ySIM Service Management: A ‘ Management Focus for Service 6 Competition ee eee Christian Grénroos Accepted January 1990 ‘Table Employment within the Service Sector — Percentage of the Total Workforce Swedish School of Economics and Business Administration, Helsinki, Finland Understanding Services and Service Management Becomes Imperative to Success Services have rapidly grown in importance in the USA as well as in most western societies. From half to over two-thirds of the economic activity in these economies take place in the service sector. Moreover, a constantly growing percentage of the active workforce is employed within the service sector (see Table 1). However, today it is not only so-called service firms which need to understand the nature and the management of services. Services go far beyond what is traditionally called the ‘service sector”’, For any manufacturers of goods, it has become difficult to find a basis for a competitive advantage which distinguishes a given firm from the competition. ‘“Everyone can produce the goods” is a saying which makes more and more sense. Therefore, some other ‘means of differentiating the offerings have to be found or developed; otherwise 10 1980 198 OBC Toul oo OBCD Barge ssa Canada eos Usa 03 vK 66.8 Norway 66 Denmark 659 Sweden Fance a3 Fintnd si tly sip |) West Germany a7 | Spain SLB | me oa Sourthere is nothing other than price to turn to. And a low price strategy works only for a firm which consistently over time can maintain a cost advantage over the competition. Hence, the figures in Table 1, as in any statistical mezsure of the size and importance of services to economies, is a huge understatement of reality. Pursuing a service strategy can be a way of differentiating the offering and creating a competitive advantage. This, however, demands a thorough understanding on the part of management of the characteristics of services and the nature of service competition, ie. management must understand that traditional management methods and common wisdom from manufacturing may ‘often be a trap in service contexts. In this article, some unique principles of managing in service competition will be put forward, so that managers in service firms and manufacturers of goods alike can avoid falling into a management trap and focus their interest on the right issues. This new focus we call service management|cf. 2-14). We offer the following definition of service manage- ment|l4]. Service management is to: (1) understand the utility or value customers receive by consuming or ising the offerings of the organisation and how services alone or together with physical goods or other kinds of tangibles contribute to this utility that is, to understand how total quality is perceived in customer relationships and how it changes over tim 2) understand how the organisation (personnel, technology and physical resources, systems and customers) will be able to produce and deliver this utility or quality; (3) understand how the organisation should be developed and managed so that the intended utility or quality is achieved; and (4) make the organisation function so that this utility or quality is acheved and the objectives of the parties involved (the organisation, the customers, other partners, the society, etc) are met. This is a fairly exhaustive way of describing what service management is. A shorter definition may be more selling, but itis less complete, Albrecht offers the following definition: “Service management is a total organisational appcoach that makes quality of service, as perceived by the customer, the numbe: one driving force for the operation of the business’"|10, p. 20}. It can be said with even fewer words, as Schneider and Rentsch/15] do. They argue that firms that apply service management principles consider ‘‘service as the organisa-ional imperative”. A Change of Focus A service management perspective changes the general focus of management in service firms as well as in manufacturing firms|16| (2) from the product-based utility to total utility in the customer relationship|17|; Service ManagementYSIM 11 (2) from short-term transactions to long-term relationshi (3) from core product (goods or services) quality (the technical quality of the outcome) to total customer perceived quality|18) in enduring customer relationships, and (4) from production of the technical solution as the key process in the organisation to developing total utility and total quality as the key proces ‘Two major basic shifts in management thinking are implicit in the service ‘management principles as compared to a traditional management approach from manufacturing. These are (1) a shift from an interest in internal consequences of performance to an interest in the external consequences, and (2) a shift from a focus on structure to a focus on process. These two shifts are of paramount importance. A service strategy requires both to be succe ssfully implemented. Service management as a management philosophy is predominantly related to managing processes where the underlying structures a-e of less importance, but of course are not unimportant. If the structures take over, flexibility of operations and handling customer contacts suffer, and frequently the flow of information from customers, suppliers, distributors and other stakeholders through the front line to top management and back suffers|cf. 19|. Moreover, if structure is expected to govern behaviour, managers and supervisors frequently do not fully appreciate their responsibility for continuously encouraging their subordinates, and the motivation of the employees suffers. The perceived service quality deteriorates, and customers are probably lost. ‘Traditionally, in mainstream management thinking from the industrial era economies of scale and productivity of capital and labour are considered the driving forces behind a profitable business. Hence, the internal efficiency of the business is the main focus of management. In managing service competition, the complicated characteristics of services and the nature of service production and consumption (e.g. the inseparability of production from consumption and the role of customers as co-producers, as well as the broad interface between the service provider and the customers) make the external efficiency of the business, ie. customer satisfaction with the operations of the organisation, the focal point of management|34,6,l1,13,l4). The internal efficiency and cost considerations are stil of great importance, of course, but customer satisfaction and external efficiency come first. The concepts of “‘int=rnal efficiency" and “external efficiency” used in this sense were introduced by Ekholm|20}. Six Principles of Service Management ‘The focus on process and external consequences leads to some more or less unique principles of service management, which change the traditional approaches to (1) the business logic and what drives profit, (2) decision-making authority, (3) organisational structure, (4) supervisory control, and (5) reward systems; and when there is a shift in the focus of reward systems different tasks and types of achievements than traditionally have to be (6) monitored and measured. These six principles of service management are summarised in Table I.Principle Remark () The profit equation and Customer perceived Decisions on external business logic service quality drives efficiency and internal profit effcency (cost control and productivity of capital and labour) have to be carefully integrated (2) Decision-making authority Decision making has to Some strategically be decentralised as close important decisions have as possible to the to be made centrally “organisation-customer interface @) Organisational focus ‘The organisation has to This may often require a bee structured and fat organisation without functioning so that its unnecessary layers sain foal is the mobilisation of resources {o support the front-line ‘operations (4) Supervisory controt Managers and As litle legislative control supervisors have to procedures as possible, focus on the although some may be encouragement and required suppart of employees (8) Reward systems Prodtiction of customer All relevant facets of perceived quality has to service-qualty should be be the focus of reward considered, although all systems ‘cannot always be built into ‘2 reward system (6) Measurement focus Customer satisfaction To monitor productivity with service quality has and internal efficiency, to be the focus of internal measurement measurement of criteria may have to be achievements used as well; the focus on customer satisfaction is however, dominating Source: A The Business Logic ‘As has been discussed in some detail in the present chapter, the general ‘economic focus or the business logic is shifted from managing internal efficiency of the productivity of capital and labour to managing total efficiency based on ‘a notion that customer perceived quality drives profit. Scale economies may or may not be a strategically reasonable objective; but it is never sound, and it is always dangerous, automatically to consider economies of scale a source of profitability. Rather, an uncritical pursuit of large-scale production and of potential benefits of scale economies easily turns an operation into disaster. Service Management ES Table I. Principles of Service ‘ManagementFrequently, the opportunities of developing “market ecanomies"e 21) can be used to create a solid competitive advantage and « basis for profitable operations. And because of the nature of services and service competition, some sort of pursuit of ‘market economies”” should always be incorporated in the strategic approach. Service management appreciates the critical importance to success of ‘managing customer relationships and customer perceivec quality. The internal efficiency needed to function profitably is an inevitable issue, but it is not a prime issue. It must be totally integrated with external efficiency issues and geared to managing customer perceived quality. As soon the internal perspective starts to dominate, interests in costs and managing productivity without a simultaneous consideration of the quality implications will take over; and issues related to creating and maintaining excellence and revenue generation become secondary and get less or no management attention. Decision-making Authority Because of the characteristics of services, e.g. the inseparabilty of critical parts of production and consumption, and the facets of customer perceived service quality, e.g. the demand for flexibility and recovery capabilities, decisions concerning how a service operation is supposed to function have to be made as close as possible to the interface between the organisation and its customers. Ideally, the front-line employees involved in the moments of truth (to use a concept introduced in the service management literature by Normann|4,10)) of the interactions of this interface should have the authcrity to make prompt decisions. Otherwise sales opportunities and opportunit es to correct quality mistakes and avoid quality problems in these moments of truth are not used intelligently, and become truly wasted moments of opportunity to correct mnistakes, recover critical situations and achieve re-sales and cross-sales. If these moments go totaly unmanaged, service quality deteriorates quickly and becomes mediocre(6\, Of course, a front-line contact employee, e.g. a bank clerk, cannot always have the professional knowledge required if a customer wants, for example, a sophisticated financial solution for an international business. However, he or she should nevertheless keep the decision-making authority, for example, to ask for assistance of back office or staff professionals. However, if the employees in customer contacts (ané support employees serving the front line) are not given authority to think and make decisions for themselves, they become victims of a rigid system. As Cummesson|22| says ina straightforward manner: “'You can stupify your front line service personnel by making them robots with discretion to handle only a limited number of standard operations. Or you can empower them to handle also deviations. ..thus being more efficient’’(p. 85). 'Empowering” the personnel is a powerful way of mobilising the energy which human beings have. It means that the employees are encouraged, and trained, to recognise the diversity of customer contact situations and to use their judgement to take care of the situations and solve problems following from deviations from standard procedures so that customer satisfaction is created. Thus, the continuously occurring moments of truth become well-utilised ‘moments of opportunity”.‘Thus, operational decision making needs to be decentralised as much as possible; normally more than one first considers possible. However, as Ivar ‘Samrén, CEO of SAS Service Partners, points out, not all decision making can and should be decentralised. According to him, chaos may follow .n an “organisation if strategic decisions, for example, concerning overall strategies, business missions and service concepts, are not made centrally[23). The unique knowledge among front-line personnel of important aspects of the business which is vital to making such strategic decisions should, however, always be used in centrally occurring decision making. First of all, this improves the decisions, and second, it creates a better commitment to these decisions among ‘hose ‘who in the final analysis will have to live with them and execute them. ‘The “‘local”” manager, be it the head of a branch in a network organisation, such as a bank or hotel chain, or the head of a department in a manufacturer ‘of goods which produces services, such as technical service, deliveries, claims handling or customer training, has of course the overall responsibility for his or her subordinates. He/she is also responsible for the total operation of the “local’” organisation. Hence, these people have dual responsibilities, one towards the customers, one towards the corporation: the ‘local”” manager is responsible for perceived service quality towards the customers and for profitability towards the corporation|24]. Organisational Focus Traditionally, the organisational focus is to build up and maintain a structure where management is executed through processes involving legislative control. ‘This often creates a lack of flexibility, fuels centralisation tendencies throughout and is easily a hindrance to the vertical low of information in the organisation. In the final analysis, it urges people not to think for themselves, especially not to make decisions which are not endorsed by rules and regulations formulated by management. Organisationally, service management shifts the focus away from structure and control procedures to process and how improved external efficiency and customer perceived quality, with acceptable internal efficiency, are achieved. This, in turn, requires a more flexible organisational solution, where mobilisation of resources — management, staff, back office, etc. — to support customer contact activities is imperative. The organisational structure which suits this requirement may differ from situation to situation, but some common principles can be identified. For example, the organisation has to be much flatter than traditionallyle.g. 10]. Supervisory Control (Or rather supervisory support.) In traditional management approaches supervisory systems are very much related to monitoring how the organisation, and its various parts, is capable of performing its tasks according to predetermined standards (legislative contro. If such standards are met, the employee or group of employees has performed satisfactorily, and is perhaps rewarded for this. However, such a supervisory control system does not fit the nature of services and service production very well. By their very nature, services most often cannot be completely standardised. Moreover, if employees are to deliver quality services, guidelines and visions and a substantial degree of flexibility to meet Service Management nSIM. 1 12 the special wishes of customers or successfully to recover negative situations in the buyer-seller interactions, a looser structure is preferable to rigidly defined standards. Only the technical quality aspects of services can be well monitored by standards. The functional quality aspects related to how the service process and the service encounter are perceived, which from a competitive edge standpoint is so important, are not very well suited to :raditional standards. Functional quality-creating ‘performance cannot easily, if at all, be monitored by comparing it to predetermined standards. Instead, service management requires that the supervisory focus has to be on the encouragement of employees. and on their support. This may require new management methods. In order to make this approach to supervisory control, or rather supervisory support, work, the previously mentioned concept of “‘empowering’’ the employees is, essential. However, empowering by providing front-line employees with adequate skills and decision-making authority to perform well is not always enough. Davis argues that in addition to being empowered, the employees have to be “enabled” to produce quality services: "‘Customer satisfaction depends upon the enabling tools provided the customer service representatives”|25, p. 13). And in the final analysis, a supportive service culturele.g. 14,15,26} guides the employees so that they make correct decisions on their own witout interference by supervisors, Management by service culture replaces sup2rvision by legislative control and direct interference by managers and supervisors in organisations where the personnel are empowered and enabled to think for themselves and make decisions of their own for the benefit of the organisation's customers. Reward Systems Normally, reward systems are geared to the focus of supervisory control. What is monitored can be measured, although naturally not al, if any, of the tasks and factors that are controlled are geared to reward systems. And the other way round, what is measured can most easily be controlled and rewarded. However, as well as a shift in supervisory focus, a corresponding shift of focus of rewarding is called for. Generally speaking, service management requires that producing perceived service quality at some level — excellent or otherwise acceptable — should be rewarded, rather than me-e compliance with predetermined standards. All too frequently, service firms make their employees do stupid things by rewarding the wrong actions: e.g. number of meals served in a restaurant or the cost of food (internal efficiency) instead of the satisfaction of patrons (external efficiency). By such reward systems, management and front- line employees alike are forced to shift their interest from customer satisfaction to internal issues. Customer perceived quality most certainly suffers. Measurement Focus What is controlled and perhaps rewarded has first to be measured, one way or the other. The focus here has, of course, also to be shifted, or at least, expanded. The ultimate signs of success are customer satisfaction with total perceived quality and the bottom line, Thus, according to service management principles, in order to enable management to establish service-oriented supervisory approaches and reward systems, customer sat sfaction with servicequality, as well as tasks which boost satisfaction, have to be measured. Just ‘measuring how standards are met and the bottom line is not enough, although internal efficiency criteria may have to be used as well, so that the productivity of capital and labour is kept under control. The external efficiency criteria always dominate, however, and monitoring customer satisfaction must never be surpassed, only supported by other measures. Conclusions “The customer relationships of service organisations have special features which easily make well-known management methods less effective, sometimes even dangerous. The business logic is different in service. If this is not taken into consideration, mistakes are easily made. Some distinct service management principles have to be understood and applied. A failure to do this may result in mediocre service quality as perceived by the customers, a weaker competitive position, less motivation for service among the personnel and, finally, lost customers. Notes and References 1. OECD, Labour Force Statistics, 1988, 2. Land, K. and Knudsen, K., Infrduition til Service Management (Introduction to Service Management), Civilokonomernes Forlag, Copenhagen, 1982 3. Grénroos, C, Siategic Management and Marketing in the Sercice Secor, Marketing Science Institute, Cambridge, Mass., 1983 Normann, R., Service Management, Wiley, New York, 1984 5. Clement, J, Ledelse af Serviceirksomheder (Management of Service Firms) Civilokonomnérnes Forlag, Copenhagen, 1985. 6. Albrecht, K. and Zemke, R., Service America!, Dow Jones-Irwin, Homewood, I, 1986. ool Press, 7 Heskett, JL-, Managing in the Service Economy, Harvard Business $ Cambridge, Mass., 1986, 8. Lehtinen, J. and Storbacka, K., Paleelujohaminen (Service Management), Jarmo R. Lehtinen, Veikkola, Finland, 1986, 9, Mill, PK., Managing Service Indutries: Organisational Practices in a Post-incustrial Economy, Ballinger, New York, 1986. 10. Carlaon, J., Moments of Truth, Ballinger, New York, 1987 IL Albrecht, K., Al America’s Service, Dow Jones-Irwin, Homewood, II, 1988, 12, Bowen, D.E. and Schneider, B., ‘Service Marketing and Management: Implications for Organizational Behavior”, Research in Organizational Behavior, Vol. 10, 1988. 13 Zemnke, R., The Seruice Edge, NAL Books, New York, 1989. M4. Gronroos, C., Sernice Management and Marketing: Managing the Moments of Truth in Service Competition, Lexington Books, Lexington, Mass., 1990, 15, Schneider, B. and Rentsch, J., "The Management of Climate and Culture: A Future Perspective”, in Hage, J. (Eda), Futures of Organizations, Lexington Books, Lexington, Mass,, 1987, 16, This change of focus and the corresponding service management principles, a8 well as ‘many other related issues, such as marketing, developing service offerings, internal marketing and creating @ service culture are described in depth in| Service Management 13YSIM Al 14 9. 21 22, 23, Focusing on the total utility instead of more narrowly on the product-based ulility means that the value added for the customers following from other slements ofthe customer telationships i, from a strategic and operational point of view, considered equally important as the value, or utility, inherent in the product (a good oF a service) itself Service quality research has demonstrated that total service quality as perceived by ‘stomers has two dimensions, namely the quality of the outcome of the service production process (what the customer perceives he or she has received from having used the service) and the quality of the process (how the customer perceives the buyer-seller interaction or the service encounter), Gronroos|e.g 3,14) calls the former qualty dimension technical ‘quality of the outcome and the later functional quality of th: process Peters, T., “Restoring American Competitiveness: Looking for New Models of Organizations", The Academy of Management Executive, No. 2, 1988. Ekholm, B.G., The Business Idea and its Life Path, research report, Fourth Annual Strategic Management Society Conference, Philadephia, Pena., October 1984. Heskett, J.L., “Lessons inthe Service Sector", Harvard Business Reviw, March-April, 1987 Gummesson, E., "Nine Lessons on Service Quality”, Thal Quality Management, February, 1989. Samrén,[., "Service Strategies in Practice”, European Research, ESOMAR, February, 1988, ‘This thesis has been formulated inthis form as an internal service management rule by another highly successful Scandinavian service firm, Svenska Fandelsbanken, one ofthe consistently most service-oriented and customer-oriented, and most profitable, banks ‘operating nationiide in Sweden. In this corporation the phrase, "moment of opportunity” as it has been used here was coined. Davis, FW. Jr, “Enabling is as Important as Empowering: A Case for Extended Service Blueprinting in Service Excellence: Marketing's Impact on Perprmance, papers from the Eighth Annual Services Marketing Conference, American Marketing Assication, Chicago, M., October, 1989. Schneider, B., "Notes on Climate and Culture”, in Venkatesan, M., Schmalensee, D.M. and Marshall, C.E., (Eds.), Creativity in Sereices Marketing: What's Next, What Horks, What's Developing, American Marketing Association, Chicago, U., 1986,