02 Nov 2015

The Secret Sauce of the Service Sector

Three Harvard Business School professors show there’s no mystery to providing good service
(LtoR): Len Schlesinger, James Heskett, Earl Sasser.

Good and bad service experiences die hard. Who can forget the hotel receptionist who went above and beyond the call of duty to accommodate a last-minute change in travel plans….in contrast to the sulky server at an expensive restaurant who clearly wanted to do anything but wait on you. Long-time Harvard Business School professors Jim Heskett (now emeritus), Earl Sasser, and Len Schlesinger have been studying the service sector – the good and the great as well as the bad and the ugly – for more than three decades. In their new book, What Great Service Leaders Know & Do (Berrett-Koehler), they examine the most up-to-date best practices and explain how companies can put a smile on customers’ faces and keep them coming back for more. In a recent interview, they explained some of their findings.

Why is it so important to look closely at leadership and management practices in the service sector – what role does it play in the U.S. economy?

Heskett: Leadership practices in the service sector deserve attention because this sector represents nearly 90 percent of employment and nearly 80 percent of gross domestic product in the United States. The economic future of the country is largely in the hands of those who lead our service organizations. It’s natural that we would look to leaders in the service sector for the same cutting-edge practices that we used to find being implemented in the past in our large industrial enterprises. The growing importance of the service sector is not just a U.S. phenomenon. The proportion of jobs devoted to services has shown gains in both more and less developed economies for decades. We found that the U.S. does not have a monopoly on great service leaders or best practices in service organizations. They are doing business around the globe. While Southwest Airlines, for instance, has continued as a legendary U.S.-based service provider since its inception in 1971, IKEA of Sweden has evolved to teach the world’s retailers about the power of a well- defined and well-executed service strategy.

Your first chapter is titled “Leading Breakthrough Service is Different.” What is your definition of breakthrough service, and why is it different?

Sasser: Breakthrough services are those that provide extraordinary results and a high-quality experience for customers and employees alike, high value (not necessarily low costs) to customers, and relatively high return (for the industry) to employees and investors. This “trifecta,” which occurs as a result of outstanding service design and delivery, can be found in only a few very special organizations such as Apollo Hospitals in India; Chateauform, a provider of business conference and seminar venues in France; and the Vanguard Group, which specializes in investment management in the United States. Breakthrough service providers are changing the rules of the game for entire industries around the world. Their emphasis on an approach to execution that simultaneously addresses the needs and desires of customers, employees, and investors sets them apart from the bulk of competitors that routinely emphasize one constituency to the detriment of others.

What are some of the skills that great service leaders must have?

Schlesinger: Many of the essential skills that great service leaders must have are similar to those that are important for all general managers—effective communication, the analytic ability to size up a situation quickly, skills of reflection and concentration, and the ability to inspire others and maintain objectivity in the face of triumphs and setbacks. Our observations of great service leaders reveal a greater emphasis on those skills demanded for intense personal interaction, engagement with employees at all levels of large people-intensive organizations, the ability to work with the large number of other general managers found in a typical service organization, and comfort with a team-based organization.

What are some examples of organizations that do all this right?

Heskett: Organizations that have benefited from this kind of leadership are those that are recognized repeatedly as “best places to work”—Edward Jones in financial services, Four Seasons Hotels & Resorts, J. W. Marriott, Nordstrom, Publix supermarkets, Quicken Loans, Southwest Airlines, Starbucks, USAA insurance, Wegmans, Whole Foods Markets, and Zappos.com, among others. These organizations have a greater than random probability of also being recognized for best customer service. And at the same time, they have been shown to register three times the profitability of S&P 500 firms in recent years.

That’s a perfect lead-in to the next question. In a 1994 Harvard Business Review article, you all pioneered the “service profit chain” – what you now refer to as version 1.0 of that concept. Remind us what that was, and how version 2.0, which you introduce in this book, updates this idea.

Schlesinger: The basic relationships between employees, customers, and financial results—in that order—that we set forth in the original service profit chain formulation still hold true. But a great deal of research over the past 20 years or so have put a lot of meat on those bones. As one example, we’ve come to learn more about creating the high-trust environment that leads to engaged employees who provide exceptional service that makes customers coming back for more – a combination that results in higher revenues and profits. At the risk of oversimplifying, it’s done by turning “no surprises management” on its head, creating a place where employees can rely on their bosses not to surprise them instead of the other way around. We have also come to realize the importance of an organization’s mission to attract and retain the fewer, better employees required to deliver value to customers in a cost-effective manner.

The role of the frontline employee is at the heart of the service profit chain. I would wager that most of us have run into difficulty in this regard at one time or another. How do the great service organizations avoid this?

Sasser: It starts with creating great--not always comfortable--places to work for people who are customer oriented, then populating them with the right people in terms of attitude, not skills. Consider the Mayo Clinic. It’s organized around the patient, not the care provider. The work and pay are largely based on team performance. Medical “stars” would find the place very uncomfortable. And yet, through collaboration and teamwork, the people of Mayo Clinic deliver remarkable services and carry on good research as well.

You write that great service leaders know that customers actually buy results and value, not services or products. Please explain.

Heskett: Executives who define their businesses in terms of results open up a world of opportunities for new service and product packages. Ask leaders today what business they are in, and you will still get too many answering in terms of products or services. This practice still exists more than five decades after the legendary Harvard Business School marketing professor Ted Levitt warned executives about the pitfalls of “marketing myopia” – that is, the short-sighted and inward-looking approach to marketing that focuses on the needs of the company instead of defining the company and its products in terms of the customers' needs and wants. If IKEA founder and CEO Ingmar Kamprad had simply thought of his business as a furniture retailer, for example, that company would not be selling a “lifestyle” so successfully on a global basis today to its customer base of students, younger singles, and married couples moving into their first apartment or house together.

We live in an age of high tech, which conventional wisdom says is a boon to improved efficiency and productivity. Yet you write that there are dangers in overdoing it. How so?

Schlesinger: Technology can be used effectively to replace low-contact service work. But when Starbucks introduced a faster, larger espresso machine that shortened the service experience and came between customers and their barista, technology was being used to the detriment of service. High tech works best in the service sector when it helps frontline people become heroes and heroines in the eyes of their customers. Technology also shines when it connects an organization with its customers, employees, and suppliers, providing them with 24/7 access. The ability to capture all the data and information generated by customer activities is another advantage high tech provides. Beyond all this, connectivity and big data are the essential ingredients driving the growth of so-called anticipatory services - -those that are performed before a customer realizes he or she has a need for them. That ability to anticipate customer needs will increasingly be a hallmark of top companies.

You assert in the book that great service leaders take steps to develop a core of customers who are owners. How can they be both?

Heskett: Owners in our minds are those employees and customers who suggest new ways of doing things or introduce new employees and customers to the business. The best customers, for instance, are those who are most willing to refer other potential customers. Instead of being coddled, the best customers should be put to work and asked to become ambassadors. Research has found that after being asked, they become even better customers. It takes only a core of one such customer-owner in ten or twenty to produce remarkable growth in a service business. But to create customer-owners requires a high percentage of employees who behave as owners with a stake in the success of the business. Customer ambassadors are not routinely created by interactions with employees who don’t have an owner mindset. Employee ownership is not easily accomplished if the ownership mentality is not spread throughout the organization.

What do you see as the future of the service sector, and how can organizations stay ahead of the curve?

Sasser: We admit that we really don’t know what the future holds beyond the current trends toward services that anticipate demand and are not geospecific, but are more technologically intensive and globally competitive. Great service leaders admit to the same uncertainty. Then they create organizations that learn, innovate, are rapid responders, and rely on grand goals--such as Jeff Bezos’s goal for Amazon of selling everything to everyone everywhere—instead of getting bogged down in long-term planning for scenarios that are not likely to emerge..

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