Service businesses make up approximately 65% of the Australian economy, up to 75% of the European and 85% of the US economies.
Shifting your mindset from shifting product to collaboratively creating value with the customer through providing a service can yield far greater results.
In the 1960’s Peter Drucker coined the phrase of ‘knowledge worker’, which is essentially what a service business is. That is teaching, and transferring of knowledge or a skill, where a physical item is not transacted.
The problem is that most businesses don’t know that they are a service business. For example (e.g. construction businesses don’t identify themselves this way). Additionally, the employees are not trained ‘how to work’ in a knowledge and service environment. Over all there is precious little ‘science’ about managing a service business when compared to manufacturing businesses.
The gap in knowledge is so profound, that IBM has initiated a Service Science academic research program, which looks at the challenges of service businesses, with the goal of improving productivity, quality, learning, and innovation across the service sector.
This change in thinking is result of IBM moving from primarily being a manufacturer of computers to making most of its revenue from IT service.
It is amazing to think that service businesses are 70% of GDP but most managers don’t know the key drivers. For example scalability in service business presents an enormous challenge, how do CEO’s design strategies that tackle service design, development, marketing and delivery systems to enable growth.
Service based business traverse many disciplines, creating complexity and challenge. The disciplines that need to be addressed are computer science, operations research, engineering, management sciences, business strategy, social and cognitive sciences, and legal sciences. All of this needs to be understood and integrated into a single cogent fashion to be an effective service business.
Co-creation of Value
The role of a service businesses is to help ‘unlock’ value for the customer. Service work is collaborative, it is not something you ‘do’ to a customer, rather it is about the ‘co-creation of value’ between the producer and customer. Where the customer is In boundary of organisation.
To unlock the value in service businesses there essentially two variables which need to be considered.
- Doing what you do – well, and
- Service quality
The first is the technical service quality. That is being able to consistently and reliably deliver your service time after time. This is fundamental to service.
The banking sector in the last 5 years has taken on ‘six sigma’ initiatives, which has significantly improved service quality. Inspired by GE, Australian Banks have implemented this approach to service to reduce the time taken to approve their mortgage broker applications. Rapid response being a key to providing value to the customer. once analysed and improved customer were given approvals in 3 days, down from 10.
Through a systematic approach to problem solving and breaking the service down into a process, it was reduced to three days for approval. The variation all but eliminated, and customer complaints almost nil.
This demonstrates the power of ‘process design’ as a core science of service businesses. Creating predictable repeatable systems, which are managed up and down the value chain.
Managing the ‘value-chain’ is an important point, as a person making a change in another position down the line can cause significant problems.
A great example is that of a potato crisp company in the UK, which required potatoes they bought in be no more than a certain size. The purchase office found that if he bought bigger potatoes he would be able to reduce costs. Which he dutifully did. Causing the delivered potatoes unable to fed into the machines, no crisps made and missed the Christmas order at Tesco’s. However the purchase officer got his bonus for coming in under budget.
This demonstrates the importance of the value chain. Had the buyer consulted the manufacturing team and explained the buying situation and understood each others requirements, perhaps they may have come to an arrangement unlocking the value of cheaper potatoes. This demonstrates what happens every day in the service world where a process that flows up and down the value chain hasn’t been mapped out.
Customer service
The second aspect of innovation in the service economy is the actual delivery of the service. The cognitive sciences of human behaviour must be examined. As we don’t simply hand over a product and walk away, instead we deliver a knowledge and help them utilise it. How do we demonstrate and measure value?
This the point at which the true value can be unlocked for the customer.
Rolls Royce manufacture aircraft engines, yet more than 50 per cent of their revenues come from service. That is the service contracts they have to keep the engines operating and in the air.
Other examples include home delivery by supermarkets, a growing area of service. And the London Port Authority selling their dredging knowledge to New York City.
At the heart of this is partnering with your clients and understanding how you can add value to them given your skills.
Professional services are notorious for having problems scaling hampered by scarce resources with scarce knowledge. However they are extremely well placed to package their ‘knowledge’ and perhaps sell as books and manuals, and various other learning materials.
Other options are found in pricing, or bundling. For example adding insurance. Such as a dry cleaner adding an insurance service in case their garment is damaged. This gives the customer peace of mind, solves a problem, and provides this at the point of contact.
Other alternatives to un-lock value for customers could be to perhaps rent your product and not buying, transforming the product into a service. After all, do people buy a drill or a hole in the wall?
Ultimately service businesses are all about relationships. There is no transfer of product. You must get you customers very involved. Listening more and tailoring solutions to their specific needs to achieve the goals they have and unlocking value for them.
You start by really understanding what it is you do well. All of the knowledge to transfer into a service business already exists in your business. The data is already there. You need to mine it in a different manner and understand truly where you excel and exploit those areas.
You generally can’t do service innovation on your own. You need an objective third party to come in help you see the acres of diamonds in your own back yard.
A great example is phone companies. They add endless features to the phones which are impossible to use. However, by segmenting the market they find that only a small percentage of people use, say, email. By over complicating every phone they sell they destroy value for those who just want a straight phone.
The message is customise and co-create with your customer, thereby making them a client.
