Technology in Services: Creating Organizational Revolutions

SERVICE TECHNOLOGIES have radically reordered the power relationships, competitive environments, and leverageable opportunities in most industries — whether in services or manufacturing. In the process, they are obliterating long-held precepts about management itself and creating entirely new strategic, organizational, and control system options for achieving competitive advantage. What are some of the more important management insights from our research?

• Contrary to much popular dogma, well-managed service technologies can simultaneously deliver both lowest cost outputs and maximum personalization and customization for customers.
• In accomplishing this, enterprises generally obtain strategic advantage not through traditional economies of scale, but through focusing on the smallest activity or cost units that can be efficiently measured and replicated — and then cloning and mixing these units across as wide a geographical and applications range as possible.
• Instead of the dehumanization often experienced in other realms, well-implemented service automation actually increases the independence and value of lower level jobs. At the same time, such automation empowers contact people to be much more responsive to customer needs.
• Such systems, when well implemented, frequently drive organizations toward entirely new conceptual configurations. These may assume “inverted pyramid,” “infinitely flat,” or “spider’s web” characteristics in order to deliver outputs most effectively and flexibly to a widely distributed customer base.
• In the process, they often disintermediate costly organizational bureaucracies, dramatically lower overhead costs, support rapid execution of strategies, and substantially increase the system’s customer responsiveness.

Creative use of technology in leading-edge companies has converted these concepts from theoreticians’ fantasies into realistic strategic options for virtually any company.

Obtaining Both Customization and Lowest Cost

Strategic dogmas exist that postulate an inherent conflict between obtaining lowest cost from a system and offering highest flexibility and customization.1 To achieve maximum value from service technologies, one must set these aside. By designing their systems properly, many well-run service companies both obtain optimal flexibility at the customer contact point and achieve maximum “production” efficiencies from constant repetition, experience curve effects, and cost-quality control. They accomplish this by first seeking the smallest possible core unit at which production can be replicated or repeated, then developing micro-measures to manage processes and functions at this level, and finally mixing these micro-units in a variety of combinations to match localized or individual customers’ needs. What do these smallest replicable units look like? The nature of the unit, of course, varies by industry and by strategy.

• For Mary Kay Cosmetics or Tupperware, the sales presentation is such a unit; for accountants, audit check procedures, inventory control processes, or tax preparation subroutines may be critical; for lawyers, prepackaged documents, paragraphs, phrases, court opinions, or case briefings may be the leverageable unit. In financial services, elements of individual “transactions” (like buy/sell units, prices, times, names, customer codes, etc.) are core units; for information retrieval, it is the “key word”; for communications, it is the “packet” or the bit; and so on.

Early in the life cycle of many service industries, the smallest truly replicable unit seemed to be an individual office, store, or franchise location. Later, as volume increased, it often became possible for the parent to develop and replicate greater efficiencies within locations.2 This was accomplished by managing and measuring critical performance variables at individual departmental, sales counter, activity, or stock-keeping unit (SKU) levels. Then the successful formula approaches of H&R Block, McDonalds, Mrs. Fields, and Pizza Hut pushed the repeatability unit to even smaller “micro-management” levels. Replicating precisely measured activity cycles, personal selling approaches, inventory control patterns, ingredients, freshness and cooking cycles, counter display techniques, and cleanliness and maintenance procedures in detail became keys to success; lapses led to difficulties. So precise are many nationwide chains’ measurement and feedback systems that their headquarters can tell within minutes when something goes wrong in a decentralized unit, and often precisely what the problem is.

Finally, in some industries — like banking, communications, structural design, or medical research — it has become possible to disaggregate the critical units of service production into packets, data blocks, or “bytes” of information. Accessing and combining such units on a large scale is emerging as the core activity in achieving flexibility and economies of scale on a level never before envisioned.

Managing at the Micro-Unit Level

Most of the major strategic successes we observed in the use of service technologies came from defining and developing these replicability units and their associated micro-measures in careful detail. The exceptions were some large transportation companies (airlines or railroads) and utilities (electric power grids) that relied on more traditional economies from large-scale facilities. The ultimate purpose of focusing on the smallest replicable unit of operations, however, is not just the mass production benefit that standardization allows. Effectively combining these micro-units permits one to achieve the highest possible degrees of segmentation, strategic fine tuning, value-added, and customer satisfaction in the marketplace. Interestingly, the larger the organization, the more refined these replicability units may practically be — and the higher their leverage for creating value-added gains. Greater volume allows a larger company to collect more detail about its individual operating and market segments; analyze these data at more disaggregated levels; and experiment with more detailed segmentations in ways smaller concerns cannot. For example:

• American Express (AmEx) is the only major credit card company with a large travel service. By capturing in the most disaggregated possible form — essentially data bytes — the details that its various traveller, shopper, retailer, lodging, and transportation company customers put through its credit card and travel systems, AmEx can mix and match the patterns and capabilities of each group to add value for them in ways its competitors cannot. It can identify lifestyle changes (like marriage or moving) or match forthcoming travel plans with its customers’ specific buying habits to notify them of special promotions, product offerings, or services AmEx’s retailers may be presenting in their local or planned travel areas. From its larger information base AmEx can also provide more detailed information services to its two million retailer customers — like demographic and comparative analyses of their customer bases or individual customers’ needs for wheelchair, pickup, or other convenience services. These can provide unique value for both consumer and retailer customers.

The key to micro-management is breaking down both operations and markets into such detail that — by properly cross-matrixing the data — one can discern how a very slight change in one arena may affect some aspect of the other. The ability to micro-manage, target, and customize operations in this fashion, because of the knowledge base that size permits, is becoming one of the most important uses of scale in services.

Critical to proper system design is conceptualizing the smallest replicable unit and its potential use in strategy as early as possible in system design. Summing disaggregated data later, if one so desires, is much easier than moving from a more aggregated system to a greater refinement in detail. And highly disaggregated data often captures unexpected experience patterns that summary data would obscure. Much of the later power and flexibility of American’s SABRE, McKesson’s ECONOMOST, or National Rental Car’s EXPRESSWAY systems derived from making this choice correctly, while less successful competitors’ systems did not.3 Too many companies have chosen a larger replicability unit in order to save initial installation costs. In the process they have lost crucial detailed experience and segmentation data that should have become the core of their later strategies.

Technology Provides Efficiency and Empowerment

Well-designed technology systems for services not only increase efficiency, they empower employees to do their jobs better. Why is this so important in services? In most cases, a service must be produced simultaneously with its consumption — as a telephone call, a vacation, a restaurant meal, electrical energy, or a hospital stay would be. There is often no inventory potential, very little opportunity for later repair, and no resale market for the service. This means that much of a service’s perceived value is created at the moment and place of contact. And the frontline person’s willingness to handle that contact with diligence and flair is often critical to success of the enterprise.

Properly designed service technology systems allow relatively inexperienced people to perform very sophisticated tasks quickly — vaulting them over normal learning curve delays. Then by constant updating, the most successful technologies and systems automatically capture the highest potential experience curve benefits available in the entire system. This allows employees to take advantage of the total organization’s constantly expanding capabilities, which they could not possibly learn first hand or be trained personally to execute. This is vital when so many service operations rely on entry-level, part-time, or relatively inexperienced workers to meet their needs at lowest cost. By increasing the value-added per employee, the technologies also open possibilities for wage gains, as well as opportunities for many employees to own a profitable franchise or manage the very decentralized operations of automated service systems.

Interestingly, effective service automation generally encourages greater — rather than less — empowerment and decentralization at the contact level. This is true of both professional and more product-oriented service organizations — like restaurants, retailers, or post-sale product support units. By routinizing the operating detail that it once took great effort to master, managers and workers can concentrate their attention on the more conceptual or personalized tasks only people can perform. An example will suggest how technology helps both decentralize and empower personnel in successful service organizations.

• Domino’s Pizza, perhaps the fastest growing food chain in history, encourages its local store managers to regard themselves as individual entrepreneurs. First, for each of its 4,500 highly decentralized outlets, industrial engineering and food science research automated the making of a pizza to as near a science as possible, eliminating much of the drudgery in such tasks, yet ensuring higher quality and uniformity. Then, finding that its store managers were still spending fifteen to twenty hours per week on paperwork, Domino’s introduced NCR “mini-tower” systems at its stores to handle all of the ordering, payroll, marketing, cash flow, inventory, and work control functions. This freed store executives to perform more valuable supervisory, follow-up, menu experimentation, public relations, or customer service activities — expanding and elevating their management roles. Thus they could focus even more on founder Tom Monahan’s goals: that they be independent entrepreneurs devoting themselves as much as possible to the company’s highly developed customer service philosophies.

Some strategies, of course, call for more empowerment, some for more standardization of activity. Some service situations even require that technologies be used primarily to obtain uniformity, rather than flexibility. In some services, like bank accounting, film processing, or aircraft maintenance, one may actively discourage too much independence, because exactness and tight tolerances are required. Great service successes, however, generally exhibit a unique blend: a distinctly structured technology system and a carefully developed management style to support it. The subtle ways in which the two are developed and emphasized can lead to quite different market postures in the same industry.

• Federal Express (FedEx) has long emphasized the use of a friendly, people oriented, entrepreneurial management style in conjunction with state-of-the-art technology systems. Its DADS (computer aided delivery) and COSMOS II (automated tracking) systems give FedEx maximum responsiveness. And its training programs, colorful advertising, decentralized operating style, and incentive systems stress the need to go to the limit personally in responding to customer needs and ensuring reliable, on-time delivery. By contrast, UPS has long utilized old-style trucks, hand sorting, lower cost land transport, detailed time and motion study controls for its drivers, and a hard headed control system that give it a lower cost — but considerably less customer responsive — market position. Both companies have been successful, FedEx by emphasizing “highest reliability and customer service” and UPS by emphasizing good service at low cost.

New Organizational Forms

In their efforts to gain the benefits of these two concepts — management at the micro-level and increased empowerment at the customer contact point — many service companies have developed strikingly new, and more effective, organizational modes. Several of the most important ones are described below.

Inverting the Organization

To the customer, the most important person in the company is very often the one at the point of contact. What happens in the usually brief one to three minutes of that contact will demonstrate — or destroy — for the customer all the value the company so expensively has sought to create through its product, quality, distribution, and advertising investments.4

In some situations this consideration is so dominant that it has led to the concept of “inverting the organization” to make all systems and support staffs in the company “work for” the frontline person to deliver the company’s full capabilities at the moment of customer contact. Managers in such enterprises try to make their organizations perform as if they were a series of pyramids focused on the frontline contact people. Some, like Toronto Dominion Bank and AIG, have formal organization charts with the customer at the top, the CEO at the bottom, and an inverted organization hierarchy in between.

Such techniques may be useful reminders, but it is really technology and an inversion of roles and attitudes that make such concepts work. The point person (e.g., a branch bank’s customer service representative) cannot possibly know or control all the system details (investment options, differential interest rates, future values, etc.) necessary to deliver the organizations full power to the customer. Thus, successfully inverted organizations first capture and continuously update or monitor as many relevant service elements as possible by structuring data banks, “expert system” models, and interactive feedback and communication systems to make as much as possible of the firm’s total expertise available instantly to the point person. Network technologies allow frontline personnel to call forth and cross-matrix whatever details their customers’ specific needs may require — using collected micro-units of information either directly as data or indirectly to build unique solutions for customers even at the most remote locations. Within the data limits and decision rules defined by the system, non-routine decisions are left as much as possible to local personnel. These individuals then call for help on those specialized issues they cannot handle themselves. And each person in the management hierarchy is expected to respond to this “order” for support.

As an interesting part of the inversion, it is usually the software or planning personnel (ordinarily considered “service” or “staff’) who design “line” decisions. They do so by providing accessible answers to routinely asked questions or by simulating (through expert systems) many of the more sophisticated decisions line managers would normally make. To complete the inversion, intermediate line managers, rather than being order givers, become essentially expediters, information sources, and performance observers — roles frequently assumed to be “staff — supporting the contact people. However, their other substantive line roles — particularly as arbiters of last resort for frontline personnel and as sensors of situations beyond the scope of the technological systems — take on even greater relative importance as routine activities decline. Because of the distortions that inevitably take place in human communication, eliminating the hierarchical layers between the central repository of information and the customer contact point becomes an important goal that a well-developed information technology system facilitates. When this occurs the few remaining line executives become even more important in their expanded roles — managing much wider areas of organizational contact and those more complicated issues where interpretation, intuition, creativity, and human motivation count.

“Infinitely Flat” Organizations

When technology is creatively implemented in services, companies often achieve other remarkable organizational configurations. For example, there now seems to be virtually no limit to the reporting span — the number of people reporting to one supervisor or center — that a service organization can make effective. While spans of twenty to fifty have become relatively common, spans of hundreds exist in some service organizations. Several examples will make the point.

• Shearson American Express’s and Merrill Lynch’s 310 to 480 domestic brokerage offices connect directly with their parents’ central information offices for routine needs, yet can bypass the electronic system for personal access to individual experts in headquarters. In effect, technology permits the company to function in a coordinated fashion with the full power of a major financial enterprise, yet allows local brokers to manage their own small units independently. The result is to provide the most extensive possible local responsiveness and customization for the company’s dispersed customer base.

• Federal Express, with 42,000 employees in more than 300 cities worldwide, has a maximum of only five organizational layers between its nonmanagement employees and its COO or CEO. Typical operating spans of control are 15–20 employees to one manager, with only 2.1 staff employees per million dollars in sales — about one-fifth the industry average. As many as 50 couriers are under the line control of a single dispatching center. FedEx’s advanced DADS and COSMOS computer-communications capabilities allow it to coordinate its 21,000 vans nationwide to make an average of 720,000 “on call” stops per day. Because of its leading edge flight operations technologies and avionics controls, as many as 200 FedEx aircraft can be in the air simultaneously, but under the control of a single authority, should it become necessary to override flight plans because of weather or special emergencies.

There is no inherent reason that organizations cannot be made “infinitely flat” — in other words, with innumerable outposts guided by one central “rules based” or “computer controlled inquiry” system. In designing service company systems, instead of thinking about traditional “spans of control,” our study suggests that the terms “spans of effective cooperation,” “communication spans,” or “support spans” may have more meaning. By defining, routinizing, and automating operating parameters at their finest replicable level, companies can often obtain the thorough cost and quality controls they need for system coordination and productivity at each of many highly decentralized operating nodes. In these circumstances, the normal functions provided by personal hierarchical controls become almost irrelevant.

Extremely wide reporting spans work well when the following conditions exist: localized interactive contact is very important; each ultimate contact point or operations unit can operate independently from all others at its level; the critical relationship between decentralized units and the center is largely quantitative or informational; and the majority of the relationships with the information center can be routine or rules based. Although service units have generally pioneered such organizations, a few manufacturing enterprises have realized that the same characteristics occur in specific production situations and are beginning to implement similar approaches. The immediate economic impact of such systems is, of course, that they allow major investments in extremely sophisticated systems at the center, deliver this sophistication in highly customized form at remote points, eliminate overhead hierarchies, and add value (at lower unit costs) in both the center and the remote nodes. American Express — whose expertise at credit processing is so great that its competitors hire it to process their credit transactions — is one such example. AMRIS (described later) is another.

An often overlooked feature of these systems is the longer-term payoff potentials that carefully developed feedback loops from the decentralized nodes can offer to the center. By sophisticated segmentation and synthesis of data generated at the nodes — and the often much more detailed information about their customers they collect — the corporation’s “information center” can develop a knowledge base with a power neither it nor any single outlet could possibly achieve alone. Aggregating and comparing detailed information from these sources, the center can often develop an ever-increasing set of higher value-added services and sell them back to its own nodes (or the latter’s customers) to further increase its profits and those units’ competitiveness. For example:

• American Airlines’ parent recently created a sister company, AMR Information Services (AMRIS) to further leverage the knowledge, staff, facilities, and technologies its SABRE reservations system had built. Along with operating an offshore data entry business, AMRIS is entering a partnership with Hilton, Marriott, and Budget Rent-a-Car to handle their critical reservations and property management activities worldwide. AMRIS’s system (called CONFIRM) will provide a single source with hundreds of remote nodes — in other words, a very fiat organization — through which travel agents can make and confirm all desired reservations.

But CONFIRM will also provide its client industries with a much broader and deeper database to micro-manage their yield strategies, for example, foreseeing unexpected shortfalls or special surges in occupancy or demand soon enough to target short-term promotional and pricing strategies. In time, comparative data across client companies will enable AMRIS to develop industrywide decision support models, further amplifying its own and its clients’ competitive advantages. Yet each participant in this consortium (and their individual outlets) can operate as independently as they wish.

“Spider’s Web” Organizations

When the highly dispersed nodes of service operations or customer contact must interact frequently, another startling organizational form begins to emerge. It is sometimes called a network, but is best described as a spider’s web because of the light yet structured quality of its interconnections.

• Arthur Andersen and Company (AA&Co.), a leader in applying technology to professional services, has to interlink its 40,000 knowledgeable professionals with thousands of clients, each with a mix of operations around the United States and in up to 200 other countries. The company’s cumulative experience is growing so fast that, according to executives, “Even those in the know may not have the best answer to the totality of a complex question.” Consequently, individuals in AA&Co. can no longer even rely on their personal knowledge of whom to call for information. So in addition to trying to capture the history of its contacts with major clients, keeping up electronically with changing IRS and FASB requirements, and attempting to catalogue where it has found solutions to particular problems, the firm is developing an electronic bulletin board to let any professional send out a query to the entire AA&Co. system to find useful solutions or knowledge that any other individual in the company may have for special problems.

The firm operates in a highly decentralized, realtime mode. Each local office is as independent as possible. Partners say that AA&Co.’s distinctive competency has become “empowering people to deliver better quality technology-based solutions to clients in a shorter time.” Customers now look to the firm to deliver computer-based solutions to systems problems in a league competitive with EDS’s and IBM’s capabilities. Yet professionals who leave AA&Co. immediately lose access to its systems and accumulated experience.

Such open network formats increasingly characterize the way multinational or investment banks, financial or professional service companies, engineering and construction enterprises, research and health care, and accounting and advertising firms operate. Unlike the units of infinitely flat organizations, each of the nodes in the spider’s web frequently needs, for effectiveness, to be in touch with the information or resources all other nodes contain. Within wide ranges, each node may function quite independently in serving a particular client base. However, in certain circumstances, the individual nodes may need to operate in a highly coordinated fashion to achieve strategic advantage for a specific purpose. To deal with this problem, companies with traditional organizational structures must resort to complex matrix organizations that allow the project leader to coerce resources, as needed, from the otherwise decentralized network. But this often creates very costly motivational, priority, turf, and transfer pricing issues. Others have found the flexibility, fast response, and opportunism of the spider’s web concept so attractive that they have established entirely new management modes that allow it to operate.

Managing Networks

Spider’s web organizations create their greatest value by increasing the levels of information shared among members and heightening the motivation individual members have to solve customer problems. To maximize these effects, many successful managers consciously leave their formal organizations somewhat ill defined. But they establish well-defined, customer-oriented control systems centering on individual client or segment activities, such as market penetration, call and service frequency, and other customer satisfaction measures. They often use team, overlapping, or shared responsibilities to increase the number of people among whom information is communicated. Rotating tasks and locations, pooling resources, and mixing membership on various ventures further enhance information sharing and personal ties within the web. With vague hierarchical goals — yet well-defined output measures directed toward how well customers are being satisfied — individuals focus on ends and are free to adopt the most appropriate organizational and technical means.5

To further encourage lateral coordination, many organizations no longer try to allocate profits among cooperating groups. They either use simple fee-splitting rules — like equal division among the departments — or multiple counting systems that give full credit to all contributing groups. This eliminates conflicts among groups but enables managers to give selective bonus rewards to individuals at the end of the year. To make the whole system work, managers have to have well-developed micro-measurement systems, stay very close to ongoing operations, spend a great deal of time on personnel evaluations, and be willing to give substantial bonus differentials for outstanding as opposed to mediocre performance.6 Any of these can represent a shocking change for organizations operating in traditional hierarchical or profit center modes.

Creative Management for Profits

Managing these new organizational forms poses some interesting challenges. Yet we have observed some consistent patterns, problems, and benefits that seem to accompany development of these new modes. What are some of the most interesting themes?

Destruction of Bureaucracies

A common consequence of these new organizational strategies is their dramatic potential for reducing intermediate management — and other organizational — bureaucracies. This occurs in part because a customer’s highly personalized perception of quality in services tends to demand as much customization at the point of sale as possible. Delivering reliably against this expectation requires that intermediate levels of interpretation or handling be avoided like the plague. Each transfer point or intermediary can introduce unintended errors, distort intentions, or create costly but unmeasured bureaucratic delays. Unfortunately, because the outputs of internal service functions are so difficult to measure, it is easy for such costs to balloon uncontrollably. Targeting internal, as well as external, service activities for substantial disintermediation (entire elimination of the function if possible) can lead to startling competitive gains, usually including more rapid response times and better service for customers.

• For major newspapers like the New York Times, electronic technologies are enabling editors and reporters to go directly to printable copy at their electronic work stations. While still in contact with their field sources, they can pretest spacings, enhance picture quality, and lay out entire pages without handling any hard copy. Through disintermediation of make up, type setting, and other proofing stages they cut costs, shorten cycle times, and deliver more current news to their customers. Electronic publishing also allows such newspapers to target the news for different localities, release multiple local editions on tight schedules, and serve their regional advertising customers more effectively.

Leveraging and Keeping Key People

Many companies find that developing internal service technologies to a high level has become a critical factor in attracting, leveraging, and keeping key people. This is most obvious in the more professional service areas like research, design, engineering, finance, marketing, or public relations. In such fields, better qualified people will more readily join or stay with a company if it provides the most advanced technology systems for practicing their art. The concept has special power in independent professional service firms, where very talented people are essential but can easily move to other enterprises, often taking clients with them. Proper strategic use of technology in these situations increases the professionals’ personal potentials within the firm — enabling higher billing rates and salaries — yet creates a dependency that ties them more tightly to the enterprise. Thus used, technology serves in both offensive and defensive roles.

• Advanced accounting, legal, consulting, and financial service houses use technology as a two-edged sword. First they capture and store updated regulations, legal opinions, and professional practice rules to ensure highest quality for their services. Then they attempt to automate their routine audit, client analysis, and repetitious operations (like contract boiler plate or tested clauses for public documents) and concentrate on the unique aspects of their clients’ situations. This has progressed so far that some activities — like audit functions in CPA firms and portfolio or bubble chart analyses — that used to be the core offerings of many professional firms have become commodities with such low margins that they are often used primarily as promotions to obtain other business. As they are freed from overseeing these routine tasks, key people can benefit from the excitement of solving more challenging problems and from the higher revenues this allows. In fact, many professional services firms now find that the core of their distinctive competency lies in the accumulated knowledge in their databases and the capacity of their members to access and build solutions on those databases. The technology thus creates entry barriers for competitors, switching costs for clients, and (perhaps most important) switching costs for their own key personnel.

Successful use of technology in these situations is built around certain imperatives. First, the technology must leverage its users’ personal capabilities and enhance their value to the greatest extent possible. Second, to capture the maximum benefits of the technology, quotes, billings, and internal controls need to shift from an hourly billing basis toward a value-added concept. Finally, while being simple to access, the technology’s innards must be sufficiently complex that its reproduction becomes a genuine barrier to key individuals’ leaving. This defensive consideration is especially critical for independent professional partnerships, but it is increasingly important in product oriented companies where an individual’s knowledge or contacts — for example, in research or marketing — are central to the enterprise’s success.

Technology has also become strategically important in providing job satisfaction at all levels of service organizations. How well a company treats its key employees — whether they are high performing sales clerks, skilled technicians, or expensive professionals — will ultimately be reflected in how productive these employees are and how well they treat customers. Well-designed technology systems directly support desired motivational processes at all levels.

• For example, retail stores have found that some of the major benefits of their bar code scanning and price look-up systems come from a marked decrease in pricing and inventory identification errors and, even more important, a correspondingly improved morale among checkout personnel. Be cause there are no product identification errors, purchasing and stocking activities are more accurate, avoiding annoying stockouts and outdated merchandise. Checkout and sales clerks are less embarrassed by not knowing item descriptions or current prices, can speed up their service considerably (thus decreasing frustrated customers’ antagonism), and have more time to spend on the more pleasant customer interactions they enjoy.

Precise and Swift Strategy Execution

Another important advantage accrues from proper exploitation of service technologies. As managers break their service production down to the smallest replicable units consistent with customers’ varying needs, they must be able to measure performance in comparable detail. Assuming they install proper feedback mechanisms, this gives them the capability to execute their strategies quickly and precisely, maintaining a desired productivity, quality, and “product” mix even as demand fluctuates violently or new products are introduced.

• While insurance companies used to rewrite their offerings and rate books once or twice a year, they must now adjust to the constantly changing interest rates and offerings of other direct and functional competitors, like banks, money market funds, and the single premium offers from brokerage houses. Insurance executives state flatly that their agents could not possibly understand or present the volatile complexity of their products without responsive on-line information connections with head-quarters. Such connections are essential to calculate and immediately update the company’s margins on each product, maintain desired spreads, and motivate agents to sell the most profitable current product mix.

Respondents in our study often asserted this theme: “In services, execution is everything. If you can’t deliver what customers want, when they want it, with the personal touch they like, all your strategic thinking and investments won’t amount to much. Our technology is one key factor in execution. The other is the management systems and culture that cause our people to react quickly and favorably to our offerings and to our customers’ needs.”

Managing Technologies and Attitudes

While many strategic analyses focus mostly on measurable economic factors, our study found that managing employee perceptions at the frontline level was among the most highly leverageable — and lowest cost — activities service managers undertook. When strongly inculcated corporate values were made meaningful at the operating level, morale became higher, service levels improved, productivity went up, time horizons lengthened, increased delegation was possible, personal conflicts decreased, and control system costs dropped — all with high impacts on value-added and profits. But it also turned out that a dual orientation toward technology and managing values was crucial. Together, in our sample, the two yielded some of the greatest successes in modem business history. But when one was ignored, disasters could happen.

• Many are familiar with the explosive growth Donald Burr created with his charismatic leadership of People Express. At first, the company’s shared vision was fully communicated and internalized at virtually all levels of the organization. This and other personnel practices led to a highly committed, efficient, and responsive company. However, one of the reasons People Express failed was Mr. Burr’s disdain, if not active dislike, for technology. Despite the pleading of some key people, People Express was not connected to the major automated reservation systems, key operations were not computerized, and flight services became ever more confused and difficult for passengers. Finally, other airlines with more sophisticated information about flight patterns and rate structures were able to chip away at People Express’s niche without severe cost to themselves. Over time, it became increasingly difficult to implement the company’s vision, especially as People Express attempted to expand operations without a sufficient computer infrastructure. Finally, employee morale began to lag because of the frustrations of operating in such confusion.

• By contrast, Wal-Mart stores, the last decade’s fastest growing and most profitable major retail chain, offers an excellent example of how the combination can be implemented well. Wal-Mart focuses its advanced technologies and all of its efficiency efforts on serving its customers better and lowering prices, not just on cost cutting or margin generating per se. To drive its customer oriented value system, executives spend four to five days a week personally talking to customers and employees in the field, and then return for Friday/Saturday “idea sessions” to improve operations. To emphasize this orientation further, Wal-Mart often designates certain employees (who might otherwise have been displaced by technology or systems changes) as “people greeters” to increase customer satisfaction. It has also developed an extensive “Buy America Plan,” which helps Wal-Mart’s dominantly blue-collar customers by protecting their jobs. All these practices support the company’s constantly reinforced theme that “serving the customer right is what makes profits.”7

The Company as a Voluntary Organization

Two of the most important strategic differences between large scale services and manufacturing operations are the dependency of the entire system on the person at the contact point with the customer, and the very high degree of geographical dispersion among the points where the service is produced and delivered. The people who can and do create the greatest value in these situations are genuinely “volunteers”; they have often been described as “assets who walk out the door every night.” And their skills, intrinsic attitudes, and knowledge are such that they rarely have to stay with the company unless they so choose. For a service company’s core strategies to succeed, everyone in critical positions — especially those who deal directly with customers’ concerns — must be in an environment where they want to perform well, and be trained and empowered to do so. Many of these people — often numbering in the thousands in large enterprises — tend to be at locations remote from the corporate center.

Realizing this, successful service companies focus on delivering empowering details — from required data to repair supplies — in a timely manner to key personnel and then cultivating their willingness and capabilities to use these to serve customers. In order to ensure maximum responsiveness at the contact point, however, one must also have the confidence that the frontline person will intuitively respond in the proper way when non-programmed situations occur. Empowerment with control entails many things. Critical among them are providing information, supplies, and performance measures with micro-precision at the frontline level and paying special attention to values and attitude management — including the selection, indoctrination, skills training, and incentive processes converging on people at the point where the service is created and delivered.

Two of the least glamorous services — maintenance and hair dressing — show dramatically how managing this combination can pay off.

• Service Master — by carefully analyzing its data base of fourteen years maintenance history for seven teen million equipment units — can lower its clients’ costs immediately by using detailed models of exactly how each unit should perform, when preventive maintenance pays, and when replacement should occur. But when ServiceMaster comes in to manage hospital or other equipment maintenance services, it typically finds maintenance people in a survival mode, with their equipment deteriorating daily and no training or career paths allowing them to break out of seemingly dead-end jobs.

The first things ServiceMaster does are to get the system cleaned up, give people needed training, and help them feel more in control of their lives and operations. Morale immediately goes up. Then ServiceMaster introduces maintenance personnel to a career development program. It shows them how to get an associates degree in plant engineering, to become a group manager, a facilities manager, or even the head of a ServiceMaster unit. As senior vice president Craig Frier said, “Our technologies enable them to run things right. But we can’t do anything or get to any of our goals for the facility until we can get rank-and-file maintenance, housekeeping, or dietary employees to understand and believe in themselves, their futures, and their worth.”

• Visible Changes, in the fragmented hairdressing industry, achieves three and one-half times the turnover of its competitors, twice the average sales per customer, and almost four times the industry’s average product sales in its outlets. Starting with hairdressers — who generally have no loyalty to their employers and see their profession as a low-paying dead end — Visible Changes tries to give its employees a sense of proprietorship, without stock equity. Employees make their own decisions, and always earn their rewards.

Nothing comes as a “benefit.” People earn their health insurance from their sale of hair care products. They have to earn the right to go to advanced hair styling programs. But as a reward, hairdressers, when customers especially request them, receive a 35 percent commission and the right to raise service fees by up to 40 percent. Bonuses, based on performance ratings, can add another 10 percent, and profit sharing 15 percent more. A computer-based system helps measure and reward each individual’s performance down to the finest detail; it maintains needed cost controls, points out where performance can be improved, and creates equity among individuals. The typical employee earns three times the industry’s average wage.8

The value of most service companies depends strongly on their managements’ style and leadership qualities, the culture that management creates, and the way key people respond to these factors. No financial analysis of the “breakup” or “takeover” value of a service company means much without a realistic assessment of whether a new management could — and would — continue to build similar value through its people. To enhance a firm’s market value, perhaps management should try to capitalize as much of a firm’s uniqueness as possible into its operating systems and technologies, which are transferable on sale. But these will never quite capture that last, most important, ephemeral, and leverageable element in services — the skills and attitudes of key operating people and management.

Key Challenges

We have emphasized the reality and the success of these fascinating new organizational forms and strategies. Yet managements encounter many difficult issues in implementing them — particularly in settings where more traditional structures have enjoyed a long history. It is often easy to introduce a radical organization form in a well-conceived startup. Elsewhere, one can anticipate certain common complications.

• Intermediate management levels — whose very meaning is threatened by such configurations — will resist strongly, unless the firm’s growth offers more productive havens.
• Especially in more professional service activities, those for whom information has been power will struggle against giving their newer colleagues access to client contacts, mentally stored solutions, or private files that have given senior members a competitive edge in the past.
• MIS people who have made their careers around large central computer systems often become unsettled centers of resistance when they realize that powerful desktop computers and decentralized networks will make their primary skills obsolescent and erode their power bases.
• Experienced line personnel may become frustrated and confused by the need to choose and compromise among the competing demands various important parties place on them.

The accompanying article suggests a framework for analyzing strategy in this new environment and how, by simplifying their organization, companies can overcome many of these resistances while achieving greater strategic focus. Both articles demonstrate that the opportunities for increased efficiency, flexibility, and responsiveness — with significantly lowered overheads — are very great. The question is no longer whether these potentials are real. The issue is whether, when, and how to begin moving toward these potentials — before or after one’s competitors have seized the initiative.