McKinsey on Operations

An in-depth look at the problems facing senior managers Published by The McKinsey Quarterly February 2007

Improving productivity in product services

Services operations are variable, and measuring their performance is complex. But a company can raise their productivity by managing demand, assigning tasks by the cost of resources, and increasing labors efficiency.

Article at a glance Product companies are struggling to reduce the cost of the services operations that support and maintain their product lines. Unlike manufacturers, which can optimize controllable processes, services organizations have to manage many variables, including unique requests, challenging environments, and differing levels of employee motivation. Still, companies can improve the productivity of their services by reducing the demand for service work, assigning the least costly resources to tasks, and boosting labor output. Contrary to many executives fears, improving productivity in these ways usually raises rather than lowers customer satisfaction.

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Improving productivity in product services

Travis Fagan, Eric Harmon, and Timothy Lukes

As the service element of a business grows,

by meeting a common goal of companies and their customers: fewer problems and repairs. When companies identify and correct the conditions that make service necessary, both sides win. By looking closely at the sources of failure and finding ways to address them, product companies can reduce services costs by 10 to 25 percent while maintaining or increasing customer satisfaction. Successful companies do so by reducing the amount of work they do, channeling work to the least costly resources, and improving employee productivity.

product companies struggle to make these services more productive. Most product-based services depend on call center agents who answer questions from customers or on field service agents who maintain and repair equipment at customer sites.1 Achieving the desired productivity gains is challenging for several reasons. First, executives tend to rely on improvement approaches that have worked in product businessesfor example, Six Sigma or lean. These models fail in services, not because the theory doesnt applywho could argue with reducing waste?but because they are often applied to only part of a service process (rather than across the complete chain of events that make up the service) or because they dont account for the inherent variability in services. Every service call differs at least slightly from the one before, bringing into play a particular set of personalities, problems, and environments. As a result, defining standard processes and setting benchmarks can seem problematic. Its even harder to standardize the behavior of employees, since each of them brings different capabilities and motivations to the task.

The productivity problem in services

When manufacturers set out to improve productivity, they typically have the benefit of working with a consistent process in a stable and controllable environment. But the inherent variability of services makes it difficult even to measure productivity, much less to improve it. Nevertheless, companies can improve the way they measure the performance of services if they follow a few principles, such as benchmarking themselves against past levels of performance, identifying the root causes of expenses, taking measurements at the level of individual tasks, and calibrating costs across departments and functions.2 Improving productivity follows the same principles

A second reason for the difficulty of improving performance in services is that executives often think they must deliver the same service at a lower cost. Instead, they should take a broader view of processes and find ways to do less work by managing demand. Finally, companies sometimes handicap themselves because they worry that reducing costs will hurt customer satisfaction. In fact, when managed correctly, improved delivery increases satisfaction

as measuring it. For example, if executives measure costs across departments and functions, they can identify and correct cases where one department passes its costs to another, thereby improving its own numbers. Consider a call center where customer support agents direct difficult jobs to field teams in order to keep the centers average call time low. Since a field service call costs much more than a phone call, the company as a whole would be better served if the call center agents spent more time resolving issues.

This article focuses primarily on the service businesses of product companies rather than on pure services organizations (such as insurance or banking) or on industries that rely heavily on information technology, with much lighter human support (such as payroll processing). However, many of the same principles apply to all such companies as well. 2 Eric Harmon, Scott C. Hensel, and Timothy E. Lukes, Measuring performance in services, The McKinsey Quarterly, 2006 Number 1, pp. 309.

Improving productivity in product services

Another challenge stems from the nature of service contracts, which often specify levels (for example, 98 percent on-time delivery for a logistics contract) and impose hefty penalties when service dips below them. Fear of missing those marks can lead providers to staff up beyond optimal levels, and the cost of overstaffing is often higher than the penalty for failing to meet the contracted service level. Furthermore, exceeding requirements for one customer can generate a tendency to overdeliver for others as well. A services provider therefore may want to renegotiate contracts that lead to overstaffing, explaining to clients that such an arrangement raises costs for them too. In view of the fundamental challenges in services environments, improving productivity requires managers to reexamine service delivery processes from both a broad perspective and a granular one. Applying the broad perspective, managers should look at processes from one end to the otherfor example, from customer complaints all the way back to product design. The detailed focus seeks to identify the true source of a problem that causes work rather than merely targeting secondary issues.

capabilities for printing labels and verifying addresses online. Even reprinting and confirming handwritten addresses when a package is picked up turned out to be more efficient than allowing it to proceed with a bad address all the way to the delivery driver. Another problem, often more insidious, can result from measuring and evaluating productivity in each silo independentlya practice that allows each unit to meet its targets even if doing so makes the overall process unprofitable. In the earlier call center case, for example, success in meeting one units metrics actually raised costs for the organization as a whole. At both the call center and the package delivery company, the solution required coordination across several units to create a lasting, systemic fix that improved productivity throughout the whole process.

Focus on the biggest productivity drains

Productivity efforts often target the processes that generate the most complaints from staff and customersthe squeaky wheel getting the oil. But in many cases, less visible problems cost more time and money. One medical-device manufacturer had released a new piece of equipment that managers viewed as its most profitable product. But some months later, in a review of service calls, the company discovered that this machine required so much maintenance that it was actually losing money in more than half of its installations. The company had to renegotiate its service contracts and, in some cases, to remove the machine from customer sites. All efforts to improve the productivity of services should begin with this sort of detailed look at how time is actually spent, for estimates are often at odds with reality. Employees tend to complain about long and arduous incidents that occur once a month, while shrugging away the ten-minute ones that occur a dozen times a day. At an industrial-equipment provider, a complicated piece of equipment was legendary

Take an end-to-end perspective

Because processes flow from one department to another, companies need to look at an entire chain of events, especially the handoffs across silos. That broader view allows executives to make meaningful process changes rather than mere departmental fixes. Consider the case of a package delivery service, which discovered that its handwritten address labels were creating enormous waste. Drivers struggled to decode illegible scrawls and frequently had to return packages to senders. The standard fix within the business unit was for drivers to call the sender or a dispatcher before wasting too much time on a difficult delivery, but these calls couldnt always resolve the issue. An end-to-end process review came up with a better solution: reduce the number of handwritten addresses at the start of the process by establishing better Web

Improving productivity in product services

among field engineers for its difficult installation and maintenance procedures. However, a closer look at the way the field force spent its time revealed that the equipment had such a small installed base that its maintenance had little impact on the companys overall cost structure. Instead, the company found it could generate much bigger productivity gains by making minor improvements to more common installation, repair, maintenance, and documentation processes. Process-improvement teams should segment processes into smaller activities and look closely at equipment by considering the reliability of each component. With this information in hand, the teams can identify how much time each activity takes and uncover opportunities to make processes more efficient.

service team worked with product developers to build a more reliable component. The developers also designed a temporary fix that switched installed equipment over to a duplicate component if the first one failed, so that service technicians needed to make repairs less frequently. The costs of better components and duplicate systems were more than offset by the savings on service calls. Other companies have invested in systems that help to diagnose and fix problems remotely. In all of these cases, companies may need to invest in a more formal program to incorporate feedback from customer-facing staff into the product design cycle. Another key to reducing work is preventive maintenance. The medical-device company in the earlier example discovered that one territory recorded 20 percent fewer incidents than the average. An investigation revealed that the field agent there took a more proactive approach, servicing all the companys devices whenever he was called in to repair any one of them. By adopting this best practice for all service requests, the company saved more than $1 million in incident calls during the first year. Companies should also encourage customers

Improving service productivity

After identifying the root causes of work and the time required to perform it, executives should focus on three categories of improvement opportunities: limiting the need for work (except where companies can charge directly for it), carrying out work with the least expensive resources, and boosting labor productivity.

Manage demand for services

Managers know that if they can reduce the need for service calls or customer support not covered in service plans, they can lower costs while maintaining customer satisfaction. Efficiency teams earn their keep by finding ways to eliminate paperwork and remove unnecessary process steps, but bigger gains come from simplifying or eliminating work altogether. Many companies keep a running list of the 10 or 20 incidents that create the greatest demand for services (by frequency and the time needed to resolve) and then focus on ways to prevent them. The best way to do so is to improve the design of products in order to make them more reliable, easier to fix, or both. After one industrialequipment manufacturer identified a particular part as the biggest driver of repair work, its field

to troubleshoot and fix their own problems by modifying product design, training, and support, as well as by setting up mild barriers to free service. Many companies offer troubleshooting tips on their Web sites, but customer education should go further, especially in enterprise situations. A company that sells security products realized that many of its service calls resulted from mistakes made by customers during the first month of use. The company set up a training team that showed up after installations and taught customers how to use equipment properly and to make their own simple repairs. Customer satisfaction rose while the need for service calls dropped. Other situations call for a less formal process; a call center agent, for example, might teach a PC owner how to add a printer connection, in hopes that the user will do so independently in the future.

Improving productivity in product services

In some cases, mild barriers to requesting service can encourage customers to look for their own answers before picking up the phone. Certain computer and consumer electronics manufacturers, for example, offer customers one free service call before charging them as an incentive to work through easy questions themselves or to use online support options. Finally, companies must avoid the tendency to deliver more service than a contract specifies. Sometimes technicians dont know the scope of a warranty or contract, and a business may view certain customers as so strategically important that it delivers too much in hopes of retaining them. A clear understanding of the costs of overdelivery, as well as open communication between customer and provider about these costs, can help companies avoid that trap.

(and lower-cost) labor where possible, reserving more experienced talent for tougher tasks. This approach may mean segmenting a task into highly skilled work (for example, diagnosing the problem) and lower-skilled follow-up tasks (a routine repair once the problem has been identified). When a technology services company improved the training of low-cost call center agents so that they could take on more of its workload, they began to handle 80 percent of the calls that previously had been routed to more highly skilled (and highly paid) staff.

Manage individual productivity

Managing the productivity of individuals is a key to improving the productivity of services. Lean, Six Sigma, and other improvement programs developed in manufacturing can be helpful in a services environment, since they share the same goals: eliminating waste and increasing efficiency. Our experience suggests that three areas stand out as especially important, no matter what productivity program a company chooses to employ. Use labor efficiently. Poor planning and lax oversight can mean that field technicians spend just 20 percent of their time on actual service tasks and call center agents spend less than half of their working day on the phone with customers. A business can raise these percentages by studying how its service people work and the ways in which they can become more productive. These efforts should focus on streamlining or eliminating tasks that take time away from providing service. Field reps, for example, can handle more service calls each day if their routes are carefully planned and their trucks have the right tools and supplies. A cable installer found that its technicians could do three jobs a day instead of two if they prepared the day before, during the last hour of the afternoon, when too little time remained to begin a new job. Sometimes low productivity stems from structural problems, including a tendency for companies to staff up during their busy times, leaving them with idle hands when service demands ease.

Use the least expensive option

One of the most common ways to reduce labor costs is the offshoring of jobs to lower-cost regions. This approach is not always feasible for product services operations, howeverand its not even an option if a field call is required. But companies can keep labor costs in line with productivity goals in other ways as well. First, businesses shouldnt pass tasks to more expensive resources if less costly ones can do the job. In practice, it may mean handling as many calls as possible automatically (for example, with voice recognition or menu systems) before routing calls to a customer service agent, as well as resolving as many issues as possible over the phone before
Targeted investments in new technologies can help reduce call center costs. See Using IT to boost call-center performance, on mckinseyquarterly.com.

sending out field technicians. A call centers performance shouldnt be

judged only by the average handling time, since this metric creates an incentive to pass difficult tasks to the field unit. Companies should also consider costs passed from one unit to another. Second, companies should use lower-skilled

Improving productivity in product services

Companies can make more-informed decisions about their labor investments if they collect better data about how many technicians are required to handle an account base. At peak times, they can often meet the higher demand by having employees work overtime and by adding thirdparty partners. Standardize environments and tasks. Some variability is unavoidable in service tasks, but companies can make it more manageable by standardizing where possible. Businesses can set up standard tool kits for service technicians, for example, and give all call center agents the same kind of workstation, so it is easier to shift people where they are needed without having to retrain them. Processes should be scripted whenever possible, since standard routines minimize errors and reduce times for service calls by as much as 30 percent. Perhaps most important, services businesses must find ways to limit customized requests. Wellintentioned sales and service personnel often agree to address them, but across an organization they can add up to a major productivity drain. Companies should offer a limited service menu that includes the most common requests and train service personnel to refrain from performing extra work that doesnt fit within a billable model. Measure work group performance. Many businesses measure performance at the unit level, but the most productive ones measure work groups or even individuals because a finer-grained analysis can yield information that helps companies perform better. 3 Consider the experience of a high-tech manufacturer with a well-known commitment to customer service. The company found that the maintenance and repair costs of its installed base were outstripping its sales margins. It had tried to rein in these costs,

but service teams had convinced management that every call was different and that reducing costs would damage customer satisfaction. The company had numbers on its services units, but the performance of individuals was a black box. To overcome this problem, the company reviewed its service calls over the previous six months to come up with average times for all of its tasks. It then used these benchmarks not only to compare performance across regions or countries but also to see how well individual technicians performed each task, thereby identifying which of them excelled at some tasks and which were generally poor performers. The former group got specific training; the latter were paired with successful agents or let go. After 18 months of a global rollout, the companys service productivity improved by 16 percent even though the number of total incidents rose by 28 percent over that time. The same field force handled the increased workload without allowing service levels to dip.

The key to improving productivity in product services lies in changing the mind-set that such jobs are impossible to measure and manage. Variability is inevitable, but companies can strive to find benchmarks, reduce waste, make the best use of resources, and bring costs under control. And contrary to the warnings of many sales and service agents, these efforts shouldnt hurt customer satisfaction. Admittedly, not every action to raise productivity directly improves customer service, but many do enhance both the bottom line and the potential for new business.

Travis Fagan and Eric Harmon are principals in McKinseys Dallas office, and Tim Lukes is an associate

principal in the Miami office. Copyright 2007 McKinsey & Company. All rights reserved.

Metrics on individuals are preferable, but work group analysis must suffice when each individuals efforts cant be separated from those of the team.