19Sep

Can an Organization be a Cost-Leader and Quality Leader at the Same Time?

Guest article by Jochen Wirtz

Actually yes, Cost-Effective Service Excellence is Doable!

Service excellence and cost effectiveness are seen to be in conflict, yet there are organizations that achieve both.  What do these great organizations have in common: Google, Amazon, USAA, Vanguard, Singapore Airlines, JetBlue and Narayana Health?  Believe or not, but they all are among the leaders in their respective industries in terms of both productivity and customer satisfaction!  That is, they are one of the top quality service providers and at the same time they have the highest labor productivity and lowest unit costs in their industry.  We termed this Cost-Effective Service Excellence (or “CESE” for short). How did these organizations achieve this?

Analyzing how 10 CESE organizations did it, Valarie Zeithaml and I identified three core strategies these organizations followed.  The 10 organizations and the strategies they pursued are shown in Figure 1.

Figure 1: CESE strategies pursued by sample organizations

Source: Wirtz and Zeithaml, 2017

Dual Culture Strategy

First, a dual culture strategy provides a comprehensive set of high quality services at low cost. The dual culture strategy is akin to ambidextrous organizational approaches in the management literature with a focus on leadership ambidexterity and contextual ambidexterity (but not much structural ambidexterity).  One factor common to all these firms is a dual culture strategy, taking an ambidextrous approach to business challenges and embracing – rather than avoiding – what others might see as contradictions.

The organizations in our sample that successfully achieved the dual culture strategy combined an intense focus on costs with equally passionate customer centricity and focus on service excellence. Specifically, they showed an extreme deployment of generic productivity strategies and tools that allowed them to minimize the gap between actual and potential efficiency while delivering service excellence.

For example, Singapore Airlines (SIA) cabin crew undergo some of the most rigorous service training in the industry, instilling a business culture that is exceptionally customer-centric. As a result it is regularly voted one of the best airlines in the world. Yet it is also one of the most obsessively cost conscious and at SIA – apart from issues of safety and security – no cost is too small to reduce.

Company leaders, internal communications and training continuously emphasize that profit is a function both of service excellence and costs. Staff are taught that anything that touches the customer must ooze SIA’s premium positioning, whereas everything behind the scenes is subject to extreme cost control.

At Amazon, for example, customer obsession and frugality are core values. The firm’s CEO, Jeff Bezos, is known for his passion for putting the needs of its customers first, demanding employees chase solutions to any customer complaint that comes his way. At the same time, he role-models and communicates frugality on anything that does not add value to customers.   Amazon actively avoids spending money on things that don’t matter to customers. “Frugality breeds resourcefulness, self-sufficiency, and invention,” Amazon’s leadership principles state.

At Narayana Health, Dr. Devi Shetty, the group’s founder and chairman, once explained to me that “the notion that ‘if you want quality, you have to pay for it’ went out the window a long time ago”.. His senior employees receive daily text messages detailing the group’s expenses, maintaining focus on keeping costs low and driving ideas for savings and process improvements.

Narayana Health has an intense focus on cardiac surgery quality and success rates. Yet surgeons also constantly compare ideas on how to cut costs, such as through the routine sterilization and reuse of medical devices that were sold as single-use products. Another cost saving step involved redesigning the processes before and after surgery to allow operating theatres to be used for 20 hours a day.

Chef Davide Oldani, founder and head chef of Ristorante D’O in northern Italy, is passionate about making the Michelin-starred restaurant accessible to a broad audience through low prices and repeatedly communicates this to key stakeholders. To reduce costs Oldani introduced multi-tasking, cutting the need for wait staff by having chefs serving the food. He chose less fragile glasses and plates to cut replacement costs and opted to locate his restaurant in a low rent area 20 km from the city, running at 100% capacity for all lunch and dinner shifts to reduce unit costs.

Furthermore, the dual culture approach in our case organizations required a rationale employees could buy into as it seemed counterintuitive to offer great service externally, but be stingy internally. That is, employees need a credible rallying cry concerning why cost-effectiveness is critical in addition to service excellence.  The organizations in our study did this by emphasizing various rationales. These include: a mission to provide the best customer value (Amazon); recognition that they operate in a hyper-competitive industry (SIA); making Michelin-starred food affordable (Ristorante D’O); and supporting a charitable cause (Narayana Health).

See Tables 1 and 2 for examples of dual culture strategies in our sample organizations

Table 1: Example of a Dual Culture Strategy: Singapore Airlines

CESE Strategy Findings
Dual Culture Strategy
  • Internalized a dual culture of service excellence and cost-effectiveness
  • Role modeling by management; cost-emphasis and frugality permeated all levels of management.
  • Extreme focus on cost cutting and productivity due to the intense competitiveness of the airline industry. This cost consciousness, as a cultural value, was visible not only when dealing with suppliers and operating aircraft but was also engrained in every employee.
  • Powerful reward and incentive systems that drove both objectives. Employees received the same annual bonus of a multiple of their monthly salary. That bonus was hardwired to the annual profit of the organization and had reached up to six months of salary; during quarters of operating losses, the base pay could be cut by up to 20%. Therefore, employees were intensely focused on the profitability of the airline.
  • Internal communications and training continuously emphasized that profit is a function of service excellence (which drives revenues through the loyalty of demanding business travelers who are SIA’s most valuable customers and core target segment) and costs (which is the other side of the profit equation). As a result, SIA’s employees had internalized that anything that touches the customer must be consistent with SIA’s premium positioning, whereas everything behind the line of visibility was subject to extreme cost control.
  • SIA was highly disciplined in prioritizing routes and customer segments. It put its best and newest inflight products on the most competitive routes such Singapore to London and shifted its older planes (they are still new by industry standards) to less competitive routes such as Singapore to Delhi. It tiered its customers to channel priority towards more important customer segments and to deliver excellence as defined by the different segments.
  • Employees were trained to integrate conflicting decisions on when to emphasize service excellence and when to emphasize cost-effectiveness.

Source: Web Appendix for Wirtz and Zeithaml, 2017

Table 2: Example of a Dual Culture Strategy: Amazon

CESE Strategy Findings
Dual Culture Strategy
  • Amazon had a strong customer centric culture and push for service excellence, while it was at the same time extremely cost-conscious. The rationale for its dual culture was to be able to bring service excellence and the lowest possible prices to its customers.
  • Role modeling by top management; Jeff Bezos, founder and CEO of Amazon, was known for frugality and for not spending on anything that did not matter to customers. He was at the same time extremely customer centric and infamous for becoming enraged when individual customers complained, requiring that anxious employees found solutions immediately.
  • Amazon’s sacrosanct leadership principles encompassed frugality: “We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency, and invention. There are no extra points for headcount, budget size or fixed expenses”.
  • Examples of Amazon’s extreme cost-consciousness include (1) minimized employee compensation and it designed bonuses to be back loaded to extend employee tenure; (2) provided low-cost stored value cards for public transport to avoid subsidizing parking; (3) did not subsidize food and made only vending machines available; (4) provided new workers with only minimal materials which had to be returned upon resignation; (5) all employees flew economy class; (6) used cheap blond-wood door-desks as conference room tables.
OM Approaches to Reduce Process Variability
  • Amazon’s business model was built on the Internet with a high focus on SSTs (incl. for search, selection, payment, account management, and reviews) which were facilitated by modular services (i.e., highly structured processes with a few, clear options), a minimal front office (mostly its website, but it also opened a few highly automated retail shops and self-service lockers for pick-up and returns) with an almost completely buffered back-office that can run highly efficient fulfilment services that were increasingly automated.

Source: Web Appendix for Wirtz and Zeithaml, 2017

Operations Management (OM) Approach

Second, an OM approach reduces process variability and thereby allows the increased use of systems and technology to achieve CESE.  Organizations that pursued an OM approach included Amazon, Vanguard, Google and USAA.  See Tables 3 and 4 for examples.

The OM approach addresses the root causes of inefficiencies in service processes through OM approaches that reduce customer-induced variability and thereby reduce potential conflicts between productivity and service excellence. Unlike a pure dual culture approach, these OM approaches typically require some degree of change in the customer interface. They include (1) isolating and industrializing the back office, and reducing the front office, (2) modularization of service, and (3) self-service technologies (SSTs).

Table 3: Example of an OM Approaches: National Library Board

CESE Strategy Findings
OM Approaches to Reduce Process Variability
  • NLB needed to scale up its membership and reach to drive life-long learning in Singapore but had a limited budget. To achieve its mission it pursued a strategy of service excellence while using technology to contain costs and achieve scalability. It recruited the former CEO of the National Computer Board in Singapore to drive the library automation to increase speed, and streamline and improve service while increasing productivity.
  • Groundbreaking innovation and deployment of technology in both the back and front office that often simultaneously drove service excellence (e.g., reduced waiting times, improved availability of titles, and enhanced convenience) and efficiency (e.g., RFID-enabled smart shelves reported mis-shelved books; robots that scanned and shelved books). NLB was a globally leading library in SST deployment (e.g., it was the first library to implement RFID to automate check-out, returns, sorting; it used an app-based self-service locker reservation system; had library branches where all customer-service processes were SST-enabled and that operated entirely without customer-facing employees).
  • Related to SSTs, NLB made heavy use of crowdsourcing, peer-to-peer, and community/volunteer-delivered services (e.g., its Citizen Archivist Project used crowdsourcing to caption and transcribe 15,000 photographs and documents in 2015), enabled through NLB’s ability to creating a sense of community.
  • Deployment of technology and SSTs were enabled through process redesign that included streamlining, simplification, buffering of front-office activities from the back-office (e.g., book drops, and RFID-enabled dropping off books into mailboxes of Singapore Post, auto-sorting systems, robot-assisted shelf-reading), and modularization of service (e.g., payments were only accepted through a low-fee cashless system).
  • NLB’s culture made innovation everyone’s job, and it was driven by ad hoc cross-functional teams and not by specialized teams.

Source: Web Appendix for Wirtz and Zeithaml, 2017

Table 4: Example of an OM Approaches: Google

CESE Strategy Findings
OM Approaches to Reduce Process Variability
  • Most products were designed to be “stand-alone” to avoid complexity for developers and users, which Google also called its “Swiss Army Knife” approach.
  • Extreme focus on scalable solutions that delivered excellent user experiences and were facilitated through SSTs.  Even revenue-generating service interactions and transactions were largely automated and delivered through SST whereby the typical Google advertiser has no contact with a Google employee.
  • Service related to problem resolution was mostly offered through SSTs and SST platforms that were either provided by Google or facilitated by it; they included online help tools, webmaster tools, webmaster videos, forums, blogs and other forms of support provided by online user communities.

Source: Web Appendix for Wirtz and Zeithaml, 2017

The Focused Service Factory Strategy

Finally, the focused service factory strategy can enable CESE through a highly specialized operation, typically delivering a single type of service to a highly focused customer segment. That is, the focused service factory features tightly-defined and industrialized service processes targeted at a highly homogeneous customer base. As a result, the focused service factory delivers reliably exactly what its target customers want. It also reduces customer-induced variability to a minimum—customers tend to receive a single, highly standardized, and excellent service offering. See Tables 5 for an example.

Interestingly, the three strategies can be applied in isolation or in certain combinations, where by each strategy can be pursued alone, or the OM and focused service factory strategies can be pursued in combination with the dual culture strategy (see Figure 1).

Table 5: Example of a Service Factory Strategy: Narayana Health

CESE Strategy Findings
Dual Culture Strategy
  • Extreme focus on surgery quality; focused on success rates and innovation (e.g., pioneered “beating open heart surgery”.
  • Extremely cost conscious culture, e.g., (1) doctors and senior administrators received a daily SMS detailing the previous day’s expenses to keep them conscious of the need to keep costs down. It is aimed to induce prudence as they could see how their decisions about which medicines, supplies, or tests to use affected the cost of treating patients. It also motivated employees to suggest ideas for cost savings and process improvements; (2) doctors received comparative performance data for their own hospital and 21 others in the group, which encouraged them to share best practices; (3) routinely reused medical devices sold as single-use products, such as $160 steel clamps employed during beating-heart surgeries, which were sterilized and reused 50 to 80 times; (4) maximized utilization of equipment and operating theatres, the latter were used for surgeries 20 hours a day, four hours were needed for cleaning; (5) centralized surgeries in a few hospitals at larger facilities as volume allowed high utilization, low unit costs, and learning and innovation; (6) drove a hard bargain with suppliers, esp. for equipment and consumables; had strong bargaining power as its biggest two hospitals performed about 12% of India’s open heart surgeries; (7) its new hospital in Mysore, India, was built on a $7 million budget, the lowest for a super-specialty hospital in India due to smart design.
  • Senior leadership walked the talk and communicated the extreme cost consciousness internally as a mission to bring advanced healthcare to the poorest of India by keeping prices low (wealthier patients cross-subsidized poor patients, and low overall costs allowed a wider coverage).
Focused Service Factory
  • Focused on open-heart surgery which allowed the hospital to production-line and industrialize the procedure; it decided against building a general hospital that intertwined many service processes and patient segments, and therefore would have been incredibly complex and expensive, and would not have had the same quality output.
  • Encouraged general physicians to become specialists, and specialists to become super-specialists; trained nurses to advance to higher-skilled positions of nurse intensivist, akin to nurse practitioners in the US.

Source: Web Appendix for Wirtz and Zeithaml, 2017

Conceptual Framework and Key Take-Aways

Service excellence and cost effectiveness are perceived to be in conflict, yet there are organizations that achieve both. Organizations that successfully pursue a dual strategy have been shown to outperform their peers.  It is suggested that competitive pressures make it critical to take the management of such contradictions and paradoxes seriously. In particular, sustained performance occurs through attending to and dealing with strategic contradictions. Based on an integration of literature and case examples, we propose that the successful management of service excellence and cost-effectiveness is a contradiction that can be achieved as is outlined in the conceptual framework in Figure 2. This framework provides an integrated view on the strategic options organizations have when aiming to pursue a strategy of CESE.

Figure 2:  Three Strategic Approaches to Achieving Cost-Effective Service Excellence (CESE)

Source: Wirtz and Zeithaml, 2017

Furthermore, many leaders pursue strategies to improve customer satisfaction (service quality) and cost-effectiveness/productivity at the same time. At the moment there are no clear guidelines on how they can do this without creating conflicts between these two objectives.  The so what of this research is that it helps managers to think about how to go about improving productivity while also increasing or maintaining service excellence.  It provides three clear strategies to do so and allows managers to develop their own strategic approach to CESE and then to clearly articulate how they will achieve cost-effective service excellence.

The level of variability in customer service processes and resulting business models seems to be a strategic decision. If a business model keeps variability high, it requires an extraordinary effort to achieve CESE largely through leadership ambidexterity and contextual ambidexterity to successfully execute a dual culture strategy. Alternatively, variability can be reduced either on the process-side through OM approaches, or on the customer-input side through the focused service factory strategy. These alternatives imply very different business models with different value propositions and customer segments.

Even within a given business model, service firms need to be intensely aware of the cost implications of providing options, flexibility, customization, and added products and features offered to their customers. Complexity and uncertainty grow exponentially and reduce the level of potential productivity while making it more and more difficult to deliver service excellence. Therefore, it is an important and strategic decision how much variability a business model should contain, and if OM strategies and tools are pursued, how variability should be reduced while aiming to delight customers.

The focused service factory model offers many interesting business opportunities in both the offline world as well as the online world where services are increasingly delivered through apps on smartphones. Such focused service factories typically combine smart processes and new technologies that provide tailored solutions for well-defined problems and narrowly defined customer segments. For example, in healthcare, Narayana Health decided against building a general hospital that intertwined many service processes and patient segments and therefore would have been incredibly complex and expensive without the same quality output. The principle is simple: a specialist who only delivers a single product to a single segment will be faster and better than the generalist who must cater to a wide range of customer needs.

Finally, rapidly developing technologies that become better, smarter, smaller, and cheaper (e.g., geo-tagging, robotics, drones, virtual reality, speech recognition, the Internet of Things, and artificial intelligence) will transform virtually all service sectors, and bring opportunities for a wide range of service innovations that have the potential to dramatically improve the customer experience, service quality and productivity all at the same time. The framework developed in this research offers a strategic lens through which these new services can be viewed and approached.

Empirical evidence suggests that once companies successfully achieve a dual strategy of CESE, they reap the highest long-term financial return compared to organizations that focus on either customer satisfaction or productivity alone. CESE is clearly highly desirable, but very difficult to achieve.  Our paper provides three strategic avenues managers can achieve CESE.

The Full Article is Published “Online First” in the Journal of the Academy of Marketing Science; it is open-access which means it can be used for teaching, sharing without copy right payments:

Let me know if you are familiar with other organizations that are among the leading organizations in their respective industries in terms of both service excellence and productivity.  I’d love to hear from you!

Jochen Wirtz
Vice Dean of Graduate Studies and Professor of Marketing
NUS Business School, National University of Singapore

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