The Service-Driven Service Company

For more than 40 years, service companies successfully followed an industrial model based largely on the principles of traditional mass-production manufacturing. Today that model is obsolete, as dangerous a threat to the long-term health of the service sector and the U.S. economy as it has already proved to be in manufacturing. It leads inevitably to degradation in the quality of service a company can provide. And it sets in motion a cycle of failure that is uniformly bad for customers, employees, shareholders, and the country. Among its symptoms are customer disaffection, high employee turnover, flat or falling sales, and little or no growth in productivity for individual companies and for services overall.

As an example, consider the situation McDonald’s now faces. From the day that Ray Kroc opened his first hamburger stand in 1955, the company’s operating system has been a model of efficient service, not only for fast-food operators but also for hotels, retail stores, banks, and scores of other businesses in which personal contact is an essential part of delivering value to customers. Every aspect of the operation is designed to assure quick service, clean surroundings, and uniform products. Nothing is left to chance or individual discretion: a McDonald’s franchisee can no more decide to sell tuna sandwiches (the kitchen has no place to prepare them) than a counterperson can scoop too many (or too few) french fries.

The rewards of this mass-production approach have been enormous. For years, no one in the industry could match McDonald’s growth and profitability. Then, at the end of the 1980s, things changed. McDonald’s had a harder time finding satisfactory employees, especially in the suburbs. Construction costs shot up, as did prices. For the first time ever, sales and operating income in many of the U.S. stores began to stagnate or even fall. Attracted by competitors that offered more varied menus, lower prices, or both, customers defected and continue to defect. And while McDonald’s is working hard to win them back, its own systems are constraining its ability to respond.

Production-line thinking cannot help traditional service companies like McDonald’s that are now facing unprecedented pressure from new competitors. Attracting and retaining today’s customers demands a fundamentally different approach, one that reverses what we call the cycle of failure. The basic premise is simple: the old model puts the people who deliver service to customers last; the new model puts frontline workers first and designs the business system around them. The consequences of this reversal are profound, as senior managers are discovering at companies like Dayton Hudson and Fairfield Inn, which have made service delivery the centerpiece of their competitive strategy.

A new model of service is emerging, replacing the old model of industrialization in every element of the business. In this new model, companies:

• value investments in people as much as investments in machines, and sometimes more.

• use technology to support the efforts of men and women on the front line, not just to monitor or replace them.

• make recruitment and training as crucial for salesclerks and housekeepers as for managers and senior executives.

• link compensation to performance for employees at every level, not just for those at the top.

Finally, to justify these investments, the new logic uses innovative data that traditional accounting and measurement systems do not track: the aggregate costs of customer or employee turnover, for example, or the greater profit margins that repeat customers can provide.

As yet, no single company has put all the pieces of this new service model together. But its internal logic is already becoming clear: capable workers who are well trained and fairly compensated provide better service, need less supervision, and are much more likely to stay on the job. As a result, their customers are likely to be more satisfied, return more often, and perhaps even purchase more than they otherwise would. For individual companies, this means enhanced competitiveness. For the United States overall, it means the creation of frontline service jobs that can bring more working people into the mainstream of economic life.

More than 45 million people (or roughly 42% of the U.S. work force) are employed in serving food, selling merchandise in retail stores, performing clerical work in service industries, cleaning hospitals, schools, and offices, or providing some other form of personal service. These are the occupations that accounted for most of the U.S. job growth in the 1980s, a pattern that will continue at least until the turn of the century. Yet for the most part, these jobs are poorly paid, lead nowhere, and provide little if anything in the way of health, pension, or other benefits. Many are truly dead-end jobs. (See the table, “Dead-End Jobs.”)

Dead-End Jobs Dominated Many of the Service-Sector Industries That Grew the Most in the 1980s And Will Continue to Dominate in the 1990s. Source: United States Department of Labor, Bureau of Labor Statistics.

For a long time, demographics masked this reality. As baby boomers and married women streamed into the work force, it was plausible to believe that these were mostly first jobs for teenagers or a source of supplementary income for two-earner families. Now, however, that is no longer the case. The number of young people coming into the job market has fallen sharply, while many if not most of the women are breadwinners and often single parents as well. The reality is that the people behind the cash registers, sales counters, and vacuum cleaners are adults. The work they are doing is increasingly likely to be their permanent form of employment.

Moreover, for many service workers, it is the work itself that is permanent, not a particular job. The old industrial logic has created a new class of migrant workers in the United States—some 16 million service workers, according to figures derived from Department of Labor data. Like field hands moving from farm to farm, these people travel from one short-term job to another, becoming more demotivated with every move. Sometimes they are fired because their performance is inadequate. But often they are purposely let go just before they qualify for the five or ten cents more an hour that three or six month’s seniority would command.

CEOs and their senior managers are responsible primarily for the well-being of their companies, not the well-being of society. But in the cycle of failure, the two coincide. Today a handful of pioneers have chosen to break the cycle by recognizing and rewarding the value their frontline service workers provide. The results so far are encouraging. Employees typically earn more and enjoy their jobs more than their peers in comparable companies. Employers report higher rates of customer satisfaction and retention, lower employee turnover, and higher sales. Employers of choice in their industries, these companies are staking out strong competitive positions based on a system that produces uniformly good service—and that competitors bound to the old industrial model will be unable to match.

Poor Service by Design

The industrial approach to services is on display virtually every hour of every day in supermarkets, airports, banks, hotels, government offices, and more. But its effects may be easiest to see in the department store, that warehouse of goods where all too frequently the typical customer experience is aggravation.

Imagine that you have just walked into the men’s department of almost any big store in the United States to buy a pair of slacks. You might spot a seemingly unoccupied salesperson standing at a distance. More likely, you see racks of clothes, counters filled with accessories, and other shoppers equally in need of help. Undeterred when no one offers to wait on you, you begin the search on your own. You find the pants section, choose a few pairs to try on, and search out a dressing room. You may first have to find someone to unlock it or give you a numbered tag to monitor the merchandise—and you. Should you want a different size, color, or style, you’ll have to get it for yourself. And when, at last, you are ready to pay, you still have to track down a cashier in the right department. Special requests—“Could you see if another store has these slacks in my size?”—take time, if they can be accommodated at all. Returns, exchanges, and other problematic transactions (like register errors) take more time and the intervention of a manager who is authorized to respond.

What is astonishing about this scenario is not the poor service it depicts. What is astonishing is that these service failures are not failures, they have been designed into the system by the choices senior management has made. Like their peers in many other service industries, the department store’s managers have created, and continue to run, a self-reinforcing system that establishes an inevitable cycle of failure. Ironically, the system’s assumptions and operating practices virtually guarantee the degradation of the services the business exists to provide.

The cycle of failure begins with a set of interlocking assumptions about people, technology, and money derived from old industrial models. Today these assumptions are rarely made explicit, even in manufacturing where they had their birth. But their internal logic still drives a great many companies and managers. Simplifying somewhat, that logic goes like this: all things being equal, it is better to rely on technology, on machines and systems, than on human beings. Machines are more efficient and productive. They cost less in the long run. And they are infinitely less trouble to manage since, unlike people, they do not need to be recruited, supervised, trained, and motivated.

The human resource policies and practices that follow from this industrial logic effectively treat people as though they were machines. Frontline, customer-contact jobs are designed to be as simple and narrow as possible so that they can be filled by almost anyone—idiot-proof jobs. Employers ask little of potential employees. They use minimal selection criteria (often nothing more than the ability to show up on time) and set abysmally low performance expectations. At the same time, these employers offer little in return. They keep wages as low as possible, typically just above the legal minimum. The training they offer new hires is rudimentary at best, a reasonable policy in a system that gives workers no room to exercise discretion or judgment. Opportunities to advance are rare.

Unfortunately, however, this industrial model flies in the face of what service-sector customers many times value most: the things that technology cannot do at all or as well as thinking human beings. Automated-teller machines are one exception. But on the whole, consumers have shown little liking for restaurants without servers, hospitals without nurse’s aides and orderlies, hotels without front-desk clerks, or department stores without salespeople. In fact, the more that technology becomes a standard part of delivering services, the more important personal interactions are in satisfying customers and in differentiating competitors.

Recent research on customer loyalty in the service industry conducted by the Forum Corporation shows that only 14% of customers who stop patronizing service businesses do so because they are dissatisfied with the quality of what they bought. More than two-thirds defect because they find service people indifferent or unhelpful. Yet helpful, attentive service is out of reach for companies that follow the traditional industrial model.

Sears is a good example. Like other big merchandisers, Sears has faced strong competitive pressure from a variety of sources for years. Specialty shops and catalogs have used superior service and product knowledge to attract customers willing to pay full price. Breakthrough fashion retailers have reaped enormous cost advantages by using technology and just-in-time inventory methods to slash design-to-market cycle times. Off-price and warehouse stores sell identical branded goods at deeply discounted prices. Even the department stores’ own efforts to compete have contributed to the problems they face: markdowns and almost continuous sales have lowered revenues, eroded margins, and accustomed shoppers to year-round bargain hunting.

In this environment, improving (or even maintaining) profitability is a daunting task. Despite its extensive and growing base of retail outlets, revenue gains at Sears have averaged only 4.3% per year since 1986, while operating margins in the same period have deteriorated significantly, dropping from 4.9% in 1986 to 1.2% in 1990. (In contrast, arch-rival Wal-Mart Stores maintains a 4% net margin on its operations, and its average sales growth over the past five years has exceeded 28%.) Perhaps worst of all, Sears is widely perceived to have lost the loyalty of its target market, middle-income consumers.

Sears has tried to reverse these declines by upgrading its buying organization, introducing new merchandising strategies such as “Everyday Low Pricing,” and cutting costs throughout the organization. Since 1989, the giant retailer has eliminated over 33,000 nonselling positions for a projected savings of $600 million to $700 million. But despite these efforts, management still seems not to have realized how critically important its salespeople are to turning things around, and how long-standing human resource policies have seriously eroded the sales force’s ability and will to compete.

For example, in the labor market, Sears has consistently followed the basic tenet of the old industrial mind-set to keep labor costs as low as possible. During the 1970s and early 1980s, Sears shifted the composition of the sales force from 70% full-time employees to 70% part-timers. In the short run, this change undoubtedly reduced the aggregate wage bill and cut benefit costs dramatically. Over time, however, it led to rising rates of turnover and a sharp drop in customer satisfaction.

The chain of consequences that is the cycle of failure explains these unintended outcomes: with fewer, less knowledgeable salespeople on the floor, customers will get less and lower quality help. Impatient, dissatisfied customers have no reason to hide their feelings from employees. And since discontent breeds discontent, sooner or later even the most conscientious salespeople become demotivated. Then the best leave, the mediocre hang on until they are fired, and the cycle starts over with a new crop of recruits who are likely to be even less capable than the people they have replaced.

“Cycle-of-failure” companies cannot attract job hunters with good skills or experience to fill vacancies because quality employees will naturally be attracted to positions offering better prospects and pay. So they must use new technology mostly to monitor employees’ work (electronic time clocks, for example, and sophisticated countertheft systems) rather than to give customers better service. Total expenses rise because more supervisors and managers are needed to deal with situations marginal employees cannot be trusted to resolve. Overall, service quality ratchets down another notch or more.

Obvious as these connections may be once they have been stated, many service company managers do not make them. The assumptions reflected in the cycle of failure contribute largely to this myopia. In fact, the harder managers push to resolve performance shortfalls using tools derived from the industrial model, the less likely they are to make real long-term progress. Moreover, the day-to-day performance measures commonly used in most companies only reinforce this vicious circle.

The Economics of Service

Managers in labor-intensive service companies cannot track the real performance of their operations with traditional measurement systems. Determining the costs of customer turnover or the economics of service recovery requires metrics that generally accepted accounting principles do not provide. It also requires senior managers who are willing to abandon conventional wisdom about how and where profits are created.

In service companies that have stores, restaurants, or other facilities in many locations, two assumptions are common. One is that location strategies, sales promotions, and advertising drive the top line. The other is that cost control is the unit-level manager’s primary responsibility. Both assumptions are right in part. Prominent locations, catchy sales promotions, and memorable ads are fine ways to bring in trade. And no business can operate profitably for long without careful cost controls at every level. But what these assumptions omit is the role that workers who are in direct contact with customers play in enhancing or diminishing customer satisfaction and therefore profits.

Research into the economics of problem resolution and service recovery highlights the critical role of customer-contact employees. Data collected by Technical Assistance Research Programs for the U.S. Department of Consumer Affairs show a close link between resolving a customer’s problem on the spot and the customer’s intent to repurchase. When customers experience minor problems, 95% say they will repurchase if the complaint is resolved speedily. If the resolution process takes even a little time, however, the number drops to 70%. A spread of 25 percentage points can easily mean the difference between spectacular and mediocre operating performance. (Indeed, studies on the effects of customer loyalty have shown that even a 5% increase in customer retention can raise profitability by 25% to 85%.1) Yet the old industrial model virtually guarantees poor on-the-spot problem solving because it assumes that only managers can solve problems. As a result, it has created a generation of service workers who are either uninterested in customers’ difficulties or unable to assist them if they do care. Even if they want to, managers cannot confidently rely on workers hired under the cycle-of-failure model to do the right thing.

The economics of turnover are another area in which new metrics are needed—and where traditional accounting practices reinforce the cycle of failure and invisibly undermine a business’s profits. To illustrate the scope of the problem, consider some data from Sears.2 In 1989, 119,000 sales jobs turned over in the retail network of the Sears Merchandise Group. The cost of hiring and training each new sales associate was $900, or more than $110 million in the aggregate (a figure that represents 17% of the Merchandise Group’s 1989 income).

Costs of this magnitude often lead managers to make cuts in training. The explanation is the absence of relevant information: while wages and training costs are universally measured and known, the return on these investments in employee development is not because the incremental value of better service has long been considered unknowable. Now, however, that assumption is breaking down. Managers are looking for measures that will help them evaluate the relationship between training and employee retention, for example, or the value of the consistency of service that comes from lower turnover. In sum, they are beginning to factor in the new economics of service.

In 1989, Sears surveyed customers in 771 stores as part of its routine service-monitoring activities. Its findings throw new light on the critical importance of employee turnover as well as on the value of employee morale overall. First, the data make it clear that employee turnover and customer satisfaction are directly correlated. In stores that were given relatively high customer-service ratings, 54% of the sales force turned over in a year compared with 83% at the poorer scoring stores. Second, customer satisfaction correlates directly with the composition of a store’s sales force. The more a store relied on a continually changing group of part-timers (a staple in many service businesses), the lower the customer ratings it received. The higher its percentage of full-time and regular part-time workers, the more satisfied customers said they felt.

Evidence from companies that are mounting innovative efforts to measure the full costs of employee turnover adds to the impact of these findings. For example, two divisions at Marriott Corporation undertook a study to quantify the links among turnover, customer retention, and profitability. As a working hypothesis, management estimated that a 10% reduction in turnover would reduce customer nonrepeats by 1% to 3% and raise revenues by $50 million to $150 million. The study’s conclusions are striking: even with high-end estimates for recruitment and training costs and low-end estimates for the cost of lost customers, reducing turnover by 10% yielded savings that were greater than the operating profits of the two divisions combined.

The inefficiencies in day-to-day operations created when employees leave are another hidden cost of turnover. Merck & Co. found that disruptions in work relationships and the transactional costs of getting employees on and off the payroll raised the total costs of employee turnover to 1.5 times an employee’s annual salary. Further, the analysis concluded that, from an investment of 50% of an employee’s salary in activities to eliminate turnover, Merck could reap a one-year payback.3

Finally, in a study done in 1988 and 1989, Ryder Truck Rental discovered that another hidden cost of turnover is its impact on workers’ compensation claim rates (a significant component of benefit costs). In the 16 districts with annual voluntary turnover of less than 10%, the workers’ compensation claim rate was just over 16%. In the 20 districts where voluntary turnover ranged between 15% and 20%, the rate rose to 23%. In addition, Ryder found that increased training led to decreased turnover. Among employees who participated in the company’s new training program, the turnover rate was 19%. Among employees who did not participate, the rate soared to 41%.

Documenting the critical relationships among customers, profits, and employees presents a measurement challenge to be sure. The economics of customer loyalty are only now beginning to be worked out, despite overwhelming evidence of their importance. The economics of employee loyalty are still largely unexplored. But thoughtful managers at companies such as Marriott, Merck, and Ryder are making measurable strides in factoring the new economics of service into their strategies and their general accounts.

Design for Service

Companies cannot design new standards of service by following old routines. In many service industries, one or two leading companies have realized this and begun to do business in a radically different way that represents a 180-degree turnabout from the old industrial paradigm. Its consequences are apparent to everyone—customers, employees, managers, and competitors.

At the heart of this new approach to service are the needs and expectations of customers as the customers themselves, not the operating system and its constraints, define them. Fast-food patrons who expect instant service as well as variety will not be satisfied if new menu options leave them watching the clock. Shoppers who want to consider purchases from several departments at the same time need salespeople who can help them do so, not clerks who are tied to one department and one register.

As these examples indicate, putting customers first means focusing on how and where they interact with the company. That, in turn, means focusing on the workers who actually create or deliver the things that customers value—a spotless hotel room, a quick and easy refund, a fresh, inexpensive sandwich. In companies that are truly customer oriented, management has designed (or redesigned) the business to support frontline workers’ efforts and to maximize the impact of the value they create. New job definitions and compensation policies are critical parts of these redesigned systems. So are new organization structures and systems. The product is economic performance that is startling compared with the performance of traditional industry competitors.

Consider Taco Bell. Over the past three years, in an overall market that has been flat to declining, sales growth at company-owned Taco Bells has exceeded 60%. Profits have grown by well over 25% per year (compared with under 6% annually at McDonald’s U.S. restaurants). All of Taco Bell’s financial success has come while it has dramatically cut prices for its core menu by over 25%.

The media and industry analysts attribute this success to Taco Bell’s “value strategy.” The chain offers the most popular menu items such as tacos and burritos at prices as low as 99 cents, 79 cents, 59 cents, and recently even 39 cents. But this analysis begs the question of how the restaurant can perform so well financially while carrying on such aggressive price cutting. The answer lies in the way Taco Bell’s management has chosen to operate its business. If McDonald’s is the epitome of the old industrialized service model, Taco Bell represents the new, redesigned model in many important respects.

Taco Bell’s new model is based on a very simple premise: customers value the food, the service, and the physical appearance of a restaurant, and that is all. Everything that helps the company deliver value to customers along these dimensions deserves reinforcement and management support. Everything else is nonvalue-adding overhead. The brilliance of this strategy lies in its execution: Taco Bell’s management examined every aspect of the restaurant operation, then fundamentally altered roles and responsibilities at every level of the corporate hierarchy.

At the outset, management realized that the company could not execute the new strategy as long as its old, seven-layer organization remained in place. To compete on service and maintain low prices, the stores had to be staffed with talented, motivated people supplied with timely, accurate information about how their units were performing. Such people would need far fewer supervisors: in fact, the span of control has gone from one supervisor for every 5-plus stores in 1988 to one for every 20-plus stores today. Management would require different things from those supervisors: coaching and support, for example, rather than direction and control. And it would need new information systems to help raise quality and sales as well as to monitor mistakes.

To meet these needs, management initiated changes in almost every part of the business. By expanding the company’s sophisticated information technology to the store level, for example, it freed restaurant managers from more than 15 hours of nonproductive paper work each week while providing real-time performance data on costs, employees, and customer satisfaction. Management also restructured the store’s operating processes to reflect the fact that fast-food customers value fresh, tasty food served in clean surroundings and don’t particularly care where the work of preparing that food is done.

The back room of any fast-food operation is a complex, high-volume manufacturing system. By outsourcing much of the preparation work that had been done in the restaurants (like shredding lettuce and chopping tomatoes), Taco Bell shifted its factory operation from manufacturing to assembly. Now while more automated facilities perform the tasks that lend themselves to economies of scale, Taco Bell’s employees concentrate on customers and their needs. In contrast, the back room of the average McDonald’s is becoming increasingly complex. The more that management adds items such as pizza and fresh muffins to appeal to a broader set of customers, the more complicated the store’s manufacturing operation becomes, and the more managerial attention and control it demands.

By making these changes, Taco Bell’s management drove down costs and removed more than 15 hours of back-room labor per day from the average operation. Even more important, it shifted the focus of both frontline workers and their managers from manufacturing meals to serving customers. The ratio of front-of-the-house personnel to back-room factory workers has been turned upside down, and employee job descriptions increasingly focus on the limited but crucial service dimensions that drive the bottom line. Patronage from high-frequency fast-food consumers has skyrocketed, and consumer perceptions of Taco Bell’s value outstrip all competitors.

These front-of-the-house jobs cannot be done by incompetent, uncommitted workers. They require men and women who can take responsibility, manage themselves, respond well to pressure from customers—in short, the kind of people who rarely come to mind when most service managers think about candidates for frontline service jobs. Taco Bell’s management does not make that mistake. It assumes that service workers—like everyone else—come to the workplace with a wide variety of attitudes, assumptions, and expectations. Some will have the potential to be high performers; others will not. To differentiate among them, Taco Bell uses a selection process that is designed to elicit prospective employees’ values and attitudes toward responsibility, teamwork, and other “life themes” that have been shown to correlate with successful service work. Far from being discriminatory, the selection process has demonstrated its value in identifying high-potential candidates without regard to race, sex, ethnicity, or age. Oftentimes, detailed preliminary interviews between managers and candidates are conducted over the phone.

These selective hiring policies are a critical component of the new human resource model that Taco Bell is developing. Training efforts are another. Revised job descriptions for the company’s restaurant managers require them to spend more than half their day (or twice the time they used to) on human resource matters, such as developing their unit’s employees. To help them with this task, they are now receiving training and support in communication, performance management, team building, coaching, and empowerment that they, in turn, pass on to the front line.

Changes in job design and supervisory style have stimulated marked improvements in employee morale. In a recent companywide survey, 62% of the respondents said they felt more empowered and accountable; 55% felt they had more freedom to act independently; 66% felt they had the authority they needed to act; and 60% felt a strong sense of accountability.

More capable people with the responsibility and freedom to act inevitably require better pay. Dramatic changes in compensation have yet to hit Taco Bell’s front line. But already, workers behind the counter take home paychecks that are above the industry average. Moreover, even as the company’s pay system evolves, the perception is growing among employees and competitors alike that it is disrupting the industry’s traditional practices. For example, store managers are eligible for bonuses that allow them to earn up to 225% of the industry average based on the restaurant’s economic and service performance. And those numbers are slated to rise as more funds are generated from incremental profitability and from further increases in the company’s spans of control. (The chart, “Pay for Supervision or Pay for Service?” shows how dramatic such a redistribution of funds can be.)

Pay for Supervision or Pay for Service? This hypothetical example reflects the experience of actual companies that are redesigning their organizations according to the new logic of service. By cutting out layers of management and redefining frontline jobs, they are generating labor cost savings that allow price reductions, higher wages, and human-resource investments—and thus yield better service and higher profits.

Precisely how these new policies and attitudes will translate into greater employee loyalty remains to be seen, although it is reasonable to expect marked reductions in turnover and continuing improvement in the quality of new hires. But it is clear that Taco Bell’s success comes from more than lowering its prices. The company has explicitly rejected the prevailing model of service organization in favor of a redesigned system with service at its core. Human resource management is a central component of this new model as well as a critical part of Taco Bell’s competitive strategy overall.

While all these changes have been taking place at Taco Bell, McDonald’s has focused on more of the same: more advertising and promotion efforts, more new products, more new locations. But more of the same no longer works. Competing against Taco Bell and other redesigned service businesses demands a shift in management’s mind-set as well as a new appreciation for the real value of service and the value that service employees create.

Reversing the Cycle of Failure

Senior managers at companies like Dayton Hudson, Marriott, and ServiceMaster (which provides health-care, educational, and industrial facilities with services ranging from materials management to food service) know there is no single strategy for competing on service. What they share is a certain faith in human nature, the belief that many people want to do good work. They reject the prevailing notion that “you can’t find good people anymore.” And they repudiate any suggestion that a positive work ethic can only be assumed if people have the right degrees or skin color or native language. As a result, these companies have consciously set out to develop human resource policies and practices that will make them employers of choice, not just in their industries but in the labor market overall.

Selection and hiring practices are the most obvious way in which these companies differ markedly from their competitors. Take recruitment: whereas most large service companies have to rely on the luck of the draw, these employers tend to have applicants who have come through referrals or because they have heard good things about working for the company. The selection process is also sharply different. In essence, they prefer to interview ten candidates to find the right person for a job rather than hire the first warm body who comes along—and then have to fill the same job ten times over. Moreover, they are able to say, quite specifically, what “right” means in their particular business. Interviewers at Dayton’s, for example, favor applicants who see retail sales as a career. Suitable candidates for housekeeping jobs at Fairfield Inn (the Marriott Corporation’s new chain of economy inns) are not only dependable people with good work habits and a passion for cleanliness but also people who are willing to be evaluated and compensated on the basis of their performance.

As these examples indicate, hiring decisions at pioneering service companies are based largely on how people think, not on what they are. Those decisions are possible because these employers have carried out careful analyses to determine the characteristics entry-level workers need to be successful in their jobs and the degree to which those characteristics can or cannot be imparted through training. In hiring front-desk clerks, Fairfield Inn will gladly take on a candidate who relates easily to customers but needs to learn how to use a personal computer. Computer whizzes with no interest in people are another matter altogether. As a result, the work forces at these companies can be enormously diverse and still be homogeneous on the one dimension that matters, their ability to provide excellent service.

Training and development is another area in which these employers are breaking new ground in their industries. Increasingly, training is seen as both a means to more competitive performance and as an end in itself. At ServiceMaster, for example, medical professionals regularly talk to entry-level employees about basic health issues, such as how diseases are transmitted from one person to another. The talks contribute to the company’s ability to provide good service because they emphasize how crucial it is for everyone to be scrupulous about cleanliness. But they also add to the hospital workers’ stock of knowledge as well as to their pride in themselves and the importance of their work.

In addition to educating and motivating employees, training sessions typically provide the context in which employees commit themselves to the company and its service expectations. New sales consultants at Dayton’s take part in a two-day “celebration” in which the underlying theme is “It’s my company.” During the sessions, they work through exercises to identify and improve their attitudes toward service and customers, watch videotapes on the importance of body language, and engage in role playing to build their enthusiasm for the company. Throughout, the focus is on helping the associates think and act like customers instead of on teaching technical skills like using the registers.

Moreover, training pertains to everyone, not just to newcomers. Capital budgeting in these organizations places as much emphasis on people as on money. One prerequisite for making the shift from the old industrial model of service to the new customer-centered model is an intensive investment to train and communicate with existing employees. The rationale for this investment comes partly from the need to set higher performance standards and expectations and partly from the need to convey the information and skills workers will need to meet those expectations. Urging salespeople to “go the extra mile” for customers will not accomplish anything, for example, unless those salespeople also understand why and how things can be done differently. Likewise, managers whose chief responsibility has shifted from supervising workers to coaching and developing workers will need coaching and developing themselves to perform successfully in their new roles.

Ironically, a critical piece of many managers’ reeducation is an on-the-job refresher course in service. Today more and more supervisors and managers are spending large portions of their days on the front line. At Dayton’s, department managers and even some buyers are on the sales floor 50% of the time. Store managers at Taco Bell typically work out front where they can interact with customers instead of being hidden away in the back room to monitor operations. One advantage of this arrangement is the repeated opportunity it provides for managers to model good service for frontline workers. Another is the fact that it gives managers a steady stream of the richest possible data: firsthand feedback from customers on the quality of their operations. A third (and often double-edged) advantage is that it gives at least some middle managers a productive job to do and so creates a place for them in their companies’ newly flattened organization charts.

In virtually every large-scale change effort we have studied, one of the most stubborn problems is resistance from middle managers. Many people call them the concrete layer and tell endless stories of how they get in the way of progress. The plain fact is, in this new service model, they often do get in the way. As spans of control widen, fewer middle managers are needed. Moreover, if they are left in place, the problems of change increase geometrically. Without a lean organization, senior management cannot push operating decisions down to the front line. Without cuts in middle-management head count, it cannot redistribute wages either.

By and large, middle managers understand this (which is why they engage in acts of sabotage if the problem is not addressed—any rational person would do the same). Nevertheless, the unpleasant truth remains: moving to the new service model demands the resizing of middle management’s ranks. This means moving some people up, moving some back into expanded unit-manager jobs that can keep good managers close to customers, and moving some out of the organization.

What supports this resizing and makes it possible is the development of new technology to retrieve and transfer the information that middle managers once controlled. With good systems in place, a company can achieve great gains in productivity in ways that assist frontline workers and are not obvious to consumers. But as this suggests, in the new model, technology is almost always viewed as a resource and support and not as a source of competitive advantage in its own right. Sooner or later, new systems and tools become available to everyone. Employees with positive, customer-oriented attitudes are a lot harder to copy or buy.

Becoming a quality service organization is tumultuous; there is no getting around that fact. After the “Performance Plus” program was initiated at Dayton Hudson three years ago, frontline turnover rose as sales consultants decided whether pay-for-performance and other aspects of the new system worked for them. Fears of performance pressure and job insecurities contributed greatly to the success of a union-organizing campaign at the Detroit Hudson’s store before the program was even introduced. (Dayton Hudson’s management has chosen to make the change incrementally, adding three or four stores to the program each year.) Nevertheless, management has persevered on the strength of conventional financial results (sales gains of up to 25% in individual sales per hour, compensation that averages 20% more, stable—though shifting—operating costs) and on the strength of results that are just as crucial competitively but not yet as easily quantified: significant gains in customer satisfaction.

At Dayton’s, as at other service pioneers, the formulas that will show the dollars-and-cents consequences of reversing the cycle of failure are still being derived. But the base for those calculations is growing rapidly as more and more managers start to measure and track the costs associated with keeping and losing customers and employees. In addition, they are sharing that information with employees, through paychecks linked to performance and through “scorecards” from departing guests, mystery shoppers, and random samplings of customers.

Today companies in many service industries and labor markets have chosen to reverse the cycle of failure. The benefits are already apparent in higher profits and higher pay. Further evidence will only become more obvious over time, as the gap widens between these employers of choice and their more traditional competitors. For years, customers had no alternative but to accept the poor performance and limited quality that were designed into almost every service operation. Today they do.

How Does Service Drive the Service Company?

Michael R. Quinlan is Chairman and CEO, McDonald’s Corporation, Oak Brook, Illinois.

In “The Service-Driven Service Company” (September–October 1991), Leonard A. Schlesinger and James L. Heskett correctly assert that there is no longer room in the marketplace for service companies that apply a production-line, industrial-based approach to business at the cost of customer satisfaction.

It is because I concur so strongly with this underlying premise that I was shocked not to find McDonald’s identified as an example of a forward-looking company that is setting ambitious benchmarks for tomorrow’s service industry. Instead of writing about the McDonald’s of the 1990s, the authors chose to examine the McDonald’s of 10 and 20 years ago.

Speed of service, clean surroundings, and dependable quality are critical components of McDonald’s formula, but they have never been either the starting point or the goal of our business. At McDonald’s, customer satisfaction is, and has always been what’s made us the industry leader and what continues to drive the increases in our market share.

As company founder Ray Kroc said, “The customer is number one. After all, that’s the name of the game.” Nice words? Yes, but words backed by action is where it counts—on the front line where the customer is served. There are precious few companies in the world that direct a greater portion of their resources at that critical point of contact than McDonald’s does.

Much of the continuing, extensive consumer research we do pertains to customer satisfaction, enabling us to monitor customer feedback and integrate that data into actionable information for our franchises and restaurant managers, where it can be immediately applied to improving service.

At our Hamburger University training facilities, today’s curriculum emphasizes pushing authority as far down the organization as possible—listening to and empowering crew employees to do “whatever it takes” to deliver the best possible experience to our customers and to solve problems on the spot.

Building on training systems that have been state-of-the-art for years, McDonald’s most recent and ambitious initiative is a series of face-to-face orientations on “customer care” that ultimately will touch every employee in every one of our more than 12,000 restaurants. We have a field-service support team in place to work this emphasis on customer care into our day-to-day operations. This program will lead to local restaurants conducting their own consumer-focus groups, employee rap sessions, complaint tracking systems, and other frontline, service-enhancing actions.

But our efforts don’t stop with training. In order to truly deliver on the promise of customer satisfaction, store managers must be free to interact with customers, and that is where the company’s advances in technology to support frontline efforts of employees come into play. Many years ago, McDonald’s was the first quick-service company to put computers into the hands of local managers to reduce the time they had to spend away from the counter doing inventory control, labor scheduling, preparing restaurant profit and loss statements, and the like.

The company was the first to introduce the concept of outsourcing food preparation work that did not have to be done in the restaurant itself and the first to introduce such innovations as direct-draw shake machines and double-sided “clamshell” grills that cook both sides of a hamburger simultaneously. These innovations improved speed of service and the quality of our finished products and enabled the staff to spend more time on face-to-face customer service.

Technology at McDonald’s is also making it possible for our restaurants to offer more food choices from kitchens that have never been simpler to operate. Our goal has long been to deliver a meal within 60 seconds of the order being placed, and even with our new menu options, that average has not slipped.

In commenting on McDonald’s and our competition, the authors miss some important points: that objective and independent financial institutions—such as First Boston, Merrill Lynch, Kidder Peabody, Goldman Sachs, and Solomon Brothers—have concluded that McDonald’s remains an excellent long-term investment; that over the past five years, we have boosted expansion by 20%, while return on assets and return on equity have averaged about 18% and 21%; and that our cash flow from operations, net income, and net income per share have grown at double-digit compounded annual rates for the past ten years.

Finally, the authors note that, “as yet, no single company has put all the pieces of this new service model together.” Once again, I can only agree. We do not have all the answers—neither do others in our industry nor the authors themselves. However, we are confident that we know where to look for both the questions and the solutions of tomorrow, whether these be in continuing to pay in excess of the minimum wage, continuing our five-year record of decreasing turnover, or implementing compensation systems linked to specific customer-satisfaction criteria.

Keeping our eyes on the customer is our single focus for the 1990s. In the 70s, we focused on serving the customer; in the 80s, we emphasized satisfying the customer; and now, in the 90s, our goal is to exceed customer expectations—building sales and profits, widening the gap in differentiating McDonald’s from the competition, and setting new benchmarks for the entire service industry.

Ron Zemke is President, Performance Research Associates, Inc., Minneapolis, Minnesota.

Bully for Schlesinger and Heskett! An organization’s reputation for quality customer service is indeed built one customer and one contact at a time. Most frequently, that contact is a face-to-face, living, breathing, human contact. And as their article attests, savvy managers—particularly in retailing—understand how important it is that frontline employees have the time, the tools, the training, the support, and the backing and encouragement not only to satisfy the customer then and there but to do it in a way that brings him or her back for more. No amount of marketing money and moxie can wash away the effect on the customer of poor frontline performance.

It is equally important to note that quality frontline service does not exist in a vacuum. Senior management must, as Schlesinger and Heskett imply, have an aggressive concern that the work systems, policies, and procedures of the organization empower rather than impede frontline success with customers. Implicit in the spectrum of senior management responsibilities that the authors specify is one other that has weighed heavily in our service quality work: management vision.

Time and again we have seen service quality improvement efforts flounder because senior management failed to communicate clearly its vision of quality service. Training, systems design, policy, procedure, and even supervisory behavior must reflect a clear, consistent view of what the organization is trying to achieve for the customer. Without this laser-sharp focus, frontline people are left to guess for themselves what a quality outcome looks like. Many will guess correctly. Frontline employees are, after all—as Schlesinger and Heskett rightly point out—thinking, consuming adults themselves. But some will not guess correctly. The resulting inconsistency of action creates no advantage for the organization. Only senior management can create, articulate, and communicate the sort of vision that leads to the sort of real-time, frontline performance that is critical to success in today’s service-conscious marketplace.

Jim Snider is President, Partners in Education, Burlington, Vermont, and author of Future Shop (to be published in January 1992).

In their ambitious article, Schlesinger and Heskett present a fascinating description and explanation of a changing service world. But they fail to define this world adequately and to recognize that its constituent parts are driven by fundamentally different economic forces. The lessons learned from Taco Bell are not as readily applicable to Sears as the authors imply.

In particular, the authors fail to make the important distinction between what I call “transaction services” and “information services.” An information service is the type of service a salesperson at Sears provides. The salesperson gives advice about a product and then expects the customer to purchase it. A transaction service is the type of service that an order taker at Taco Bell provides. As an intrinsic part of the product ultimately sold, the order taker quickly and attentively waits on the customer.

This may at first seem like a small distinction, but in fact, there is a critical economic difference. With an information service, the customer has a strong incentive to take advantage of the service without paying for it. Such cheating is not possible with a transaction service, since the purchase is an intrinsic part of the service. As a result, improved customer satisfaction for a transaction service will translate directly into increased sales. But this is not so with an information service.

This fact is not lost on the retail industry. In the last few years, for example, many service-oriented retailers have opposed bills proposed in Congress to tighten restrictions on retail price maintenance. One of their major arguments is that without retail price maintenance, consumers will shop their stores for product information and then buy at a mail-order house or local discounter. Only with retail price maintenance can retailers be assured that they will see a return on their investment in information service. Similarly, department stores and other high-service retailers frequently justify their use of derivative and private label merchandise on the grounds that this is the only way they can continue to provide high-quality service.

In their attack on the quality of sales help at department stores such as Sears, Schlesinger and Heskett fail to account for the astonishing growth of wholesale clubs, which provide no sales help at all. These warehouse clubs are selling the same type of appliances, consumer electronics, and office supplies that Sears has thrived on for many years. Many consumers are more than happy to shop Sears and other service-oriented retailers for their information and then buy from low-price warehouse clubs. No wonder a Sears salesperson recently remarked to me that Sears had no choice but to lower its sales commissions, once among the highest in the industry. Customers may be more satisfied with the service, but that does Sears no good if it doesn’t get the order.

Leonard A. Schlesinger and James L. Heskett Respond : “Customer Satisfaction Is Rooted in Employee Satisfaction”

Our article, “The Service-Driven Service Company,” attracted comments from executives representing a formidable list of service companies. They have much to be proud of in terms of the collective accomplishments of their organizations. And yet their comments remind us again of the difficulty of seeing whole a service-driven strategy for the 1990s. Like the blind men attempting to identify and elephant by feeling the animal in different places, these comments, as well as the research and experiences that the commentators cite, focus on selected pieces of a much larger puzzle.

Both Dinah Nemeroff and Michael Quinlan emphasize the importance of putting customers first and designing a strategy to satisfy them. Ms. Nemeroff takes us to task for putting frontline service workers first and designing the service strategy around them. The importance of customer satisfaction is implied in what we said; perhaps we didn’t state it strongly enough. But the growing body of data we have collected thus far suggests that customer satisfaction is rooted in employee satisfaction and retention more than in anything else, including clever technology (especially clever technology, since competitors can so easily replicate it). To go one step further, if the technology restricts employee latitude and perhaps even customer choice, as is the case in some of the businesses we have observed, it can actually create a constraint on strategic alternatives and long-term performance.

Ironically, after acknowledging the importance of employees in McDonald’s service equation, Mr. Quinlan returns to an extended description of new technologies being employed by the company, technologies designed to restrict rather than expand employee latitude. This is, in fact, what we would expect of the CEO of a company that has followed so successfully the industrial model for designing and implementing the service encounter and delivery system.

Contrast these comments with James Perkins’s reminder of Federal Express’s corporate philosophy: people, service, profit. These priorities are roughly in the same order as the priorities our article outlines.

Steven Reinemund maintains that our cycle of failure argument presents too simple a view of the need for new service models. Price-value comparisons, says Reinemund, are the primary reasons customers vote with their feet in purchasing services. What is the source of favorable price-value relationships? Employees and organizations that provide high-quality service and low costs, providing the leverage that allows for the latitude to deliver extraordinary price-value relationships.

Jim Snider claims that our arguments are not universally valid, that for what he calls “information services,” it does no good to emphasize more satisfying customer relationships. The customer, he says, will use an information-providing, high-cost outlet to make an informed buying decision but will actually buy from a low-service, low-price competitor. The implication here is that the information-providing organization has to be high cost. We disagree, even though the irony is that his example company, Sears, has achieved neither a high-information nor a low-cost position. Sears exposed itself to the customer-behavior problem that Mr. Snider describes when it began featuring more nationally branded than private-label merchandise. A service-driven strategy backed up by Sears’s highly valued private-label merchandise would, we believe, have provided the basis for bolstering its store-floor selling and service capability.

Once having abandoned both initiatives, what would Mr. Snider have Sears do—try to compete by emulating competing discounters? He is probably right that a return to a service-driven human resource strategy will be of little help now; only if it is coordinated with other carefully designed moves involving branding, logistics, and other initiatives could Sears hope to return to its former standing. No one medicine can cure this patient.

Customer Satisfaction Is Rooted in Employee Satisfaction

We could continue to respond to comments concerning portions of our article, but to do so would obscure our central arguments. They were that: (1) any effective service strategy comprises a number of carefully integrated, internally consistent elements; (2) the model that industrializes a service has worked well in the past for organizations like McDonald’s; but (3) another model—one that emphasizes the human factor in association with technology that improves service to customers and increases employee satisfaction—is a promising alternative to industrialization.

Putting this in perspective produces what we would call a “service profit chain.” Its goal is not customer satisfaction, as Dinah Nemeroff maintains, but profit. And that profit is most closely linked to customer retention: customer retention is a primary determinant of what we call “quality of market share”; and as a determinant of profitability, quality of market share will gain as much attention in the 1990s as market share did in previous decades.

The Service Profit Chain

Customer retention results from customer satisfaction, which, as Steve Reinemund suggests, is determined largely by the value the customer perceives. Perceived value results from a comparison of service/product quality with price and other costs of acquiring the service/product package. Value, service quality, and costs are driven in turn by employee retention, employee satisfaction, and the quality of the internal service support that employees use to help customers—found to be an even more important determinant of employee satisfaction than compensation levels are.

Our data suggest as well that employee satisfaction is especially high in service organizations that not only deliver high value to customers but do it through front-line service workers who are carefully selected, well-trained, given latitude to solve customer problems, compensated at least in part on their performance, and even given responsibility for ensuring that their positions are staffed. It is this model that allows managers to act as coaches rather than supervisors and increases spans of management control to 20, sometimes even 40, employees to 1 manager. At the same time, it reinforces the satisfaction of employees who look to be members of winning teams.

Our article proposes one highly effective model for achieving outstanding, high-value service. Increasingly, we believe it will prove to be successful against strategies that employ more and more job-narrowing technology, restrictive controls, and programmed behavior and that reduce the human element in service delivery beyond a point acceptable to many consumers. Though this service model will not appeal to all customer segments, especially those seeking little or no human interaction in the service transaction, it will have enduring qualities of being differentiable and hard to emulate. What’s more, it will offer the potential of high value to both customers and the people who serve them, the heart of a service-driven service company.

We are led to this paradoxical and disturbing conclusion: with transaction services, increased competition leads to better service. But with information services, exactly the opposite happens: the more competitive the marketplace, the worse the service. This, indeed, is exactly what has happened in the consumer electronics industry. As superstores, warehouse clubs, and mail-order companies have sprouted up all over the country, competition has increased and information service declined. It is Sears’s misfortune that its industry obeys such a dynamic. Under these circumstances, suggesting—as Schlesinger and Heskett do—that Sears and other similar retailers increase their emphasis on sales help is like suggesting to a drowning victim that he gulp down more water.

Dinah Nemeroff is Director of Customer Affairs, Citibank, N.A., New York, New York.

Indeed, companies must be service driven. Foremost, they must be customer satisfaction driven. Schlesinger and Heskett assert “the new [service] model puts frontline workers first and designs the business system around them.” The optimal model, however, puts customers first and designs a business around their satisfaction.

While Schlesinger and Heskett point out several significant cost issues, I disagree that “the economics of customer loyalty are only now beginning to be worked out.” The bottom-line impacts of customer satisfaction are knowable and, in many cases, well-known—in terms of both expense reduction and revenue growth. Increased satisfaction demonstrably leads to higher customer revenue.

Citibank analysis shows that highly satisfied branch banking customers increase their business nearly 50% more than less satisfied customers. Similarly, highly satisfied corporate customers of Citi’s foreign exchange business are three times as likely to select us as one of their primary dealers. These kinds of quantifications are as critical as a business’s income statement in establishing true returns on investment.

The client-feedback process used to obtain these satisfaction benchmarks can also yield business design diagnostics. Not only the customer-contact staff, discussed by the authors, but also customers themselves can provide a wealth of information on how to invest for satisfaction.

Customers can pinpoint satisfying (and dissatisfying) staff behaviors: for instance, we’ve learned that a service rep who must consult a supervisor to make certain decisions, a routine typically endorsed by management, is seen by some customers as less than fully competent. Customer-calibrated thresholds can be used to define service standards such as how long is too long to wait for a teller? And customer preferences can dictate service functionality. The features of the automated voice-response system Citibank Visa and MasterCard members use to obtain account information are based on customer input. It’s therefore not surprising that almost 50% of the time, card members elect to use this self-service option.

Certainly, the sound human resource practices the authors advocate are an important element in a total quality management approach. The “service professionalism” of all staff is one of the strategic quality principles I observed in a 1980 study of excellent service companies (reported in Tom Peters and Bob Waterman’s In Search of Excellence).

“Customer relations mirror employee relations” is a truism long practiced by excellent service managers. Benjamin Schneider proved this in 1980 in a study of bank branch personnel and customers: “When employees report that their (own) branch emphasized service by word and deed, customers report superior banking experiences” (“Service Organization: Climate Is Crucial,” Organizational Dynamics, Autumn 1980).

Foreshadowing Schlesinger and Heskett’s praise of Taco Bell, Schneider calls for managers to be flexible “service enthusiasts,” not “service bureaucrats interested in system maintenance, routine, and adherence to uniform operating guidelines and procedures.” He admonishes managers that reliance on “easily countable, relatively short-run indices of human effectiveness [such as turnover] may be shortsighted in the manufacturing sector; in the service sector it is myopic.”

Because the quest for quality is unending, Citibank managers expect to be continuously refining the basics of service professionalism, including selection, training, coaching, and rewarding, as discussed by the authors. At the same time, we’ve begun to tackle more complex executional issues, including insuring customer satisfaction throughout worldwide service delivery.

Citibank knows that it must be a global service team and an interdisciplinary one as well: we aim to combine the best of human resources with the best marketing, systems and operations, and financial and credit practices.

Experts in all of these functions contribute to Citibank’s worldwide customer-satisfaction initiative. We’re working to combine state-of-the-art human resources management with four additional elements:

Culture. Our goal is to make customer satisfaction a Citibank value and a corporate performance norm. Senior managers must lead the way by actively practicing service statesmanship.

Process. Classic service quality management, including quality control and service standards, is used in all profit centers.

Information systems. Our new global RADAR software, for example, analytically tracks revenues, customer relationship development, and customer satisfaction, as well as account managers’ action plans and follow-up.

Performance measures. To evaluate and reward staff performance, managers use a diversified set of criteria, including those tracked in Radar, as well as cost management, teamwork, and operational quality.

Steven S. Reinemund is President and CEO, Pizza Hut, Inc., Wichita, Kansas.

Few people would argue with the several excellent fundamental principles of service that Schlesinger and Heskett outline. However, the “cycle of failure,” as convincing as it may sound, is not the cause of sales shortfalls at McDonald’s and Sears. To hold these companies up as proof of this principle is an oversimplification of their challenges.

Value is their primary issue, and service, of course, is a part of the value equation. Price too is important, and in the case of McDonald’s and Sears, I believe consumers have voted for better price-value alternatives.

Robert Ayling is Secretary & Legal Director and Director of Human Resources, British Airways, Hounslow, England.

I work in an industry whose main unit of production is an aircraft seat traveling 500 mph at 33,000 feet. This seat does not differ greatly from that of our competitors. Our customer is forced to sit in this seat for up to 13 hours, and the demand for the seat is a derived demand based on the customer’s desire to be in a different location at a certain time.

Given this unpromising start, the level of service given to our customers by our frontline staff is the major factor in determining how we can attract new customers and retain existing ones, and, as a consequence, how profitable a share of the available market we can secure.

I therefore agree with much of Schlesinger and Heskett’s article. It consolidates and then builds on the approach that many service-oriented companies adopted in the 1980s: putting people first, both customers and employees. The article also underlines the fact that, when the inevitable economic downturns are with us, frontline employees are crucial to a company’s survival.

Further, I believe the authors successfully identify the battleground on which many of the leading service companies will either survive or perish in what has become an increasingly competitive environment. But I want to add two caveats:

1. Beware of underestimating the value of middle managers. To succeed in the approach the authors advocate would require substantial changes in the culture of many organizations. Those changes are best achieved through a process of management development: identify desirable management practices; gain commitment; manage performance, achievements, and behaviors; and introduce performance-related pay.

2. Beware of sacrificing technological support systems. With the advent of the technological age, I believe we are having some difficulty in understanding the complex relationship between worker and machine. Perhaps the pendulum swung too far in favor of technology in recent years, causing an excessive compensatory swing in the opposite direction. Finding the right balance is not easy, but the rewards of matching a skilled work force with an appropriate level of technology are substantial.

If one embraces much of the thinking outlined in “The Service-Driven Service Company” and acts on it, what happens when one’s main competitors have done the same? The main challenge then moves from winning new customers to retaining existing ones. The role of frontline staff remains of paramount importance in this newly focused objective.

The retention of customers can be briefly defined as: service delivery = zero defects; and service recovery = zero defections. Our statistics tell us that customers who experience bad service complain, on average, to 11 people, while those who experience good service tell only 6 people. Further, it is said that it is 5 times more expensive to attract a new customer than it is to retain one. In light of these figures, Schlesinger and Heskett’s article becomes even more relevant.

Karmjit Singh is Assistant Director of Corporate Affairs, Singapore Airlines Limited, Singapore.

Schlesinger and Heskett’s article is a timely reminder that even the most successful companies are vulnerable to the “cycle of failure” if they lose sight of key customer service objectives and the means to achieving them. What’s more, their service model is validated by the recent experience of the airline industry.

The progressive deregulation of civil aviation in the 1980s has done much to erase the widespread apathy many airlines previously showed toward implementing effective human resource management and putting their customers first. By progressively leveling the playing field of a once heavily protected and inefficient industry, deregulation has exposed the weakness of carriers who have clung to a “production line” or “industrial” approach to human resource management.

Equally, deregulation has highlighted the success of carriers with service-driven cultures. Those with a history of striving for higher levels of customer service, like Singapore Airlines, have been able to reap the rewards of a more open and competitive environment.

We agree with the authors that the only way to guarantee that customers are satisfied is by making sure that those who serve them are satisfied with their jobs and have a positive attitude. You cannot instruct staff to be courteous and customer responsive; it has to come from staff members themselves. This means devolving responsibility and decision-making authority to the front line.

This was best illustrated by SIA’s Outstanding Service on the Ground (OSG), a three-year development program for ground service staff completed last year. The theme of the final year was “Dare to Break the Rules: Being a Service Entrepreneur.”

SIA’s commitment to satisfying and motivating its staff lies at the heart of its corporate philosophy. Investment in human resource development is one area of the airline’s operations that has remained sacrosanct, despite the vagaries of cyclical financial conditions. It is simply too important.

The emphasis is not solely vocational. SIA’s human resource development program aims to upgrade not only job-specific skills but also individual capabilities in all areas of life. As a result, the airline has a creditable staff turnover rate of around 5.6%. Quite sensibly, unless a company succeeds in fulfilling the expectations of its own staff, it will have difficulty satisfying its customers.

James A. Perkins is Senior Vice President, Personnel Division, Federal Express, Memphis, Tennessee.

Leonard Schlesinger and James Heskett have captured the crucial success factor for service companies—keeping employees satisfied. In identifying the four necessary components of the new service model, the authors claim that “as yet, no single company has put all the pieces of this new service model together.” With due respect to the authors. Federal Express has successfully incorporated all four elements of the new model.

1. “Value investments in people as much as investments in machines, and sometimes more.” Federal Express, from its inception, has put its people first. Not only is it right to do so, but it is also simply good business. Our corporate philosophy is succinctly stated: People, Service, Profit (P-S-P). We believe that if we put employees first, they in turn will deliver the impeccable service demanded by our customers, who will reward us with the profitability necessary to secure our future.

The Federal Express approach is to satisfy employees’ basic needs through job security, clarity, rewards, and justice. Our management practices reflect our P-S-P philosophy by enacting progressive employee relations programs such as Survey Feedback Action, Open Door Policy, and the Guaranteed Fair Treatment Procedure.

Our commitment to “people first” is further demonstrated by our excellent health benefits, employee assistance programs, and employee safety and wellness programs.

Our corporate climate encourages open communications and feedback throughout our work force. Federal Express has designed a number of formal methods for employees to communicate directly to upper management through the corporate newspaper, UPDATE, the corporatewide television station, FXTV, and departmental quality action teams.

2. “Use technology to support the efforts of men and women on the front line, not just to monitor or replace them.” State-of-the-art technology at Federal Express includes PRISM, our paperless personnel records information system, and interactive video, which combines computer technology and audiovisual capabilities so that employees can train themselves with little or no supervision. Couriers use handheld computers to relay all package information to a centralized computer, enabling fast retrieval of information on all shipments.

3. “Make recruitment and training as crucial for sales clerks and housekeepers as for managers and executives.” Federal Express is committed to promotion from within; outside applicants are hired only when qualified employees cannot be found in the existing employee ranks. We have centralized field-recruitment centers and conduct panel or multiple interviews to maximize the likelihood of hiring the best candidate. We are completely committed to affirmative action and equal employment opportunity principles. Special recruitment efforts are continuous. Federal Express employs the blind, hearing impaired, and other people with disabilities. All new employees receive an orientation that includes an introduction to both the P-S-P and the quality philosophies of the company. The importance of specific job-training skills are emphasized in all groups of hourly employees. For example, hub package handlers receive 40 hours of training, new couriers 160 hours, and new customer service agents 200 hours. Job-skills training, quality improvement training, and management training are ongoing and vital to employee job success and employee retention. Our overall corporate turnover rate is .6%—down from .8% last year.

4. “Link compensation to performance for employees at entry level, not just for those at the top.” All pay groups are eligible for special compensation programs. As an example, Federal Express’s pay-for-performance program rewards domestic customer-contact hourly employees for experience and knowledge of the job. Known as Propay, this lump-sum bonus is available to 50,000-plus customer-contact and package-handling employees once they reach the maximum rate.

How do we know that these four elements lead to employee satisfaction? In our most recent annual survey of all U.S. employees, 85% said they are proud to work for Federal Express. How does that relate to market share? The latest market figures give Federal Express 42.5% of the total air cargo market. The final test of any company’s success resides with its customers. We ask ours continuously how well we are meeting their needs. Our most recent customer survey, conducted by an independent agency, reported that 95% of our customers are completely satisfied with our service.

We have no argument with the Schlesinger and Heskett new service model, or with their belief that employee satisfaction is the critical success factor. In fact, we would argue that Federal Express has spent its entire 18 years of existence proving that the authors’ model is absolutely, positively correct.

Joseph E. Antonini is Chairman and CEO, Kmart Corporation, Troy, Michigan.

Kmart is in the midst of a renewal. Like Schlesinger and Heskett’s model company, Kmart has recognized the need to update its customer service. We have done this through improvements in technology, training, and management.

Technology. Our technology renewal has always kept the customer in mind. We have installed scanning cash registers and instantaneous credit-card approval to speed up transaction time at our checkouts. We will soon have an electronic check-approval system in place. This same scanning equipment allows us to track peak customer-traffic times so we have more operators on duty to serve our customers. Scanning information provides us with customer buying trends so that we can supply the goods they want. Technology has changed our stockrooms to processing centers. New merchandise is electronically scanned and verified, ready to be placed on the sales floor. This not only saves time in the back but also improves our in-stock position, another customer demand. As new technologies save our associates time, we are better able to control salary expenses by eliminating unproductive tasks and putting the associates where they are needed, helping customers.

Training. We have developed a comprehensive training program for all of our associates called Path to Excellence. Training creates not only service-oriented associates (all our training materials stress the benefits of outstanding customer service) but also more efficient associates, who can therefore spend more time helping customers. To ensure that we are hiring customer-oriented associates, we have instituted a preemployment screening process. We test new hires to identify those who show an aptitude for customer-service job skills, a program that has already won numerous awards.

As Schlesinger and Heskett note, turnover in the retail industry is high. Kmart has always prided itself on having a large group of dedicated long-term associates. This year alone we will have more than 500 associates celebrate their 20th anniversary with the company. Kmart is further reducing turnover with several new programs. For example, we now have annual pay-for-performance reviews for associates. We have increased our recruiting of nontraditional employees; most areas of the country now employ people with disabilities and seniors as associates. We provide inner-city youth with job training, career counseling, and a position in a local store. Our future strength lies in our associates; they are who we count on to serve customers.

Management. Our management team is both responsible for this renewal and very much a part of it. We are a big company, and as such tend to have problems communicating. Through a satellite system, however, we are able to communicate weekly with field managers, who can call in with questions and comments. This link allows us to clear up any misunderstandings and lets managers share their success stories with the rest of the chain. With a more thorough understanding of their priorities, store managers can better focus on those priorities and have more time to be where they are needed, on the sales floor exceeding customer expectations.

And for the first time in Kmart’s history, we have developed an organizational chart for the stores. New guidelines for all stores and clear reporting lines give associates more authority to make decisions that affect customer service. In the past, for example, associates did not have the authority to approve checks and instead had to call a supervisor to do it. This policy was not customer driven, so we changed it. Associates now approve checks themselves, without supervisor approval.

Walter F. Loeb is President, Loeb Associates, Inc., New York, New York.

I agree with Schlesinger and James Heskett that quality has deteriorated in many service organizations. My experience in the retail industry confirms this.

There is a tremendous and accelerating personnel turnover rate within this industry. Department stores and specialty retailers have had payroll turnover of more than 150% per year. Today young people have many employment choices, and there are good reasons why some are quickly disenchanted with retail establishments.

• The hours are inconvenient. Working on Friday nights, Saturdays, or Sundays does not exactly have social rewards. After all, a spouse or friend is not likely to have the same schedule, yet customers want to shop at these times.

• The hours are long. Most retailers still require a 40-hour week instead of the standard 35 hours in most other industries.

• The pay is low and unattractive relative to other industries. To some retail managements, profit margins dictate a low salary structure.

• There are few stores that recognize a job well done. The new employee is likely to report to an entrenched staff that established its work habits in the dark ages (based on the industrial models Schlesinger and Heskett discuss).

• Customers can be abusive even in the most friendly, nonhostile retail atmosphere.

• Performance pressure can be counterproductive, causing many employees to leave.

On the other hand, there are a great many opportunities for growth and advancement. The retail industry accepts women and men on an equal footing and is generally color-blind. There are many opportunities in the buying, store management, and technical support areas, and these opportunities can lead to growth. This creates excitement.

Very few companies have real acceptance from young people today. Stores like the Gap, the Limited, Crate & Barrel, Merry-Go-Round, and a few others are unique in having more applicants than they can handle. A new employee can quickly rise from salesperson to department head, department manager, night manager, day manager, assistant store manager, and so on, with small pay increases and performance recognition. But more important, because of the merchandise they sell and the culture they have developed, these specialty stores enjoy unique acceptance by employees’ peers—it is a status symbol to work at these stores.

Most of the service industry is out of touch with society. Too many companies fail to create excitement and a feeling of belonging for employees. Too many times people are told rather than asked, encouraging passivity. What’s more, employees do not care about company growth. At Crate & Barrel, on the other hand, management shares plans, successes, and failures with their associates. The company acts quickly on suggestions and ensures that most employees give their best. There are celebrations of all kinds; it is fun to belong to this organization.

Overall management objectives such as offering growth, value, and service have to be understood and assimilated by the entire organization. Quality of the merchandise inspires pride in the company, value in the promotion reflects honesty in dealing with the customer, and service means that the total company understands the importance of being here today and building for tomorrow.

1. Frederick F. Reichheld and W. Earl Sasser, Jr., “Zero Defections: Quality Comes to Services,” HBR September–October 1990, p. 105.

2. Dave Ulrich et al., “Employee and Customer Attachment: Synergies for Competitive Advantage, “Human Resources Planning, Vol. 14, No. 3, 1991.

3. J. Douglas Phillips, “The Price Tag on Turnover,” Personal Journal, December 1990.

A version of this article appeared in the September-October 1991 issue of Harvard Business Review.