booz & co control-service-costs-gain-competitive-advantage
TRANSCRIPT
Perspective
Control Service Costs, Gain Competitive AdvantageA Winning Playbook for Service Operations
Harry HawkesCurt BaileyPatricia RiedlVikas Bhalla
Booz & Company
Contact Information
ChicagoCurt [email protected]
Patricia [email protected]
ClevelandHarry [email protected]
Florham Park, NJ Barry [email protected]
HoustonGeorge [email protected]
LondonJohn [email protected]
MumbaiAbhishek [email protected]
New YorkRichard [email protected]
Vikas BhallaSenior [email protected]
San FranciscoCurt [email protected]
Doug [email protected]
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EXECUTIVE SUMMARY
The effective management of service operations is crucial if companies are to control their labor costs and improve customer satisfaction. The challenge is to achieve both goals simultaneously. For executives to successfully meet this dual challenge, service operations must be analyzed and optimized by holistically addressing the six drivers of high-quality, cost-effective service: product and process design; service-level labor requirements; service and distribution network structure; process management; workforce management; and measurement and compensation.
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Service operations can have an out-sized effect on customer acquisition and retention. When service levels and costs are properly balanced and optimized, they can deliver a sub-stantial and sustainable competitive advantage that competitors will find hard to match.
Service operations touch multiple areas of most organizations, includ-ing client service, customer experi-ence, field service, business support functions, and back office services. They represent a large and grow-ing percentage of the cost structure in many companies. They are often very labor-intensive and complex to manage. When they require high levels of customer interaction or added value, they can be difficult to outsource. And because repetition and consistency are often hallmarks of excellence in service operations, they can become mired in the status quo, making step-change improve-ments extremely hard to achieve, even when they are clearly in the best interests of customers and the company.
Many companies have successfully transformed their manufacturing, R&D, and other product-oriented functions, but far fewer have optimized their service opera-tions. Meanwhile, executives across industries are finding it increas-ingly challenging to manage service costs—especially labor, the largest cost component of service—while maintaining service levels. Recent technological advances have helped contain service costs by reducing or eliminating human intervention, resulting in higher overall produc-tivity. For example, airlines, banks, and hotels have successfully adopted self-service kiosks. But technology is only one part of the solution.
Maintaining service levels can be critical to business success. In many companies, service is the primary revenue-generating activity; in the United States, for example, ser-vice businesses now account for a majority of GDP and employment. Moreover, companies in every sector of the global economy maintain essential customer-facing functions
THE DUAL CHALLENGE OF SERVICE OPERATIONS
Executives across industries are finding it increasingly challenging to manage service costs while maintaining service levels.
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Source: Booz & Company
Exhibit 1 The Quality and Cost Drivers of Service Operations
- Improve product architecture through product customization and overall configuration management- Analyze and improve mean time before failure (MTBF) and mean time to repair (MTTR) at the product level - Embed remote service capabilities in products and processes - Develop comprehensive end of life (EOL) and total cost of ownership (TCO) strategies - Implement self-service technologies- Design processes to produce high-quality outputs and eliminate rework
- Match the job requirements to customer needs, desires, and expectations - Match the employee to the job requirements - Align operating hours and service windows with customer demand patterns
- Consolidate across geographic and functional dimensions - Make appropriate repair-versus-return tradeoffs- Balance service levels and utilization across geographies - Determine the proper mix of service sourcing
- Dynamically baseline all service operations processes - Eliminate waste and standardize whenever possible - Measure process outputs in real time and pursue continuous improvement
- Determine the total labor hours required - Determine the optimal mix and scheduling of full-time and part-time employees - Identify and manage the trade-offs between employee turnover and career development investments
- Identify key performance drivers and define metrics based on those drivers - Cascade those metrics through the organization, eliminating extraneous data collection - Align compensation and reward systems with desired employee behaviors
11.0 million = S
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Product & Process Design
Service-Level Labor Requirements
Service & Distribution Network Structure
Process Management
Workforce Management
Measurement & Compensation
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and processes. Without first under-standing your customer segments, what their potential lifetime value is, and how to design a tailored set of service models to suit them, running a profitable service operation will be very difficult. For example, front-desk performance is strategically important in the hotel and gaming industry, as this is often where the customer experience begins - par-ticularly for high value customers. Executives must maintain service operations in order to deliver the customer value on which revenues and market share depend, and they must simultaneously reduce service
costs to meet higher profitability expectations. Whether the business is a retailer considering optimum sales floor coverage, a hospital seeking to improve care delivery by better utilizing nurses and beds, a hotel trying to reduce check-in times (or upgrade customers), or a manu-facturer trying to deliver technical support in global markets, the lead-ers of the organization must under-stand and manage the factors that affect service delivery and costs in a rigorous and holistic manner.
Service operations leaders must develop strategies capable of iden-
tifying and capturing opportunities for improvement. Toward that end, Booz & Company has developed a framework to help them simultane-ously attack service costs and effec-tively meet customer requirements. The framework encompasses the six principal drivers of service quality and costs (see Exhibit 1). Although all of the drivers may not be relevant to all companies, leaders who iden-tify and manage the drivers that do affect their companies will be able to reconcile the conflicting mandates of service operations and deliver high-quality, cost-effective service to their customers.
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The foundation for high-quality, cost-effective service operations is established during the design phase of products and processes. Product and process design affects quality and total service costs in significant ways. In particular, it can reduce service costs early in product and process life cycles by reducing defects during their launch phases, and it can reduce total service costs by shrinking their maturity curves. Gains can be captured in the following ways:
Improve product architecture through product customization and overall configuration management. For example, by continuously assessing potential computer con-figurations, a computer equipment company discovered that it could save an average of US$6 per com-puter simply by installing its largest hard drive in each unit. The savings included reductions in service costs (stemming from simplified repairs), in order processing, and in technical support services.
DRIVER 1: PRODUCT AND PROCESS DESIGN
Design can reduce service costs early in product and process life cycles by reducing defects during their launch phases.
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Analyze and improve mean time before failure (MTBF) and mean time to repair (MTTR) at the product level. Analysis often reveals huge varia-tions in MTBF and MTTR across product types. For example, a second computer equipment company dis-covered that the MTTR of its third-party products was twice as long as that of its internally developed products. The main causes of this variation were product designs that made repairs more difficult, a lack of service technician training, and the infrequency of service requests on the third-party products.
Embed remote service capabilities in products and processes. Remote services, including diagnosis and repair capabilities that are built into products and processes, can simultaneously reduce service costs (right part, right place) and enhance
customer satisfaction and loyalty. For example, many production equipment manufacturers are using remote services to increase equip-ment uptime, which enhances the productivity of their customers and lowers their own service costs.
Develop comprehensive end of life (EOL) and total cost of ownership (TCO) strategies. For some products, such as photo printers, servicing and repair can make up the largest portion of their total cost. Thus, significant sav-ings can be realized by analyzing and reshaping the product life cycle to improve steady-state reliability. Apple, a pioneer in this area, has adopted very short product life cycles (13.9 months on average) that seek to shrink post-launch maturity curves with aggressive quality tar-gets at product launch (1,200 ppm).
Implement self-service technologies. Self-service technologies—such as bank ATMs, grocery self-checkouts, and automated tech support—reduce manual support requirements and labor costs in a variety of settings. Properly applied, they can also improve customer satisfaction and retention.
Design processes to produce high-quality outputs and eliminate rework. Poor process design can lead to increased rework and lower pro-ductivity, especially when manual intervention is required. Companies have become increasingly aware of this issue and are trying to address it through programs such as Design for Six Sigma (DFSS). For example, a large managed services company used DFSS to redesign processes in its mail center operations and reduced rework by 30 percent.
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Typically, labor is the largest cost in service operations and a key driver of customer satisfaction. The chal-lenge is finding the mix of labor that enables a company to meet customer service costs effectively while operat-ing within regulatory and contrac-tual constraints. This challenge can be met in the following ways:
Match the job requirements to customer needs, desires, and expectations.
Do customers desire a full-service experience or do they prefer to shop on their own? Are they technologi-cally sophisticated or do they require step-by-step support? Whatever the answers to questions like these, the customer should be the primary determinant of job requirements in service operations.
Match the employee to the job requirements. Companies cannot afford to staff service operations with employees who are either over- or under-qualified for their jobs. They should rationalize their management structures and ensure that the tasks that employees perform are prop-erly matched to their abilities. For example, one retailer recently hired part-time employees to perform routine tasks that had previously
been done by assistant managers. As a result, overall labor costs were reduced by 4 percent with no adverse effect on performance.
Align operating hours and service windows with customer demand patterns. Service operations leaders analyze usage patterns and consider them in light of corporate targets, such as market share and revenue goals, to ensure the proper service cover-age. One company with a large and active mailroom undertook such an analysis and discovered that mis-alignments in its service coverage were resulting in unnecessary idle time at some times of the day and excessive backlogs at other times. By realigning coverage with demand, it was able to eliminate both problems (see Exhibit 2).
DRIVER 2: SERVICE-LEVEL LABOR REQUIREMENTS
Source: Booz & Company
Exhibit 2 Mailroom Capacity Analysis
9A
220
020406080
100120140160180200
Idle Capacity
Mail Volume
Inflow Capacity Backlog
Mail Volume
Capacity Planning(70% Full-Time and 30% Part-Time Employees)
Capacity Planning(100% Full-Time Employees)
Reduced Idle Capacity
10A 6P5P4P3P2P1P12P11A 7P 9A 10A 6P5P4P3P2P1P12P11A 7P
220
020406080
100120140160180200
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Over time, as business and economic growth rates vary, mergers and acquisitions occur, and companies change their product mix and market focus, service and distribution network costs can get out of whack. Management coverage can become excessive, idle time can rise, and unnecessary facility expenses can be incurred. The operational and cost effectiveness of service and distribution networks can be improved in the following ways:
Consolidate across geographic and functional dimensions. In order to optimize asset utilization and minimize fixed overhead costs in service operations, companies should analyze their market coverage and service footprints. Such an analysis helped one service outsourcer realize that it was maintaining two separate organizations to provide hardware installation and repair service in the same geographic areas. This model had enabled fast response in the past, but with the volume of service requests in decline, it made more sense to consolidate the two organizations.
Companies can use shared-services models to significantly reduce overhead costs. For example, an information management company traditionally maintained dedicated support functions within each of its business units. By consolidating and centralizing these functions, the company reduced the total cost of
support, while creating functional scale that enhanced its ability to implement advanced technology solutions in a cost-effective way.
Make the repair-versus-return choice. The choice between repair and replacement will differ across companies based on costs, service-level expectations, and customer types. But it is important to determine which option is more cost- and quality-effective and implement it. When making this choice, it is critical to take a comprehensive view across the full product life cycle.
Balance service levels and utilization across geographies. The efficiency of service operations tends to vary greatly among geographic locations. For example, the information management company used workforce optimization software to conduct a resource density analysis and
DRIVER 3: SERVICE AND DISTRIBUTION NETWORK STRUCTURE
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discovered that its field technician utilization levels were low overall and that there was no correlation between field tech utilization and customer density (see Exhibit 3). In fact, utilization in some areas with low customer densities was greater than utilization in areas with high customer densities. This suggested that the performance of field management was a primary factor in the company’s service tech utilization levels, and senior management realized that it did not have the
proper tracking and reporting processes in place to recognize and improve field service performance.
Determine the proper mix of service sourcing. Outsourcing will often produce short-term cost savings, but if it negatively affects customer satisfaction and the company’s competitive position, it can be counterproductive in the long term. Many companies outsource field tech services in areas with low customer
density due to their lack of scale, and this can be a good decision in situations where the service being provided is standardized and easily monitored, and service part complexity is not too extreme. However, it may not be a good choice when services require high customer touch or complex capabilities. The right mix of sourcing balances low costs and service quality in a way that enhances a company’s competitive advantage.
Source: Booz & Company
Exhibit 3 Resource Density Analysis at an Information Management Company
Data (Black)
Label X-axis
Exhibit Subhead- Developer can self-determine:
- Quality of the infrastructure to be installed- Operational model of the network- Services to be provided- Quality of the services to be provided
- Developer can manage infrastructure and service modernization as demanded
- Developer can generate additional returns from telecommunications services
Label X-axis
Data (Black)
Data (Black)
Data (Black)Highlight (Black)
Data (White)
4.3%
6.2%
32.8%
26.6%
30.1%
11.0 million
EXHIBIT HEADING (WHITE)
Middle East & Africa
Asia/Pacific
Europe
North America
Label X-axis
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13.5
0%
20%
40%
60%
80%
100%
120%
0 2 4 6 8 10 12 14 16 18 20 22 24
Utilization
Field Techs per Geographic Cluster
Group Clusters Field Reps Utilization
Low Density 62 176 51%
Medium Density 45 290 56%
High Density 17 251 52%
Total 124 717 53%
Low utilization in high-density clusters is an indicator of overcapacity
Potential for utilization improvement
High DensityMedium DensityLow Density
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The management of service opera-tions processes after they are designed and in place can have an enormous impact on their cost and effectiveness. Gains can be captured in the following ways:
Dynamically baseline all service operations processes. Service processes are rarely static; they change in response to the needs of the business and its customers. As a result, the first step in manag-ing service processes is mapping them and measuring their outputs. Through such a baselining effort, a major hotel operator was able to identify the critical path tasks in its front-desk operations that promised to improve guest satisfaction and eliminate nonessential activities while significantly cutting costs.
Eliminate waste and standardize whenever possible. There are many kinds of waste associated with service operations processes that can be driven out to enhance service quality and lower costs. There could be waste in the process due to unsatisfied demand, overproduction, or delays. For exam-ple, one retailer installed a conveyor belt to reduce the non-value-added movements in the process used to deliver products to the cashier.
Companies should identify any process steps that can be standardized across customers and geographies. Process standardization, and automation when possible, can reduce labor requirements and enhance customer satisfaction. For example, one regional hospital reduced the waiting time for new admissions from 4.5 hours to 1.5 hours by standardizing the admissions approval process.
Measure process outputs in real time and pursue continuous improvement. Companies can optimize both cost and service levels by continually measuring and improving processes. Continuous improvement is a widely accepted idea, but in many companies, it will require the development of a culture that supports it. Further, service processes need gatekeepers, who hold decision rights over process changes and are accountable for their performance. Without these gatekeepers, the time and effort devoted to improving processes can be wasted, as in the case of a retailer in which one team worked hard to reduce non-value-added register pop-ups, only to find out later that another team had been implementing new non-value-added pop-ups at the same time.
DRIVER 4: PROCESS MANAGEMENT
Process standardization, and automation when possible, can reduce labor requirements and enhance customer satisfaction.
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The productivity of employees is a major consideration in all service operations, especially those in which the workforce is large and decentralized. To optimize employee productivity, decision makers can take the following actions:
Determine the total labor hours required. Labor hours can be calculated in a bottom-up manner, by identifying labor drivers and creating a robust model for determining task times and frequencies, or in a top-down manner, based on comparisons of operational performance to labor hours. Either method can be used to accurately assign labor hours at the location level, but the bottom-up approach offers an additional benefit in that it allows the modification of labor hours as input drivers change. For example, one company created
a detailed model, based on unique store demand patterns, to calculate the necessary staffing required to manage its truck tire service centers, generating a 12 percent savings in labor costs.
Determine the optimal mix and scheduling of full-time and part-time employees. Once labor hours per location are determined, management should consider how the hours should be apportioned between full-time and part-time employees, and how these employees should be scheduled to meet customer demand and fulfill operational activities. For example, when one hotel studied the check-in process, it discovered that many guests were experiencing check-in waits of more than 20 minutes. Further analysis revealed that having just one less employee could
DRIVER 5: WORKFORCE MANAGEMENT
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add more than 10 minutes to the average wait time. A significant number of guests waited so long that many of them did not intend to return. However, with the addition of just five part-time employees during peak periods, an additional expenditure within the hotel’s budget, more than 90 percent of guests could be checked in with less than a 15-minute wait.
Identify and manage the trade-offs between employee turnover and career development investments.
Service operations should tailor benefits, training, and career development to specific employee cohorts. They should also weigh development investments based on the macro conditions in their industry and the position-
specific needs of employees. For instance, retailers may want to limit development opportunities in entry-level service positions, such as clerks, which are subject to high turnover rates. Conversely, they might choose to invest in promising team leaders, who are interested in advancing through the ranks of management, and in store managers, who are less likely to change jobs.
Service operations should tailor benefits, training, and career development to specific employee cohorts.
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Unfortunately, few service opera-tions and companies have robust performance measurement and compensation structures. Most fall into one of three groups: those that track metrics in a consistent way at all levels, but have not aligned their compensation systems to the metrics; those that track metrics, but use inconsistent definitions across levels; and those that don’t track metrics at all. Nonexistent, inappropriate, or inconsistent measurements result in missed improvement opportunities, the inability to understand if process changes are working, and ineffective decision making. To properly align measurement and compensation systems, executives can take the fol-lowing actions:
Identify key performance drivers and define metrics based on those drivers.
Misaligned incentives create the risk of driving the wrong employee behaviors, a condition that results in increased labor costs, decreased service levels, and low employee morale and retention rates. To avoid these outcomes, service operations must ensure that their metrics (and, thus, performance goals) are aligned with the critical drivers of business performance. Cascade those metrics through the organization, eliminating extraneous data collection. Most service organizations, espe-cially in the retail sector, are drown-ing in data and collecting more every day, but are thirsty for insights. To avoid this dilemma, companies should identify the data that is most relevant to their service operations performance and ensure that it is
DRIVER 6: MEASUREMENT AND COMPENSATION
Misaligned incentives can result in increased labor costs, decreased service levels, and low employee morale and retention rates.
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properly collected and utilized (see Exhibit 4). It is important to collect non-financial data, such as customer profitability and customer satisfac-tion, as well as key financial and operational indicators. Data should cascade from the bottom to the top of the organization so it can be ana-lyzed and responses can be crafted. Then the responses need to cascade back down through the organization so they can be executed and their results measured.
Align compensation and reward systems with desired employee behaviors.
By clearly defining compensation and rewards, and communicating the metrics that determine them, service operations can stimulate employee motivation and provide the clar-ity that people need to change their behaviors.
Further, service operations managers should work with HR to take a more proactive role in establishing and managing compensation and reward systems. They should recognize that tenured workforces come at a higher cost that often cannot be justified in terms of performance; that the lack of salary caps and compensation
bands can create wide variations in cost among similarly skilled employ-ees; and that market-based salary reference points are often inflated and thus serve as a poor guide to compensation. To address the prob-lems that result from unsupported assumptions, companies can act with varying levels of aggressiveness to reduce labor costs, depending on various internal and external factors including individual performance, salary benchmarks, the financial condition and goals of the company, and labor supply conditions.1
Source: Booz & Company
Exhibit 4 A Cascade of Data and InsightData (Black)
Label X-axis
Exhibit Subhead- Developer can self-determine:
- Quality of the infrastructure to be installed- Operational model of the network- Services to be provided- Quality of the services to be provided
- Developer can manage infrastructure and service modernization as demanded
- Developer can generate additional returns from telecommunications services
Label X-axis
Data (Black)
Data (Black)
Data (Black)Highlight (Black)
Data (White)
4.3%
6.2%
32.8%
26.6%
30.1%
11.0 million
EXHIBIT HEADING (WHITE)
Europe
North America
Label X-axis
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13.5
Asia/Pacific
Senior Management
Metrics
0
20
40
60
80
100
120
0 2 4 6 8 10 12 14 16 18 20 22 24
Utilization
Field Techs per Geographic Cluster
Group Clusters Field Reps Utilization
Low Density 62 176 51%
Medium Density 45 290 56%
High Density 17 251 52%
Total 124 717 53%
Low utilization in high-density clusters is an indicator of overcapacity
Potential for utilization improvement
High DensityMedium DensityLow Density
RESPONSES
Indicator Metrics
Detailed Metrics
Data
DATA
Operating income/location
Gross revenue/location
Direct cost/location Indirect cost/location
Revenue/FTE/day Transactions/FTE/day Profit/FTE/day
# of employees/location
% of employeesfull-time
Average wage rate/employee
Average wage rate by position
in market
Average tenure of employees
Percentage of repeat customers
Size of locationAge of location# of competitor
locations in trade area
Customer density in trade area
Average basket value
Average customer income & profit
% of gross revenue discounted > 30%
% of gross revenue sold at full price
Customer satisfaction score
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Service strategy success always comes down to execution. The six quality and cost drivers of service operations provide a comprehensive approach for improvement. However, understanding the drivers is only one part of the service cost equation. Executives must recognize which drivers to address given their unique organizational goals and structures and prioritize them. Then they
must be able to execute the changes necessary to achieve cost-effective service levels—and change is never an easy undertaking.
As service operations leaders approach the quality and cost challenge, they should pay particular attention to the first two drivers: product and process design and service-level labor requirements. Too
IN PURSUIT OF HIGH-QUALITY, COST-EFFECTIVE SERVICE
The six quality and cost drivers of service operations provide a comprehensive approach for improvement.
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often, these drivers are overlooked because they must be activated in the design stage of products and processes—a stage in which service managers have not traditionally participated. This is a mistake, because once costs are built into products and processes, it is always more difficult to eliminate them. Savvy service leaders recognize this and are proactive in bringing the cost consequences (and the appropriate revenue implications) of design decisions to the attention of senior management before they become set in stone.
The remaining four drivers—service and distribution network structure, process management, workforce management, and measurement and compensation—are the levers that service leaders can pull to improve the quality and cost of existing operations. But if they are
approached as separate silos, they can often work at counter-purposes to one another. For example, the full power of continuous improvement initiatives in process management will be stifled if employees are compensated only on the volume of their output. They won’t take the time to eliminate waste and streamline their processes if they are penalized financially. Savvy service leaders recognize the interconnected nature of these four drivers and approach them in an integrated and holistic manner.
Finally, service leaders must consider the ever present challenge of implementation and execution. Rigorous analytics and detailed improvement plans are of little consequence if they can’t be translated into action and results. To avoid this, service leaders should adopt the following best practices:
Prioritize the set of levers required • to drive the change. Identifying which of the above strategies are most relevant to service costs within your organization will help maximize the impact of change and avoid unnecessary effort.
Designate an experienced and • respected executive to lead the transformation, supported by a dedicated core team. Change is most effectively driven from the top of the organization and requires the support of a skilled team that is capable of identifying opportunities, understanding constraints, and communicating with employees at all levels.
Work closely with HR and • employee relations throughout the change. HR and employee relations can provide valuable assistance in handling sensitive issues (such
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as workforce reductions and adjustments to compensation systems), identify creative resource solutions, and ensure that all employees are treated fairly.
Develop a road map at the level of • detail required to drive execution, including agreed-on milestones. This road map should identify critical path tasks and deadlines, provide the flexibility needed to manage special cases, and include a communication plan for ensuring that all employees are informed of key changes in a timely manner.
Adopt the right change • management framework. To ensure success in large-scale service transformations, the management framework used to undertake this change should match the change
demands of the initiative. For instance, an initiative that depends on employee participation will require a management framework that motivates, educates, and empowers employees.
Conduct multiple pilot programs • (launch and learn). Pilots are extremely valuable in identifying implementation issues, building success stories, and streamlining the rollout plan.
Create a detailed training plan. • Gaining traction early on through focused training is an effective investment in the long-term strategy.
Provide the right incentives and • motivators. Use incentives and other motivators to encourage
employees to actively participate in the execution of the strategy.
High-quality, cost-effective service is essential to corporate success, but it is particularly challenging to achieve. Defining unique customer segments and models to profitably serve them requires frequent analysis. Service workforces tend to be large with high turnover rates and are difficult to mobilize. Service processes are complex and often dependent on the consistent execution of many detailed steps. And “big bang” solutions to cost reduction are rare. Nevertheless, companies that take a measured and comprehensive approach to delivering service can improve their bottom lines and gain a hard-to-match competitive advantage in the marketplace.
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About the Authors
Harry Hawkes is a partner with Booz & Company based in Cleveland. He leads the firm’s global operations and perfor-mance improvement practice for the media and entertain-ment industries. Curt Bailey is a partner with Booz & Company based in San Francisco. He focuses on operational performance improvement in the healthcare industry.
Patricia Riedl is a principal with Booz & Company based in Chicago. She works with consumer packaged goods and retail clients on labor optimization and supply chain improvement strategies.
Vikas Bhalla is a Booz & Company senior associate based in New York. He has more than 10 years of experience in developing and implementing both growth and operations strategies for companies in the consumer/retail, media, digital, and health industries.
Endnote
1 For more information, see “Retooling Labor Costs: How to Fix Workforce Pay Structures,” by Harry Hawkes, Albert Kent, Vikas Bhalla, and Nicholas Buckner (www.booz.com/global/home/what_we_think/reports_and_white_papers/ic-display/48599052).
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