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MANAGEMENT AND ACCOUNTING

KPI FRAMEWORK FOR

Superior Services
By Patrick PC Ow

Services are more difficult to measure than production lines. It is more difficult
to control and measure the workflow and provision of a service because it is
harder to pin down exactly how individual customers or clients will react
during service delivery, given a set of expectations and promises.

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KPI Framework for Superior Services

There are three categories of services: vice firms. As services are intangible, measurements are always
䡲 Professional services (e.g. auditing, consulting, external reporting); open to interpretation or challenged. Unfortunately, ‘hard’ finan-
cial measures tend to drive out ‘soft’ measures of excellent cus-
䡲 Trade services; and
tomer service. We need to be more patient when it comes to see-
䡲 Transactional services. ing investments in intangibles pay off.
We need to understand the nature of these services before ob- In order to understand what and how to measure a service, we
jectively measuring and subsequently rewarding their performance. need to understand the characteristics of our service and its de-
Services differ from the production of goods in four key ways: livery, based on the following service dimensions:
䡲 Intangibility — Services are not objects. Goods, the outputs of 䡲 Level of customisation.
manufacturing, are physical objects. We can touch and feel them. 䡲 Front office versus back of fice focus.
Measuring services requires clear definitions of intangible fac- 䡲 Customer contact time required.
tors like helpfulness of your staff or the feeling you get when 䡲 People versus technology focus.
you wait too long in a queue at the bank. Generally, it is based 䡲 Discretion available to staff.
on promised ser vice levels.
䡲 Product/process focus.
䡲 Heterogeneity — Most services are people-to-people transactions. Professional services are generally high-contact services where
It makes it hard or challenging to deliver the same high quality customers spend considerable time in our service process. There
consistently from the same employee day after day, especially are high levels of customisation, and the service process is tai-
over long periods. lored or customised to meet the needs and requirements of indi-
䡲 Simultaneity — Production and consumption of services occur vidual customers.
simultaneously (e.g. having a haircut). Therefore, most services Staff require significant discretion and professional judgement
cannot be adequately inspected (or counted) prior to their de- and human courtesy. The ratio of staff to customers is relatively
livery or consumption. Thus, the customer becomes an inte- high, with a significant emphasis on how the service is delivered.
gral part of the service process. Services are managed through short chains of command, profes-
䡲 Perishability — You cannot store them for later use or have sional development training and shared values.
them inventoried to cope with fluctuations in demand (e.g. ho- A comparison is shown in the table below.
tel rooms, or seats on an airplane). It is an opportunity loss.
Characteristics Professional Trade Transactional
Unlike many goods, services are perishable. Services Services Services
These four key differences between services and manufactur- Level of
ing pose a unique set of problems for the collection of data to customisation High Some Low

measure service effectiveness. Without effective measurement, Front office versus


we are unable to objectively reward good employee performance back office focus Front office focus Mixed Back office focus

(financially/non-financial) and most of all, retain good perform- Customer contact


time required High Varies Low
ers within the organisation (talent management).
Align all service measures to organisational strategy. We need People versus
People focus Both Technology focus
technology focus
to clarify the strategy to those who have to implement it (e.g. our
staff or people). Service measures must make our strategy real Discretion
High Some Low
available to staff
and implementable.
Front line employees must have a clear “line-of-sight” of what Product/process
Process focus Both Product focus
focus
the strategy is and how to execute them. Having a well-written strat-
egy is pointless, if no one understands it or cannot implement it. We need to objectively measure five properties of service per-
This is particularly important to professional service firms because formance, which are as follows:
most of the time, front-line people deliver services, not machines. 1 Service utilisation.
If a professional firm has strategies in place to build stronger 2 Service quality.
relationships with its customers in order to give them greater
3 Service flexibility.
benefits, then it should be putting a lot of effort into measuring
service quality and customer outcomes. 4 Service innovation.
Financial measures, particularly budgets, have their rightful 5 Cost per occasion of service.
place in corporate reporting systems. In most cases, unfortunately, Firstly, service utilisation measures the level of service activity
we over-emphasise financial measures to the exclusion of key non- relative to the total potential demand for that service, usually ex-
financial service measures, ruling out investing in intangible ser- pressed as a percentage. If the total demand is unknown, service
vice quality, innovation and flexibility, which would have longer- utilisation is the level of service activity. This relates to the num-
term and direct beneficial effects on customer delivery and ex- ber of people we need to employ to fill the potential demand.
pectations. The balanced scorecard tool seeks to address this. The customer is the ultimate judge of the service quality (of our
These concerns have particular relevance for professional ser- professional service). It is the way and environment in which the

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KPI Framework for Superior Services

service is delivered. Some firms seem to be run under the principle 䡲 % service availability in terms of spare capacity.
of causing as little inconvenience as possible to staff (for fear of los- 䡲 Mix of staff availability (% part-time staff, casuals, contractors).
ing them), and as much inconvenience as possible to the customer.
Delivery speed flexibility determines how well our service pro-
Other firms seem to deliver their services with as little irrita-
cess meets our customers’ requirements in terms of speed of re-
tion to the customer as is possible. Measuring service quality is
sponse and time taken for serving our customer. It is the through-
important because it can pinpoint those aspects of the service
put time per customer. For example, it measures the following:
that need most attention, and correction and it can be a point of
competitive differentiation and revenue generation. 䡲 % service facilities (e.g. beds in hospital ward) allocated for emer-
External measures of service quality measure the things that gencies.
matter most to the customer, and they are as follows: 䡲 Speed of response (e.g. average time to answer calls).
䡲 Reliability — Your staff call your customer back as promised, 䡲 Customer waiting time.
or are punctual for meetings. They are dependable and deliver 䡲 Days taken to process enquires.
the ser vice as per schedule or as promised. 䡲 % late deliveries/services not meeting standards.
䡲 Accessibility — Convenience of location, or opening hours. Specification flexibility determines how well our service process
Customers having access to your staff for important professional meets the different needs of different customers, especially from a
advice, especially after office hours. different industry or organisational size. Larger customers in a
䡲 Tangibles — The look and feel of the service environment. This unique industry expect complex service effort and high expertise.
may not be that relevant for professional firms as most delivery One of the major issues with specification flexibility is match-
would be in their customers’ offices. ing the technical and interpersonal skills of our staff, supported
䡲 Empathy — Courtesy, friendliness and helpfulness, and under- by appropriate information systems (if any), to the needs of indi-
standing the customers’ needs or requirements. vidual customers.
Here, professional services have the greatest degree of specifi-
䡲 Responsiveness — Response time, speed of delivery and solu-
tion match customer needs and expectations. This includes cation flexibility and it has to be managed appropriately for supe-
meeting regulatory or external deadlines and submissions to rior customer performance and competitive advantage. For ex-
ample, it measures the following:
regulators or third parties.
䡲 % time (or payroll) spent on training (e.g. professional development).
Thirdly, service flexibility is the ability of the service process to
䡲 Customer satisfaction in adapting to changed or special require-
adapt to change. The demand for services depends on the nature
ments.
of business, industry, agreed service levels and seasons. For ex-
䡲 Number of different products and services delivered and cus-
ample, audit peak periods are after 31 December, or changes in
tomer satisfaction thereof.
financial reporting requirements (e.g. IFRS).
Fourthly, service innovation is the application of new ideas and
Our challenge is to be sufficiently flexible and have enough
knowledge to bring about some business and competitive advan-
resources to meet the peaks and changing demands, while on
tage, and customer benefit. In many service firms, because the
other occasions not be wasteful of our limited or scarce resources.
service process includes the customer, many argue that innova-
There are two types of measures that may be relevant:
tion is more natural and on going. This is unlike manufacturing,
䡲 Internal Measures of Service Quality. For example: where new product development tends to be more punctuated.
• Proportion of time spent with customers. Changes in regulatory framework provide opportunities for pro-
• Customer to staff ratios. fessional firms to innovate (e.g. the introduction of goods and ser-
䡲 Proxy Indicators of Service Quality (useful when an organisation vices tax).
does not have the resources to conduct customer surveys). For Generally, the success of an innovation can be categorised as follows:
example:
Benefit Issues
• Customer complaints as a % of occasions of service.
• % of contract cancellations, withdrawals from services. Financial Has the innovation improved our financial
performance?
There are three components of service flexibility:
Competitiveness Has it made our firm more competitive?
䡲 Volume flexibility.
Customer Benefits Has it increased benefits to our customers?
䡲 Delivery speed flexibility.
Quality Has it improved service quality to our
䡲 Specification flexibility. customers?
Volume flexibility determines how well our service process re- Flexibility Has it improved volume, delivery or specification
sponds to changing levels of demand, particularly at different flexibility?
times of the week, month or year. It depends on the optimum Resource Utilisation Resources used more efficiently?
level of infrastructure and resources to meet these variations or
changes in demand. Examples of volume flexibility measures are: There are three ways to measure service innovation.
䡲 Number of lost customers to orders due to failure to meet demand. 䡲 Impact the innovation has on service performance. Improve-

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KPI Framework for Superior Services

ments in our performance either mean There is a positive link between superior enced some service problem or failure
improvements in higher customer out- intangible service and increased financial during the past 12 months (an estimated
comes or increased financial results. Per- outcomes. Conventional managerial wis- 2,400 of the 6,000 total customer base).
formance management frameworks like dom holds that attending to customer sat- 䡲 80 per cent of these policyholders reported
the balanced scorecard are designed to isfaction, value, and loyalty makes good the problem to the company, and 20 per-
measure these results from innovation business sense for at least two reasons: cent did not (1,920 and 480 of the 2,400 hav-
efforts. Attribute meeting targets and im- 䡲 Satisfied customers are likely to continue ing experienced a problem, respectively).
proving budget performance to service to buy from and/or continue to do busi- 䡲 40 per cent of those who contacted the
innovations. Use service innovations to ness with us, while dissatisfied custom- company were ver y satisfied with the
drive improvements in service flexibil- ers are likely to take their business else- company’s response (768 of the 1,920).
ity. This is generally the competitive ad- where. With such a competitive environ- 䡲 35 per cent of those who contacted the
vantage of individual professional firms. ment organisations are working in, cus- company were only partially satisfied
䡲 Measure and monitor the deter- with the company’s response (672 of
minants of success and failure the 1,920).
of any innovation.
䡲 25 per cent of those who contacted
䡲 Innovation process itself. Mea- the company were dissatisfied with the
sure the process for developing company’s response (480 of the 1,920).
service innovations along three 䡲 All of the very satisfied policyhold-
dimensions: ers intend to renew their policies dur-
• Cost — How much did we in- ing the coming year.
vest in a service innovation?
䡲 Five per cent of the partially satis-
• Development time — How long
fied policyholders say they will not
did it take from concept to pro-
renew as a result of their experience
duction?
(34 of the 672 partially satisfied cus-
• Quantity — How active are we?
tomers).
And finally, we have to consider
䡲 40 per cent of the dissatisfied poli-
the total cost of delivering the service
cyholders say they will not renew as
(direct and indirect), including the
a result of their experience (192 of
costs of material, labour and
the 480 dissatisfied customers).
overheads. Every delivery of ser-
䡲 10 per cent of the policyholders
vices to our customers must have a
who experienced a problem, but did
cost/benefit analysis attached to it.
not report the problem to the com-
While we can have the highest or
pany, will not renew as a result of
best service delivery or experience,
their experience (48 of the 480 who
if the cost of delivering such service
did not report the problem).
outweighs the financial revenue po-
tential to be generated, then we Based on the example above, it is
have to review our strategy and projected that 274 customers will not
promises made to our customers. renew their policies (34 partially sat-
tomer retention and relationship man- isfied customers plus 192 dissatisfied cus-
Conduct methods, time and motion stud-
agement becomes more crucial. tomers plus 48 customers not reporting the
ies and activity-based costing methods to
determine the time and resources taken for 䡲 Satisfied customers tell others about problem).
each service process and operation. Once their positive experiences, while dissat- At an average annual value of RM15,000,
this timing and service level is established, isfied customers tell even more people the projected cost of customer dissatisfac-
then only can we adequately determine the about their negative experiences. the tion is RM4,110,000, not counting lost rev-
number of staff and resources required, cost of new customer acquisition is gen- enues/opportunities due to negative word-
and the direct and indirect costs associated erally higher than retaining existing of-mouth communications from dis-
with the provision of the service. Giving a ones. gruntled former policyholders who do not
five-star service does not necessarily trans- Assume therefore that an insurance com- renew their policies! AT
late to superior financial results. pany has 6,000 policyholders, with an aver-
Qualified as an accountant and lawyer, Patrick
Therefore, to deliver superior profes- age annual value of each policy of RM15,000.
PC Ow has keen interest in performance mea-
sional ser vice, we have to measure and Assume also that, based upon a recent sur- surement and the cascading of top-level
manage the five properties of service per- vey of the company’s policyholders: scorecards into personal scorecards. For ex-
change of ideas, he can be contacted via e-mail
formance objectively. 䡲 40 per cent of the policyholders experi- at patrickow@gmail.com.

July 2006 • ACCOUNTANTS TODAY 29

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