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The Idea in Brief

All successful firms must design a compelling offering and manage the workforce to deliver it at an attractive price. Merely service firms must do even more than: deal with the frustrating fact that their customers tin wreak havoc on service quality and costs.

For example, a customer dithering at a fast-food counter slows things downwardly for anybody else waiting in line. An builder's client struggling to analyze how a new facility will be used drags out the design process.

To tackle this challenge, Frei advises aligning four key elements of your business:

  • What your service offer consists of
  • How you fund the excellence yous want to provide
  • How you manage employees to deliver quality service
  • What you do to help customers enhance—not erode—service

Get these elements pulling together, and none of them can pull your business apart—as service stars like Wal-Mart, Commerce Bank, and Cleveland Clinic take discovered immediate.

The Thought in Do

To consistently deliver service excellence, ensure that each of these iv elements reinforces the others:

Service Offering

Determine how customers define "excellence" when it comes to your offering: Convenience? Friendliness? Flexible choices? Cost? Identify what you'll do to evangelize that excellence—and what you won't do. Example:

Commerce Bank decided to serve customers who prized pleasant, confront-to-face service and convenience. It offers evening and weekend hours, buildings with high ceilings and natural light, and a fun contraption for redeeming loose change. Despite its relatively unattractive interest rates and narrow product range, its retail customer base of operations has expanded dramatically.

Funding Mechanism

Think most how you lot'll pay for the increased cost of the excellence you're seeking to provide through your service offering. Possibilities include:

  • Charging the customer. For instance, Starbucks customers value lingering in the company's java-business firm setting. To fund this inviting temper, Starbucks charges a premium for its coffee.
  • Spending at present to save later. For instance, Intuit offers client back up service free of charge. Information technology uses callers' input to ameliorate future versions of its software, so customers volition ultimately need less support.
  • Having customers exercise the piece of work. For example, airlines' self-check-in kiosks not just reduce costs; they too enhance the service offering past liberating travelers from long lines at staffed counters and by providing convenient tools such every bit seat maps.

Employee Direction

Ensure that your workforce management activities (recruiting, selection, grooming, job design) empower employees to deliver the excellence embodied in your service offerings. Example:

Commerce Bank competes on extended hours and friendly service, not on depression cost or production variety. It knows it doesn't need direct-A students to primary its express product ready, so it hires for attitude and trains for service. For case, it uses elementary recruiting criteria, such as "Does this person smiling in a resting country?" And information technology encourages employees to recruit people they come across providing groovy client service in other industries.

Customer Management

Articulate which behaviors customers must demonstrate to go the most value from your service. And then blueprint your service specifically to foster those behaviors. Case:

To become customers using the new cocky-check-in kiosks, airlines ensured that travelers could complete the transactions with far fewer keystrokes than cheque-in personnel used to need. Past dissimilarity, retail stores that offer self-service checkout machines haven't made using those machines piece of cake for shoppers. Moreover, the stores expect shoppers to shoulder responsibleness for fraud prevention by weighing bags during checkout. Result? Anxious customers avert the machines.

As the world's major economies have matured, they take go dominated by service-focused businesses. But many of the direction tools and techniques that service managers use were designed to tackle the challenges of production companies. Are these sufficient, or exercise we need new ones?

Permit me submit that some new tools are necessary. When a business takes a product to market, whether it's a bones commodity like corn or a highly engineered offering like a digital camera, the visitor must make the product itself compelling and also field a workforce capable of producing it at an attractive cost. To be sure, neither task is easy to do well; enormous amounts of management attention and academic inquiry have been devoted to these challenges. But delivering a service entails something else too: the management of customers, who are not simply consumers of the service but can likewise exist integral to its product. And because customers' involvement as producers can wreak havoc on costs, service companies must also develop artistic ways to fund their distinctive advantages.

Any of these four elements—the offering or its funding machinery, the employee management organisation or the customer management organization—can exist the undoing of a service business. This is amply demonstrated by my assay of service companies that accept struggled over the past decade. What is just equally articulate, however, is that there is no "correct" way to combine the elements. The appropriate design of any ane of them depends upon the other iii. When nosotros look at service businesses that have grown and prospered—companies similar Wal-Mart in retail, Commerce Bank in cyberbanking, and the Cleveland Clinic in health care—it is their effective integration of the elements that stands out more than the cleverness of whatsoever element in isolation.

This article outlines an approach for crafting a profitable service business organization based on these four critical elements (collectively called the "service model"). Developed as a core teaching module at Harvard Business concern School, this approach recognizes the differences between service businesses and product businesses. Students in my grade learn to think about those differences and their implications for management practise. Above all, they learn that to build a keen service business, managers must get the core elements of service pattern pulling together or else risk pulling the business autonomously.

1. The Offering

The challenge of service-business organisation management begins with design. As with product companies, a service business organisation tin't final long if the offering itself is fatally flawed. Information technology must effectively run into the needs and desires of an attractive group of customers. In thinking about the design of a service, however, managers must undergo an important shift in perspective: Whereas production designers focus on the characteristics buyers volition value, service designers practise better to focus on the experiences customers want to have. For example, customers may attribute convenience or friendly interaction to your service brand. They may compare your offering favorably with competitors' because of extended hours, closer proximity, greater scope, or lower prices. Your management team must exist absolutely clear about which attributes of service the business will compete on.

Strategy is often defined as what a concern chooses not to do. Similarly, service excellence tin can exist divers as what a business chooses not to do well. If this sounds odd, information technology should. Rarely do we advise that the path to excellence is through inferior performance. Just since service businesses usually don't accept the luxury of simply failing to evangelize some aspects of their service—every physical store must have employees on-site, for example, even if they're not specially skilled or plentiful—near successful companies choose to evangelize a subset of that packet poorly. They don't make this choice casually. Instead, my research has shown, they perform desperately at some things in order to excel at others. This can be considered a hard-coded trade-off. Call up about the company that tin can afford to stay open for longer hours because it charges more than the competition. This business is excelling on convenience and has relatively junior performance on price. The price dimension fuels the service dimension.

Service excellence can exist defined as what a business chooses not to exercise well.

To create a successful service offer, managers demand to decide which attributes to target for excellence and which to target for inferior functioning. These choices should exist heavily informed past the needs of customers. Managers should find the relative importance customers place on attributes and so match the investment in excellence with those priorities. At Wal-Mart, for example, ambience and sales assist are least valued past its customers, low prices and broad selection are near valued, and several other attributes rank at points in between. (Run across the exhibit "Wal-Mart'southward Value Proposition" in David J. Collis and Michael G. Rukstad's commodity "Tin Yous Say What Your Strategy Is?") The trade-offs Wal-Mart makes are deliberately informed by these preferences. The company optimizes specific aspects of its service offering to cater to its customers' priorities, and it refuses to overinvest in underappreciated attributes. The fact that it takes a drubbing from competitors on things its customers care less about drives its overall performance.

The phenomenon, of course, has a round aspect. Shoppers whose preferences match Wal-Mart'south strengths self-select into its customer base. Meanwhile, those who don't prefer Wal-Mart's attributes buy elsewhere. It is important therefore to identify customer segments in terms of attribute preferences—or as some marketers adopt, in terms of customer needs. Identifying what might be called customer operating segments is not the same exercise as traditional psychographic partition. Rather than stressing differences that enable increasingly targeted and potent messaging, this type of segmentation aims to find populations of customers who share a notion of what constitutes excellent service.

Once an attractive customer operating segment is institute, the mission is articulate: Management should design a new offer or tweak an existing one to line upwardly with that segment'south preferences. Look, for example, at the fit achieved by Commerce Depository financial institution, which has been able to abound its retail customer base dramatically even though its rates are amid the worst in its markets and information technology has fabricated limited acquisitions. Commerce Bank focuses on the set of customers who intendance well-nigh the experience of visiting a concrete branch. These customers come up in all shapes and sizes—from young, first-time banking clients to time-strapped urban professionals to elderly retirees. As an operating segment, however, they all believe that convenience is a bank'south well-nigh important attribute and choose Commerce Bank because of its evening and weekend hours. Second nearly important to them is the friendliness of interactions with employees, and so the hope of a cheerful, familiar teller has become office of the bank's cadre offering. Commerce has added to its branch ambience with interior elements both lovely (high ceilings and natural light) and fun (an agreeable contraption for redeeming loose change). When it comes to attributes less important to the depository financial institution'southward customers—price and product range—management is willing to cede the boxing to competitors.

It is tempting to think, "If I'thousand a actually skilful manager, then I don't accept to cede annihilation to the competition." This well-intentioned logic can lead, ironically, to not excelling at anything. The only organizations I have seen that are superior at virtually service attributes demand a price premium of l% over their competitors. Almost industries don't back up this type of premium, then trade-offs are necessary. I like to tell managers that they are choosing between excellence paired with inferior performance on i mitt and mediocrity across all dimensions on the other. When managers understand that inferior functioning in 1 dimension fuels superior performance in some other, the design of excellent service is not far behind.

2. The Funding Mechanism

All managers, and even virtually customers, hold that there is no such thing every bit a gratuitous tiffin. Excellence comes at a cost, and the cost must ultimately be covered. With a tangible product, a visitor's machinery for funding superior performance is usually relatively elementary: the toll tag. Only the customers who forfeit the extra greenbacks can avail themselves of the premium offering. In a service business, developing a way to fund excellence tin can be more complicated. Many times, pricing is not transaction based but involves the bundling of various elements of value or entails some kind of subscription, such as a monthly fee. In these cases, buyers can extract uneven amounts of value for their money. Indeed, even nonbuyers may derive value in certain service environments. For example, a shopper might spend time learning from a knowledgeable salesperson, simply to leave the store empty-handed.

In a service concern, therefore, direction must give careful thought to how excellence will be paid for. There must be a funding machinery in place to allow the company to outshine competitors in the attributes it has called. In my study of successful service businesses, I've seen the funding mechanism take four bones forms. Two are ways of having the customer pay, and two cover the cost of excellence with operational savings.

Charge the customer in a palatable style.

The classic approach to funding something of value is simply to take the client pay for it, but ofttimes it is possible to make the grade that payment takes less objectionable to customers. Rarely is that done with à la carte pricing for the niceties. A large office of Starbucks's appeal is that a customer can linger almost indefinitely in a coffeehouse setting. Information technology's unthinkable that Starbucks would place meters next to its overstuffed chairs; a better way to fund the temper is to charge more for the coffee. Commerce Bank is open belatedly and on weekends—earning it loftier marks on extended hours—and it pays for that service by giving a half pct point less in interest on deposits. Could information technology fund the extra labor hours by charging for evening and weekend visits? Perhaps, but a slightly lower involvement rate is more palatable. Direction in whatsoever setting would do well to creatively consider what feels off-white to its customers. Often, the least creative solution is to charge more for the detail service feature you lot are funding.

Create a win-win between operational savings and value-added services.

Very clever direction teams find ways to raise the customer experience even while spending less (finding, in other words, that there can be such a matter as a free lunch). Many of these innovations provide merely a temporary competitive reward, as they are rapidly recognized and copied. Some are surprisingly durable, withal. An example is the immediate-response service provided by Progressive Casualty Insurance. When someone insured by Progressive is involved in an auto accident, the company immediately sends out a van to assistance that person and to appraise the impairment on the spot—ofttimes arriving on the scene earlier the law or tow trucks. Customers love this level of responsiveness and give the company loftier marks for service. But in anticipation of such a need someday, would they pay more than in insurance premiums? Unfortunately, no. People are pathologically price sensitive about auto insurance and almost never select annihilation but the rock-bottom quote. The key to Progressive'south ability to fund this service is the cost savings it ultimately yields. Unremarkably insurance providers are subject to fraud, with criminals making claims for accidents that were staged or never happened. Because of these and other types of disputed claims, firms also incur loftier legal fees—which, combined with the other costs of fraud, add up to some $15 out of every $100 in insurance premiums across the industry. Since deploying its vans, Progressive has seen costs in both categories plummet. Sending a company representative to the scene pays for itself.

Progressive offers some other client convenience that many competitors have then far shied away from: giving quotes from other providers alongside its ain when a potential buyer inquires about the toll of insurance. It'due south not that Progressive is determined to go one improve than rivals to win the business. In fact, Progressive's is the lowest quote only most one-half the time. What Progressive does believe is that its quote is the right one given the probability of that person's getting into an accident—a probability that the insurer is best in grade at determining. If indeed its quote is spot-on, so allowing a competitor to insure the customer at a lower rate is doubly effective: Information technology frees Progressive from a coin-losing proposition while burdening its competitor with the unprofitable business relationship. Thus a level of service that looks downright altruistic to the customer really benefits the company. This is an instance of leveraging operations into a value-added service.

How can your management team detect win-win solutions of its own? When I pose this question to managers, their impulse is to imagine what new value could be created for customers and then to ponder how that could be funded through toll savings. I advise beginning instead by asking, "Where are our biggest cost buckets?" With these in heed, managers can then simultaneously decide how to reduce costs and create a value-added service. A good first identify to wait? Anywhere that time is a large component of toll. Removing time is frequently fruitful, since information technology tin can directly improve service even as it cuts costs.

Spend now to save later.

Often it is possible, if somewhat painful, to brand operational investments that will pay off somewhen by reducing customers' needs for auxiliary service in the future. A classic example is Intuit's determination to provide free customer support, in defiance of the software manufacture norm. Call centers are expensive to staff considering of the combination of technical knowledge and sociability required to field inquiries effectively. Customers meanwhile are extremely uneven in their neediness vis-à-vis it. For most software makers this adds up to the obvious conclusion that customers should be charged for support.

Intuit founder Scott Cook sees the matter differently. Those needy calls, he believes, are a useful form of input to continued production evolution—the engine of hereafter revenues—and that justifies an even greater expense outlay. Intuit has its higher salaried product-development people, not solely customer service people, fielding calls so that subsequent versions of its offerings will be informed by straight knowledge of what users are trying to reach and how they are beingness frustrated. This is part of a broader delivery to feedback-driven improvement that Melt refers to as "DIRST"—for "practise information technology right the 2d fourth dimension." The investment has paid off in better software, which means a lower phone call book. "Our contest thinks we're crazy," Cook says, and he understands why. "If we got as many calls as they practice, nosotros'd be out of business concern."

Have the customer practice the work.

One other type of funding machinery for enhanced service puts the cost dorsum in the customer's courtroom, but in the course of labor. Offer self-service, from pump-your-own gas to self-managed brokerage accounts, is a well-established way to keep costs low. If the goal is service excellence, though, you must create a situation in which the client will prefer the exercise-information technology-yourself adequacy over a readily available total-service alternative. Airlines have achieved this, at last, with flying check-in kiosks, although the value proposition they initially presented was dubious. At first, passengers felt compelled to use the relatively unappealing kiosks but because carriers had allowed the lines in front of manned desks to go intolerable. Today, notwithstanding, frequent fliers prefer the kiosks because they provide readier access to useful tools like seat maps. Businesses looking to achieve service excellence in other settings should not have such an indirect route. They should prepare themselves the challenge of creating cocky-service capabilities that customers volition welcome. Indeed, if a self-service option is truly preferable, customers should be willing to accept on the work for nothing or fifty-fifty pay for the privilege. When managers designing self-service solutions are non permitted to add together the inducement of toll discounts, they are forced to focus on improving the customer feel.

If a self-service option is truly preferable, customers should be willing to take on the piece of work for nothing or even pay for the privilege.

Any funding mechanism is used to cover the costs of excellence, information technology is best thought out every bit thoroughly equally possible prior to the launch of a new service, rather than amended in lite of experience afterward. When a service that's been perceived as costless all of a sudden has fees associated with information technology, customers tend to react with disproportionate displeasure. And since companies cannot thrive by offering service gratuitous, it is vital that they not fix expectations that can't be sustained. With careful analysis and design, a company can offer and fund a better service experience than its customers would bask elsewhere.

three. The Employee Direction System

Companies often live or die on the quality of their workforces, just because service businesses are typically people intensive, a relative advantage in employee management has all the more bear upon in that location. Top management must give careful attending to recruiting and option processes, training, job pattern, functioning management, and other components that make up the employee management arrangement. More to the point, the decisions made in these areas should reflect the service attributes the visitor aims to exist known for.

To design a well-integrated employee management system, start with two elementary diagnostic questions. First: What makes our employees reasonably able to achieve excellence? And and so: What makes our employees reasonably motivated to achieve excellence? Thoughtfully considered, the answers will interpret into company-specific policies and programs. Companies that neglect to connect the dots between their employee management approaches and customers' service preferences will find information technology very hard to award their service promises.

At 1 large international retail depository financial institution I studied, a senior manager had come to a depressing realization. "Our service stinks," she told me. Under her guidance the bank took various measures, mainly centering on incentives and training, but the problem persisted. Customer experience in the co-operative did not improve. Perplexed simply determined, the executive decided to get a frontline employee herself for a month. She idea it would take that much fourth dimension to experience a typical range of service interactions and come across the roots of the problem. In fact, information technology took 1 day. "From the time the doors opened, customers were yelling at me," she reported. "By the end of the twenty-four hour period, I was yelling back." What became articulate was that employees were gear up to neglect. Recent cross-selling initiatives had created a prepare of customers with more complex needs and higher expectations for their relationship with the bank, but employees had not been equipped to respond. As a result of decisions made by the management squad (all individually sensible), the typical employee did not accept a reasonable chance of succeeding. The bank'southward employee management system was broken.

If your business requires heroism of your employees to continue customers happy, so you take bad service past pattern. Employee self-sacrifice is rarely a sustainable resource. Instead, design a system that allows the average employee to thrive. This is part of Commerce Bank'due south competitive formula. Recall that the bank chooses to compete on extended hours and friendly interactions and not on low toll and production breadth. Now call up how that strategy could inform employee management; the implications are non difficult to imagine. For instance, Commerce concluded that it didn't require straight-A students to master its limited product gear up; it could rent for attitude and railroad train for service. In job interviews, its managers could apply uncomplicated weed-out criteria—similar "Does this person smile in a resting land?"—rather than trying to maximize beyond a wide range of positive characteristics. The bank's current employees could be deployed as talent scouts, on the principle that information technology takes one to know i. (When people from Commerce run across someone providing great service in another setting, whether at a restaurant or at a gas station, they manus out a card printed with a compliment and a proffer to consider working for Commerce.)

It'southward a simple reality that employees who are above average in both attitude and aptitude are expensive to use. They are not merely attractive to you but also bonny to your competitors, which drives up wages. A business organisation that wants to maintain a competitive price structure will probably need to compromise on ane quality or the other (or, if information technology insists on having both, find a fashion to fund that luxury). If, as Commerce Bank does, you choose to hire for mental attitude, then you must engineer things then that even lower-aptitude employees volition reliably deliver neat service. Similar managers who don't desire to admit that their service is designed to be inferior on some attributes, many people are reluctant to acknowledge a trade-off between aptitude and attitude. Merely failure to accommodate this economical reality in the pattern of the employee management system is a common culprit in flawed service.

4. The Customer Direction Organisation

In a service environs, employees aren't the only people affecting the cost and quality of service delivered. The customers themselves can be involved in operational processes, sometimes to a very large extent, and their input influences their experiences (and often other customers' too). For example, an architectural house's client may explain the purpose of a new facility well or poorly, and that will bear on the efficiency of the design procedure and the quality of the end product. A customer who dithers at a fast-nutrient counter makes the service less fast for everyone backside him.

Client involvement in operations has profound implications for management considering information technology alters the traditional role of the business organisation in value cosmos. The archetype product-based business buys materials and adds value to them in some style. The enhanced-value production is and so delivered to customers, who pay to receive it. In a service business, nevertheless, employees and customers are both part of the value-cosmos process. A main benefit is that customer labor tin can exist far less expensive than employee labor. It can also lead to amend service experiences. When students participate more in a classroom environment, for instance, they learn more. Simply there are challenges, too. Designing a system that explicitly manages these challenges is essential to service success.

Consider the issue of customer choice. Service designs may call for customers to perform important tasks, but for the most office customers take no interview, no background check, and no personality profile. As a sometime senior executive from Nestlé now working in fiscal services put it, "I could control who was in my factory at Nestlé; I have no such command over the customers in my bank'due south branches."

In improver, despite many organizations' best efforts, customers are non as like shooting fish in a barrel to train as employees. There are usually many times more customers than employees, and creating effective grooming materials for such a large, dispersed, unpaid, and often irrelevantly skilled workforce is hard. When this holds truthful, firms must adjust the limited training in the blueprint of the service experience. If tasks are shifted from employees to customers—from college-skilled to lower-skilled people—then they must be adjusted accordingly. Airlines seem to get this right. Call back (if you tin) the last fourth dimension you checked in with an agent at the full-service counter. Chances are yous witnessed the amanuensis complete a dizzying sequence of keystrokes. It would not seem reasonable to expect customers to perform these same steps, and so when the bank check-in role was transferred to customers, information technology was dramatically simplified. By contrast, think of the cocky-service supermarket checkout. Here customers are asked not only to do what trained employees take washed previously but also to shoulder the boosted responsibleness of fraud prevention through a complicated process of weighing bags. Asking customers to perform more-complicated tasks than higher-skilled employees contributes to the disarray and anxiety that surrounds these checkout lines.

Customers likewise accept a not bad deal of discretion in their operational activities, commonly far more than employees. When a visitor introduces a new process that it wants employees to use, it tin merely issue a mandate. When customers are involved, transitions similar this tin can be significantly more complicated. Look at Zipcar, the popular automobile-sharing service. To go along costs depression, its service model depends on customers to clean, refuel, and return cars in fourth dimension for the next user. Motivating employees to perform these tasks would be routine; motivating customer-operators has required a complex, evolving mix of rewards and penalties.

In managing customers in your operations, then, you'll need to address a few key questions: Which customers are you focusing on? Which behaviors do you desire? And which techniques will most finer influence behavior? For example, a company whose business organization model depends on customers' timeliness—whether it'south a dental office packing its engagement calendar or a video store circulating hit films—may apply more- or less-heavy-handed tactics to ensure compliance. In a previous commodity for Harvard Concern Review ("Breaking the Trade-Off Between Efficiency and Service," Nov 2006), I related lessons from several companies that have used a range of techniques to alter customer beliefs. These techniques can be divided into two basic categories: instrumental (the carrots and sticks we unremarkably see play out every bit discounts and belatedly fees) and normative (the use of shame, blame, and pride to motivate us to return shopping carts and selection up trash even when no ane is looking). The important thing is to manage customers in a way that is consequent with the service attributes you've chosen to emphasize overall.

Integrating the Elements

Successful service companies have a working plan that incorporates all four elements of service design. Inside each of those areas, nonetheless, it is hard to spot whatsoever all-time practice. This is because the whole business depends more than on the interconnection of the 4 than on whatever 1 element.

A standout instance of effective overall integration is the Cleveland Dispensary, which is consistently ranked among America's near eminent hospitals and has been a leader in pioneering cardiac care for decades. It's hard to put a finger on the source of that advantage. The fact that the clinic has specialty centers focusing on diabetes, for instance, or cardiac care is not exceptional in itself. Its refusal to attach financial rewards to doctors' productivity is unusual but might not exist effective elsewhere. Step back from the details, withal, and the bigger picture emerges. Attracting the highest-severity patients means that doctors will e'er confront a challenging environment in need of innovative solutions. Organizing into disease centers rather than narrower, more traditional lines of specialization (such every bit kidneys or blood) sets the stage for cross-disciplinary collaboration—and thus for novel perspectives—within those centers. Removing productivity incentives gives doctors license to spend time on innovation, which is enhanced by their close work with specialists from other fields. The detail choices made on methods, processes, and personnel are the right ones for the Cleveland Dispensary because they complement one some other and come together in a smoothly operating system.

Whatsoever service company, no matter how long established, tin can benefit from a review of its operations using the framework laid out in this commodity. Bringing the iv elements of service pattern into tighter alignment can exist an ongoing procedure of small tweaks and experiments in alter, inspired by the kinds of questions included in the sidebar "Diagnosing Service Design." A management team planning to launch a new service volition find the framework particularly helpful. It flags the decisions that should exist fabricated early and in tandem then that they don't clash downwards the road. And at the highest level, it underscores two very important principles of service blueprint. First, there is no such thing as a good thought in isolation; there is only a good idea in the context of a specific service model. Second, it is folly to attempt to be all things to all customers.

The success or failure of a service concern comes down to whether it gets iv things correct or wrong—and whether information technology balances them effectively. Here are some questions that will sharpen managers' thinking along each dimension and help companies gauge how well their service models are integrated.

1. The Offering

Which service attributes (convenience? friendliness?) does the firm target for excellence?

Which ones does it compromise in order to achieve excellence in other areas?

How do its service attributes match up with targeted customers' priorities?

2. The Funding Mechanism

Are customers paying as palatably as possible?

Tin operational benefits exist reaped from service features?

Are there longer-term benefits to current service features?

Are customers happily choosing to perform work (without the lure of a discount) or just trying to avoid more than-miserable alternatives?

3. The Employee Management System

What makes employees reasonably able to produce excellence?

What makes them reasonably motivated to produce excellence?

Have jobs been designed realistically, given employee pick, training, and motivation challenges?

4. The Client Management System

Which customers are you incorporating into your operations?

What is their job design?

What have you washed to ensure they have the skills to do the job?

What have yous done to ensure they want to do the job?

How will yous manage any gaps in their functioning?

The Whole Service Model

Are the decisions you make in ane dimension supported by those you've made in the others?

Does the service model create long-term value for customers, employees, and shareholders?

How well do extensions to your core business organisation fit with your existing service model?

Are you trying to be all things to all people—or specific things to specific people?

The beginning point notes the importance of fit, mentioned earlier every bit a cardinal strength of the Cleveland Clinic. At the clinic, direction knows that extensions to its core business must be examined closely for their fit with its existing service model. The organization recently abandoned the concept of a high-end wellness and spa offering considering information technology didn't build on the infirmary's core operational strengths. In some ways this seems like an obvious indicate, but managers oftentimes stray into areas of relative weakness, peculiarly when they see a firm they consider to exist a directly competitor succeeding with a service they don't even so offering. Progressive fabricated this mistake when it decided to venture into the dwelling house insurance market place. No question, in that location is money to be made in home insurance, equally innumerable firms accept shown. But Progressive failed in its attempt because the challenges of that business did not match up with the company's competitive strengths. Recall that Progressive is justifiably proud of its analytics advantage, which enables information technology to effectively size up the hazard that a given policyholder volition file a claim. Unfortunately, that kind of actuarial prowess is not equally central to making a profit on insuring homes. Abode insurers rise or fall on the management of their investment portfolios—and that is a relative weakness of Progressive. (Firms typically lose money on the insurance simply brand money investing prepaid premiums.) The fit, in retrospect, was a bad one. It should accept been seen that fashion early.

Just as mutual a failing is the misguided desire to be all things to all people. In today's service economy, information technology is nigh impossible to design a service model to cover a huge range of customers and remain competitive across them. Instead, firms should blueprint their service models for more targeted excellence by being specific things to specific people.

Great service companies are, almost without exception, very clever virtually selecting their customers. Nosotros saw this in Progressive's highly informed choice of whom to do business organization with. Commerce Banking concern, from its ancestry in 1973, knew it should stake out its ain claim on the market. "The world," its founder Vernon Hill said, "did non need another 'me-as well' bank. I had no capital letter, no make name, and I had to search for a way to differentiate from the other players." Shouldice Hospital, a Canadian specialist in hernia operations, is highly selective most its client base. Not only does it serve just patients experiencing a certain type of disquiet, information technology has the luxury of operating on otherwise healthy people. It has skimmed the foam of the market.

Becoming a Multifocused House

Inevitably, companies that try to be all things to all people begin to struggle when upstart competitors like Shouldice start picking off profitable niches. Often, the refuse is not taken seriously until it's too belatedly. (Run across the sidebar "Coming to Terms with the Threat.")

How do incumbents react when a focused entrant appears on the scene? The usual response seems to follow iv singled-out stages of "strategic grief."

Dismissal. The incumbent perceives the entrant as a nonthreat. It is a deceptively easy assessment to brand, given that the focused house has optimized its service model to be deliberately good—and bad—at certain aspects of the incumbent's business.

Sadness. Adjacent comes a sense of loss as profitable customers start to defect. They are willing, if not eager, to make the trade-offs inherent in the entrant'due south service model.

Relief. Sadness is replaced by relief as the realization dawns that only i of the incumbent's customer segments is beingness targeted by the focused entrant. The new competitor may win on a few dimensions of value and take certain customers away, but there are still many other segments to serve!

Dread. Finally, the larger threat reveals itself. The problem is not this single aspirant; it'southward the inevitable assail of focused firms on other fronts.

Spotted in time, the threat of focused competitors can be met effectively. Is there a troubling area of competitive action on your radar screen? If so, don't be lulled past its small-scale scale and isolation. Motion quickly to understand what's going on at that place. In particular, focus on the entrant's rate of improvement along critical measures similar market share, share of wallet, and service quality. Benchmarks of absolute difference can fool managers into assertive that the threat is not imminent. But when a new competitor improves faster than you practice, the gap before long closes.

Once you lot learn the threat is real, explore your potential advantages. Can you compete effectively as a "multifocused" firm (one that targets multiple niches rather than trying to tackle everything)? The threat needs to exist addressed with humility. The temptation will exist bully to believe that "our way" remains the meliorate way. If anything, overstate the fact that it is non, and proceed from that assumption to craft a competitive response.

Nonetheless, some incumbents accept managed to compete finer with their more than-focused rivals, and at that place is much to learn from their experience. The common thread in their competitive responses to upstarts is the capacity to get "multifocused." In other words, they stopped trying to embrace the entire waterfront with a unmarried service model. Instead they pursued multiple niches with optimized service models—each designed to achieve excellence on some dimensions at the expense of inferior performance on others. The secret to success in a multifocused house is the ability to benefit from having various service models under 1 house umbrella. This benefit often comes in the form of shared services (that is, internal service providers), which enable a firm to generate economies of scale and economies of feel beyond its service models. Effectiveness at utilizing shared services to the advantage of the individual service models can determine the success of a multifocused firm. (See the exhibit "Are Focused Competitors Nipping at Your Flanks?")

Highly focused firms are the blight of big, established companies. Because they laser-target certain customer segments, they are able to optimize their service models. The service quality they provide, using specialized employees and a customized product fix, is potent. By contrast, incumbent firms typically concenter a mix of customers, hire and develop a variety of employees, and—as a result of excellent, well-intentioned suggestions from both groups—are rampant product proliferators.

The shared services architecture can exist seen in multifocused corporations across industries—from Yum Brands, a collection of five fast-food companies, to Omnicom, which consists of hundreds of companies in the interactive-marketing space, to GE, which seems to have no limit on the markets it can enter. Each corporation has created distinct service models for distinct customer operating segments and gauges the overall do good of the models by assessing how much they gain from i another. What determines whether a company has assembled the correct portfolio of service models? It comes down to a critical test: Is each of the business firm's distinct service models better off as a consequence of the others? If the reply is no, it signals that performance is virtually to decline or that the company may want to spin off some service models. If the reply is yes, it'due south almost always thank you to superior management of shared services, and the incumbent thrives.

The services shared in multifocused companies typically include business functions like finance, purchasing, data technology, homo resource, and executive training. The calibration advantages they provide are straightforward and include pooled purchasing, preferred access to credit, and other cost-related benefits. Economies of experience are more difficult to realize but tin also be more valuable. Here, the challenge is to employ knowledge gained in one service model to strengthen the operation of the others. To a limited extent, this kind of knowledge transfer occurs informally; this has always been the hope and promise of diversified companies. The important departure in successful multifocused firms is that they formalize the procedure, designing very explicit means of leveraging feel across service models. Knowledge transfer is facilitated by deliberate investments in such programs as formal best-practice sharing; centralized, dynamic employee training; and the rotation of managers among models.

My inquiry convinces me that the best means of sustaining growth in a service business is to employ the multifocused model, yet it is also evident that this model requires concentrated endeavor to defend. Leaders of individual service models constantly affirm that dedicated, rather than shared, resources would practise more to strengthen their own businesses. Operations managers, meanwhile, raise a chorus of complaint that shared services crave more than-vigilant command "below the line" if they are to deliver the necessary economies of scope and experience. Given the perpetual assault on the model, information technology may not be surprising that another common characteristic of successful multifocused firms is directive (even autocratic) leadership. This leadership way accommodates different personalities, simply it ever relies on senior managers who are able and willing to exert potent influence on subordinates. They must be, in lodge to balance the competitive autonomy of individual service models with the collective value of shared services. Without strong, centralized leadership, revenue-generating line managers typically overrule shared-services managers, specially in moments of strategic distress. Indeed, companies ofttimes stack the deck past placing stronger leaders in the service models than in the shared services, effectively undermining the performance of the system.

The Direction-Practise Frontier

Direction scholars, and not a few practitioners, accept taken upwards an interesting fence in recent years: Is the discipline of management fundamentally unlike in service businesses than in product businesses? The way in which management is studied and taught in graduate business schools was forged in the context of the industrial economy. Are the approaches that worked for manufacturing companies equally applicable to services?

As service businesses go along to innovate, succeed, and exist studied, the answers are condign clearer. The framework presented here suggests why the traditional techniques take proved equally durable as they accept and why they still leave sophisticated managers wanting more. Much of what determines the health of a production business—the soundness of its offering and the management of its people—is just equally indispensable in a service business and can be addressed with a similar tool kit. Only whole new areas involving the roles of customers have opened upward, and their tool kits are only now being assembled.

A version of this commodity appeared in the April 2008 outcome of Harvard Business Review.