What Great Service Leaders Know and Do

Creating Breakthroughs in Service Firms

James L. Heskett, W. Earl Sasser, Leonard A. Schlesinger

• Publisher: Berrett-Koehler Publishers
• Year: 2015
• ISBN:
  9781626565869
• Edition: 1
• Topic: Business
• Subtopic: Leadership
• Index: Business

Entire service businesses have been built around the ideas of Heskett, Sasser, and Schlesinger, pioneers in the world of service. Now they test their ideas against the actual experiences of successful and unsuccessful practitioners, as well as against demands of the future, in a book service leaders around the world will use as a guide for years to come. The authors cover every aspect of optimal service leadership: the best hiring, training, and workplace organization practices; the creation of operating strategies around areas such as facility design, capacity planning, queue management, and more; the use—and misuse—of technology in delivering top-level service; and practices that can transform loyal customers into "owners."Looking ahead, the authors describe the world of great service leaders in which "both/and" thinking replaces trade-offs. It's a world in which new ideas will be tested against the sine qua non of the "service trifecta"—wins for employees, customers, and investors. And it's a world in which the best leaders admit that they don't have the answers and create organizations that learn, innovate, "sense and respond, " operate with fluid boundaries, and seek and achieve repeated strategic success.Using examples of dozens of companies in a wide variety of industries, such as Apollo Hospitals, Châteauform, Starbucks, Amazon, Disney, Progressive Insurance, the Dallas Mavericks, Whole Foods, IKEA, and many others, the authors present a narrative of remarkable successes, unnecessary failures, and future promise.

CHAPTER 1

Leading a Breakthrough Service Is Different

What great service leaders know: leading a breakthrough service is different.

What great service leaders do: they take steps to ensure repeated memorable service encounters.

Robert Nardelli left General Electric to become CEO of Home Depot in 2001. Expectations were high for Home Depot, the home improvement retailer whose growth had slowed when Nardelli took over. After all, he had already led several GE manufacturing operations to great success.

At Home Depot Nardelli found that the stores were staffed with knowledgeable, full-time employees, sometimes more than were absolutely necessary. He led a move to hire more part-timers, many with less expertise in home improvement, in order to size the retail workforce to customer traffic patterns. The move backfired. Customers noticed immediately that their favorite employees on the floor were no longer there. Soon after, Nardelli was no longer there.

Nardelli found that leading a service organization is different from leading a manufacturing organization. In manufacturing, if the factory labor force is too large, there is a simple solution: downsize. Consumers are rarely aware a change has occurred. But at Home Depot, consumers did notice. Heading up a service organization proved to be very different from his previous job. In fact, there are many subtle differences in leading a breakthrough service organization which, if not understood, can pose real challenges for a manager with other kinds of experience.

WHAT IS A BREAKTHROUGH SERVICE?

Standards for judging a service are highly subjective. When we first explored service breakthroughs and the organizations that achieved them, we described them as

those one or two firms in every service industry that stand out from the pack. . . . Firms that seem to have broken through some sort of figurative “sound barrier,” that have passed through the turbulence that precedes the barrier into the relatively quiet, smooth zone beyond which a management action produces exaggerated results, results that often exceed reasonable expectations. Firms that alter the basis of competition in their industries.¹

Based on our experiences in recent years, we can improve on that vague, albeit inspiring, definition. It requires an understanding of the way in which value is created for customers, the employees who serve them, and investors.

Value Is Central to the Idea

When we talk with consumers, business customers, and even recipients of social services about value, four topics come up, time after time, in conversations: (1) results obtained from a package of products and services, (2) the quality of the experience in obtaining them, (3) the costs of acquiring them (other than price), and (4) price itself. Together, they make up a “customer value equation” (figure 1-1).²

Figure 1-1 Customer Value Equation

Other things being equal, as results and quality of experience increase, value for the customer goes up. As price or costs of accessing the service increase, value goes down.

Recent research has explored the relative importance to customers of results (the what of service) versus experience (the how of service) in the customer value equation. It leads to the conclusion that when the service is performed in a customer’s immediate purview or is being recalled shortly after the service encounter, experience is a more important influence on customers’ perceptions of value. Otherwise, customer perceptions of value are more likely to be influenced by the results they realized.³

The customer value equation reflects the extensive research on the topic of service quality carried out by Leonard Berry, A. Parasuraman, and Valerie Zeithaml in the past three decades. One of their early studies, based on interviews with 16 focus groups, concluded, for example, that customer expectations and the degree to which those expectations are exceeded or met on each of the dimensions of the equation determine customers’ overall appraisal of service quality and value.⁴

The employee value equation is based on research and employee interviews and can be stated in a similar manner (figure 1-2).⁵

Organizations that deliver value provide employees with a reason to come to work (the nature of an organization’s activities—its “business”—and its mission). They offer opportunities for personal development, frequent feedback, and ultimately greater latitude to solve problems for valued customers, all factors that contribute to the employee’s capability to deliver results. The quality of the workplace is determined by such things as the “fairness” of one’s manager (whether the manager hires, recognizes, and fires the right people in a timely way), the quality of the work performed by one’s peers in the workplace, and the degree to which good work gets recognized. High pay as well as easy access to, and continuity of, the job contribute to value. That’s why pay is portrayed in the denominator of the fraction as 1 ÷ Total Income; when calculated this way, higher pay contributes to value for the employee.

Figure 1-2 Employee Value Equation

The third of the three value equations (figure 1-3)—the investor’s value equation—is widely known as simply return on investment.

Figure 1-3 Investor Value Equation

These three equations are interrelated. Revenue for the investor, other things being equal, means higher prices and lower value for the customer. Similarly, lower expenses for the investor, other things equal, means lower value for employees if the expense reductions come out of their compensation. But these zero-sum trade-offs need not be the case if a new policy or practice creates a way of delivering better results at lower costs while producing margins sufficient to create extraordinary value for customers, employees, and investors alike. That’s largely what this book is about.

Breakthrough Service Redefined: The Service Trifecta

We’ve observed hundreds of service organizations in action, and we’ve seen what works and what doesn’t work. We’re convinced that breakthrough services are those that provide

1. extraordinary results and a high-quality experience for customers and employees alike

2. high value (not necessarily low costs) to customers

3. relatively high returns (for the industry) to employees and investors

Think of it as the trifecta of outstanding service design and delivery.

Breakthrough services share one other characteristic. They have all changed the rules governing how entire global service industries are operated. That’s what is so exciting about them. It’s what makes it important to understand how they are designed and led.

WHAT GREAT SERVICE LEADERS UNDERSTAND: THE “RIGHT SERVICE ENCOUNTER”

Many leadership practices have proved effective in any kind of organization. Still, great service leadership is distinguished both by the magnitude of its challenges and the priorities involved in addressing them.

Jobs in services involve personal relationships and require interpersonal skills to a greater degree than jobs in some other sectors. Unlike most manufacturing jobs, many service positions bring service workers into constant contact with customers in the service encounter.⁶ In many service occupations, the service is both produced and “consumed” at the time it is delivered. As a result, the service provider is able to see the customer’s reactions and take satisfaction from them. In the customer’s eyes, the provider of a personal service has skills and a personality that are at least as important as the company and its brand. The provider is an important factor in the purchase decision. Although the encounter may be less personal in services such as retail and transportation, the service provider still has a strong influence on customer loyalty. For example, in an industry with minimal service differentiation, Customers often cite Southwest Airlines’ Employees (Customers and Employees are always capitalized in the airline’s communications) as one of the primary reasons they fly the airline whenever schedules and itineraries permit.

Service encounters often require face-to-face customer contact, customization of a service, and the co-creation of services by employees and their customers.

The Need for Face-to-Face Contact with Customers

Services that entail face-to-face contact with customers—hospitality, entertainment, professional services, education, personal services, and health care, for example—often require employees to be deployed over large geographic areas in order to provide customers with easy access. Organizations thus might have multisite operations with relatively complex organizational forms. Managers may need to ensure effective communication through a multilayered organization, particularly when change is being implemented. They may have to deal with real estate to house widely dispersed service personnel as well.

Degree of Customization Required

Some services are best performed with little customization. At Shouldice Hospital in Toronto, for example, surgeons fix hernias by a time-honored method that provides quality (measured in terms of operations that rarely have to be repaired) much higher than the average for North American hospitals. They are hired primarily for their enthusiasm for work in an environment that provides regular hours and good work/life balance—but one in which they have very little latitude in what they do. Surgeons who easily experience boredom have no place in Shouldice’s operating rooms.

In the same industry, the Cleveland Clinic looks for surgeons with an interest in research and the ability to use good judgment in treating patients with widely varying medical histories and needs. Innovation is a natural part of the job description for many of the organization’s professionals. This requires that the service provider use judgment in customizing the treatment of individual patients.

Both of these organizations benefit because they carefully hire their employees and give them good training, excellent support systems, and, where it is appropriate, more (Cleveland Clinic) or less (Shouldice Hospital) latitude to use judgment in the face-to-face relationship. These practices ensure both great results and a high-quality experience for the patient, meeting our standard for breakthrough service.

Co-creation of the Result

Customers at Shouldice Hospital participate to an unusual degree in co-creating the service.⁷ They diagnose themselves and, if necessary, diet to make the weight limit that Shouldice doctors impose to qualify patients for surgery. Patients prepare themselves for surgery by shaving themselves, take charge of their own recovery by walking from the operating table, and counsel other patients who have not yet been under the knife. All of this helps Shouldice keep its costs to a minimum while offering jobs with more interaction with patients and fewer menial responsibilities. While it increases patient enthusiasm for the process and its results, it also requires that management hire and train people who can work with patients in ways often foreign to other hospitals.

WHAT GREAT SERVICE LEADERS DO

Organizations achieve excellent service on a consistent basis by recognizing and taking steps to address the determinants of repeated memorable service encounters, something for which there is no equivalent in manufacturing or other activities. The most important of these is employee loyalty, especially in an age when such loyalty is on the decline.

Manage for Employee Loyalty

The importance of the service encounter to the success of many service enterprises places a premium on the continuity of relationships between customers and the employees serving them. This continuity requires employee loyalty. Whereas high rates of labor turnover inflate costs and cut into profits, longer tenure reduces recruitment and training costs, preserves productivity gains, and creates a more positive experience for customers—making employee loyalty one of the most important deep indicators of future performance in a service organization.

Great service leaders understand that retention rates rise along with opportunities to advance. Leaders of a number of large service organizations realize the positive effects of frontline continuity on customer satisfaction and loyalty, and they are making significant efforts to expand frontline advancement opportunities for the best employees to keep them closer to the customer for longer periods.

Whole Foods Market, for example, has designed everything, from the rigor of the selection process, to the amount of latitude for self-management on the job, to methods of compensation to encourage frontline employees to stay. Teams at the global, regional, store, and store department levels manage the company. A store often has eight teams that are responsible for anything from produce to checkout. After a 30-day initial probation period, new employees must earn a two-thirds positive vote by members of their team—an endorsement by team members who regard their vote as one that directly affects the quality of their paycheck and work life. As team members, they set labor cost/sales or cost of goods/sales ratios for their store department, they are entrusted with decisions about how to achieve those ratios (including what food items to buy locally), and they are paid bonuses based on how well they do as a team. This often involves coming up with new ideas for increasing sales as one way of mitigating increases in labor costs.

At the same time, employees benefit from what CEO John Mackey describes as a “bias toward overdisclosure” of information on which teams base their decisions.⁸ Every team member knows how other teams in the store are doing. Every member knows how the store is doing compared to other stores. Every member can know what other team members are paid. Employees have an opportunity to vote every three years on various items in the company’s benefits package, from pay for community service to provisions in their health insurance. As employees reach the three-year mark on the job, they are given stock options to encourage them to stay with the company. All of these factors contribute to Whole Foods’ turnover rate of less than 10 percent of full-time employees after the probationary period, a fraction of rates across the grocery retailing industry as a whole.⁹ It’s no...