The service sector is the dominant component of all major developed economies. In addition, the service sector is also growing in developing economies such as India, Brazil, Russia, and China. These developing economies have also experienced productivity improvement and growth in the double digits. Understanding performance measurement at service firms in these economies is an integral part of managerial decision making leading to corporate value enhancement.
The advantages of implementing a performance measurement system include the presence of a robust decision support system for managers, timeliness of relevant information, improved quality of information for decision making, more effective and clear communication among various stakeholders, and the alignment of goals. Performance measurement challenges in the service sector range from people issues to having a well-defined understanding of service processes and the differences between the service and nonservice sectors. Achieving good measurements of customer satisfaction or service warranties are also difficult but important.
Hence, a robust performance measurement system is a prerequisite for performance improvement and management leading to productivity improvement and business effectiveness. Performance measurement systems are designed and implemented to monitor and maintain influence over companies, which in turn helps firms achieve business goals and objectives. At the basic level, a performance measurement system asks four basic questions: (1) What has happened in terms of corporate performance? Does everybody know what has happened? (2) Why has it happened? Does everybody in the firm have the same understanding of the managerial drivers? (3) Is it going to continue? How long will it continue? (4) What are we going to do about it? What are the organizational barriers?
Even though implementing a Performance Measurement (PM) System is proving to be a difficult task, many service firms are doing so. Problems usually arise either at the design stage or the implementation stage. Design issues lead to poor data quality, as measuring what is easy to measure is pursued instead of measuring what should be measured. Challenges at the implementation stage are much more related to the existing firm culture and the infrastructure of the information system. The implementation stage also needs to consider human issues. Effective implementation in a service sector has to consider these challenges in addition to considering the uniqueness of the service sector.
Performance Measurement (PM) has grown over the past few years with the creation of frameworks, such as activity-based costing and the Balanced Scorecard. Lately, different forms of performance measurement systems have received their share of criticism. Much of the criticism of traditional performance measurement systems stems from their failure to measure, monitor, and control multiple dimensions of performance, due to an almost exclusive concentration on financial (and lagging) measures of performance. Although PM systems prove to be helpful to firms, they have yet to be a plainly definable and meaningful concept. Some of the specific criticisms include the following:
Multiple interpretations of PM systems across the organization. The goal and usage of the system are not clearly defined.
Lack of common understanding among various stakeholders.
Lack of alignment with business goals and strategy. The PM system is not aligned with corporate strategy and is not updated and changed as strategy changes.
Lack of understanding of business context. A standard cookie-cutter approach is used but not adapted to a particular business context. The business context will vary based on the service subsector, the firm’s maturity, the firm’s size and geographical diversity, and the firm’s variety-of-offerings portfolio.
Lack of relationship between measures and business performance. A causal relationship is missing between what is measured and what is important for the business performance.
Recent examples of popular measurement systems are the Balanced Scorecard, the Performance Prism, and the Performance Pyramid. The Balanced Scorecard is the most widely used performance measurement system. A recent study showed that 60 percent of companies in America have tried the popular Balanced Scorecard. Due to various shortcomings, the Balanced Scorecard elements need to be adapted in the service context. For example, the Balanced Scorecard lacks employee focus, a partnership mindset, service innovation, and a clear emphasis on leadership quality. The Balanced Scorecard was not designed specifically for service firms and is not predictive in nature.
Unilever added “people development” as a fifth dimension to the Balanced Scorecard. Partners’ or service chain partners’ contributions and their impact on performance measurement are either missing or not adequately addressed in existing frameworks. Business interdependencies are increasingly becoming more important, and a robust system should include service chain partners (or suppliers) as stakeholders.
Service innovation is poorly defined and often not reflected in popular performance measurement systems such as the Balanced Scorecard and Performance Prism. Employees at the operations level are unable to relate to the Balanced Scorecard, thus causing a gap in communication between executives and employees. A performance measurement system designed specifically for the service-dominant context—one that includes explicit measures to implement the scorecard—is needed.
To design a performance measurement system, we need to understand characteristics of services, various business subcontexts in the service domain, and uniqueness presented in this context. The characteristics of services, including the intangibility of services, simultaneous production and consumption, and proximity to the customer, are thoroughly discussed in the literature. Classification schemes may be helpful when identifying the order of priority of service quality dimensions, because they are based on dimension of contact, customization, and labor intensity. For example, the Haywood-Farmer three-dimensional model puts every service into one of eight cubes. Another classification considers dimensions such as nature of the service delivery and availability of service outlets. Based on the nature of services, one could also classify service among three categories: transaction, services, and experience. Table 2.1 presents a comparison among these three categories. The degree of customization and customer participation is the highest for experiences.
Table 2.1. Understanding Services
Transaction Services | Services | Experience |
|---|---|---|
High volume, less variety | High value, more variety | Overall experience, high variety |
Productivity | Quality and performance | Overall perception |
Invisible to customer | Visible to customer | Partnership, co-design |
Often in push system | Responsiveness, push-pull boundary in the middle | Customer driven and pull system |
Automation, standard processes | Back room has some transactional process | People to people |
High “service inventory,” less work needed after arrival | Medium “service inventory” Consistency standard leading to better service recovery | Very little “service inventory” |
Within the next few decades, the major productivity improvements and growth opportunities are expected to take place in the service sector. Major corporations like General Motors and General Electric are shifting from manufacturing to the service side of the business, because most of their profits are realized through the service component. Adopting a process view of services has implications on the corporate strategy of a service firm.
Process-oriented disciplines, which are common in manufacturing settings, may share certain basic concepts, such as breaking down processes into logical steps and sequences to facilitate their control and analysis. The process view, however, does not include the customer viewpoint and customer preferences. Blueprinting, which is designing a process flow diagram including the customer visibility line, is a method of mapping out a service system. Service blueprinting is much more valuable in the service context, because customers are the integral part of the system.
The service industry has designed jobs in parallel with Taylorism and Fordism manufacturing practices (for example, splitting up the high and low customer contact activities within a job to cut costs). This practice is also known as the “decoupling process,” where (a) low customer contact (face-to-face or person-to-person) activities are removed from the customer’s line of visibility, and (b) such activities are standardized and often centralized in a remote location (for example, a call center and processing center in the financial industry) to achieve economies of scale. The service blueprint will show above-the-line and below-the-line steps of the process.
Customers do not view high-contact services as a collection of processes. As evident from the preceding discussion, the process view represents the provider’s perspective. Customers consider services as experiences. The experience view of service takes the psychology of customer-employee interaction into consideration. Increasingly, service firms are even attempting to convert a transaction into an experience to achieve better customer retention.
As mentioned previously, performance systems often lack an alignment with the business context. Therefore, an understanding of the service strategy and business context is a necessary first step in this direction. Service strategies will depend on the target customer segment. Similar to the view of transaction and high/low contact services, R. Metters and V. Vargas in an article in Business Horizons (2000) suggested the following strategic approaches for service firms: cost leadership, cheap convenience, dedicated service, and premium service. The cost leadership approach is used when the business strategy on services is to compete on price; therefore, the decoupling process is used to reduce costs. In the service industry, cost leaders generally centralize their services, causing cost to decrease while reducing the work variance. Job duties become highly specialized and do not necessarily promote cross-training. When dealing with standard-type customers, this approach can be highly efficient; when dealing with special requests, however, it can create a sense of chaos. The use of technology in this particular system helps with labor reduction. Even though this strategy is cost efficient, there are negative effects, including a loss in flexibility, response time, and quality.
The cheap convenience competitive approach is used when firms aim to enhance customer convenience while remaining cost efficient. The use of back-office work is limited, and the front-end workers are cross-trained to do the back-end work themselves; this process greatly cuts the number of workers. Because the workflow patterns are not predictable, however, this model can potentially hurt customer service, creating a bottleneck in customer queues.
The dedicated service competitive approach offers greater variety and flexibility than the two approaches described previously. The decoupling process is used to enhance the front-end office capabilities; the cost consideration is a secondary concern. The firm can place employees in the front- or back-end office depending on their work personalities (people-oriented or task-oriented), as well as centralize back-end tasks by region and designate specific teams to specific organizational front-end areas.
This dedicated service model fosters long-term relationships between front- and back-end office colleagues; it reduces the overlap in work and promotes the employee with a more personalized responsibility. Employees will be more willing to go the extra mile for the customer and colleague. The back-office employees are cross-trained in different departments to eliminate bottlenecks; furthermore, management is encouraged to set in place an incentive program that rewards the back-end employee for supporting the front-end employee.
The premium service competitive approach provides a superior level of personalized customer service. The goal in this approach is to go beyond the transactional orientation to a relationship orientation, maximizing customization and responsiveness. The use of back-end operations is seen only when there is an overwhelming advantage provided by scale economies. In this model, hiring the proper employee, offering superior training, and ultimately retaining these employees are extremely important objectives. If employees leave the organization, they could potentially take their clientele with them due to the relationship they have formed. Customers form a loyalty relationship with the front-end employee, not necessarily with the organization itself; the use of back-end employees is seamless to the client. A managerial challenge is to ensure that the front-end employee is maintaining conformance with quality standards and brand image.
The ultimate success of each of the respective approaches is dependent on considering the market in which the firm is situated, as well as executing the selected approach that fits the current marketplace and customer base. If the type of company, target customer group, and market segmentation are not considered and studied appropriately, the decoupling decision will fail.
In the early 1980s, the academic and business communities argued that existing measures were not appropriate given the modern manufacturing environment. In the early twenty-first century, the existing frameworks do not adequately address the modern service-dominant economic environment. Service-dominant logic and related concepts are increasingly becoming accepted even in product-centric firms. The majority of performance measurement systems in use today were developed in the manufacturing setting. Attempts have been made to force-fit these frameworks into the service-dominant context.
Our understanding of service performance measurement itself is evolving. For example, service inventory discussed in the previous section has been redefined for the services context. As Andy Neely and Rob Austin assert, “Rather than add yet more confusion and complexity, there is a need to step back from recent developments and reflect upon where the field of performance measurement has been and where it is going.” Observation is especially relevant for the field of service performance measurement. A comprehensive performance measurement system specifically for services must be developed. Specific challenges associated with service firms’ performance are listed here:
Inherent variation among customers, servers, time periods, and service processes—. Customer variability is an added variability that should be incorporated. Various classifications of performance measures are available: objective versus subjective measures, internal versus external measures, and core versus noncore or supporting process-based measures. In this section, the impact of customer variability on core measures is considered. The core process of the service delivery system includes added variability, which is nonexistent in manufacturing-based systems. Manufacturing systems include demand variability. Customers often co-produce services and introduce added variability. Due to customer involvement in the service product process, four types of variability are introduced, as shown in Table 2.2: (1) arrival/request of the customer, (2) capability of customers with respect to their expected involvement, (3) effort employers are willing to exert, and (4) subjective preference of customers for how service should be delivered.
Table 2.2. Customer Variability Management
<source>(Frei, FX, Harvard Business Review, 2006 Nov:93-101)</source>Arrival/Request
Capability Process
Effort Employer
Subjective Performance
Create complementary demand
Move demand to off-peak pricing
Target customers based on internal capability
Target customers based on motivation and preferences
Set consistent expectations
Persuade customers to adjust preferences influence
Experienced and skilled employees
Build service inventory
Prepare customers
Communicate expectations
Outsource customer contact
Employees training
Reservation (by type)
Customer self-service
Experienced employees
Cross training
Buffer labor
Automation
Self-service
Automation
Self-service
Active customers introduce all four types of variability, and passive customers introduce type 1, 2, and 4 variability. How is customer-introduced variability relevant to performance measurement? Performance measurement needs to be context-dependent, and the reduce-accommodate strategy creates business contexts.
Prominently including the engagement of employees—. Human capital is a critical asset at a service firm. Employee engagement drives the financial performance and innovation potential of a service firm. A recent Watson Wyatt survey report showed the relationship between its Human Capital index and shareholder value. Specifically, five key human capital practices are associated with a 30 percent increase in shareholder value: recruiting excellence, clear rewards and accountability, collegial flexible workplace, communications integrity, and prudent use of resources. The survey represented 60 percent of firms in service settings. Employee engagement/development has been often overlooked in the existing performance measurement framework. Employee engagement is critical in the service-dominant context, and its impact on financial performance should be even greater.
Including the service innovation dimension—. Our understanding of innovation and the innovation process in services is derived from the manufacturing setting. However, performance measures like R&D spent per employee or numbers of patents per employee are meaningless in a service-dominant context. The service innovation topic is not yet explicitly integrated into the academic world. Questions about service innovation that demand answers include the following: Do services innovate any differently? How does innovation happen in the service-dominant context? How is progress of service innovation measured? How can innovation performance be improved? In manufacturing settings, innovation can be classified as product-related or process-related. Service firm innovation places emphasis on human skills and collaboration with service chain partners. However, services can innovate along a third dimension, namely organizational change. This dimension of innovation is nonexistent in the manufacturing context. Services also have a tendency to innovate incrementally as opposed to being discrete or step-wise innovation as evident in the manufacturing setting. A performance measurement system needs to capture these inherent differences.
Maintaining a partnership focus—. A service offering often includes elements that are offered by partners. The performance of a service firm is directly impacted by the quality of relationships it maintains with its partners. The concept of relationship takes a different meaning in the services context, because these companies are partners and not merely suppliers of a standard component of an offering. A robust performance measurement system should include the element of partnership management.
Existing in a solution-dominant world—. Customer solution perspectives need to be included into the performance system. In essence, a pure product or pure service world does not exist these days. The either/or dichotomy of products and services has been replaced with a solution-dominant context, as shown in Figure 2.1. Managers should identify the needs of the customers and provide appropriate solutions. The solution could include some product and some service component. We define a solution as an integrated and customized system of products, services, and knowledge co-produced with customers and partners to achieve better customer outcomes than the sum of the parts. Key points to note are that the innovation process is a collaborative process, and the outcome or customer need is a starting point. We also need to consider the experience aspects of customer-service firm interaction. Typical success indicators used in a product-centric world are product revenue, product profitability, and market share. A solution-centric world will likely include measures such as customer experience, value created, and satisfaction and loyalty. Figure 2.1 shows characteristics of solutions and experiences.
The following section provides a discussion on the importance of customer-introduced variability. Customer-introduced variability is unique to service situations due to customer involvement at service production and design stages. The section provides an understanding of different types of variables and strategies to managing these situations.
Frances X. Frei, in a recent Harvard Business Review article, suggests how to manage customers’ involvement in service operations to deliver consistent quality at sustainable costs. In a product world, a firm faces variability only in the production process. In service settings, customers introduce additional variability, because they are often an integral part of the production process.
All variability can be classified into five categories that create operational issues for a company. The first type is the Arrival variability, which involves queuing management such as cashiers at retail stores, call centers, and emergency rooms. The second is Request variability, which involves options and substitutions. The option for white or wheat toast at a typical cafe is an example.
The third category is Capability variability, which is the difference in customers’ knowledge, skill, physical ability, or resources to perform their tasks that affect the quality or cost of service. For example, a patient’s ability to describe his symptoms will affect the quality of the healthcare he receives. The fourth is Effort variability, which is the difference in additional work that customers are willing to offer. Whether or not a shopper returns her shopping cart to the corrals in the parking lot has an impact on the store’s service quality and cost.
The fifth type of variability, Subjective Preference variability, involves customers’ opinions in terms of what good treatment is (which can differ among customers). Although some people think it is helpful that a salesclerk talks to customers, others think it is soliciting. To reduce the impact of these customer-introduced variabilities and enhance the competitiveness of service, managers must use a systematic process to diagnose problems and fine-tune interventions. Whenever customer-introduced variability creates a challenge for a company, managers often assume that they had to either accommodate customers’ various desires and behaviors at high cost or refuse to accommodate them at the risk of customer defection.
The customer interface can be made-to-stock (MTS) products or made-to-order (MTO) products. MTS products in the manufacturing world have an inventory to absorb the variability in demand. MTO products typically compete on delivery time and customization; these processes generally have low utilization. These types of products include assemble-to-order, make-to-order, engineer-to-order, configure-to-order, pack-to-order, and print-to-order. Similar principles can be applied to services. Service inventory, recently discussed in the literature, is all about the placement of the push-pull technology and how it defines the amount of work that is completed and stored before a customer requests service. This variable is what seems to make the service inventory much more unique when compared with the product inventory.
Since the dawn of the new push environment that is present today, keeping too much inventory within a company can end up being costly and unnecessary. What the service inventory provides is work readily available to its customers before they even request the service. The reason that this new methodology is becoming increasingly more relevant is that the environment went from a pull environment to a push environment. In other words, companies no longer build product in response to actual demand; rather, they wait for the consumer to come to them in order to meet their needs. The service industry has technically always been a form of a push environment, because such companies wait for the consumer to come to them with a request for service. The service industry needs to be viewed in the context of how firms compete and create value for their customers by contributing a certain number of attributes.
How well a service delivers these attributes to customers is critical to the company. The four main attributes of a service are quality, speed, customization, and price. Quality is increased as the push-pull boundary is moved toward the market. Shifting this push-pull boundary lets the company account for failures that allow it to respond efficiently.
Combining speed and price together, service inventory allows for greater customization that will quicken the time of receiving the service along with reducing the cost. The reason behind the quicker customization and lower cost is due to how relatively cheap it is to hold and maintain service inventory, thus allowing service providers to have greater pricing flexibility. Whether companies deliver these four attributes properly depends on the process choices that the company decides to make.
During this process design, managerial decisions are based on certain drivers of performance: the placement of the push-pull boundary, the level and the composition of resources, and access policies. The push-pull boundary determines how much work is done and stored in anticipation of demand. Resources are used to perform the actual work of delivering a service. And access policies are used to govern how customers are able to make use of service inventory and resources. Where the push-pull boundary is located is one of the major decisions under consideration within the process design. Table 2.3 provides an overview of the impact of service inventory on service attributes for services and experiences.
Table 2.3. Service Inventory
Service Attribute Desired by customers | Impact of Service Inventory on Performance SERVICES | Impact of Service Inventory on Performance EXPERIENCES |
|---|---|---|
Service Inventory | Medium service inventory. | Low service inventory. |
Quality | Provides for consistency and conforms to standards. Provides standard and simple response to service failures. | Conformance to a standard is not important. Individualized response is expected. |
Speed | Medium level of service inventory reduces amount of work needed after customer arrival (lower capacity requirements). | Speed is slower as more steps have to be completed. |
Customization | Customers use preferences for customization. Allows greater customer control. | Customers co-design the experience and provide multiple inputs to customize the experience. |
Price | Service Inventory helps in self-service and reduces cost of service provided. | Customers are willing to pay higher prices. |
The service industry allows for a company to take advantage of the economies of scale. The service industry can perform better because those businesses are constantly dealing with customers on a semipersonal basis and knowing what that customer is looking for in terms of customization. With regard to economies of scale, consider the Radian Group of Philadelphia. This insurance group stores the information collected from its customers in its own database, thus making it easier to exploit economies of scale much more cheaply and quickly for its customers. One way in which Radian’s service inventory relates to product inventory is by limiting what the company can deliver to its customers quickly, which is true of all service inventories when compared to product inventories.
Supply chain management must focus on how much inventory should be held for the company in regard to product inventory in manufacturing. For service inventory, on the other hand, the decisions really rely on what kind of work to store. In other words, a service provider must decide what types of offerings are needed to build inventory and at what stage the service should be completed.
Two instances in which a service provider should consider service inventory for its company are (1) when it can find a positive in enhancing its competitive position over other service providers, and (2) when it sets a standard set of access policies for the company ensuring that it can maximize its success. Knowing where to push the push-pull boundary for a service provider is important, because where that boundary is set determines the success of the company. Service providers should set this boundary where they find their service inventory providing structure and support to their service. The service provider should find the greatest results at this level. In this case, a service provider’s inventory will be maximized, thus helping out its economies of scale.
Managing service inventory is a great way to enhance a company’s economies of scale. When related to managerial decisions, service inventory is important, because it can end up being costly or detrimental to customer satisfaction for a company if too much inventory is held or not enough is present. The service inventory decision is part of the service delivery design decisions and is discussed while presenting Six Sigma applications in services.
If properly designed, a service guarantee enables a service organization to gain control over all aspects of service delivery and related processes. A service guarantee (with clear goals/objectives and an information feedback network) assists the organization by identifying items that need performance improvement. Committing to error-free service can force a company to provide error-free service. Why do most existing service guarantees fail? In the customer’s eyes, a service guarantee loses its power in direct proportion to the number of conditions and exceptions it possesses. Ideally, the service guarantee should have the following traits:
Be unconditional—. The service guarantee should promise the customer unconditional satisfaction without exceptions. If the company cannot guarantee all the elements of its service unconditionally, the company should unconditionally guarantee the elements of its service that it can control.
Be easy to communicate and understand—. The guarantee should be written in simple and concise language that specifically identifies the pledge. This assists both the customer and employees in understanding expectations.
Be meaningful—. The service guarantee should ensure the aspects of the service that are important to the customer and offer a financial payout if promises are not kept.
Be easy (and painless) to invoke—. Customers should not have to expend additional effort to invoke the guarantee, nor should the customer be made to feel guilty about invoking the guarantee.
Be easy and quick to collect—. The customer should not work hard to collect on the guarantee. The process should be quick and easy.
The following reasons outline why a service guarantee works:
The guarantee pushes the entire company to focus on the customer’s definition and perception of good service.
The guarantee sets clear performance goals and standards that boost employee performance and morale.
The guarantee generates reliable data (through guarantee payouts) noting poor performance, thus improving the reliability of the system.
The guarantee forces the organization to examine its entire service delivery system and related processes for potential breakdown. It helps identify causal relationships and makes the system foolproof.
The guarantee builds customer loyalty, sales, and market share.
We should note both the real and the perceived power of an unconditional service guarantee, because it forces a company to focus on its customers, set clear standards, and generate feedback (to use in continuous improvement and to help understand why certain items failed).
The explicit example of the trade-off is Southwest Airlines. While traditional airline companies are making expensive investments to accommodate the customer-introduced variability by providing international flights, offering multiple-cabin classes, instituting several levels of refunds for tickets, providing reserved seats, providing full meals with multiple kinds of beverages (including alcoholic beverages), transferring passengers’ luggage, flying into larger airports in major cities with a “Hub and Spoke” flight routing system, and networking with travel agents, Southwest is saving money by focusing on domestic flights, with one class, no refund tickets, no assigned seats, simple snacks and beverages, no luggage transfer, use of secondary airports with a “Point to Point” flight system, and use of a direct booking system though the Internet and phones. Although its operation certainly reduces the range of service and additional benefits for some, the quality of the main service (in this case, a safe and comfortable flight with smooth booking, checking, and boarding procedures) has been maintained, thus explaining why Southwest continues to be profitable even after the 9/11 attacks.
The same concept of limiting service options is applied to the cruise ship industry. EasyCruise seeks to attract young, budget-conscious travelers in Europe who are less interested in flashy entertainment and spacious cabins than in getting off the ship and enjoying destinations they might not have been able to afford to visit otherwise. Because EasyCruise does not offer lavish meals and expensive shows, it is able to charge lower prices. Hence, these low-cost players alter customers’ behavior permanently and get people to accept fewer benefits at a lower price.
Another great example that altered customers’ behavior drastically in the transportation industry is Zipcar, which completely changed the car-rental system. Instead of applying a rental concept, it created a sharing concept. Members of Zipcar can pick up a car in their neighborhood and use it for a couple of hours without the cost and hassles of owning a car. Users just need to apply online to be a member. They can check vehicle availability and reserve a car via the Internet or telephone. After the reservation they receive an access card, which they can use to unlock the doors by just holding it to the windshield. Each vehicle records hours of usage and mileage, which is uploaded to a central computer via a wireless data link. The rental fee is as low as $8 an hour including driver’s insurance. (There is an annual membership fee according to each plan.) Also, members get reimbursed for typical car maintenance items, such as car washes and window wiper fluid refills.
Zipcar can provide such a flexible service with low cost simply because the company does not have to maintain offices and large parking garages. However, an even more significant shift is occurring in the customer’s behavior. In fact, Zipcar is a perfect example of managing customer-introduced variability with low cost, yet in an uncompromised manner. What if users do not return the car on time? What if users cause damage to the cars? Such provisions of renting a car take up a big portion of the cost for the traditional rental-car companies.
On the contrary, Zipcar’s business model became feasible based on the users’ mutual trust. This “sharing” concept functions simply by spontaneous cooperation of users for their mutual benefits. Users manage their arrival variability by reserving a car online. They manage their request variability by choosing a pickup location and a type of car from the existing list. They manage their capability of applying for a membership, making a reservation, finding a car, unlocking doors, and paying fees. They manage their effort to keep the cars clean for other users and return them to the pickup spot. They manage their subjective preference from a value-for-money standpoint.
Although Zipcar’s business model has not yet been accepted by mass society, after early adapters start telling of their experience, the power of word-of-mouth will rapidly enhance the possibility of business penetrations. Because the business was designed to set a mutually beneficial operating role for customers, they find an explicit value in the service.
Another tactic for trade-off that manages customer-introduced variability is the self-service system. Until a couple of years ago, no self-service gas stations existed in Japan. Because of law regulations, customers could not pump gas into their cars and had to sit and wait while a staff person filled up gas in the car, cleaned car windows, and picked up garbage for them. Consequently, customers paid extra service fees to the gas stations.
However, deregulation made an epoch turn in the gas station industry in Japan. As of December 2005, there are now 4,900 self-service stations and 43,000 traditional full-service stations in Japan. Full-service stations are decreasing every year, with a 20 percent decrease from 53,000 stations in the year 2000 alone. On the contrary, self-service stations are increasing, with 12 times more now compared to 400 stations in the year 2000.
As with Zipcar, the business model altered customers’ behavior in Japan. Customers appreciate their cost benefit rather than becoming critical about service quality. A partial reason for this phenomenon is that companies handed over the control of service quality to the customers. Customers now do not have to pay for an unnecessary service, because these additional benefits are optional. They pay for the fundamental quality of products or services and take responsibility for fulfilling the quality of supplemental services themselves.
Challenges in performance measurement systems within the service sector will vary based on the subsector. For example, the healthcare sector has its own additional challenges related to regulations and privacy issues. Professional service firms need to focus much more on human capital and knowledge management issues.
The size of the firm will also play a role during the design and implementation stages. A small firm in the early stages of development will have its own set of unique challenges as opposed to a mature multinational firm with global presence. Some of the challenges are becoming more apparent now due to the changing nature of business. The extent of outsourcing leading to a fluid definition of service firm boundaries is creating additional challenges in terms of ownership and accountability. As discussed previously, the importance of partner selection and the quality of the partnership relationship is becoming increasingly important.
Existing performance measurement systems often have been criticized for providing a standard cookie-cutter approach.
Understanding of both process and experience views is necessary to design a performance measurement system for services.
Challenges to designing performance measurement systems for services are the following: added variability due to customer involvement, importance of employee engagement, and service innovation and inclusion of partnership focus.
A fresh understanding of “service inventory” and “service delivery system” is necessary to implement a performance measurement system.
Understanding the importance of a service guarantee is also important to implement a performance measurement system. The service guarantee is one way to build customer loyalty, collect information, and improve the system.