Guest article by Tor W. Andreassen.

“When the tide goes out, you know who’s been swimming naked!”

When I came to the field of service research in the mid 1990s, Disney, Nordstrom, Southwest airlines, Ritz Carlton hotels, were in the vogue as “best case” examples to learn from. Today they all experience financial difficulties. What happened? 

Three factors come to mind:

  1. Service quality and customer satisfaction is not the only predictors of success.
  2. Technology has enabled new solutions and alternatives.
  3. Covid-19 has changed the rules of the game.

While the pandemic with its impact on mobility, social distancing, and change of social interaction, is a “Black swan” that no one could predict, technology is an area most service researchers and managers has neglected for too long. There are exceptions! 

In hindsight, I will claim that too many researchers got stuck in the traditional human interaction approach to creating, delivering, communicating, and capturing value reflected in “golden service models” like the GAP-model, the Service Pyramid, she Service Profit Chain, etc. They are still relevant in some cases, but they are gradually losing relevance in a digital economy. Let me be more specific.

The video-conferencing firm Zoom, who few had heard of before March 12th, is today worth more than USD50B. That is more than the combined value of most major airline companies like Southwest (14B), Delta (12B), United (6B), Lufthansa (4B), and IAG (4B). In fact, a look at the top 10 most valuable firms in the world, sends a strong message: They are primarily North American platform-based service firms. 

Relative to our “old service heroes”, platform companies are different in three distinct areas.
First, they are asset and employee light enabling them to scale their operations in a matter of seconds, with a marginal increase in costs.
Second, and because they are digital, they can collect vast amount of customer transaction data over time (e.g. search, purchase, logistics, payment) which they feed into advanced algorithms to be analyzed using artificial intelligence (AI) and machine learning (ML).
Third, relative to our “old service heroes”, platform firms have a different mix of employees with less focus on front line employees and more on back office staff. 

Let me use Airbnb as an example. Their market cap by October 2020 is about USD120B, which is 4x the value of Marriott, 6x Hilton, and close to 25x the value of Choice. If you compare number of Airbnb accommodations vs hotel guestrooms, the numbers are staggering: Airbnb 7M compared to Hyatt (0.2M), Wyndham (0.8M), Intercontinental (0.9M), Hilton (1.0M), and Marriott (1.4M). On the employee side, Airbnb’s share of engineering and information technology employees is 19 % compared to for example Hilton Worldwide 3%, and Marriott International 2%. Compared to late August 2019, the amount spent on Airbnb is up 75%. Professor Scott Galloway at Stern predicts that Airbnb will be the world largest actor within hospitality by 2021. 

Service researchers need to respond to the new rules of leadership of service firms.
First, the unrelenting pace of change is a harsh reality that every leader needs to contend with. According to KPMG, 65% of the leaders they interviewed worried about new entrants disrupting industry business models. This calls for research on agility, digital business models, digital innovations, and value creation.
Second, leaders of service firms need to relate to geopolitical risks like trade disputes or civil unrest and how this may impact their business’ bottom line independent of which industry you are in. This calls for a more global perspective on service research and rightly consider North American as a special context.
Third, leaders face the huge challenge of determining what the future of work will look like and what it will mean for their organizations. As service researchers we should focus on the combination of technology and employees with a view to nurture employee well-being.
Finally, firms are expected to help solve important societal issues and their leaders will be held accountable. According to Edelman Trust Barometer, 84% of people expect CEOs to inform conversations and policy debates on one or more pressing social issues, including jobs, the economy, automation, regulation, and globalization.

Today, leaders are expected by their board, employees, customers, and society to follow a set of commitments: deliver value to customers, invest in employees, deal fairly and ethically with suppliers, support communities, generate long-term value for shareholders based on in accordance with United Nation’s sustainability goals. Service research needs to follow suit and provide new insight to this complex and multifaceted service world. A place to start is to look at our history with new eyes and admit that technology and Covid-19 are forceful change agents requiring a new approach to old problems. We need to innovate or face irrelevance like most of our old service heroes.

Tor W. Andreassen
Professor of Innovation at NHH Norwegian School of Economics
Director for the research center Digital Innovation for sustainable Growth

Photo credit: Andrea Davis.