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effects of service quality on organization operational costs

All organizations are struggling to improve customer-focused quality in decentralized,
individualized, and highly competitive domestic and global markets. Service industries are
especially aware of the need to modify manufacturing-based total quality management (TQM)
systems to guide their own internal organizational change processes. Better design,
implementation, and daily management of customer-focused quality improvement (QI) strategies
are essential for survival in rapidly changing business and public service environments. When
thoughtfully applied and appropriately modified to meet all types of customer needs, QI
principles are a sound means to respond to customer needs. This conclusion is well-known and
often repeated in business circles. Service quality in organization plays an increasingly important
role in the economy of many countries. In todays global competitive environment delivering
service quality is considered as an essential strategy for success and survival. Customer needs and
expectations are changing when it comes to organizational services and their quality
requirements. However, service quality practices in public sector organizations is slow and is
further exacerbated by difficulties in measuring outcomes, greater scrutiny from the public and
press, a lack of freedom to act in an arbitrary fashion and a requirement for decisions to be
The main objective of this study is to find out effects of service quality on organization
operational costs. But specifically it aims at identifying tools to improve service quality and
factors to consider when improving service quality.

A case study was applied in conducting the research project; this is due to the fact that this type of
research design accommodates almost all research instruments such as questionnaire, interview,
observation and documentary source. (Kothari, 2004)
Mainly secondary documentary data sources where consulted as this type of research consults
several publications both published and unpublished, reports and journals.
Documentary sources from various economics publications on agglomeration or production
across borders. The Internet also was used as source of information and data.

Literature review
Service quality
The fact that the perceived quality of the product is becoming the most important competition
factor in business world has been the reason of naming the present business era as Quality Era
(Peeler, 1996). Consequently, service marketing intellectuals and researchers have offered several
metaphors of this issue. For example, Berry (cited in Kandampully, 1998, p 423) calls it the most
powerful competition weapon and Clow (1993) calls it the Organizations life-giving blood.
Quality is a multi-dimensional phenomenon. Thus, reaching the service quality without
distinguishing the important aspects of quality is impossible. In his discussion of service quality,
Gronroos (2000) refers to three dimensions of output technical quality, service performance
quality, and organizations mental picture. Also, Lehtinen and Lehtinen (cited in Harrison, 2000)
have referred to dimensions of physical quality, interactive quality, and organizational quality as
three dimensions of service quality.
Dimensions of Service Quality
Although these attempts have had a major role in division of service quality into process quality
and output quality, but they lack enough details. On this basis, Zeithaml et al. (1996) have
referred to ten dimensions of service quality in their primary researches. But, in their further
researches, they found a strong correlation among those dimensions. Thus, they combined these
dimensions and applied the fivefold dimension of Reliability, Responsiveness, Assurance,
Empathy and Tangibles as a basis for making a tool for testing the service quality, known as
SERVQUAL. In their researches, they emphasize that SERVQUAL is a lasting and reliable scale
of service quality (Parasuraman et al., 1994). Todays knowledge intensive services businesses
require reliable methods of measurement, assessmentand improvement.

Operational costs
In firms that produce a variety of different products or services (multiproduct firms) some
additional distinctions are important. Each of these concepts can apply to total and average costs,
including both fixed and variable components. A direct cost can be specifically attributed to the
production of an individual service or product, without requiring the use of allocations to separate
it from costs incurred in the production of other services or products.

Gupta, Ajay Sharma and Satish Ahuja (2010) identifies a system for Operating costing as a
system of cost accounting applied by those units which are not producing goods but those which
are providing services for the benefits of the consumers or clients. These services may be
provided by the organization to the outside world (i.e. consumers) or within the organization to
carry out the organizational function carried out by different departments, or service centre within
the organization or undertaking. As for example telephone is a service, mobile facility is a
service, T.V. programme is a service, transport, education, hospitals, gas supply, electricity,
libraries, water supply, streetlights, etc. In simple words we can say operating costing is the cost
of producing and maintaining any type of service either for human being or for industrial
organization or a service organization. Hospital provides the services to the public and clubs like
Rotary Club or Lions Club by organizing blood donation camp for hospital provides services to
the hospitals. It is because of this operating costing is also called as service costing. Service
Costing: The operating cost are mainly period cost as the expenses are accumulated for a period
(may be a day, week, fortnight, month or a year) and these are related to the quantum of service
provided during the period. The cost per unit of service is calculated by dividing the expenses
incurred by the service unit. Sometime the operating cost can also be the terminal cost as for
example a bus, a car or a ship or an airplane is chartered out for a specific trip or tour and the cost
of such trip or tour is worked out treating it as specific job or arrangement. Scope of Operating
Cost has been discussed operating costing is applied in those areas which provide services and
not producing consumable or industrial goods. Special Terminology Used in Operating Costing
System Classification of Cost: In operating cost generally the various types of cost incurred for
providing a service is divided into following three categories: (a) Standing cost or fixed cost. (b)
Maintenance cost (c) Running cost or operating charges. Service quality has an effect in all the
above classified costs under different circumstances, be it maintenance, running or fixed costs
provided a given level of service quality is attained.

Concern about quality issues has become heightened in all types of service organizations.
Competitive service providers such as accounting firms, airlines, banks, importexport firms,
insurance companies, and private hospitals, as well as regulated monopolies such as local
governments, schools, and utilities, are being asked to demonstrate at least minimum QI
application. In most cases, success is still defined by the bottom-line return on investment, better
customer satisfaction, and increased market share. Nonetheless, greater numbers of tax-supported
agencies are now seeking ways to transform organizational cultures and improve service to
customers as well. Given the bewildering "acronym-soup" of choices, and hoping to avoid the
pitfalls of earlier post-industrial misapplications, this can be a daunting task. There is now a
general industry-wide awareness of various QI strategies, some with exotic-sounding buzzwords
such as kaizen, ISO 9000, poka-yoke, and Hoshin Planning. Despite intense interest, however,
most service organizations are still only vaguely aware of the potential impact of the quality
revolution on their daily work environments. Only a few very select multinational world-class
competitors recognize the competitive advantage of quality and productivity strategies for
improving market share and motivating the work force. Significantly, those regulated and non-
market services most in need of improved customer service quality are not as yet faced with the
same competitive challenges as manufacturers in the 1980s.
The figure below is a Service Quality Gap Model which illustrates the effects of service quality
on organizational operational costs that is if all gaps are to be improved.
Gap1: Market research gap. Management may not understand how customers formulate their
expectations from past experience, advertising, communication with friends: Improve market
research, Foster better communication between employees and its frontline employees, Reduce
the number of levels of management that distance the customer
Gap 2: Design gap. Management unable to formulate target level of service to meet customer
expectations and translate them to specifications; Setting goals and standardizing service delivery
tasks can close the gap.
Gap 3: Conformance gap. Actual delivery of service cannot meet the specifications set by
management for example Lack of teamwork, Poor employee selection, Inadequate training,
Inappropriate job design.
Gap 4: Communication gap. Discrepancy between service delivery and external communication,
Exaggerated promises in advertising and lack of information provided to contact personnel to
give customers.

Source: Researcher, 2014
Gap 5: Customer expectations and perceptions gap. Customer satisfaction depends on minimizing
the four gaps that are associated with service delivery. Organizations try to measure the gap
between expected service and perceived service through the use of surveys.
From the above point of view, when organizations will try to improve or maintain the gaps fore
mentioned, the likely to be affected are common costs and those costs that are variable.
Continuous service quality calls for severe market research through bold research and
development to find out what satisfies customers and design services to deliver satisfaction.
Additionally, following gaps of designing, communication through the word of mouth,
conformance and customer expectations and perceptions require special tools and experts to exert
them which will require extra costs to attain them.
However, these costs are only for a short term period thus it is one type of investment in the long
run that would help an organization reduce operational costs and stick on delivering expected
service quality to customers.
Furthermore a service quality may have a positive impact to organization operational costs since
a firm may have a positive image in the public which eases consumption of the service as the
firm creates a competitive advantage. Costs of advertising or creating any means of awareness to
the public will be minimized.
The service quality revolution is impacting the daily operations of public and non-profit agencies
as well as private organizations; definitions of service quality are merging and business
environments change almost daily. Information, capital, products, and services flow across
international borders at speeds unheard of just a few months ago. As larger numbers of nations
subscribe to open markets and liberal free trade policies, competition increases and more
governments "de-monopolize" and deregulate their own service markets. Providers of critical
public, private, and non-profit services such as education, healthcare, law enforcement, and
corrections increasingly recognize that a new economic reality exists. Often protected by quotas,
tariffs, or favorable government regulations that isolate them from the rigors of "do-or-die"
competition in international markets, regulated service monopolies have had fewer incentives to
change. Without competition, inefficiencies in service quality delivery processes are protected,
costs increase, and customer complaints are more likely to be ignored (cable TV service is a
prime example). Despite the relative security of regulated local markets, many public agencies
are increasingly aware that their jobs as well as their organizations could disappear overnight as
rules change and world markets continue to merge. Therefore, most organizations are set to
operate in changing environment in that technology is advancing and new ways and methods of
doing things have been identified through creativity and innovation, thus contingency costs have
also been set to overcome any upraising costs when maintaining and improving service quality.
A service recovery is satisfying a previously dissatisfied customer and making them a loyal
customer. This will help firms get back customers who already wished to quit or even who have
had wrong perception about products or service quality rendered by the given organization.
To meet the challenges of intensified international competition, many service organizations have
to initiate changes variously known as total quality control (TQC), total quality management
(TQM), continuous quality improvement (CQI), and business process reengineering (BPR). The
major reason for applying these quality improvement (QI) strategies is as an effort to respond to
the needs of customers and manage the complex interrelationships between costs, competition,
market sham, productivity, and profit. For thousands organizations, the application of
TQC/TQM/CQI/BPR has resulted in impressive gains in productivity, increased market share,
and improved global competitive position. For other less fortunate firms, including many service
organizations, the experience with "off-the-shelf" industry-based quality systems has produced
mixed results. The last decade witnessed a profound restructuring of basic productive enterprises.
Large multinational enterprises have literally "reinvented" themselves from the inside out using
TQM and CQI principles.

Also service organizations should reduce operational costs with Automated Service Provisioning
and management to minimize complexity and lower operational costs with an intention to deliver
the expected service quality.

Privatization is yet another tool for service quality attainment incase a given organizations sees
cost of attaining a given level of service quality are unattainable. Privatization will enable given
private bodies to re-invest in given organization while aiming at attaining service quality.
Reducing and controlling operating costs has become a necessity in this financially challenging
environment. The following strategies are among those available for reducing and controlling
costs with the target of providing a given level of service quality.
Budget, Plan and Monitor. A budget provides a roadmap for the financial management of the
organization including controlling costs. Historical results along with the effects of current
revenue and cost trends provide the basis for a budget and can help predict the future financial
health of the organization. It will also provide the benchmark for reporting future financial
results. Monthly reviews of actual financial results compared to budgeted amounts will provide
the information necessary to react quickly to variances to the plan.
Review Purchasing Procedures. Purchasing procedures should be examined for possible areas for
reducing costs. During the review, a check of authorization processes should take place to ensure
adherence to authorization limits. The review should also look for adequate controls on spending
limits and the number of people authorized to make purchases.
Review Suppliers. An analysis of the existing base of suppliers could also reveal opportunities
for reducing costs by consolidating purchases for additional buying power. Consolidation of
suppliers will also produce a reduction of administrative expenses due to processing fewer
purchase orders, invoices and payments.
Additionally, try negotiating with current suppliers for better pricing and consider proposals from
alternative suppliers to lower costs in all operating expenses areas including the small expenses.
Many service organizations literally are broken up into smaller, more manageable, decentralized
units in order to establish closer working relationships with customers and suppliers as means to
deliver expected service quality. Given the sheer size and scope of the effort, mistakes are
inevitable. Many TQM and CQI programs have failed or are poorly executed, especially when
imposed from the top down in a rote and mechanized "do it or else" fashion that is reminiscent of
early 20th century industrial bureaucracies leading to operation costs raising. In some instances,
the principles of TQC and CQI (or other related acronyms) are misunderstood and misapplied.
Early efforts to apply quality theories in services often met with initial successes, followed by
frustration, resistance, and eventually layoffs as the quality demanded by management is not (or
cannot) be internalized and delivered to customers.

Gronroos, C. (2000). Service management and marketing. John Wiley & sons Ltd

Gupta SP, Ajay Sharma, Satish Ahuja. (2010) Cost Accounting. FK Publications. Prince Print
Process, Delhi

Parasuraman, A., Zeithaml, V. & Berry, L (1988). SERVQUAL: A multiple item scale for
measuring customer perceptions of service quality. Journal of Retailing, 64(1), 12-40.

Parasuraman, A., Zeithaml, V.A. & Berry, L.L. (1994). Alternative scales for measuring service
quality: a comparative assessment based on psychometric and diagnostic criteria. Journal of
Retailing,70(3), 201-230.

Milakovich, M. E (1995) Improving Service Quality: Achieving High Performance in the Public
and Private Sector, CRC Press, Florida