Growing Negative Services

When people hear the word services, they often think about offerings that are “neutral” or “routine.” They conjure up familiar experiences that they navigate regularly — for example, dry cleaning, haircutting or lawn care. Such services are distinct from the types of services people aspire to use, such as those associated with travel and entertainment; for classification purposes, these might be labeled “positive” services. However, there is a third type of service, which is not often considered or particularly well understood. We refer to these as “negative” services because they deal with events most people hope they will never have to deal with — things such as toothaches, leaky roofs or collision repairs.1 Whereas much of the writing about services has looked at the nature of the activity (for example, whether it is tangible or intangible) or has examined the activity from the provider perspective (for example, in medicine, whether the need is acute or chronic), we take a customer viewpoint. (See “About the Research.”)

Most people feel confident in describing common problems and the routine services they require. They have no trouble identifying qualified service providers in these areas. But negative services are different: Customers are not able to evaluate the content of the service — only the process (and then only after the service has been completed). Because the precipitating events that trigger the need for negative services are not everyday occurrences, many people are not equipped to diagnose their needs or make informed judgments about the solutions required. They may know that they have a toothache or a flooded basement, for example, but they don’t know the right response. Furthermore, even after the service has been provided, they usually are in a poor position to judge its quality or the price paid for it. This has led many professional groups to develop codes of ethics. Nevertheless, there are many cases of unnecessary medical procedures and of consumers wondering if the repair parts they purchased were truly necessary.

Negative services are offered by many kinds of companies. They are frequently associated with warranties, which companies have traditionally provided as a means of staying competitive. However, in recent years, they have become more visible in other industry environments. For example, Sears, Roebuck and Co., one of the world’s largest retailers of appliances, tools and machinery, has made negative services a profitable part of its business. A substantial part of the U.S. health care industry — concerned with diagnosing and treating illnesses and responding to accidents — falls into negative services. So do the tens of thousands of businesses that specialize in repairing cars and unclogging drains. Services shift from being negative to becoming routine when the problems are largely under control and can be managed by the recipients themselves, as in the case of people with diabetes.

Companies hoping to build positions in negative services face two major challenges: (1) how to access inexperienced customers, who are not in a strong position to evaluate the service being provided and may have a poor idea of its cost, and (2) how to organize and deploy their services to meet customer needs when demand is unpredictable.

The Nature of Negative Services

Prospect theory in psychology offers a fresh perspective on how individuals view risks and losses in decision making.2 It suggests that people are not “rational” about decisions when they are fearful. They do not study the facts, select strategies or weigh the probable outcomes. People in need of negative services approach decisions in a similar fashion. Our investigation suggests that people go through at least three phases when receiving negative services: awareness and selection, connection and provision.

Awareness and Selection

Though people are conscious of negative services, they often deny that the services are intended for them. Consequently, the services can be divided into two broad forms: pre-event, in which the service recipient acknowledges a probable service need (risk) or has some institutional inducement to anticipate the need, and post-event, in which the recipient reacts with some urgency to problem signs or symptoms, although the specific nature of the problem may not be known.

When choosing a pre-event contract, few service recipients take the time to understand the quality differences between potential service providers, or they may find evaluation difficult. Pre-event contracts, often selected on the basis of cost or ease of access, frequently lock service recipients into specific provider relationships. Even with an element of choice, provider selection may be heavily influenced by referrals or existing relationships with the provider network. An auto insurance company, for example, may not mandate a specific body shop, but it may suggest one.

In situations where no pre-event contracts exist and services needs arise (that is, post-event), service recipients often assess their service options based on the magnitude of the problem (in terms of cost or personal requirement) and on the time they have available. If the need is urgent, as in the case of an auto accident or a broken furnace during winter, people may take “any port in a storm.” They know they need help, and, unfortunately, they are not in the best position to sift through all the possible solutions to determine how much each will cost.

Connection

Once the need for negative services is evident, people often tap into a large network of service providers, whether they are aware of it or not. A single car accident, for example, typically triggers the involvement of a towing company, at least one insurance company, an appraiser, a body shop and a car rental agency. If someone is injured, other services are required: an ambulance, an emergency room and health insurance. Some services act as connectors, even if the end users don’t actively choose them. For example, ambulance services play a big role in hospital selection. Similarly, when a U.S. motorist calls AAA to request road service, he or she has no idea which towing company will appear on the scene.

In Europe, Multiasistencia Group, a large home assistance and repair company, has grown by leveraging relationships with a number of financial institutions; it has no direct relationship with the end users of its services. The Madrid-based company (which operates in Spain, France, the United Kingdom and Portugal) offers its services through insurance companies, banks and other affiliates, all of which are trying to cultivate the loyalty of their own customers. For example, one of Spain’s largest banks recently contracted with Multiasistencia to provide a new perk to its credit card holders: 24-hour plumbing and locksmith service. Bank customers pay no charge for service calls, and labor costs are discounted substantially below local rates.

Provision

Many service recipients tend to think in terms of a specific service provider — a surgeon, mechanic or repair-person — as opposed to a service network. But the work of an individual service provider is often difficult to isolate from all the related services that contribute to the overall experience. Following an accident, for example, the service recipient (in this case, the patient) may perceive that the principal service provider is the attending physician, but the ambulance’s emergency medical technician may be the one who actually saved the patient’s life. Nonetheless, the principal service provider (in this case, the physician) is usually in the strongest position to use the goodwill to support his or her growth strategy.

Concentration of Negative Services

Most negative service specialties are highly fragmented. Indeed, it’s hard to name a chain of boiler repair specialists, body shops or dental offices. An examination of the most recent U.S. Economic Census C43 data shows that in all but a few industries the four biggest companies control less than 10% of the market. The major exceptions are appliance repair and maintenance (where, in 2002, four companies controlled 60.5% of the market), tax preparation (60.2%), auto glass replacement (28%), pest extermination (27.5%) and funeral services (19.4%).

There has been increasing market concentration in several areas of health care, including kidney dialysis centers (an increasingly routine service, where four companies control 72.4%), ambulance services (27%) and medical and diagnostic labs (23.7%). Each of these industries has several factors favoring scale economies, so the increased level of concentration is not surprising. But markets continue to be extremely fragmented in most other health care areas. For negative service providers, significant market fragmentation raises important questions about how to approach the market and how to manage the business to achieve the best possible results. High concentration suggests that some service providers have already found strategies for growth; low concentration suggests that there may be significant opportunities (see “Market Concentration in Selected Industries.”)

Four Strategies for Growth

A number of companies have tried — with varying degrees of success — to make negative services a central part of their overall corporate strategies. In the course of analyzing the changing market dynamics within service industries, we have identified four core strategies for negative services growth: market-centric, provider-centric, network management and network enhancement. Below, we will explore how the different strategies operate and identify some ways that companies pursuing them can attempt to make them work better.

Market-centric

Since most people have only an infrequent need for negative services, it is difficult for specialized service providers to establish and maintain links with customers. This hinders some of the most obvious avenues for growth. In medicine, for example, it takes a wide network of primary care physicians to keep a narrow specialist busy. Although the likelihood that any one patient will face a specific negative condition is small, many primary care physicians referring their cases to a small group of specialists can make for a growth opportunity.

Insurance companies have strong market connections and play an organizing role; they provide a pre-event link between service recipients and specific providers. While they influence customer choice, they do not provide the actual service. Other companies, particularly those with broad market visibility, such as Sears, have been drawn to the idea of service business expansion, even if it is difficult to orchestrate.

Sears already had a $3 billion home services business when it established Sears HomeCentral in 1996. Management’s goal was to capture an even bigger share of the fragmented home services market, which Sears estimated at nearly $160 billion (including $60 billion for interior home improvement, $50 billion for exterior home improvement, $30 billion for residential maintenance and $20 billion for product repair).4

Claiming relationships with more than 70 million households and more than 15 million in-home visits per year, Sears targeted revenues of $10 billion in 2000 through a mixture of negative and routine services: roofing, siding, service contracts, heating and cooling, pest control and windows and doors. Its strength was in time-sensitive household repairs, but it anticipated that much future growth would be in areas in which customers had time to research and compare alternatives, such as heating and air-conditioning systems.

In creating the Sears HomeCentral brand, the company launched a major ad campaign to draw attention to its service focus. It offered to repair any appliance, not just those purchased at Sears. It invested heavily in training a force of 15,000 technicians (both employees and independent contractors) and armed them with the latest technology.5 To underline its new service focus, it acquired a large remodeling contractor and a termite and pest control company.6

Unfortunately, the market didn’t respond as quickly as management had hoped. Although services were much more profitable than the company’s mainstream business,7 using the Sears brand to expand into other businesses was a struggle. The company has closed some of its stores and has chosen to eliminate some of its home services lines (such as pest control). Among other things, management learned that the infrastructure for a rapid response to appliance repairs is very different from what’s needed to manage services such as deck and siding installation, which have longer time frames.

Other companies attempting to pursue the market-centric model have had more success in attracting new customers. The Terminix International Company, a leader in residential pest control, based in Memphis, Tennessee, is a rare example of a company that offers a focused negative service. Acquired in 1986 by The ServiceMaster Company, a provider of industrial services in Downers Grove, Illinois, it spends heavily on advertising to establish itself as the homeowner’s first choice for pest control. In essence, Terminix has two segments of customers: those who think they have a pest problem that needs attention (because of, say, a rotting deck) and those who want or need pest inspections when homes are being sold. Serving the two market segments gives Terminix some operational flexibility, since some of its services are more time-sensitive than others.

Provider-centric

Gaining a reputation for being the best at what it does or providing good value at low cost helps a negative service provider build its market position. However, many service recipients still want reliable information so they can evaluate service providers for themselves. Most recipients have little information, are under time pressure and have virtually no familiarity with the service they are buying. Providers looking to grow need to find ways to create the conditions for easy evaluation by prospective customers.

To understand this approach, consider the example of the Shouldice Hospital in Thornhill, Ontario, Canada, which specializes in hernia operations. Patients are treated for hernias in hospitals all over North America. They are a common problem (especially in men) and generally are not considered urgent, but treatment methods and recovery times vary. Based on its reputation for postoperative success, the Shouldice draws patients from across Canada and the United States, despite the fact that its surgeons tend to follow procedures that are more invasive than other treatments. Whereas most medical treatments are coordinated through a patient’s primary care physician, the Shouldice takes it upon itself to educate patients on the services it offers, advising potential patients on how to self-diagnose a hernia. Because it specializes, the Shouldice operates more efficiently than hospitals offering a broader range of treatments, with less capital and fewer support staff and supplies.

In a sense, the Shouldice has found a way to move its service of hernia surgery from the negative to the routine. Similar shifts are occurring in other areas of health care. Fresenius Medical Care AG, headquartered in Bad Homburg, Germany, operates more than 1,000 kidney dialysis centers in the United States. The placement of their centers around the country allows users to travel from their home base and still maintain their treatments. Similar multisite chains are developing in the area of diabetes treatment as well.

Clearly, some types of problems are easier to diagnose and manage than others. When a car muffler drags under a car, it is fairly obvious that the exhaust system needs some kind of repair. Electrical problems are less obvious: It could be a faulty battery or several other things. Service providers looking to distinguish themselves as specialists need to figure out how to provide customers with credible and accessible information to evaluate their services.

Network Management

Many service companies have achieved growth by becoming network managers. In contrast to players such as Sears and Terminix, which strive to reap the benefits of their own brands, network managers often begin with neither strong market connections nor particular strength in service provision. Instead, they manage all the network elements to provide a recognizable bundle of services, delivering advantages to both service recipients and providers.

A fairly common network management strategy is to piggyback on the business of other companies in order to gain access to customers. This is what Multiasistencia does in the area of home assistance and repair, and what credit card loss-protection companies have done by using mailing lists of bank customers. Another company that has pursued this strategy successfully is American Home Shield Corp. of Carroll, Iowa, which, like Ter-minix, is a subsidiary of ServiceMaster.

AHS is the leading home services warranty specialist in the United States, selling warranties to cover repairs throughout homes: major appliances, heating and cooling systems, plumbing and electrical systems, even swimming pools. Founded more than 30 years ago, it grew by insuring home buyers against property faults. Rather than marketing warranties directly to customers, AHS co-markets pre-event service contracts through banks and mortgage companies that are much better known, including Bank of America, Chase, GE Capital and Wells Fargo Home Mortgage. As the network manager, AHS sets the quality standards for the contractors and develops control systems. When problems occur, homeowners place calls to AHS, which dispatches the appropriate contractor.

Network Enhancement

Network enhancers study negative service networks to see how they can improve the overall service delivery process. They do not manage the whole process or provide the major service content to the end user. Rather, they look for opportunities that other network partners will value for managing their customers and integrating the supply network through information systems. Enterprise Rent-A-Car Co., which has the largest car rental fleet in the United States, has been successful in using this approach. A relative latecomer to the car rental business, it differentiated itself from the start by placing most of its offices in neighborhood markets, rather than focusing on airports and other transportation centers.8 To appeal to customers, one of Enterprise’s best-known features is providing free transportation to the rental office.

Enterprise specializes in renting to customers who need a car because of an accident, mechanical repair or theft.9 Drivers who are insured by participating insurance companies can reserve Enterprise cars when they report their accidents. Enterprise also tries to make things easy for the insurance companies and auto repair shops by streamlining the reports and using information technology to the fullest extent.10 From a customer’s view, the service is seamless.

Enterprise follows a classic network enhancer strategy. It links auto body shops to insurance companies — providing service to both — and to the owner of the damaged vehicle. In doing so, it attempts to create enough goodwill to generate customer loyalty. Intuit Inc., the Mountain View, California-based financial software company, follows a similar approach. Even though tax preparation services are mostly routine, Intuit’s TurboTax product likewise simplified the process of tax preparation by linking the taxpayer’s employer, brokerage service, bank and payroll management company. Enhancers leverage their own routine services with information systems to connect them to the overall negative service networks.

Mixing Routine and Negative Services

In some industries, such as auto repair, there is significant overlap between negative and routine services. Standard services —say, oil changes at set mileage intervals — require little discussion and are fairly simple. However, dealing with breakdowns and malfunctions falls into the negative category, even when the car is under warranty. In these circumstances, service recipients must communicate directly with service providers regarding the diagnosis of the problem and do their best to understand which repairs are absolutely essential and which can wait.

Many companies, including Sears, ServiceMaster and Laidlaw International, have tried to mix negative services with routine services. Laidlaw, for example, a diversified company based in Naperville, Illinois, concentrated on routine services (school and intercity buses) but then diversified into new areas, including chemical waste management and ambulance services. It later moved into emergency health care and outsourcing services for hospitals. Laidlaw management soon realized that combining different kinds of activities was more difficult than it appeared, requiring vastly different marketing and management skills.

Many companies run into difficulties by failing to recognize the essential differences between routine and negative services. They often attempt to sell both routine and negative services to the same customers. But negative service providers are selected based on the magnitude of the problem and the time available for response, whereas customers select routine service providers based on their specific needs and the provider’s perceived ability to meet them. Mixing different kinds of services together ignores the differences in the service recipient profiles and the service delivery systems. Some customers have contractual or preexisting relationships; other customers are decision influencers rather than recipients. Different types of customers represent different levels of knowledge and ability to evaluate the services being provided. Contrary to how it may seem, there is usually very little on the demand side to justify one-stop shopping.

IT’S EASY TO SEE why managers have such difficulty understanding negative services. Until individuals actually need the particular services, they are frequently in denial. In the course of receiving the service, they often feel anxious. And there is no getting around the reality that many negative services are difficult to evaluate before, during and after the fact.

Although customers tend to be loyal to service providers once they have established relationships, the nature of negative services makes for peculiar challenges. Ironically, making products more reliable can lead to new challenges: If there are fewer product failures in a given location, logistics support on a per unit basis may become more costly to provide. As many manufacturers known for their service can attest, being an excellent service provider is not sufficient to build a sustainable service business; it also requires a steady stream of customers. To be successful, service providers need to look at both supply and demand and devise flexible relationships on the supply side to meet the fluctuating needs of the market. (See “Leverage Points for Negative Services.”)

Most of the successful companies we studied achieved sufficient volume and built customer loyalty by broadening the scope of their services. But those who excel in negative services seem to have difficulty broadening beyond them, perhaps because meeting negative service needs requires a highly responsive system in which low cost is not the primary concern. Obviously, such a system may be less suited for more routine services.

Most negative service providers tend to focus on service delivery outcomes — for example, successful tooth implants or a perfect auto body paint job. Service recipients, on the other hand, tend to view things more from a process perspective — how it felt to be the customer or patient and how smoothly the service was delivered. Service providers need to recognize these differences in perspective and develop better ways to educate customers in evaluating their services and the customer service experience. To be successful, they must have a deep understanding of the needs of customers and how best to address them.