To Be or Not to Be…More Productive
Lower productivity can often lead to a better bottom line.
All other things being equal, productivity is good. The problem is,
all other things are not equal. Companies want to show productivity gains, but that
is not always a good strategy.
Automating customer service functions has become a popular strategy to improve
service productivity and cut costs. But too much service productivity can actually
cut into a company’s revenue, according to recent research from Roland Rust, Distinguished
University Professor, David Bruce Smith Chair in Marketing, and executive director
of the Smith School’s Center for Excellence in Service, and Ming-Hui Huang, Distinguished
Faculty Fellow at the Center.
Consider Alaska Airline’s automated check-in system at Anchorage Airport. Though
passengers were initially wary, by 2008, 73 percent of passengers were choosing
to check in using the automated kiosks on the airline’s website. That improved Alaska
Airline’s productivity by 18 percent. It also saved money: it costs the airline
$3.02 cents to use an agent to perform each passenger check-in, while self-service
costs between 14 and 32 cents per check-in. The airline was able to reduce its workforce
by 10 percent and increase its earnings by 25 percent.
But for every success story there is a corresponding cautionary tale. United
Airlines improved its labor productivity by 32 percent, and then received the lowest
customer satisfaction scores in the airline industry for the next three years running.
Its passenger revenues declined 17 percent over the same period, the worst decline
of any US airline.
Rust, with co-author Ming-Hui Huang, National Taiwan University, gathered data
from more than 700 other companies in two time periods across a variety of industries,
including wholesale and retail, information and technical services, finance and
insurance, education and healthcare, and food and recreation.
They found that when prices and profit margins are higher, the most profitable
service productivity levels tend to be lower. Firms in highly competitive industries,
with high prices and profit margins and relatively low wages, should provide higher
levels of “high-touch” service, even at the expense of productivity. In industries
where wages are high, prices and margins are low, and the market isn’t very competitive,
higher productivity—with its correspondingly lower cost—results in a better bottom
line. Each firm’s optimal level of productivity is based on those variables, and
when productivity is too high or too low, profitability suffers.
The tradeoff between service quality and productivity should be considered in
the same light as any strategic variable, says Rust: “Productivity is a strategic
decision. Companies tend to think about the cost side exclusively—“the lower our
costs are, the better our bottom line.” But that ignores the revenue side … customer
satisfaction has a very large impact on revenue.”
Managers should be able to use the model Rust and his co-author created to examine
the effectiveness of their own firms’ productivity levels. All the data from the
study’s empirical analysis are in the public domain, so any firm could replicate
it. By inserting their firm’s own data into the author’s empirical equation, managers
can get a better idea about whether they are over- or under-productive.
Firms of all sizes, across all industries, should carefully consider the strategic
tradeoffs between service productivity and quality, the authors find. But small
companies may need to be even more careful about their productivity strategy than
large companies. Small companies don’t enjoy the same economies of scale as big
firms, so it is difficult for them to compete on cost and price. High-quality customer
service to a niche market can help a smaller business out-compete larger firms that
have a cost advantage.
The results of the study lead to some straightforward recommendations for firms’
productivity strategy. “If you have a small number of customers you have to treat
them really well,” says Rust. “Any defense contractor serving the federal government
understands that. Also, the more money you’re making from each customer, the more
important it is to treat them well. To treat customers well, you place less emphasis
“All other things being equal, productivity is good. The problem is, all other
things are not equal. Companies want to show productivity gains, but that is not
always a good strategy. As technology improves, a higher level of productivity is
justified, but at a given level of technology higher productivity can be counter-productive.”
Large companies have the hardest time finding the optimal level of productivity,
according to Rust and Huang’s research. They have found that on average, large companies
are about 9 percent too productive. Most of these companies, Rust and Huang conclude,
would actually make more money if they were less productive. A side societal benefit
is that decreasing service productivity would also put more people to work, leading
to better economic conditions, which would in turn benefit the society.
“Optimizing Service Productivity” was published in the Journal of Marketing.
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