Boot Camp for Service Operations

Pick up just about any major newspaper in the United States these days, and you'll find the "o" words somewhere on the front page. Articles about offshoring lament the movement of labor to foreign countries, and outsourcing headlines decry the loss of middle-class jobs to contractors. Of late, the "o" words have been conflated to suggest that a corporate cabal bent on "exporting America" has handed high-paying, white-collar American jobs to well-trained but less expensive workers in India and other locales.

The brouhaha over the loss of service jobs, which currently account for over 80 percent of private-sector employment in the United States, is not merely an American phenomenon. Service jobs are at risk in all developed countries. In the U.K., where some claim that as many as 50,000 jobs moved offshore in 2003, the issue is just as prevalent and just as contentious. Countries like Germany and Sweden are feeling political tremors as well.

Nor is any of the noise new. Protectionism raises its ugly, if discredited, head whenever economies undergo a major transformation. Sometimes, the political process plays out for good—as it did in the United States in the 1980s, when companies went into competitiveness overdrive and the economy rebounded brilliantly. Sometimes, it plays out for ill, as it did when the 1930 Smoot-Hawley tariff on imported goods exacerbated the Great Depression. Then, as now, society and business have no choice but to confront the economic facts on the ground.

In my opinion, the worry about outsourcing and offshoring distracts from the point. Even job loss is not the issue. As painful as it truly is for people who struggle to find work in a restructuring economy, the unemployment situation will eventually be taken care of by baby boomer retirements and job creation. (Fortuitously, many jobs opened by boomer retirement will not be subject to offshore movement.) The real issue then is the loss of service competitiveness. We are now riding a tidal wave of change that we can think of as the industrialization of services. Global competition is on the rise, and some service markets are being invaded by foreign firms and new entrants. Automation is also transforming the services sector. New hardware and software systems that take care of back-room and front-office tasks such as counter operations, security, billing, and order taking are allowing firms to dispense with clerical, accounting, and other staff positions. And self-service is having a major impact: Why use a travel agent when you can book your own flight, reserve a hotel room, and rent a car online? […]

The R Words: Realign, Redesign, Restructure
The company that best understands and anticipates customer needs, delivers consistently high-quality service, and connects to the customer via the channel of choice wins. To meet those challenges, top managers must put themselves through competitiveness boot camp, revamping their company's strategy, operations, and organization in the process.

Realigning strategy. In attempting to link with customers directly, firms will need to overhaul their offerings, cost structures, and competitive platforms to align with the shortened information chain and with the changing demands and behavior of their customers.

Consider the legal publishing divisions of Thomson, a global publishing giant. In the days before electronic publishing, the company printed and distributed paper-based information about U.S. court decisions, new bills, and amendments. As courts started to publish material electronically, the role of the publishing firm began to be called into question. Understanding that it did not own the legal intellectual property, Thomson redesigned itself into an information packaging and shipping company—an organizationally far-reaching and painful effort spanning a decade. Rather than operating parallel and distinct product lines, the company chose to focus its operations around central electronic document databases; software systems took over tasks from indexing to citation. As a result, a whole slew of new specialized products could be sliced, diced, and priced out of the database. While Thomson reduced its need for lawyers and legal professionals, it added to the ranks of technologically savvy and operationally oriented managers. Today, Thomson is positioned as one of the world's dominant electronic publishers of legal, tax, and accounting information, as well as being a leader in scientific and technical data, learning, and assessment.

In this example, we see what happens as new technology changes the relationship between sources, services, channels, and customers. In Thomson's markets, speed trumps professional knowledge and processing. Many tasks shift to the customers as self-service. Professionals lose status and control. Operations and technology become more centralized, at least temporarily. And as the service becomes commoditized, competition intensifies, and differentiation grows vital.

Redesigning processes. As the services revolution proceeds, not only will all companies have to understand their information work processes, but they will also want to examine each stage of the process: Should it be performed at headquarters or in the field, nearby or offshore, in-house or in some far corner of the globe? Processes, in other words, will need to be much more specific and carefully managed than ever before. In most cases, processes will need to be closely synchronized with those of other firms as well as with customers, who may routinely collaborate and participate in producing output.

Los Angeles-based IndyMac Bank, a pioneer in electronic banking, is becoming an online mortgage "factory." The company views the back-room loan origination process as one of information assembly followed by credit analysis, underwriting, approval, and closing, in which some fifteen discrete parts are brought together into a finished product. IndyMac has distributed some of these processes to different points in the United States; some customer contact processes are slated to move to call centers abroad. Other back-room processes, such as credit analysis, are partially automated. More complex and judgment-based aspects of analysis, such as underwriting and acceptance, remain with experts in the United States. All these processes are sewn together on the back end. On the front end is an automated, rule-based platform called e-MITS, which allows customers and brokers to apply for mortgages online and automates certain tasks of application evaluation, risk-based pricing, and rate-lock guarantees. […]

An adept firm like IndyMac looks quite different from the traditional service firm in terms of people, processes, and procedures. But overhauling a traditional service design is no one-shot, onetime deal. Because technological and infrastructure changes, competition, and industry restructuring are ongoing, service companies need to constantly experiment and fine-tune their systems if they are to negotiate these changes in a sustainable manner.

Restructuring the organization. Reorganization of processes necessitates organizational change. Already, online banking and ATMs have displaced tellers, and e-tickets and automated check-in machines are forcing travel agents and airline counter personnel to find new jobs. But such automation just substitutes technology for people. Deeper changes are necessary, and leaders will need to constantly redesign their organizations to adapt to new conditions, while ensuring that the customer does not get lost in the process.

How can a service company dealing with industrialization realistically create such an adaptive learning organization? […] A radical, but more sustainable, approach is to build the organization around the restructured information and value chain. The front office takes responsibility for the customer experience; the back room handles internal processes invisible to the customer; and a third organization is responsible for dealing with partnerships (suppliers and coproducers). All three are likely to be in constant flux. Most important, these three groups can and should overlap; flexibility and constant communication among them are critical. Like task forces, these groups have to be able to live with some fuzziness in their task definitions and be willing to share responsibilities with other groups.

What kinds of new skills will companies most need? First, they will want to make sure they understand the impact of new technologies, strategies, and channels on customer behavior. Management teams may need to include skilled managers in new areas—a chief experience design officer, a director of experience engineering, a chief of global service delivery, and so on. Second, technology experts will need to be distributed throughout the organization, rather than concentrated in a separate IT group. Third, managers of vendor and partner relationships will have a significant place in the new structure and will need to learn to deal with new global allies and organizations. Finally, because the employees of the new service company may be spread across the globe, management will have to adapt to a more diverse workforce. Some of this is not new to multinational companies. But it may well be very new to traditional service organizations.

Service firms will want to consider hiring executives capable of dealing head-on with the increasingly rapid change that the sector will experience. Managing changes in the executive ranks will be painful, however, since experience can become a liability when the future is likely to be far different from the past. Many senior managers will be slow to relearn how their industries work and will find themselves sidelined. The more flexible the manager, the better his or her chances of survival. One suggestion is to hire executives from global manufacturing companies who wear the scars of the competitiveness wars, as banks and utilities did when they tapped managers from deregulated firms.

Excerpted with permission from "Will You Survive the Services Revolution?" Harvard Business Review, Vol. 82, No. 6, June 2004.

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Uday Karmarkar is the LA Times Professor of Technology and Strategy and is the research director at the Center for Management in the Information Economy at the Anderson School of Management at the University of California, Los Angeles.