Productivity, Quality and Relationship Marketing in Service Operations
Productivity, quality and relationship marketing in service operations
The Authors
Evert Gummesson, Professor of Service Management and Marketing, School of Business, Stockholm University, Sweden
Acknowledgements
Also published in the book, Service Management: Basics, Concepts, Experiences, Manfred Bruhn and Heribert Meffert (Editors), Gabler Verlag, Wiesbaden, 1998 © Evert Gummesson.
Abstract
The purpose of this article is to draw the reader’s attention to service productivity and its connection to service quality and eventually to profits. In service operations the customer plays an active role in influencing productivity and quality. Furthermore, contemporary companies are networks, not delimited hierarchies, and the productivity and quality issues affect all members of a network, not just the provider and the customer. This is clear from the new developments in relationship marketing and imaginary (virtual) organizations. In order to assess the financial outcome, the concept of return on relationships is introduced based on the notions of intellectual capital and the balanced scorecard. The article ends with challenging questions as well as recommendations for practising managers.
Article Type:
Research paper
Keyword(s):
Relationship marketing; Service improvements; Service quality.
Journal:
International Journal of Contemporary Hospitality Management
Volume:
10
Number:
1
Year:
1998
pp:
4-15
ISSN:
0959-6119
Introduction
This article addresses service productivity and its connection to service quality and profitability. Compared to service quality, service productivity as well as the joint quality-productivity consequences for profitability have received little attention. It has become obvious that profitable service operations and the service quality and productivity concepts require new mindsets and deeper insights into the nature of services, relationships, and measurement. Here, profitability will be represented by relationship marketing (RM) which stresses loyalty, customer retention, and long-term relationships as keys to profitability. The article is particularly focused on the relationships between service providers and customers as these stand out in the service encounter and the service production process. The customers’ role in creating both quality and productivity is crucial in services, whereas it is less salient in goods manufacturing.
RM puts emphasis not only on relationships and interaction between suppliers and customers, but also on relationships between suppliers and other parties. The modern corporation turns into a network of relationships in which all members of the network influence quality and productivity. This view is endorsed by new organization theory, particularly the notion of imaginary (or virtual) organizations. It is further supported by the new accounting practices of the balanced scorecard and the growing interest in intellectual capital. The article is focused on the micro level of service operations, and on what to measure rather than on how to measure.
The article draws on long-term, basic research[1]. The research currently provides more questions than answers - but if we cannot ask the germane questions, the answers do not matter.
Triplets, tribes and financial factors
The following proposition forms the vantage point for the article: “Quality, productivity and profitability are triplets; separating one from the other creates an unhappy family” (Gummesson, 1991, p. 6). The “triplets” all serve the purpose of making service operations efficient. This view is underscored by the criteria of the quality prizes that are now common on international, national, local, industry, and company levels. As an example, the first of the original goals of the Malcolm Baldrige National Quality Award in the USA is “Helping to stimulate the American companies to improve quality and productivity for the pride of recognition while obtaining a competitive edge through increased profits” (quoted from Hart and Bogan, 1992, p. 13).
The quality thinking represented by the awards is usually referred to as total quality management, TQM. The awards are the closest we have come so far to an empirically-based, general quality theory. They embrace internal, technology-related quality dimensions as well as external, customer-related dimensions. They include both goods and services and some of them include both private for-profit corporations, and not-for-profit government and voluntary organizations.
TQM and the awards criteria also serve to instil certain values and modes of operation. A main purpose is to implant the strategy of “continuous improvements”, which like the Japanese kaizen, covers all activities in an organization to improve both quality and productivity as an everyday activity, involving each and every one (Imai, 1986, pp. 3-4). Another purpose is evaluation of outcomes: how well did we succeed with regard to quality, productivity, and financial outcomes? By measuring the triplets we get a health reading of an organization’s financial status, in private companies traditionally referred to as return on investment, in the public sector referred to as the ability to fulfil societal goals within a budget.
Each triplet is the object of definition difficulties. The difficulties include the selection of indicators of success or failure, the application of measurement techniques, the ways of reporting and communicating outcomes, and the performance of activities that lead to improvements. This article will highlight aspects of the triplets and their interconnections that are part of the author’s perception of an ongoing paradigm shift in management and marketing. Technicalities of measuring the triplets will not be treated.
Service productivity
Service productivity has been sparsely treated in the literature with a few exceptions (Gummesson, 1992a; Lovelock and Young, 1979; McLaughlin and Coffey, 1990). Productivity is a ratio between output and input. The more we can reduce the input keeping up output, the better is our productivity. This is the guideline for the current trend - maybe even craze - to downsize organizations both in the private and in the public sector. In a future-oriented and offensive spirit, the focus is on revenue enhancement rather than cost reduction. Productivity in this sense can also be increased by increasing output at a faster rate than input and consequently offer improved profitability at the same time as cost goes up.
There is a widespread notion that service productivity has not improved over the years while the productivity of manufacturing has improved steadily. There is also a political and ideological debate on the productivity of the government sector compared with the private service sector.
Before we start measuring service productivity, we need to know what to measure, whether this is possible to measure, what techniques to apply, and whether the measurements can be of any genuine assistance to us. An even more basic question is whether service productivity is a viable concept at all (Adam and Gravesen, 1996; Bylund and Thoresson-Hallgren, 1994). Measurements of productivity are often ambiguous and inadequate, especially on an industry and national level. As a consequence, comparisons between service industries and nations are difficult, maybe even impossible, to make with meaningful accuracy (see e.g. McKinsey, 1992).
Service quality
The second triplet, service quality, is in the centre of attention for services marketing literature; sometimes services marketing is made synonymous with service quality management.
Beginning in the late 1970s, quality thinking has gone through a metamorphosis. The product sector in the Western hemisphere neglected its quality development, resting on the laurels of past performance. The driving force for quality came from Japan, ironically based on the knowledge of Americans who got no response for quality improvements in their home country. After having lost market share to the Japanese in product areas where Europe and the USA traditionally dominated, there was a slow awakening.
For service quality the tradition is different. Japanese competition has not yet been particularly noted for productivity and quality in services. The driving force was rather that service quality got under heavy fire from dissatisfied customers and citizens. Service researchers found that there was little on service quality in the literature; when the author first looked into this in 1976 nothing was found. Whereas systematic approaches to quality management in goods manufacturing started to develop in the 1920s by people in operations management, systematic approaches in service quality lingered until the 1980s and came from marketers (Edvardsson et al., 1994; Grönroos, 1990; Gummesson, 1993; Meffert and Bruhn, 1995). Although goods and services always appear in some kind of dependency in a customer offering, the understanding of the similarities and differences between goods and services is rarely found among the same people. There is need for “holistic quality” embracing simultaneous consideration of services and goods quality dimensions, as well as quality dimensions of computer software (Gummesson, 1992b).
There is usually an assumed causal connection between customer perceived quality and profitability. This connection is supported by evidence from the PIMS research programme (Buzzell and Gale, 1987). It is, however, increasingly being questioned, for example by Rust et al. (1994) who calculate “return on quality” and by Reichheld’s (1996) studies of the connection between profits and customer loyalty.
Profitability of service operations
The third triplet, profitability, is always at the centre of attention. Stock exchanges and the media continuously report on the price of shares and companies are assessed by short-term results. Within companies there are financial reports that may in some service businesses even be daily, for example, in restaurant and retailing operations. However, accounting practices, which are closely allied with corporate law, tax legislation, banking traditions, and methods of assessing the value of a company, primarily emerged with manufacturing in mind. There is, however, growing opposition against the limitation to report only short-term financial and historical data. The balanced scorecard is a current experiment to include other indicators such as the customer base, employee turnover, and development rate, thus measuring the intellectual capital of an organization.
The triplets are related to financial factors which constitute the result of a company: cost, revenue, and capital employed. The profile of the triplets, with consideration of these factors as they are applied on the micro level, is summarized in Table I.
The interconnection between productivity, quality, and profitability - the “triplets at play” - is graphically shown in Figure 1. The figure starts with quality, defined as doing things right from the beginning and doing the things that customers need and want. If quality in this sense improves, it can have a positive impact on revenue (left section of the figure), cost (middle section), and capital employed (right section). When function and reliability improve, they boost the image in the market, customer retention, and share of customer (i.e. the percentage of a customer’s purchase of a certain product which is made from a specific supplier). These changes stimulate sales volume growth, differentiate a provider from the competition and make the provider less dependent on price competition. Service costs for machinery go down, and so do the costs of inspection, testing, rework, scrap, complaints, and warranties. The capital employed is reduced as less stock needs to be kept; accounts receivable go down because payment comes earlier and less payment is delayed because of complaints; and reduced processing time requires fewer resources. As the cash flow becomes faster, the money can be used elsewhere and capital costs are reduced. Improved productivity becomes an antecedent to profitability and some factors directly affect profitability through enhanced revenue.
The figure is general as there are no “pure” service companies nor any “pure” goods companies. Goods and services always appear in a symbiotic relationship; all providers combine momentary activities (services) with things (goods).
Organizational aspects: triplets and tribes
The triplets are all concerned with the same phenomenon, the welfare of an organization, but from different perspectives. These perspectives have given rise to “tribes” within organizations. The tribes represent different traditions and cultures; each tribe’s awareness of the total welfare of the company is limited. The three tribes are the productivity tribe, the quality tribe and the accounting tribe.
Members of the productivity tribe (PT) are cost-obsessed and devote themselves to internal operations. The members may be engineers, statisticians, accountants, or economists.
The quality tribe (QT) used to be internally oriented and complacent in its own expert knowledge of design and manufacturing, and rarely customer-oriented. The past two decades have gradually changed that; its members are now oriented towards revenue and customer satisfaction.
The accounting tribe (AT) is the most institutionalized of the tribes. Its existence is partially secured by law, and its members are dedicated to measurement. Still accounting is primarily restrained to reporting short-term and historical financial data.
The three tribes could all contribute valuable expertise, but they each see things differently. Unfortunately, they have also contributed to erect functional silos that obstruct collaboration and coherent processes. The crucial matter is to see the contribution from all functions and utilize their concerted knowledge. This is the task of top management, the big chiefs. Unfortunately big chiefs all too often do not overview the whole or favour one perspective at the expense of another. The QT has made the most far-reaching progress to break down barriers and territory protection. The quality awards have already been mentioned; they provide total company audits with quality in focus but they also embrace productivity and profitability.
The PT has not often taken the customer and services to its heart but rather treated customers and services as residuals. Productivity statistics face a gargantuan problem as definitions of goods, services, and the combined offerings continually change through innovation and change of customer preferences. This makes comparisons and time-series difficult. “Hedonic price functions” constitute an effort to include quality changes by using a specification of product characteristics and consider the changes in each item of the specification (Assarsson, 1991). This is, however, a resource consuming process and the still very few applications of hedonic functions are confined to goods, primarily durable goods such as household appliances and computers.
The elusiveness of services
A recurrent statement in the service literature claims that service quality is more difficult than goods quality, both to manage and to assess. The author strongly disagrees with this statement; managing and measuring goods quality is not easier. But service
quality is different, and we have to recognize how and why it is different. An equally misleading but recurrent statement claims that service productivity is lagging behind goods and manufacturing productivity. The statement is based on lack of understanding for service productivity, trying to manage and measure it on the terms of manufacturing.