Service is as service does: CEOs talk the talk, but many companies don't deliver.

Service quality among U.S. firms is slipping significantly, independent data shows, and chief executives need a wake-up call lest they lose customers while offering products and services that continually fall short of expectations. CEOs can ill afford to offer products that disappoint and services that don't deliver. When they do, they must recognize their shortcomings quickly and repair the problems--and the damage--before it affects their bottom line and weakens their brand.

[ILLUSTRATION OMITTED]

Insurance companies drive customers to the brink with complex forms and ever-shifting telephone call-in procedures. Credit card companies, mutual funds and banks routinely overwhelm customers with complex statements. Customers in many industries complain about telephone recordings telling them, "Your call is important to us," only to wait 30 minutes or longer for a telephone agent.

The last time such poor customer service existed was back in the late nineties when bankers insulted complaining customers who didn't fit their profiles for profitability, airlines cut back on service amenities, and many other companies started shifting their service call centers offshore even as complaints soared about language misunderstandings. CEOs from many of these firms responded with campaigns to improve service, including peppy, image-boosting ads, increased training and new concepts such as customer relationship management (CRM) to win customer loyalty. Annual reports are filled with statements from CEOs proclaiming how deeply they care about customers.

But guess what? Apparently, the purported concern by CEOs is insincere. According to the American Customer Satisfaction Index (ACSI), which measures service nationally, the level of service early this year saw its largest decline since 1997. Says Colleen Barrett, president of Southwest Airlines, which scores well for service on independent surveys: "There's a lack of focus on customer service across the board."

This time around the reasons are more complex, and getting quality back on track is likely to be a tougher fight. According to the ACSI index, the worst businesses for service complaints include cell telephone companies, cash-strapped airlines, hospital companies and some financial firms. Manufacturing companies fare better because they undertook cost-cutting and productivity improvements long before service-oriented companies did, says Claes Fornell, a professor at the Ross School of Business at University of Michigan and director of the ACSI survey.

One disturbing trend, Fornell notes, is that satisfaction numbers are slipping for high technology and Internet-based businesses. Such companies, including eBay, Dell and Amazon.com, emerged as geeky stars in the nineties and received accolades for good customer care, but those days are long forgotten. Dell, for example, has been so badly hammered by complaints about spyware, adware and viruses in the past two years that it has spent the past year undergoing a global service tune-up. (Spyware and adware are "cookies," or small, seemingly invisible programs stored on personal computers to track usage in relation to a particular web ad, mine personal data or otherwise tap a user's system.) Dell also was blindsided by the explosive growth of computer use in homes. "Those are the two things that have really made the service decline more noticeable," acknowledges Bobbi Dangerfield, Dell's director of U.S. consumer customer experience, who focuses on making sure that customer retention and satisfaction is at the center of every transaction.

The High Cost of Productivity

Among the possible causes in a decline of service quality are an overemphasis on productivity, thoughtless price matching with low-cost competitors and head office distractions on such matters as the Sarbanes-Oxley Act.

CEOs are always under pressure to cut costs and improve productivity. The bench-mark for years has been the U.S. manufacturing sector, which has beaten back foreign competition by greatly improving productivity rates. Problem is, replicating the manufacturing is no mean feat in the service sector. "No other country comes close to the level of productivity in manufacturing," says Fornell, "but when you try to apply exactly the same thing to the service sector, it becomes more complex." CEOs may think they are doing well by cutting corners and improving productivity numbers in service industries, but they risk alienating customers and losing them for good.

Overweening price-consciousness is another possible factor. Retailers, for instance, may go too far in following the example of Wal-Mart, which wins on low prices but doesn't always do well on customer satisfaction scores. (According to the 2005 ACSI index, Wal-Mart ranked number 8 of 10 department and discount stores, only ahead of Army and Air Force PXs and Kmart.) Target, by contrast, offers some of the same conveniences as Wal-Mart but doesn't try to undercut them on price. Instead, they tend to emphasize helping customers, says Len Berry, a business professor at Texas A & M University who specializes in quality issues. Target receives credit for having a better shopping experience, he says. "All in all, the trend [towards price competition] is very dangerous," Berry says. "Price is the most easily imitated element and you may lose money doing so. That's where we are going wrong. We're so focused on price instead of being focused on improving customer values."

Nigel Travis, the British-born CEO of Papa John's pizza company, believes that Sarbanes-Oxley is contributing to the service squeeze. "In the last couple of years," he says, "so many companies have been involved with the onerous requirements of Sarbanes-Oxley, especially if you are going to a 404 review, and if they are thinking about that, they don't have time to think about quality and service."

For its part, Papa John's doesn't seem to be affected; it has received top scores among the nine fast food firms surveyed by ACSI. Wendy's International ranks second in the 2005 surveys, while McDonald's and Yum! Brands' KFC round out the bottom. Travis, a top Blockbuster executive who took over from Papa John's founder John Schneider last spring, says the Louisville-based pizza maker maintains its high scores by staying focused on what its customers want.

While discerning market trends and offering new products, Papa John's also makes certain that its ingredients are fresh at its 3,000 restaurants. That means the dough is fresh, not frozen, the water's distilled, and the tomato sauce is packed fresh. "The biggest difference," says Travis, "is that we take quality as seriously as General Electric does. They have their Six Sigma; every Monday we have a review of every store by computer."

Most Papa John's stores are operated by franchisees, and the mother company is rigid about maintaining quality. "Fellow franchisees applaud it," says Travis. "They want standards for everyone because one bad restaurant can ruin it."

Poor Air Quality

One business sector that continually receives bad press for service is airlines. Competition from low cost carriers, high fuel prices and bloated labor forces have trashed traditional U.S. carriers like American Airlines and Delta that were once proud flagships for service. Some, like US Airways Group and United Airlines, are in bankruptcy. In all cases, such problems make it extremely difficult to pay much attention to service.

Due to their respective financial crises, it may not seem surprising that US Airways and United ranked among the lowest of seven major carriers tracked by ACSI in its first-quarter survey. The highest ranking airline of the group was Southwest Airlines followed by Continental.

So how does Southwest do it? As president Barrett puts it, "It's our single focus. We tell employees at the applicant stage that we are in the customer service business and that we just happen to run an airline." Even so, new recruits are told that the highest bird in the Southwest pecking order is a fellow employee, followed by the customer and then the shareholder. The idea, says Barrett, is to create a sense of teamwork that has resulted in enviable customer satisfaction since Southwest took off as a low-cost upstart in Dallas back in 1974.

Southwest is known for what some call "its aggressively high-spirited culture." Barrett notes that the company constantly tries to boost employee morale by recognizing examples of good service. There are parties, dinners, even a scheme to use the walls at corporate headquarters to display employees' personal memorabilia, such as photos of families and pets.

Dell, which was once renowned for its customer service, is trying to boost employee morale to correct current service deficiencies. But it is doing so only after initiating a major revamp of how it responds to complaints. Dell's situation is both ironic and peculiar because its founder, Michael Dell, started the company in part because he was unhappy with the service he received from other personal computer companies. Dell was launched with broadly advertised commitments to quality service, and Dell still is second only to Apple in the ACSI index service survey.

[ILLUSTRATION OMITTED]

Service issues, however, have dogged the company for at least the past three years. Like many firms looking for costcuts, Dell outsourced many of its service call centers overseas, but it ran into trouble in 2002 because workers at some of the Indian companies it employed had poor English language skills and could not understand customer complaints or offer solutions. Internet blogs abound ripping into Dell's service, citing annoyingly long hold times for phone calls, not being able to understand the service representative or customers being bounced from one rep to another. Some bloggers claim they only got attention when they personally emailed Dell CEO Kevin Rollins or the Dell legal department.

According to Dell's Dangerfield, the company ran into trouble because it was hard-pressed to keep up with demands for service after the "digital" household (families owning several Dell computers) emerged in 2001. And like most software and hardware firms, Dell has found itself hamstrung responding to new problems such as adware, spyware and viruses. "Our customers told us we had some challenges," says Dangerfield, and for at least the past year, Dell has been on a fix-up campaign. Remedies include new policies limiting how many times a complainant can be transferred and trying to make sure problems are fixed with the first phone call or email. Dell has been surveying customers and employees more aggressively to identify its own deficiencies.

The biggest and most successful remedy, according to Dangerfield, is to make sure service representatives take ownership of a complaint. Reps give their names and are responsible for guiding the customer through the repair process. Once the issue is resolved, the rep calls or emails the customer, citing his or her name plus their supervisors' name, and asks if all went well. "We implemented the ownership program last fall and are seeing pretty good traction and a change in perception," she says.

As the Dell case proved, outsourcing is one part of the explanation for declines in service quality. "Any time you outsource a function that's critical to your customer, you're taking a big risk," says Texas A & M's Berry. "It doesn't mean [going offshore] is a bad idea, just that it's risky."

Another is over-reliance on CRM and other technology-based systems, particularly in the banking sector, that winnow out customers who cost time and money and may actually take away from the bottom line. These systems, which have been quietly reported in the press for years, rate customers according to their profitability, using specific codes that pop up on service representatives' call center screens to show just how profitable each customer was. If the customer generated revenue, he or she was treated well. If not, treatment was curt and abrupt. (Both Fornell and Berry readily acknowledge that such an approach hurts banks because it is in their interest to turn less profitable customers into profitable ones. Banks that take the time to address problems, such as late payments for legitimate reasons, create a win-win scenario.)

Data mining is another attempt to build customer loyalty by parsing, storing and retrieving personal data on customers to take advantage of cross-selling opportunities. Some experts aren't sure that complicated technology-based programs are really necessary, since applying simple common sense can do the same thing. CEOs, for example, don't need to spend many thousands of dollars in consulting fees to understand that products should be targeted at customers' needs.

Mike Glenn, executive vice president for market development at FedEx, which tops competitors in ACSI scores, agrees that CRM is "more of a catch phrase, a bit of consultant-speak." FedEx takes building service quality and customer loyalty seriously. It has to; with about 5 million deliveries across the globe every day, it has many opportunities to make mistakes. "It's like shaving," Glenn says, "if you do it every day, you look great. If you miss a few days, you look like a bum."

Like Southwest Airlines, FedEx has aggressive programs to make sure its new employees are people- and service-oriented, and it spends a lot of time building team identities and other concepts. Utilizing the dominant color in the FedEx corporate logo, the firm gives its "Purple Promise Award" to employees who take exceptional steps to assure customer satisfaction. Another is the "Bravo Zulu Award," an idea borrowed from the U.S. Navy, where winners receive letters with the "Bravo Zulu" sticker, envelopes with tickets to entertainment, or free dinners. One such recipient, says Glenn, might be a FedEx manager who leaves home for work on a Saturday to make sure a package gets delivered on time even though the customer forgot to mark "Saturday delivery" on the invoice.

Equally critical for FedEx, says Glenn, is management's ability to track how its workers are performing and to spot trends. New technology helps track delivery times each day, and the firm runs a tight service quality index to record how it does. Every week, managers go through a "WAR" review (weekly analysis and review) to weed out failures. All the while, the company benchmarks how it performs compared with its competitors.

"It all starts at the top," says Glenn, meaning, in the CEO's office. If a CEO puts unrealistic financial pressure on customer-facing units, quality will suffer. If he or she doesn't outsource a function properly, the customer may feel the result. And if a CEO doesn't build a corporate culture of service, complete with ways of measuring and rewarding, the company probably isn't going to have lots of happy customers. What the critics are saying is that it's time for more CEOs to get the service equation right--again.

RELATED ARTICLE: Leaders & Laggards

Service scores for Q1 2005 and percentage change from Q1 2004, according to ASCI. All scores are on a 100-point scale.

Airlines
Southwest Airlines                               74   1.4%
US Airways Group                                 57  -8.1%

Banks
Wachovia                                         78   2.6%
Wells Fargo & Company                            70   2.9%

Fixed Line Telephone Service
AT & T                                           72  -5.3%
Sprint FON Group (Sprint Corp.)                  66   1.5%

Hotels
Hilton Hotels                                    76  -1.3%
Ramada Franchise Systems Inc. (Cendant Corp.)    66  -1.5%