al., 1996). Consequently, it may be possible to quantify customer Content and

dissatisfaction (e.g. as a ratio between the number of customer complaints vs. measurement of
the total number of customer handlings). Other ways to circumvent the problem productivity
of service quality measurement include direct observation of the service process
and comprehensive process documentation (McLaughlin and Coffey, 1990;
McLaughlin et al., 1991).
One of our claims regarding service productivity has been that the impact of 385
the components is not an additive function which would allow the measurement
of impacts separately at first and then summing these sub-measures up in order
to get an all-encompassing measure. As a consequence, the joint effects of
various input and output factors may be approached only by using indirect
methods of measurement (e.g. associative measurement based on the presumed
relationships between factors). The cumulative effect of the various components
manifests itself at the level of overall performance, which is usually judged
against the goals set for the business. This leads to the measurement of service
productivity at the aggregate level (e.g. firm, unit) only, but the question of
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measurement at the disaggregate level (e.g. service, process) remains unsettled

(cf. McLaughlin and Coffey, 1990).
This brings us to the criterion of relevance of the chosen approach to
productivity. A service firm strives for productivity to achieve the goals set for
the business, and the fundamental goal is to make a profit in the markets. The
relationship between the productivity concept outlined above and the financial
success of the service firm may be called into question. This relationship has
been one of the cornerstones of an ongoing Swedish research effort (the QP&P
Program) focusing on the interaction between service quality, productivity and
profitability (Gummesson, 1994). The tentative conclusions of the QP&P
Program underline, amongst other things, the interaction between service
provider and customer, and between customers themselves, as two main sources
of service quality and productivity, leading consequently to profitability.
Storbacka (1994) emphasises the importance of linking the consideration of
productivity with profitability. It is possible to create a link from our concept of
productivity to profitability. The first step is a transfer to value measurements
in input factors with the help of unit prices (cf. Gummesson, 1993). The second
step is to determine the value of output less the value of input, to get a measure
of a surplus/deficit which may further be related to the money capital invested
in the firm to attain a measure of profit/loss. Even though many problems
regarding measurement must be solved, it is, in principle, possible to link our
concept of service productivity to overall profitability.
According to Bååthe and Mattsson (1993), knowledge of the measurement of
quality and productivity is relatively little developed in service companies.
However, there have been attempts to develop appropriate methods of
measurement in the service literature (see e.g. a review by McLaughlin and
Coffey, 1990).
To summarise this section, we consider that the following requirements must
be met to obtain a comprehensive measure of service productivity:
 08509dd1 4/9/98 11:59 am Page 386

IJSIM (1) both the quantity and quality aspects of service productivity must be
9,4 operationalised;
(2) the operationalisation must be implemented through a commensurable
unit of measurement; and
(3) the possibility of cumulative effects has to be accounted for in the
386 measurement effort.
In practice, the development of a single measure of service productivity
fulfilling the requirements outlined above is likely to prove a tough challenge.
On the other hand, this does not undermine our approach to conceptualise
service productivity, because there seem to be opportunities to resort to proxy
measures in the operationalisation efforts.

An illustration: service productivity in an insurance firm

Following the conceptual logic outlined in Figure 1, our illustration introduces
the basic elements of service productivity, namely the concept divided into
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quantity and quality dimensions, and further into output and input elements.
Moreover, we will describe the current measurement practice within the target
firm. Consequently, we want to emphasise that the elements of output and input
in our case firm provide the level of analysis in this section, i.e. the aim is to
show that the dimensions and elements discussed earlier in this article can be
identified in our target firm. However, this does not mean that our target firm
would currently evaluate its operations according to our notion of service
productivity. We conclude with a brief summary of the empirical analysis as
compared to the conceptual foundations adopted in this article.

The target firm

Our case company is The Pohjola Insurance Group, an insurance company
grouping covering the entire spectrum of insurance services: non-life, travel, life
and pension insurance. The parent companies of The Pohjola Group were
established in 1890 and 1891. The Group’s co-operation is based on mutual
shareholdings and agreements, and it has a joint organization. The Pohjola
Group earned 2.7 billion USD in insurance premium in 1996. With the number
of employees reaching 3,341 on average, the group is the second largest in its
branch in Finland (Pohjola, 1996). Like other insurance companies, Pohjola
recently invested in information technology, although it has been dependent on
computerised insurance registers over two decades. To foster its position in the
market, Pohjola started large development projects in 1994, the objectives of
which are not only better utilisation of technology, service value chains and
multi-skilled personnel, but also productivity. The quality policy was
determined simultaneously, and, as a consequence, the importance of quality
and productivity has now been acknowledged. However, at this stage, the
development processes ongoing in the target firm and their possible
implications in the future are not included in our illustration.
 08509dd1 4/9/98 11:59 am Page 387

Methodology Content and

In the case of The Pohjola Group, we studied three different entities responsible measurement of
for three different insurance types: productivity
(1) the motor and comprehensive insurance sale and claims organizations
responsible for car dealers as intermediaries;
(2) the travel insurance sale and claims organizations responsible for travel 387
agencies as intermediaries; and
(3) the statutory workers’ compensation insurance organization.
All the entities studied have recently electronicised their channels either
towards intermediaries or customers, and the company-based development
projects mentioned earlier concern each of them. The study was carried out by
interviewing the key actors (11 persons), among them regional managers,
claims managers, a manager of training and quality, and insurance contact
persons responsible for each insurance type. Patton (1990) confirms that a
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qualitative inquiry typically focuses on relatively small samples, even single

cases, selected deliberately. The underlying logic is in selecting information-rich
cases and respondents for study in depth.
Each actor was interviewed separately, and at first the interviews were
standardised by the equal written open-ended forms, but later we used more
specialised lists of questions, adapted to gather more detailed information on
specific areas. The standardised interview is used when it is important to
minimise variation in the questions posed to interviewees. This reduces the risk
of bias that comes from having different interviews for different people,
including the problem of obtaining more comprehensive data from certain
persons while getting less systematic information from others (see Patton,
1990). For this reason, we started by standardised interviews, but ended up with
specialised non-standardised forms in order to get in-depth data. The
interviews were held in June-July 1994, April 1995 and February 1996, and some
follow-up questions were asked in May-August 1996. The secondary data
consists of the material provided by Pohjola, including statistics and reports, in-
house newsletters, information letters and customer journals.

Quantity dimension of service productivity

At Pohjola, the traditional approach to analysing productivity is quantitative,
and only recently have the qualitative elements received explicit attention. The
output of the quantity dimension is based on the volume of insurance services:
the amount of insurance services sold, or the amount of different insurance
types (i.e. assortment) in the whole portfolio. Increasing the insurance volume
usually means selling a larger variety of insurance services to the existing
customers or attracting new customer segments. In addition, the market share
(total and per insurance type) is monitored at Pohjola, as in other insurance
companies.
 08509dd1 4/9/98 11:59 am Page 388

IJSIM Within Pohjola, labour is the key input to productivity as salaries,

9,4 commissions and social expenses account for 70 per cent of operating costs.
The personnel policy prefers job rotations, amendments in job descriptions and
job retraining instead of redundancies, which so far have been exceptional
cases. Work process re-engineering, and analysing overtime and bottlenecks are
valuable means of controlling the amount of labour input at Pohjola. Extra
388 working hours and waste of time are eliminated by minimising errors, which is
emphasised by the campaign “first pass quality policy”.
The capital invested has mainly been in IT, electronic channels and physical
environment. Technology offers an opportunity for automated service
environment, although it is important to utilise the technology on the
company’s own terms and to its own benefit. Service processes are dependent
on technological development, as all insurance registers are computer-based,
that is, every clerk is skilled in data processing through data terminals or
personal computers. IT assists in decreasing the amount of the paper handling
and clerical work, and thus saves time, human resources, and helps to avoid
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errors by eliminating manual data entries at each handling stage.

Pohjola has built electronic channels step-by-step towards their
intermediaries and customers. Travel agencies and car dealers were the first to
connect their links in 1993, and interorganizational data transfer (IDT) towards
customers concerning statutory workers’ compensation insurance was
introduced in 1995, even though the technology at the customers’ end proved to
be a bottleneck in many cases (see also Järvinen et al., 1996). In addition, Pohjola
has self-service insurance policy machines and its insurance services are
available at the automated teller machines in the largest bank group in Finland,
but this “service” has so far not attracted customers.
The physical environment covers both headquarters and the extensive
branch office network (around 95 outlets) ensuring availability of insurance
services. Insurance applications are still handled in back-offices which are often
located elsewhere, and consequently, customers do not take part into the
production process. So far, Pohjola has only a few years’ experience of telework
that offers an opportunity to adjust the amount of back-office facilities, as it
enables clerks to be located practically anywhere the technology is available.
Because of the high intangibility of insurance services, raw material is an
unimportant element in this case.

Quality dimension of service productivity

Lack of homogeneity and consequent difficulties in controlling quality are often
used to distinguish services (Foxall, 1985). However, the insurance services in
question are standardised, and the only situation lacking homogeneity is the
service encounter, i.e. interaction between a customer and a clerk. At Pohjola,
quality is interpreted as customer satisfaction. The customer satisfaction
studies have revealed that the most important factor at Pohjola is claims
handling, and the major strength was considered to be customer service in
 08509dd1 4/9/98 11:59 am Page 389

selling situations, but a serious weakness seems to be the lack of information Content and
concerning insurance terms and conditions. measurement of
As more and more customer contacts are conducted at arm’s length, access productivity
time becomes a tool for better service quality. Pohjola’s own Internet
connections offer full-time access and telephone response services 12 hours a
day. Customer co-production is a path Pohjola has chosen to proceed. More and
more insurance data entries are made at the customers’ end, and thus they carry 389
out the job for Pohjola. Customers feel satisfied because this does not increase
their duties either, but they are able to enjoy correct and up-dated insurance
registers. Moreover, additional information requests are avoided when
customers themselves take the responsibility for providing accurate and
adequate data.
Providing excellent service is a demanding job and this has been recognised
at Pohjola, which tries to attain and retain highly talented personnel capable of
using the most advanced technology in solving customers’ problems. The
change from routine work to more creative and demanding tasks, as in expert
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activities or in customer service, presents a formidable challenge to the skills of

the personnel. Therefore, individual development programmes are offered for
the personnel in these instances, although systematic career planning is not
included in the personnel policy. In addition to the organization redesign,
teamwork has been introduced as a solution, offering a way to decrease the
number of organization levels, although the organization structure has
remained functional. The personnel’s performance criteria are operationalised
by using special themes, e.g. optimal time for telephone, letter and e-mail
responses. Special attention has been given to the response to customer
complaints.
The insurance business is nowadays a combination of information and
technology, both of which are critical cornerstones for successful operation. IT
requires its own quality indicators, e.g. security of insurance registers
(backups) and ensuring the functioning of computer systems in all situations,
as well as management of high quality information. This is evaluated by the
amount of unavoidable computer breakdowns and system errors.
Physical environment in a quality sense is mainly a concern of the locations
and interiors where customers visit, and this has always been a matter of great
importance within Pohjola. The branch office network covers the whole of
Finland and the interiors are carefully designed. As Pohjola has already
operated 105 years, the organization culture can be characterised as traditional.
One important aim of the development projects is to modernise this self-image
in which in-house newsletters and information sharing provide the most
important means. Moreover, the stakeholder information bears the same
message, but aims at improved corporate image.

Measurement of service productivity

Pohjola uses conventional ways to measure the quantity dimension of service
productivity, such as the amount of insurance applications handled per clerk in
 08509dd1 4/9/98 11:59 am Page 390

IJSIM a certain time period (usually one month) and the turnaround time of one
9,4 application through various work stages. The workload of the teleworkers is
compared with that of the main office clerks and the workers before their shift
to telework. In addition, the amount of various insurance types in the total
insurance portfolio is followed, and the investments are evaluated by the aid of
pay-back periods. The quantity elements can be made commensurable by the
390 aid of monetary values, e.g. by using premium as a quantity of insurance
services and the salaries of labour accordingly, not forgetting that the total
amount of premiums may be affected either through pricing or sales policy.
Pohjola’s quality policy is operationalised in four measurable dimensions:
(1) customer satisfaction;
(2) employee satisfaction, covering aspects from routine tasks to working
environment;
(3) high quality work performance; and
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(4) profitability, of which the first refers to service quality output and the
next two to intangible input elements.
The first three items are expected to have a positive impact on profitability in
due course, and this is the reason for including profitability in the quality policy.
The quality dimension of service productivity is measured by customer
satisfaction studies, customer complaints, and employee satisfaction studies.
The evaluation criteria of The Finnish Quality Award System for self-
evaluation purposes are utilised in this context.

Summary of the analysis of the target firm

Most of the elements of quantity and quality dimensions of service productivity
are interrelated. It is difficult to analyse each element one by one in logical order.
Although we have tried to do this, we believe that it is most important to
understand the elements constituting a whole. However, both the quantity and
quality dimensions of the target firm are summarised in Table I and Table II.

Quantity dimension of service productivity

Service quantity output Labour input Capital input

Service volume Amount of labour Information technology

Assortment Recruitment Electronic channels
Market share Job rotations Self-service policy machines
Table I. Customer segments Job descriptions Headquarter and office network
The quantity dimension Service process re-engineering Telework facilities
of the service
productivity in the Error avoidance
insurance firm Overtime
 08509dd1 4/9/98 11:59 am Page 391

Quality dimension of service productivity

Content and
Service quality output Intangible input Tangible input measurement of
productivity
Customer satisfaction Employee satisfaction Branch office locations
Customer encounter and service Expertise and skills Branch office interiors
Standardised services Performance criteria
Access time Recruitment and retaining 391
personnel
Customer co-production Personnel development
programmes
Correct insurance registers Teamwork
Table II.
Corporate image Organisation structure The quality dimension
Corporate culture of the service
IT backups, breakdowns and productivity in the
system errors insurance firm
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Tables I and II show that the various elements of quantity and quality can be
distinguished in our target firm. However, Pohjola itself does not include all the
elements we present in Tables I and II in its productivity concept. The elements
of the quantity dimension seem to be covered by the current measurement
practice within Pohjola. Regarding the quality dimension, the intangible
elements have not been systematically developed at Pohjola, because it has not
tangibilised its offerings in the way suggested by the service marketing
literature. Hence, a critique against the lack of integrity of various elements of
the quality dimension seems justified, although the quality policy can be
considered as an attempt in that direction.
The management of Pohjola has already acknowledged that the current way
of measuring is not sufficient, and new tools are to be developed. The concept
introduced in this paper would widen the perspective and provide a
comprehensive formula to evaluate total service productivity. Moreover, new
measurements, such as our suggestions concerning quality aspects would
bring the customer perceptions closer to the traditional quantity aspects. Even
in the case of the quantitative dimension of service productivity, there are
several alternatives to develop new measurement techniques, and to start with,
attention has to be paid to the commensurability between the various elements
of quantity output, labour input and capital input.

Summary and conclusions

This article has outlined an approach to the evaluation of productivity in
service operations. By taking the quantity and quality aspects of service
offerings as our point of departure, we analysed the conceptual underpinnings
of the productivity concept in services. In addition, we summarised our
approach in a general formula and discussed operationalisation in terms of
measurement. It must be stressed again that our intention was not to take a
 08509dd1 4/9/98 11:59 am Page 392

IJSIM definitive stand on the issue of how to model the relationships between the
9,4 components included in our formula. In fact, we want to provide an opportunity
to develop various models to operationalise the relationships between quantity
and quality dimensions, and further, between output and input factors. As a
result, these operationalisation efforts may lead to additive, multiplicative,
exponential or other functions. After the conceptual analysis, an attempt was
392 made to illustrate our way of thinking in an empirical setting in order to show
the relevance of our concept to the management of services.
Generally, this type of service productivity concept offers a step forward
from the conventional line of reasoning centred around the concept of
productivity. The conventional way has reflected its manufacturing origins by
focusing on the use of industrial methods (industrialisation) even in the case of
services (Levitt, 1983). This has resulted in quantitative measurement, volume
orientation, heavy investments, specialisation and automation as means to
increase productivity even in service operations. In standardised services like
travel insurance, this may be a valid approach to the enhancement of
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productivity. However, by ignoring the impacts on perceived quality, the

traditional approach may develop into a vicious circle (Grönroos, 1990) leading
to inferior financial performance in the long run. This may be true especially in
the case of customised services like personal life insurance. Different types of
services call for different approaches in the formulation of service productivity.
As a consequence, the quantity and quality dimensions may receive different
weightings in our formula depending on the nature of the service in the eyes of
the customer.
Owing to the shortcomings of the conventional way of thinking, several
writers have approached the problem of service productivity or efficiency (e.g.
Blois, 1985; Grönroos, 1990; Gummesson, 1993; McLaughlin and Coffey, 1990).
Based on the case studies carried out in the QP&P Program and on the papers
presented at the First International Research Workshop on Service Productivity
held in Brussels 1994, Adam et al. (1995) put forward six general requirements
to guide the formulation of a service productivity concept in the future:
(1) Service output has to be seen as the value for the customer and from the
perspective of the customer.
(2) Service output must be defined by its quality level.
(3) The customer must become a part of the productivity concept.
(4) Measures of productivity must be more customer-related.
(5) Dynamic indicators of productivity must be used instead of static
output/input measures.
(6) Situation specific measures have to be available to allow for the
complexity and diversity of service operations.
The first four criteria are among the basic underpinnings of our conceptual
analysis of the content and measurement of service productivity. More
 08509dd1 4/9/98 11:59 am Page 393

specifically, the value for the customer is the vital point in the quality dimension Content and
of our concept, and with this dimension the traditional productivity concept is measurement of
broadened to include the customer. Through the quality-of-output component in
our formula, the second criterion of including the quality level is met. Our
productivity
illustration also shows that customer and quality orientation are evolving
trends within the target firm.
Regarding the fact that little knowledge has accumulated so far in the field of 393
service productivity, a satisfactory solution fulfilling the fifth criterion
presented above seems at present to be beyond our reach. If a meaningful
operationalisation of the formula outlined in this article is available, cross-
sectional data measured at discrete points of time may reveal changes in the
quantity and/or quality components. A more advanced alternative would be to
include lag and lead elements, i.e. time-dependent effects, explicitly in our
formula. However, our formula does not even try to uncover the process of
changing service productivity as cause-effect relationships between different
factors (cf. Collier, 1995; Heskett et al., 1994).
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In principle, our approach to service productivity is not dependent on the

aggregation level under consideration in the measurement effort. The need for
situation specific productivity measures within service firms is closely related
to the issue of the appropriate aggregation level. On the basis of our empirical
illustration, the suggested approach to service productivity is a fruitful one at
the level of a firm and from the perspective of service management. Firm-
specific operationalisation efforts are a logical first step in the measurement of
service productivity, and in many service industries like insurance the large
number of delivery units allows for measurement in comparative terms (cf.
McLaughlin and Coffey, 1990).
When analysing the content of productivity in services, the authors soon
encountered a dilemma: the deeper we wanted to go in our line of reasoning, the
less we seemed to know to form an informed opinion on the issue. The same
argument holds in the case of developing measurement methods based on the
service productivity concept. In conclusion, these arguments call for genuine
co-operative research efforts between the scholars representing different
business disciplines.
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