Managing our journey to greater productivity in the service sector (2023)

What electricity, railroads, and gasoline power did for the American economy between 1850 and 1970, computing power is expected to do for today's information-based service economy. But there is growing concern that improvements in productivity growth will remain subdued despite spending trillions of dollars on information technology. Assuming that productivity grew at an annual rate of 3%in the two decades after World War II, it grew at an annual rate of only about 1%since the early 1970s. If the previous level of productivity growth had been sustained, gross domestic product would now be aboutps11 trillion instead of aboutps6.5 trillion. that extraps4.5 trillion a year in economic output, which equates to roughly an additionalps18,000 for every man, woman and child - would have a profound impact on a wide range of social and economic problems.

What is preventing a productivity renaissance in the US economy? Clearly, the manufacturing sector cannot be blamed. Since 1980, productivity improvements in the manufacturing sector have taken the United States from a position of near terminal decline to renewed world dominance. Worry about the fate of Rust Belt cities is a thing of the past. From the 1970s to the 1980s, the United States lagged behind other major industrial powers in manufacturing productivity growth. (See the table “The U.S. Manufacturing Productivity Turnaround.”) In the early 1980s, US manufacturing began to recover, and between 1985 and 1991, the United States surpassed Germany and Canada in manufacturing productivity growth, matching Italy and second only to Italy. for Japan. and the UK.

Manufacturing, however, makes up a shrinking proportion of the US economy. Goods-producing activities (such as manufacturing and construction) employed only 19.1%labor force in 1992 - below 26.1%in 1979. (See the table “Service Sector Growth in the U.S. Workforce.”) Service manufacturing activities, on the other hand, employed 70%of all US workers in 1992 - up from 62.2%me 1979. Me 1994, 71,5%of US workers have held service jobs, either in manufacturing or service organizations, as managers and professionals, salespeople, or technical support personnel.

While the size of the service sector has grown over the past 20 years, its productivity growth has slowed. Compare your productivity growth with that of the manufacturing sector, for example. From 1946 to 1970, productivity grew 3%per year in the manufacturing sector and in 2.5%per year in the services sector. From 1970 to 1980, these annual rates dropped to 1.4%for manufacturing and 0.7%for services. Then, from 1980 to 1990, the rate recovered to 3.3%for manufacturing, but stalled at 0.8%by services The productivity renaissance has failed to penetrate the service sector.

Why didn't productivity grow as fast in the service sector as it did in the manufacturing sector? Several incomplete explanations have been offered and have resulted, in our opinion, in some serious misunderstandings. We hope to show its limitations here and to present a new explanation that places the blame in two places: the ineffectiveness of many American business managers in improving productivity, and the inherent complexity of the service sector itself. A management-based approach to improving service sector productivity offers hope for a rapid and significant recovery in the sector's productivity growth rate.

Understanding the decline in service sector productivity

There are several current explanations for the stagnation of productivity growth in the services sector. A common problem is that the problem is simply a measurement problem. Productivity, it is said, has grown. But traditional productivity measures fail to capture this growth because it has focused on improving the quality of services. The data, however, strongly argues against this possibility. First, a lack of quality measurement has been cited as an explanation since the 1950s, but there is little evidence that it has increased. Second, the quality argument would apply equally to services and manufactured goods, but manufacturing productivity has enjoyed a renaissance despite the undervaluation of quality, while service productivity has remained stagnant.

A second common explanation for the slowdown in productivity growth in the service sector is that, since the 1970s, factory workers, threatened with losing their jobs to low-wage foreign workers, have learned to work more and more. workers, who are typically much less exposed to global competitive pressure, do not. This explanation also falls short. First, the pressure on industrial workers in the United States has generally been exaggerated, often for political purposes. Second, while it is true that many manufacturing jobs were lost to foreign workers, far more were lost simply because growth in demand for manufactured goods was relatively slow over the last ten years, and this affected production.

A third and familiar explanation is that production in the service sector is well below its potential due to a variety of macroeconomic factors. In this line of reasoning, the proposed solutions are: increase national savings and investment in the services sector, reducing the federal deficit and, therefore, reducing interest rates; improve the quality of the workforce by fixing the miserable education system that produces workers unable to effectively cope with the increasingly technical nature of the jobs; and accelerate the development of new technologies, increasing support for research and development, which has been declining. In other words, save more, improve education, do more R&D, and the problems of the service sector will be solved.

Here a radically different vision will be presented. We will affirm that the problem is not the lack of resources; rather, it is that companies in the service sector are operating below their potential and are increasingly failing to take advantage of widely available skills, machines and technologies. The main reason why the service sector has not reached its full productive potential is management. If managers energetically and intelligently focused on putting existing technologies, labor, and capital stock to work, rapid productivity growth would be achieved. Certainly, management challenges are more severe in the service sector than in the manufacturing sector. However, the high levels of productivity achieved by high-end service firms indicate that management attention can result in much better performance throughout the service economy.

What is needed to realize this potential is a better understanding of the services and a set of tools, techniques and policies to help keep management focused on improving productivity. The rigorous application to the service sector of those management techniques that have been so effective in the manufacturing sector is a start. Despite their many shortcomings, techniques such as total quality management, best practice analysis, process reengineering, just-in-time management, team-based management, and time-based competition have helped to focus the attention of the production managers in the productivity and, in the process. , helped them revive their companies. Although the application of these techniques to the service industry is more complex, it would help managers to deliver high-quality services to customers efficiently. The key here is that such techniques refocused the attention of production managers on the central issue: the efficiency of basic operations. Applied with equal rigor to service organizations, they should produce similar results. The villains, in our opinion, are not the deficit, the educational system or the delay in government support for R&D; rather, it is all the forces—acquisitions, financial manipulations, government regulation, and the general fixation on high growth—that distract managers from the fundamentals of their business.

A management-based approach to service sector productivity

The evidence overwhelmingly supports the management-oriented view of the service productivity problem. Robert H. Hayes and William J. Abernathy, the authors of "Managing Our Way to Economic Decline" (HBR Jul-Aug 1980), are as relevant today as they were in the 1980s, when they argued that the performance of the Productivity lies predominantly in the hands of managers. Five broad categories of evidence point in this direction: (1) the recovery of manufacturing productivity; (2) the large and persistent gaps between the performance of average utility companies and the best-managed companies; (3) the fluctuating patterns of productivity growth in many service companies; (4) certain special events, such as management buyouts, that demonstrate high levels of untapped potential; and (5) our detailed case studies of the productivity performance of individual companies.

The first compelling evidence for the view that productivity is driven by management is the better performance of American manufacturing. The decisive element in this change was clearly not the economic factors that are the main focus of the current debate. The early 1980s were a period of huge public deficits, low private savings rates, and high real interest rates. Schools were just as bad, if not worse, than they are today, judging by the slight improvement in most measures of educational performance since the late 1970s and early 1980s. New Information Technologies Improving the productivity. Foreign competitors had equal access to these technologies but were unable to replicate the improvements achieved in the United States.

The critical factor appears to have been the performance of managers, whose attitudes changed significantly under the pressure of foreign competition. If marketing was the primary focus of the 1960s, and if management and finance dominated the 1970s and early 1980s, the most recent period has been marked by renewed attention to production management and operations. central. Many of the important management techniques that have been developed in recent years are production-oriented, and if they were indeed the decisive development in the manufacturing turn, it seems unlikely that service productivity could improve without a similar reorientation of manager skills. Caveat.

The second important piece of evidence supporting a management-based understanding of service industry productivity is the existence of wide and persistent performance disparities between the best service firms and their competitors. Northwestern Mutual, for example, has long been recognized as a provider of low-cost life insurance. (See the table “How Productivity Varies in the Insurance Industry.”) Every dollar Northwestern collected in 1991 from client premiums involved a processing cost of 6.3 cents, compared to 20.9 cents for Connecticut Mutual and 15.6 cents for Phoenix Mutual.

Differences in productivity cannot be attributed simply to differences in the product mix. At the very least, this would have worked against Northwestern because it sells relatively more low-premium policies than high-premium whole life policies. The differences cannot be attributed to the organization of the sales force either, since the numbers only measure administrative costs; the chosen productivity measure, since other measures, such as current insurance (the total amount of insurance contracted by a company) or total assets, yield similar results; or salary costs, since they differ little between companies. Neither the US budget deficit, overall R&D spending, nor the education system can be invoked to explain the differences, since technology, highly-skilled labor, and capital are equally available to virtually all firms. Similar. The differences, therefore, must be attributed to the way in which these factors are used, and this is a matter of management.

These large disparities between the most productive companies in one industry and others can be found even among Bell's regional operating companies. The telephone companies, because of their common Bell System heritage, use the same basic technologies, pay the same basic wages, and operate under the same basic labor agreements. Its employees share a common background and training. Its technology is developed jointly by equipment vendors or by their shared research and development center, Bell Communications Research. However, cost differences of around 50%characterize the operations of the regional firm as a whole, from a minimum in 1991 ofps384 per telephone line in Illinois Bell up to a maximum ofps564 for access line on New York Telephone. (See the table “How Productivity Varies at Regional Phone Companies.”) Similar differences are also seen in other areas, such as customer service. Customer service costs per access line in 1991 went from a minimum ofps32.40 in the Western US for up tops49:30 on the New York Telephone. Since there are few proprietary technologies, productivity is theoretically the same for all firms, and therefore differences in performance should reflect differences in managerial effectiveness.

Similar large differences in productivity were also found in sectors such as banking, brokerage, and retail. If a high percentage of companies in these sectors apply best practices, they can have a significant cumulative effect. Consider the following scenario: Suppose there is a productivity gap of three to one between the best in an industry and the laggards. If, over a 20-year period, all the laggards could close this gap, then the industry could enjoy 3%annual productivity growth during this period.

A third piece of evidence for the view that managers drive productivity is the fact that productivity growth in many firms fluctuates widely in both duration and magnitude. The normal cycle goes something like this: Management worries about costs and margins. He announces cost-cutting programs and mass layoffs. Then silence returns and for an extended period little else is heard until the next management intervention.

A telling example of this cycle is the experience of Citicorp's credit card division during the recession of the early 1990s. In 1990, Citicorp was widely considered to have the most efficient operations of all credit card issuers. , with the lowest costs of all its main issuers. rivals Administrative expenses grew by around 6%in 1991, then fell 3%under company-wide cost-cutting pressure, and then jumped 27%in the next two years. (See the table “The Cost of Taking Your Eyes Off the Ball: Citicorp.”) The increase in costs during these two years was a widespread phenomenon that affected all aspects of the operation. A deterioration of this magnitude in such a short period of time defies traditional economic logic and demonstrates the importance of managers keeping an eye on costs. In this case, the source of the distraction was an unprecedented increase in bad loans due to the recession, a problem that consumed much of management's time. The emphasis on managing credit losses was understandable, as a further increase in net credit expense would have a disastrous effect on the company's finances. But the rapid rise in operating costs when management attention was diverted from core operations underscores management's central role in sustaining productivity growth.

This commonly observed pattern of fluctuating productivity—periods of rapid advance followed by periods of little improvement, if not outright decline—cannot be explained by the oft-cited factors of capital, labor, and technology. This is because changes in investment, labor, and technology have, on an annual basis, only marginal effects on a company's overall productivity. Investment and depreciation change a company's capital stock by only a small percentage in any given year. Employee turnover represents only small changes in a company's workforce. Even technology changes at a relatively constant and predictable rate. So, to understand how productivity fluctuates in companies, it is first necessary to look at management actions.

There are a number of special circumstances that together provide the fourth proof that management can achieve productivity improvements. The success of most leveraged buyout companies, for example, stems almost entirely from their ability to focus management attention on the efficiency of core business operations. These opportunities would not be as readily available if these companies were operating at, or even close to, their potential productivity levels. LBO companies have made their fortunes not because of generally low stock prices (successful takeovers have continued since the mid-1980s despite high stock prices) and not because they can acquire companies at low prices. bargain prices, but because they hired difficult companies. . managers who are able to increase efficiency.

The importance of sustained management attention

One of the factors that makes it difficult to increase productivity in the service industry is that, unlike many manufacturing companies, where product engineers must work on long-term projects, service companies tend to assign their employees to temporary projects. Consider the following series of events at the Connecticut Mutual Insurance Company, which decided in 1990 to improve productivity in various departments. The company hired an external operational executive who, in her previous job at another insurer, had reached 35%costs reduction. A working group of selected departments met in December and developed a plan to reduce headcount by 25%in 1991 and for another 10%in 1992. Information technology team members would be used to carry out the project, although a handful of outsiders would be hired for critical positions. The work consisted mainly of creating a common graphical interface for the multiple databases that characterized the original operation and then simplifying processes such as underwriting, premium publication, establishment of new policies and issuance of loans. The technology involved was standard and well proven. The capital was invested primarily in personal computer workstations and programming services. Existing employees needed little training to perform the new jobs.

Some processes were reviewed more than once during the two years of the project. Surprisingly, when the processes were reviewed a second time, the productivity gains were greater than in the first pass. That is, the first round did not exhaust all possible improvements. The results of this persistence were impressive. Through 1991 and 1992, Connecticut Mutual was able to reduce the number of positions in its administrative operations by 128, just over 25.%from the original force of 500 people. His total investment was estimated at approx.ps7 million: approximatelyps4 million for new investments in computers and aroundps3 million for additional operating expenses. Annual savings were estimated atps4.5 million a year - a return of more than 60%— and quality measures, such as back office response times, have improved tremendously with the new processes.

In mid-1992, the company's CEO, who had been a strong supporter of the project, announced that he would step down in 18 months. Successful work on the project came to a halt when senior managers, including the outside operating executive in charge of the productivity plan, began competing for the top spot. Focus and cooperation between departments was quickly lost. Effort was diverted from making improvements to identifying and promoting what had been achieved. Although the project lasted until 1993, there were few reductions in the workforce after mid-1992. Management's attention now turned elsewhere.

Clearly, once the managers' attention was no longer sustained, productivity improvements diminished. Given the severity of this problem, it can be helpful to understand why projects are stalling. Competitive pressures obviously play a role, as do pressures to meet profit targets or eliminate losses. But an underlying and more plausible explanation is that management is a scarce resource. If acquisitions, stock price manipulation, and public relations are top priorities, productivity performance will lag behind. If the improvement in basic operations is high, productivity growth will follow.

Exploring existing resources

In all of the successful projects we studied, the returns on capital more than justified any investment and, in some cases, were astronomical. Furthermore, highly-skilled workers were rarely essential to success: the existing workforce was fully capable, with modest retraining at most, of meeting the demands of new work processes (although less-skilled workers were often laid off). ). Finally, to the extent that the projects we studied used truly cutting-edge technologies, they tended to contribute to failure rather than success. The successful projects predominantly used proven technologies that were at least three years old. In all these respects, managers were heavily using existing resources to achieve improvements.

Consider the experience of NYNEX Corporation. In 1991, the company wanted to install a limited automated voice response system to handle a small percentage of service calls for residential and small business customers. The installation period was less than two years, the technology had been available for a few years, and the existing customer service workforce was largely unaffected or changed (except for some minor training). The capital expenditure wasps3.25 million. Also, aboutps$2.18 million in one-time expenses were incurred, primarily labor costs associated with bringing the new system online. When the voice response system was up and running, NYNEX achieved annual savings of approximatelyps3.9 million - an annual return well in excess of 50%🇧🇷 Using the same technology in other areas of the company, NYNEX found, could save more thanps50 million a year.

Just as NYNEX was able to use existing technology to achieve productivity gains, Salomon Brothers was able to leverage an existing workforce. When the company wanted to move its administrative staff from New York City to Tampa, Florida, to reduce labor costs, a careful reassessment of roles led to a reduction from an average of 644 workers between 1991 and 1993 to 458 workers in 1994. and finally to 425 in 1995. At the same time, both the volume and complexity of transactions increased without significant improvements in the workforce. In fact, there has been a significant reduction in the number of skilled workers as many highly experienced employees have decided not to move from New York to Tampa. The reduction of the global labor force of 34%represents an average annual productivity gain of more than 15%more than two years. We have seen this pattern in company after company, and the data shows unequivocally that by using existing inputs, management can dramatically increase productivity growth rates.

The Management Challenge: Understanding Service Businesses

While management efficiencies may be what drives productivity in the service sector, we are still a long way from seeing improvements in the sector at the macro level. This is not only because of the size of the industry, but also, and more importantly, because it can be notoriously difficult to manage. One way to assess this complexity is to compare the management challenges in the service sector with those in the manufacturing sector.

The first major difference between the two sectors is that services cover a much broader range of activities than traditional manufacturing. Economists and many managers have tried to treat service as an undifferentiated amalgamation. However, while healthcare, investment management, retail distribution, private education, telecommunications, dry cleaning, and check processing may all be service activities, they present very different productivity challenges.

A necessary first step for managers is to identify the different activities that are carried out in their companies and treat each of them appropriately. One approach that has been fruitful in our research is to distinguish between transaction processing activities, such as data processing, which, with the appropriate technology, can be effectively organized into large, highly automated work environments; distribution activities (wholesale and retail) that involve local and interconnected operations with significant economies of scale; dispersed and small-scale manufacturing activities (such as dry cleaning and hamburger manufacturing); and high-level activities that involve direct human interaction and superior analytical capabilities (such as healthcare, investment banking, and law). Since the appropriate productivity improvement strategies for each type of activity are very different, it is essential to identify these separate functions, which are often integrated in the same company, if progress is to be made in improving productivity.

The second difference between sectors is that service jobs are inherently cross-functional in a way that manufacturing jobs often are not. The role of fast food workers is an obvious example. Their responsibilities often include production (making fast food), retail service (delivering to customers), customer service (ensuring customers have a pleasant experience), and transaction processing (accepting payments and making change). In some circumstances, it may also involve inventory management and simple building maintenance. Measuring, monitoring and improving the performance of an individual are therefore complex tasks. As a result, efforts to improve organizational performance require careful attention to what employees actually do and how their activities can be optimized. This complexity can thwart efforts to improve efficiency because employees who resist change often say the changes will hinder their ability to do their jobs.

To deal with this level of complexity, managers must consider a full range of management practices. Analyzing best practices within an organization with many similar units (as is often the case in services) can be a good start for managers because effective units provide useful information about management techniques and performance goals. At the same time, cross-organizational comparisons can help companies avoid repeating past mistakes. Process analysis is also often a useful tool because it can reveal the ways in which service workers may interact with customers. Ongoing analysis and feedback from quality management techniques ensure that the full range of critical functions continue to be improved. Our studies indicate that the proper application of this set of tools can lead to huge performance gains in both services and manufacturing.

Third, while manufacturing capacity can be distributed over time through physical inventory, service capacity is relatively fixed and cannot rely on inventory to store capacity. Compared to manufacturing, service operations are more rigid, involving a basic level of capacity that must be defined in anticipation of demand (for example, the number of telephone lines, switches, or stores). Also, it is sometimes difficult to tell if a utility has the right amount of capacity, since there are no out-of-stocks or inventory backlogs to use as indicators. Therefore, managers in the service industry who want to improve productivity must not only maximize capacity utilization, but must also strive to determine exactly what that capacity should be.

Consider the differences in workforce planning in the two industries. In manufacturing, excess capacity leads to storage, which in turn leads to temporary or, if necessary, permanent layoffs. In the long run, new hires often come to a standstill while laid-off workers wait to fill their old positions. In services, due to the fragmentation of operations, the signs of overcapacity are more subtle and staff adjustments are more convulsive and uneven. During the downturn in business, utility companies react in two ways: They cut work without laying off the right employees, and thus are left with excess staff. Or, frustrated that they haven't achieved projected workforce reductions, they cut jobs and employees without ensuring that the people leaving are closely related to the job being cut. As a result, many of the workers remain consultants or contractors, defeating the original goals.

Careful workforce planning is much more important for improving productivity in services than in manufacturing. Such planning should be part of any reengineering, quality management, or other technical approach to performance improvement. It should also be noted that this type of planning can reduce or eliminate the likelihood of the types of careless layoffs that have received so much negative publicity of late.

Fourth, the nature of competition differs in the two industries. Industrial production is transportable and economies of scale are global or non-existent. Competition between manufacturers is equally global and this has important consequences. Manufacturing firms do not enjoy local niches protected from the full force of foreign competition. In the 1970s, the weaknesses of the American manufacturing industry were mercilessly exposed, and weak companies were threatened with extinction. This was perhaps the single most important factor in America's manufacturing renaissance. Efficiency gains in individual companies quickly translated into gains in the industry and the economy as a whole.

This situation contrasts sharply with that of service industries, where competition is predominantly local. Services are often not transportable (think hospitals, restaurants, and stores) and some larger service organizations (such as Wal-Mart Stores and Target in discount retail) have achieved economies of scale that ensure protected market positions local. The local nature of many service firms lessens the energizing force of competition and can cause efficiency gains at the firm level to dissipate at the industry and economy-wide levels. For example, improving retail efficiency will not always translate into lower prices or higher quality locally. Rather, these improvements may simply encourage the entry of new entrants with access to the operating efficiencies involved. Your input, in turn, cannot reduce prices or increase the quality of service; instead, you can divide existing market sales more precisely among local competitors. The fixed costs are then spread across a smaller sales base at each company, greatly offsetting the original efficiencies. Therefore, at the industry level, there may be little consequential productivity gains.

The role of government in productivity growth

Traditionally, economists have argued that the government can improve productivity in the service sector by reducing deficits and interest rates, improving education, and supporting research and development. While all of these measures can be useful, they alone are unlikely to achieve much improvement in the rate of productivity growth. Probably the most important contribution the government makes to this effort is to minimize its demands for attention from business leaders.

The first way to do this is to maintain a stable macroeconomic environment and prevent the economy from going into recession. Historical evidence suggests that, in general, recessions have a negative impact on productivity levels. Furthermore, the loss in productivity growth appears to be permanent. There is no significant evidence that recessions are followed by above-average productivity growth. When it comes to the balance sheet, workforce levels, cash flow management, and other concerns businesses typically face during downturns, management's attention seems to be diverted from the daily task of continually improving performance. and the resulting decreases in efficiency are prolonged. -lasting. In our case studies, we saw several cases where large productivity improvement projects were delayed or scrapped during these periods.

The second way that the government can help the service sector improve productivity is by not over-regulating it. However, the point here is not that regulatory interventions are unjustified. When carefully designed, they can be very beneficial to the economic and social well-being of a country. The point is that regulation must be carried out both in spirit and in practice to minimize demands on business attention and resources. This means that if the government is serious about improving productivity performance, it should formulate long-term stable and cooperative regulatory policies rather than aggressive responses to the latest crisis.

Securing jobs through increased production in the service sector

It has been argued that recent productivity gains, achieved by reducing employment rather than increasing output, are less desirable than productivity gains achieved during a period of employment expansion. But this is not always the case. One example is the spectacular long-term growth in agricultural productivity: Farm labor has been reduced to almost nothing, yet the industry is the bedrock of America's prosperity. Also, while rapid industrial productivity growth in the 1980s led to a decline in manufacturing employment, the change was beneficial to the US economy as a whole. Overall employment continued to grow, and it grew especially fast for white-collar and professional workers. (See the box “Increasing levels of management in the service sector”.) The current problem is not the creation of new jobs, but the productivity of workers in these new predominantly service positions.

Keeping highly skilled workers in jobs where they are not needed is not a solution to the country's productivity difficulties. The available evidence indicates that the vast majority could find new jobs. The American economy has generated an endless stream of new job opportunities, not only for laid-off workers, but also for new immigrants, the expanding native population, and the increasing number of women entering the workforce. The challenge is ensuring that your talent leads to ever-higher levels of productivity in their new jobs, and ultimately that is a management challenge. Managers must ensure that productivity levels in the newly created service jobs that employ an increasing proportion of the US workforce are high enough to provide for the collective well-being of the nation.

Many factors complicate the task of achieving a management-driven renaissance in service productivity comparable to manufacturing, but they don't put it entirely out of reach. In fact, managers in the service sector may need to be more focused and careful in their approach to managing productivity improvements. Due attention should be paid to the identification and definition of the functions and activities carried out in the workplace; apply appropriate productivity improvement strategies to ensure that important elements of job responsibilities are not lost; implementation of carefully conceived parallel human resources and workforce management strategies; and stay focused on improving performance in the absence of global competitive forces and in the presence of many other distractions. However, there is undeniable evidence that high-end service companies achieve performance levels well above their average competitors, with certain companies seeing dramatic improvements. The management challenge is clear.

A version of this article appeared onJuly to August 1997issueHarvard Business Review.