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Building quality into services.

Manufacturing quality was the "hot" topic of the 1980s for business writers and practitioners alike--and for good reason. Japan, by implementing Company-Wide Quality Control (CWQC) and producing quality products that met customers' needs, had in effect "won the peace." America began to recognize their own quality experts, such as W. Edwards Deming and Joseph Juran, who had been preaching quality to the more receptive Japanese. A wealth of books, articles, and seminars are now available to help build quality back into American production.

The irony of this emphasis on manufacturing quality, however, is that services have been left out. After all, for the past several decades America has been predominantly a service economy. Consider the numbers. More than 68% of the nation's GNP is accounted for by the service sector, and approximately 76% of all U.S. workers are employed in service companies. And these figures only represent companies in "pure" service industries such as transportation, communications, and retailing. If you factor in the employees of manufacturing firms that perform service functions, you find that 86 out of every 100 U.S. employees are involved with services in some capacity.

Services are Lagging Behind Manufacturing

As usual, the numbers tell the story. During the 1980s, the quality conscious manufacturing sector made great strides and showed measurable improvement. On the basis of average sales per employee (adjusted for inflation), productivity among industrial companies jumped 27% between 1982 and 1990. Meanwhile, this productivity measure fell 1% during this same period for service companies. Predictably, this stagnant productivity had an effect on financial performance. Profits of the Fortune Service 500 fell 12% from 1989 to 1990 and were down 23% from 1988.

The demise in the quality of American service has been well documented over the past decade. In his popular 1982 book, In Search of Excellence, Tom Peters asserted that, "In general, service in America stinks." In his 1989 book, Quality Service, D. Keith Denton noted that, "Generally speaking, service is in a sorry state and consumers are fed up with it." And Fortune in the June, 1991 issue devoted to the Service 500 claimed that services are "Slouching into the 1990s." The magazine even went so far as to assert that, "While Fortune 500 manufacturers spent the 1980s cutting work forces, boosting quality, and honing themselves for world competition, service industries were apparently out picking daisies."

Even with this bleak picture of services in the United States, there is cause for hope. While many American service companies have yet to get serious about quality improvement, some have taken a definite leadership role. Companies such as Florida Power and Light, Federal Express, Disneyland, Marriott, and L.L. Bean are a few examples of excellent service organizations.

Services are Different

It might seem logical to assume that if manufacturing companies can make such substantial improvements, service firms should be able to enjoy success by utilizing similar techniques. After all, the factor that sparked the quality revolution in manufacturing--an increase in international competition--is now becoming increasingly prevalent in the service sector.

Unfortunately, it's not that simple. While many concepts and techniques can be borrowed from manufacturing, service quality improvement does pose special challenges. The physical nature of products in manufacturing allow quality standards to be precisely defined, conformance to standards to be evaluated, defects to be accurately determined, and methods of improvement to be explored. Services, on the other hand, cannot be defined and measured in such precise terms. Quality can really only be assessed by the recipient of the service making its measurement more subjective than exact.

What are the characteristics of services that make them so much more difficult to deal with than products? Three distinctive ones have been suggested: intangibility, heterogeneity, and inseparability.

First, services are intangible. They are activities rather than physical objects and generally cannot be measured, tested, or verified before they are consumed.

Second, services are heterogeneous, especially those with a high labor content. The consistency of the service can vary depending on the performer, the customer, and the environment.

Third, production and consumption of services often occurs simultaneously, making them inseparable. This is especially true where the service involves a high labor content and there is a great deal of interaction between the customer and the service provider.

It is important to understand that the line between services and manufacturing is not always clear. Back office functions, also referred to as quasi manufacturing, are services performed without direct interaction with the customer. The processing of life insurance forms and credit card payments are examples of back office activities. Since these are similar to manufacturing activities and do not necessarily fit the characteristics listed above, they can often be managed with the same quality control concepts and techniques applied to manufacturing.

Front office functions, on the other hand, generally involve direct interaction with the customer. Anyone giving a haircut, serving a meal, or selling a product is engaged in a front office activity. It is this high level of contact with the customer that makes these "pure service" functions so unpredictable and difficult to manage. In fact, it is the unpredictability of these service interactions that distinguishes quality in services from quality in manufacturing.

Improving the Quality of Services

The following five suggestions should improve the quality of front office activities in services. Each is made with the understanding that the unique characteristics of services--intangibility, heterogeneity, and inseparability--can present special challenges to quality improvement and, therefore, require special attention.

(1) Understand Your Customers' Needs and Expectations

Defining customer needs is more complex in services than manufacturing because of the involvement of customers in the production process. Many dimensions of service quality, such as the impact of physical facilities and interactions with personnel, might be irrelevant in manufacturing.

On the other hand, customer involvement provides an opportunity for service companies to get direct and immediate feedback on quality. Employees must be trained and directed to listen carefully to customers to find out what they are thinking. While listening is essential, it isn't enough. Customers are often unable or unwilling to articulate their expectations and may not always know exactly what they need or want. Employees must be encouraged to solicit customers' feedback. They must be willing to ask open-ended questions, and listen not only to what the customer is saying, but also to what the customer is implying. A great deal of information can be gathered on your customers' needs, your service capability to meet those needs, and the gap between the two. Such information will give clear direction to your quality improvement efforts.

Another way to "listen" to customers is through marketing research. Despite proof that such research is effective, there is strong evidence that service firms are far less sophisticated than manufacturing firms in their use of it. Federal Express is an exception. This company conducts 2,100 customer interviews per quarter to obtain information for its internal measurements. Companies that cannot afford to conduct such intensive research have another option. Servqual, a genetic survey that assesses customer perceptions and expectations of service organizations, is available free through the Marketing Science Institute (MSI), a nonprofit research center in Cambridge, Massachusetts.

A third area to look at is external communications. Effective external communications that educate customers about services and help establish reasonable expectations are worthwhile. Exaggerated claims to customers that establish expectations you cannot meet are usually disastrous. As William Davidow, co-author of Total Customer Service, puts it: "When I start pumping up people's service expectations and don't deliver, I end up giving worse service than if I had never said anything at all."

When you really understand the needs and expectations of your customers, you can more easily make strategies for meeting them. Of course, you can also go further and turn customer service into a competitive advantage by offering "expectation-plus" service. Nordstrom department stores have effectively employed this strategy by providing their customers with cross-departmental personal shoppers.

(2) Define and Communicate Company Goals and Service Standards

Once an organization understands the needs and expectations of its customers, organizational goals and performance standards must be defined and shared with employees. The employees will then know what they and the organization are striving for. Researchers have suggested that service standards help to clarify work rules and communicate the organization's priorities. Unfortunately, since services are intangible and heterogeneous, many organizations find it very difficult to define service standards and to measure performance. But it must be done. Some organizations have done it with great success.

Federal Express is a shining example of a service company that has solved the problems of service standards and measurements. The company's goal is to achieve 100% customer satisfaction. To encourage progress towards its goal, Federal Express has established Service Quality Indicators (SQI), a 12-component index that ties performance to customer expectations. Each of the 12 items is assigned a weight based on its impact on customer satisfaction. Performance data are gathered and tracked daily. Federal Express is so serious about SQI results that management meets daily to discuss the previous day's results and to track weekly, monthly, and annual trends. To ensure that meaningful performance results can be measured, Federal Express uses SQI to quantify service quality. For example, a delivery late by a few hours is assigned a 1, while a missed pickup or damaged shipment gets a 10.

To enable employees to succeed, it is helpful to establish and communicate service standards such as these. Researchers have indicated that service role ambiguity can result if service standards don't exist, if they are too general or too numerous, if they are poorly communicated or if they are not tied to measurement and reward systems. Clearly defined service standards allows for more effective training programs, more accurate measurements of employee performance, and more effective rewards and incentives.

(3) Improve Your Human Resource Management Practices

The intangible nature of services often makes it difficult for customers to judge service quality in precise terms. Because they are actually involved in the production process, customers' perceptions of service quality can be greatly affected by the nature of their interactions with employees. Since the quality of service depends heavily on the quality of employees, employees in services have an expanded and important role to play. Jan Carlzon of SAS emphasized this point when he pointed out that every time a customer interacts with an employee is a moment of truth that can leave a lasting impression.

It is critical, therefore, that service organizations place a strong emphasis on human resource management (HRM) practices. In particular, services should make sure they have effective practices for hiring, training, motivating, and compensating their employees. While these practices cannot be discussed in these few pages, we will mention that companies serious about quality are also serious about HRM.

Companies addressing quality are beginning to emphasize employee involvement. Many organizations have realized that the traditional job design characterized by short cycle, simple, and narrow task assignment is not appropriate for today's competitive environment. Leading organizations have expanded the role of the employees by giving them broader tasks, more training, and expanded authority. These organizations involve their employees in different aspects of the business and empower them to make decisions. Their experience is that higher employee involvement leads to significant improvements in quality, productivity, and customer satisfaction, as well as lower costs. Betsy Sanders, a vice president of Nordstrom department stores, has summarized their policy on employee empowerment by saying, "I know this drives the lawyers nuts, but our whole 'policy manual' is just one sentence, 'Use your own best judgement at all times.'"

(4) Handle Dissatisfied Customers Effectively

Along with the improved quality of American products came an increase in product warranties. The standard 1-year, 12,000-mile automotive warranty gave way in many instances to 5-year, 50,000-mile agreements. The message from manufacturers is that if you're not happy with the product, just bring it back. Unfortunately, since services are consumed as soon as they are produced, service providers don't have this option. While you can return a defective watch, it is difficult to return a bad haircut or rude service from a sales clerk. However, service providers can deal with this issue by addressing dissatisfied customers promptly and competently when service problems do occur.

The first step in handling service problems is understanding the cost of ignoring them. Industry experts agree that it costs five times more to replace a customer than it does to retain one, and it has been estimated that companies can increase profits by almost 100% by retaining an additional 5% of their customers! These figures are not surprising when you consider that satisfied customers tend to produce more profit each year they do business with a company, and that dissatisfied customers usually express their feelings to about ten other people.

The next step is to make it easy for the customer to complain. This is especially important when you consider that only 4% of dissatisfied customers ever inform the company of their complaints. Naturally, the employees who deal directly with customers probably hear complaints first. Not only should these employees be willing to listen to customers' complaints, they should encourage them. It has been suggested that listening, showing empathy, and demonstrating a genuine understanding of the problem provides the customer with "psychological" restitution. In addition, as mentioned previously, listening to your customers' complaints will give you valuable information on your service deficiencies and allow you to further refine your service standards.

Naturally, there are limits to how far you want to go and how much you want to spend to resolve service problems. However, being responsive to service problems gives you a chance to impress your customers and can turn good customers into great ones. This is an area where an innovative and proactive approach can make a powerful impression.

A relatively inexpensive strategy is to provide a toll-free 800 number for customers and encourage them to use it. British Airways has gone even further by setting up Video Point booths where passengers can videotape their concerns. This makes a strong statement that the company is concerned about its customers and wants to know when they're unhappy. MBNA America, the credit card operation of MNC Financial, has been able to retain 95% of its customers every year--compared to 88% for its competitors. MBNA owes this success rate to a card retention center where every customer who wants to close an account is called personally by one of 68 phone representatives.

(5) Build a Culture of Quality

One of the characteristics of services is that they are intangible and thus difficult to measure. You cannot verify the quality of a service interaction before it is delivered to the customer; production and consumption occur simultaneously. The skills, judgment, and performance of the front-line employees will ultimately determine the quality of service. In the absence of precise measurements, it is important to build a culture, or mindset, of quality throughout a company. To achieve a true culture of quality it is necessary to obtain top management commitment and adopt continuous improvement as a normal way of doing business.

Quality experts such as Deming, Juran, and Crosby do not always agree on the best way to achieve genuine quality improvement. However, they all agree that top management commitment to quality improvement as a corporate way of life is a prerequisite to success. Top management is defined here as not only the president and CEO, but also all managers who have the authority to establish and enforce policies and guidelines within the organization. These managers are responsible for establishing the philosophy, policies, and goals that will direct the organization. These managers also have ultimate control over the systems that account for 85% of the potential for quality improvement.

Bill Terrell, vice president of Preston Trucking, warns that, "People don't give you their trust and respect, they only loan it to you." Before employees can be expected to join wholeheartedly in the race for quality, top management must set the pace. They must provide their employees with the necessary support and training, and commit to a real strategy for improvement--not just empty slogans. Quality improvement may not end at the top, but it certainly begins there.

A second strategy for building a culture of quality is the concept of continuous improvement. The fifth of Deming's 14 points is to, "improve constantly and forever the system of production and service." He promotes this idea through the use of the Deming Circle. This concept, originally developed by Walter Shewhart, suggests that a company should engage in a repeating cycle of plan-do-check-act (PDCA) to improve work processes and customer satisfaction. Juran, on the other hand, suggests that management pursue continuous improvement by creating an annual quality improvement program that identifies specific projects and establishes clear responsibility for action.

The underlying theme behind each of these methods is to look for ways to improve each facet of your business, and once you improve something, try to improve it again. However, regardless of the method used to pursue continuous improvement, the key point is to pursue it. No matter how well you do something, someone will find a way to do it better. No matter how well you satisfy your customers, someone will find a way to satisfy them more. Committing to continuous improvement is the best way to make sure your company is that "someone."

One area in particular need of continuous improvement is information management. Effective information management is critical for the successful implementation of these quality improvement suggestions:

* Understand your customers' needs and expectations, either through personal contact or marketing research;

* define and communicate goals and performance standards;

* distribute decision making through employee involvement; and

* build a culture of quality.

Conclusion

When asked how long it would take for American manufacturing to catch up with Japan, W. Edwards Deming responded, "Do you think Japan is standing still?" Perhaps the question in services today is this: How long can American service companies afford to stand still while international competition continues to grow?

The productivity and profitability of the service sector in America is stagnant at best. Meanwhile, international competition is increasing in many industries including banking, airlines, innkeeping, data processing, programming, and entertainment. Japan, and other foreign countries are using the quality and productivity improvement expertise developed in manufacturing to enhance their services. Toyota Motor Sales provides one example. In the late 1970s, Toyota needed two days to manufacture a car, and 15 to 26 days to deliver it to the customer. By 1987, Toyota had reduced system responsiveness to eight days--including the time to make the car.

This article has presented a number of recommendations for building quality into services and has cited many examples of successful American service companies. The point is simple: it is possible for American service providers to improve and compete on a world-class level. However, as we have seen, the costs of complacency are potentially enormous. The issue is service quality, and the stakes are high.

References

1. Leonard L. Berry, A. Parasuraman, and Valarie A. Zeithaml, "The Service-Quality Puzzle," Business Horizons, September-October 1988, pp. 35-43.

2. Leonard L. Berry, Valarie A. Zeithaml and A. Parasuraman, "Five Imperatives for Improving Service Quality," Sloan Management Review, Summer 1990, pp. 29-38.

3. Kate Bertrand, "In Service, Perception Counts," Business Marketing, April 1989, pp. 44-50.

4. Richard B. Chase and Nickolas J. Aquilano, Production and Operations Management, 5th ed. (Boston: Richard D. Irwin, Inc., 1989).

5. W. Edwards Deming, Out of the Crisis, (Massachusetts: The Massachusetts Institute of Technology, 1989).

6. D. Keith Denton, Quality Service, (Houston: Gulf Publishing Company, 1989).

7. Brian Dumaine, "The Bureaucracy Busters," Fortune, 17 June 1991, pp. 36-50.

8. Roland A. Dumas, "In Search of Service Quality," (WMI Corporation, 1989).

9. Maynard M. Garfield, "Reduce Customer Turnover for Long-Term Success," Marketing News, 28 May 1990, p. 20.

10. Christopher W.L. Hart, James L. Heskett and W. Earl Sasser, Jr., "The Profitable Art of Service Recovery," Harvard Business Review, July-August 1990, pp. 148-156.

11. Robert W. Laza and Perry L. Wheaton, "Recognizing the Pitfalls of Total Quality Management," Public Utilities Fortnightly, 12 April 1990, pp. 17-21.

12. Christopher H. Lovelock, Managing Services, (New Jersey: Prentice Hall, 1988).

13. Ted A. Lowe and Joseph M. Mazzeo, "Three Preachers, One Religion," Quality, September 1986, pp. 22-25.

14. Anthony J. Michels and Tricia Welsh, "Slouching Into the 1990s," Fortune, 3 June 1991, pp. 254-258.

15. A. Parasuraman, Valarie A. Zeithaml and Leonard L. Berry, "A Conceptual Model of Service Quality and Its Implications for Future Research," Journal of Marketing, Fall 1985, pp. 41-49.

16. Stephen Phillips and Amy Dunkin, "King Customer," Business Week, 12 March 1990, pp. 88-92.

17. Jerry Plymire, "Complaints as Opportunities," Business Horizons, March-April 1991, pp. 79-81.

18. James Brian Quinn, Thomas L. Doorley and Penny C. Paquette, "Beyond Products: Services-Based Strategy," Harvard Business Review, March-April 1990, pp. 58-67.

19. James Brian Quinn and Christopher E. Gagnon, "Will Services Follow Manufacturing into Decline?," Harvard Business Review, November-December 1986.

20. Frederick F. Reichheld and W. Earl Sasser, Jr., "Zero Defections: Quality Comes to Services," Harvard Business Review, September-October 1990, pp. 105-111.

21. Frank Rose, "Now Quality Means Service Too," Fortune, 22 April 1991, pp. 99-105.

22. Howard Schlossberg, "Baldrige Winner Aims for 100% Satisfaction," Marketing News, 4 February 1991, pp. 1-12.

23. Patricia Sellers, "What Customers Really Want," Fortune, 4 June 1990, pp. 58-68.

24. George Stalk, Jr., "Time--The Next Source of Competitive Advantage," Harvard Business Review, July-August 1988, pp. 41-51.

25. Mary Walton, The Deming Management Method, (New York: The Putnam Publishing Group, 1986).

26. Valarie A. Zeithaml, Leonard L. Berry and A. Parasuraman, "Communication and Control Processes in the Delivery of Service Quality," Journal of Marketing, April 1988, pp. 35-48.

27. "The Human Side of Quality," Fortune, 1990.

28. "1990 Award Winner," Federal Express Corporation, 1990.

Mr. Cavaness, who holds an M.B.A. from California State University, has served as management advisor to a Pacific Bell quality-of-work-life team and chair of a committee to enhance employee development. Dr. Manoochehri, who has published in several academic and business journals, concentrates his teaching and research on operations management.

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Author:Cavaness, Joseph P.; Manoochehri, G.H.
Publication:SAM Advanced Management Journal
Date:Jan 1, 1993
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