In service businesses, increased productivity does not always translate into higher profits. Here’s why.
Many contemporary businesses are on a quest for productivity gains. They seek to maintain quality and quantity of output at ever-decreasing cost, yielding higher profitability. As advanced economies move more into the service sector, that means many managers devote a lot of attention to designing automated processes that reduce the need for people — typically their most expensive resource.
Sometimes, this works spectacularly well. Alaska Airlines, an innovator in streamlining the passenger experience, deployed a new check-in system at Anchorage International Airport in 2007, called the Airport of the Future project. By 2008, 73% of the airline’s passengers departing from Anchorage checked in via kiosks or the Web, a percentage that was significantly higher than the 50% industry average at the time. That represented a substantial cost savings,1 and the company experienced an 18% improvement in labor productivity. Between 2007 and 2009, Alaska Airlines reduced its work force by 10% and increased its net income by 25%.2
However, not all productivity gains yield such clear victories. Mass media and communications company Comcast Corp. increased its labor productivity by 11.4% from 2006 to 2007, and by another 10.9% from 2007 to 2008. Unfortunately, there were signs that customer satisfaction may have suffered. Comcast may have saved money by increasing its labor productivity, but its customer satisfaction score for subscription television services, as reported by the American Customer Satisfaction Index, fell between 2006 and 2008 and, by 2008, it was substantially below the industry average for that category.
Comcast’s story suggests that in service businesses, productivity gains are not always easy to make without sacrificing perceptions of quality. For service businesses, quality perceptions tend to correlate with investments in labor. The truth is that things are different in service, and unlike on the assembly line, increased productivity may not always lead to increased profitability.
In this article, we propose that in a service business, productivity must be treated as a strategic decision variable, not as a reliable path to greater profitability. We’ll show you the research that explains why productivity improvements often have counterproductive results in a service business. We’ll also explain why managers continue to adopt technologies that alienate their customers. Most importantly, we’ll offer a model for managing productivity strategically rather than optimizing it reflexively.