Common Mistakes in Designing And

1

Common mistakes in designing and

implementing service guarantees

Rod McColl

ESC Rennes School of Business, Rennes, France, and

Jan Mattsson

Department of Social Sciences, Roskilde University, Roskilde, Denmark, and ESC Rennes School of Business, Rennes, France

Abstract

Purpose – The purpose of this paper is to explore companies’ experiences in designing and implementing service guarantees.

Design/methodology/approach – The methodology relied on 22 in-depth personal interviews across a sample of ten Australian service firms.

Findings – The effectiveness of a service guarantee depends on how well a firm designs and implements it. It was found that service guarantees were generally not well conceived, implemented, or monitored after launch. Through a comparison of theory and practice, this study identifies a number of common mistakes, including inadequate or non-existent pre-launch market research; ambiguous definition of the role of the guarantee; inadequate market testing of alternative guarantee promises; a lack of consultation with key functional managers during development; a lack of CEO commitment; ambiguous assignment of responsibility for ongoing management of the guarantee; and an absence of performance evaluation.

Research limitations/implications – The study employs qualitative research techniques and considers only Australian firms.

Practical implications – While the common mistakes offer cautions for managers when planning a service guarantee, some outstanding examples of successfully implemented service guarantees also emerged. A notable example is the customer charter, a more comprehensive conditional guarantee that avoids many of the pitfalls associated with traditional service guarantees.

Originality/value – Previous studies do not address the experiences of a broad sample of companies that have designed and implemented a service guarantee. The findings in this paper extend the understanding of how service guarantees could become more effective and identify directions for future research.

Keywords Service guarantees, Qualitative research, Australian service firms, Service control, Australia, Customer services quality

Paper type Research paper

An executive summary for managers and executive readers can be found at the end of this article.

Introduction

Service guarantees are written promises of service performance declared through advertising and company literature, making offers of compensation if promises are not honored (Kashyap, 2001; Sum et al., 2002). They may be either unconditional or conditional, and are prevalent across many service industries, including the retailing, real estate, fast food, airline, telecommunication, transport, and leisure industries (Burch, 1993; Fabien, 1997; Henderson, 1997; Lewis, 1993; Maher, 1991, 1992), as well as professional services (Hart et al., 1992; Raffio, 1992; Reske, 1995), financial services (Berry, 1995), and education (Lawrence and McCollough, 2001; Magnuson, 1996; Maher, 1991; Ostrom and Iacobucci, 1998).

The appeal of service guarantees lies in their potentially broad strategic application. A service guarantee may serve as a quality instrument for improving firm performance, a marketing device to provide competitive advantage throughdifferentiation and the opportunity to command a pricepremium, a customer service tool to improve levels of satisfaction and increase the number of legitimate complaints, or a combination of all of these uses (Berry, 1995; Hart, 1993, 1988; Sprenget al., 1995;Tucci and Talaga, 1997; Wirtz, 1998).

A recent review of more than 20 years of service guarantee research in key relevant journals notes that the vast majority of empirical research on service guarantees (87 percent of the 109 papers reviewed) focuses on the promotional and marketing effects of service guarantees (Hogreve and Gremler, 2009). These investigations implicitly assume that the guarantees under study have been effectively designed and implemented across the organization and have been carefully communicated to customers. Studying the effects of poorly conceived service guarantees could potentially result in a contradiction of their findings.

Unquestionably, improving the design and implementation of service guarantees would enhance their effectiveness. Aframework resulting from a study of companies with service guarantee experience sets out five distinct steps for the successful design and implementation of a service guarantee (Fabien, 2005):

1 Analysis of market and internal factors.

2 Service quality signaling.

3 Guarantee design.

4 Implementation and communication.

5 Performance analysis.

However, the actual process companies use to design and implement a service guarantee remains obscure. To what extent do companies actually follow these implementation steps and their accompanying guidelines? This study answers a call for research determining how companies can design service guarantee processes to enable employees to deliver service and satisfy customers (Hogreve and Gremler, 2009). The main objective of this study is to investigate the experience of companies that have implemented service guarantees and to identify common lapses in the development and implementation process. Insights from this investigation would inform future academic research in this field and assist practitioners in learning from the experiences of others.

In addressing the overarching research objective, we begin by reviewing research issues from the service guarantee literature. We then outline our research methodology, and we follow this discussion with a presentation of our analysis and findings in the form of common missteps companies make in developing service guarantees. We conclude by connecting the contribution of this research to the current body of theory, providing recommendations for practitioners, and proposing issues for further research.

Research issues

Two themes dominate the literature, which spans more than two decades:

1 factors relating to the design of service guarantees; and

2 measurement of customer and firm-related outcomes(Hogreve and Gremler, 2009).

These themes shape the direction of this study and we discuss them in turn.

Designing service guarantees

Service guarantee may be either unconditional or conditional, but regardless of its type, a strong guarantee should be easy to understand and communicate, heavily promoted, simple and obvious, meaningful to customers, easy to invoke, fast to collect on, and credible (Hart, 1988). Where possible, a service guarantee should also specify the payout, avoid complex or legalistic language, and allow activation by the customer (McDougall et al., 1998).

Benefits of a guarantee vary across different services (Tucciand Talaga, 1997) and may be more interesting in situationswhere the price of the service is high, where an industry has apoor image for quality, and where businesses depend on repeat purchases (Hart et al., 1992). Customer circumstances that provide fertile ground for service guarantees include markets where word-of-mouth is particularly important, where the customer’s expertise is low, and where consequences of service failure are high (Hart, 1988; Hart et al., 1992; Ostrom and Iacobucci, 1998; Ostrom and Hart, 2000). Service guarantees also provide advantages to well known and reputable companies by increasing expected quality and reducing perceived risks (Wirtzet al., 2000). Service guarantees therefore seem to perform differently, depending upon the nature of the service, the competitive environment of that sector, and consumer purchasing behavior.

When developing the guarantee, before its introduction an organization should research thoroughly and consider carefully all external market forces, for example by reviewing industry standards, likely response by competitors, and attitudes of various customer segments, together with any possible internal effects on management, contact staff, and operations personnel (Fabien, 2005). However, designing the specifics of a service guarantee presents many challenges. For example, no clear guidelines exist for determining the right level of compensation (Baker and Collier, 2005; Kukar-

Kinney and MacKenzie, 2007).

Outcomes of service guarantees

Most previous empirical research examining the customer effects of service guarantees uses a combination of research methodologies but relies mainly on experiments and surveys (Hogreve and Gremler, 2009). Few studies consider the benefits to the organization.

Various studies suggest that the presence of a service guarantee can improve a customer’s intention to purchase (Kukar-Kinney, 2006) and build loyalty by signaling to customers that employees will be motivated to deliver a high level of service (Boshoff, 2003; McWilliams and Gerstner, 2006). A service guarantee positively influences customers’ perceptions of overall service quality, or at least communicates a company’s quality intentions (Andaleeband Basu, 1998; Erevelleset al., 2001). Guarantees also operate at the encounter-specific level by positively influencing customer service evaluations and reducing consumers’ perceived risks in purchasing a service (Kandampully and Butler, 2001), although whether conditional or unconditional guarantees are better suited to achieve this outcome is unclear.

In addressing the question of their effectiveness in encouraging legitimate complaints, McColl et al.(2005) found that service guarantees did not increase the likelihood to complain when they were used in isolation from other consumer stimuli, such as a firm’s advertising. Their findings suggest that providing additional evidence to the written guarantee, such as how service processes allow for promises to be guaranteed, could enhance the effectiveness of the service guarantee. Offers of high monetary compensation may have a similar effect in encouraging complaints (Marmorsteinet al., 2001).

Service guarantees have a statistically significant effect on service quality through employee motivation and vision (Hays and Hill, 2001, 2006), and a nonlinear relationship exists between perceived service quality and employee-related variables, including frontline motivation and an increased ability to detect service failures through complaint information (Sum et al., 2002). In a similar vein, service guarantees may support service initiatives by influencing a firm’s service processes, the recovery process, and new service development initiatives (Lide´n and Sande´n, 2004). These studies build a strong case for using a service guarantee as a quality tool or within a change management program.

Methodology

To study the way companies design and implement service guarantees, we began by analyzing the guarantees within the sample for their particular design elements. These elements included type (conditional or unconditional), promises of compensation, and conditions for invoking. Appendix 1

(Table AI)presents a summary of the results of the content analysis. As the earlier section covering research issues shows,the choice of design elements has received a great deal of interest from academic researchers. The discussion of the types of guarantees in the sample provides a context for the findings.

We found that each of the service guarantees met the criteria of being simple and understandable. All appeared to be easy to invoke with the exception of the bank case, where customers who spent more than five minutes in a queue and wished to invoke the guarantee needed to wait additional time to complete a detailed claim form.

In terms of the types of guarantees introduced, only the hotel case had adopted a 100 percent unconditional guarantee as part of a world-wide initiative. The most comprehensive and innovative conditional service guarantee was that of insurance-B, which claims to be first in the world to offer a customer charter in a non-public organization. The company’s charter outlines 21 service standards that customers could expect from the company and reinforces service promises by a $30 payment offer for any breaches of the guaranteed conditions. A national accounting firm independently audits the charter performance, and the company makes the results of the audit public. In total, nine companies offered conditional guarantees that promised either monetary compensation (for example, $5 for slow service in the bank case) or a refund of any charges in the event a customer invoked the guarantee (the most common form of compensation).

The process of identifying common problems in the design and implementation of service guarantees relied on qualitative research, which is appropriate for a constructivism epistemological position where the goal is new theory development (Carson et al., 2001; Crotty, 1998; Healy and Perry, 2000). Qualitative research is also appropriate when a new slant on a phenomenon is required or where the subtledetails of phenomena are not suited to an investigation using quantitative methods (Strauss and Corbin, 1990).

We conducted a total of 22 in-depth, personal interviews across ten different service organizations representing nine industries. In the previous 109 studies of service guarantees, only five investigations consider more than one industry context (Hogreve andGremler, 2009). Examining many industries in one study, as is the case here, allows the findings to be applied beyond a single case experience.

Each of the companies studied operates in Australia, where we carried out the interviews. Seven conduct business nationally and one internationally, with the remaining two being locally based in the city of Melbourne. While the organizations in the study constituted a convenience sample, we made every effort to obtain sample variability in terms of types of industry, company size, and type of guarantee, resulting in an initial sample of 17 companies that advertised a service guarantee in company literature. We conducted interviews within these organizations until a convergence of views was obtained – that is, until no new themes emerged (Miles and Huberman, 1994). This process resulted in a final sample of the ten organizations listed in Table I. We selected individual company respondents using the key informant approach (Robson and Foster, 1989), which consisted of talking with managers who were personally responsible for or closely associated with the guarantee design and implementation process. In most organizations, we conducted multiple interviews to capture the views of the cross-functional unit involved.

Interviews followed the recursive model of interviewing (Minichielloet al., 1995), as answers to open questions are more likely to reflect a respondent’s own thinking and thereby improve the validity of the results (Dey, 1993; Patton, 1990). A topic guide directed the flow of the interviews. Each interview lasted between 45 and 90 minutes, and all of the interviews were audio-taped and later transcribed verbatim.

The data analysis consisted of data reduction, followed by data display and conclusion-drawing/verification (Miles and Huberman, 1994). Owing to the exploratory nature of the study, data reduction for each of the 22 interviews employed mainly in vivo codes (Strauss and Corbin, 1990) and yielded a matrix table from codes developed from each interview. We then integrated and synthesized the displays to identify respondents’ attitudes and opinions. For the data analysis, we used QSR NVivo6 computer-based analysis software (QSR International Pty Ltd, 2006).

Findings

The findings regarding actual company practice reveal significant discrepancies from the recommendations of Fabien (2005) concerning good practice in the design and implementation of service guarantees. These variances between theory and practice include inadequate or non-existent pre-launch market research; ambiguous definition of the role of the guarantee; inadequate market testing of alternative guarantee promises; a lack of consultation with key functional managers during development; a lack of CEO commitment; ambiguous assignment of responsibility for ongoing management of the guarantee; and an absence of performance evaluation. We describe these common mistakesin detail below, under headings that refer to the steps in the guarantee implementation process (Fabien, 2005). Appendix 2 (Figure A1)presents a model depicting these mistakes.

Step 1 – Analysis of market and internal factors

Mistake 1. Inadequate or non-existent pre-launch market research

In the majority of cases, the company performed no industry analysis before implementing the service guarantee. This finding pointed to a fundamental departure in practice from the recommendations in the literature, and the model presented in Appendix 2 (Figure A1) reflects its importance. In only four cases did the company carry out primary market research – in communications, banking, insurance-B, and hotel – and even these organizations focused mainly on consumer-related issues to the neglect of other factors, such as a review of industry standards, competition, and the legal environment. The following examples illustrate various approaches to customer research.

Research in the banking case comprised a large-scale quantitative study, which concluded that for 92 percent of the bank’s customers:

Fast service at the branch was the most important service requirement in a banking service.

This finding led to the introduction of the bank’s promise that a customer would spend no longer than “five minutes in a queue or receive $5.” Insurance-A used a series of focus groups to determine the precise wording of the guarantee and its format – a car insurance guarantee that promises:

A guaranteed repair, by a reputable company using guaranteed manufacturers’ parts and completed on time.

Companies by-passed preliminary market analysis for threemain reasons: lack of time, lack of resources, or uncertainty as to what information they should gather. One company reported that:

We were under pressure to get the thing out to customers quickly and no one worried about researching the market.

Insurance-B described a positive experience of conducting a comprehensive industry analysis prior to launch which continues to play a role in identifying new guarantee promises:

Our initial research indicated that policy holders were concerned and confused about the term “100 percent guaranteed” which persuaded us to adopt a conditional version.

Today, this company holds regular customer focus group discussions using present and past clients. In addition, the company has established a system of customer and staff comment cards. Available at branches, the cards encourage general feedback and solicit suggestions for additional guarantee conditions. The company also encourages staff members to submit ideas online, anonymously if necessary, concerning potential new or revised promises. A recent example relates to customer complaints about delays in claim settlements. The average time delay for a settlement check was more than 14 days, and the company found that:

. . . our customers expected to receive a check in less than five business’ days.

After a three-month review of the operational issues requiredto reduce the delay, the company established a new target, promising to mail a check within three working days. This promise was subsequently incorporated into the following year’s guarantee and remains in place today.

In summary, we found that similarly sized firms used different approaches to researching their service guarantee, ranging from no action at all to a full assessment of the market, including customer perceptions and operational implications of meeting service promises.