Breaking the Trade-Off Between Efficiency and Service

What if a manufacturer had to deal with customers waltzing around its shop floor? What if they showed up, intermittently and unannounced, and proceeded to muck up the manufacturer’s carefully designed processes left and right? For most service businesses, that’s business as usual. In a restaurant or a rental car agency or most of the other service companies that make up the bulk of mature economies today, customers aren’t simply the open wallets at the end of an efficient supply chain. They’re directly involved in ongoing operations. The fact that they introduce tremendous variability—but complain about any lack of consistency—is an everyday reality.

Dealing with that variability is a central challenge in making a service offering profitable. But little in managers’ conventional training or tool kits equips them to deal with it effectively. Operations management theory, rooted in the manufacturing context, typically has only one thing to say about variability: It must be eliminated. Any educated manager learns to recognize it as the enemy of quality.

In the service context, the challenge is far more subtle. First, it wouldn’t be wise to drive out all variability; customers judge the quality of their experience in large part by how much of the variability they introduce is accommodated, not how sternly it is denied. Second, it wouldn’t be possible to do so. While manufacturers have virtually complete control over the cost and quality of their production inputs, service companies face this one, huge exception: Their customers are themselves key inputs to the production process. That form of input is, by its nature, capricious, emotional, and adamantly disinterested in the company’s profit agenda.

My research over the past several years has been aimed at helping service organizations overcome the challenge of customer-introduced variability. I’ve studied a wide variety of service companies, some of which prospered while others experienced escalating costs in the face of eroding customer satisfaction. The framework that has emerged from that study can help managers make better decisions about how and how much to reduce or accommodate the variability customers introduce. As the stories in the following article make clear, there are multiple ways to combat the effects of any type of variability, and the best solution is not always immediately apparent. But by using a systematic process to diagnose problems and design and fine-tune interventions, managers can reduce the impact of variability and enhance the competitiveness of their service.

Five Types of Variability
The first step in managing the variability introduced by customers is to understand the forms it can take. Customers introduce variability to operations in no fewer than five ways, so it is critical to sort out which type is causing mischief before designing interventions.

Arrival variability.
The first type of variability that creates challenges for service companies is an obvious one: Customers do not all want service at the same time or at times necessarily convenient for the company. Many a grocery store manager has bemoaned shoppers’ inability to space their transactions such that checkout clerks remain busy and lines do not form at the registers. The classic way to address arrival variability is to require appointments or reservations, but that makes sense only in certain situations. In many service environments, such as retail stores, call centers, or emergency rooms, the customers themselves cannot foresee or delay their needs. The resulting inefficiencies have inspired a large body of work in what’s known as queuing theory and many solutions (including those described by W. Earl Sasser in “Match Supply and Demand in Service Industries,” HBR November–December 1976).
Request variability.
Film buffs will recall the diner scene in the movie Five Easy Pieces, in which actor Jack Nicholson asks for a side order of wheat toast. The rule the waitress invokes—no substitutions—is a time-honored way to limit request variability, or the range of what customers ask for in a service environment. While it’s hard to imagine operations grinding to a halt over an order of toast, the fact that customers’ desires don’t emerge along standard lines poses real challenges for virtually every kind of service business. At an advertising agency, each client is executing a unique marketing strategy. At a resort, vacationers want different amenities. Even at a single-service business like Jiffy Lube, customers show up with different makes and models of automobiles.
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Capability variability.
Perhaps less obviously, service businesses must also work with customers whose own capabilities differ. Whether because of greater knowledge, skill, physical abilities, or resources, some customers perform tasks easily and others require hand-holding. This capability variability clearly becomes more important when customers are active participants in the production and delivery of a service. A cleaning service may arrive, do its work, and leave, having had no real interaction with the customer. The customer’s particular capabilities make little difference to how well the crew does its job. In a medical setting, by contrast, a patient may be more or less able to describe his symptoms, and that will affect the quality of the health care he receives.
Effort variability.
When customers must perform a role in a service interaction, it’s up to them how much effort they apply to the task. An internal accountant may or may not take care to hand over well-organized files to her company’s independent auditor. A shopper at a warehouse club may or may not have the remaining energy to return his massive shopping cart to one of the corrals in the parking lot. Such effort variability has an impact on service quality and cost, either directly for the engagement at hand or indirectly for other patrons.
Subjective preference variability.
Customers also vary in their opinions about what it means to be treated well in a service environment. One diner appreciates the warmth of a waiter’s first-name introduction; another resents his presumption of intimacy. When a top partner in a law firm lavishes attention on engagements, some clients will be gratified by the proof of their cases’ importance. Others will think those expensive billable hours could be doled out more judiciously. These are personal preferences, but they introduce as much unpredictability as any other variable and make it that much harder to serve a broad base of customers.
It’s possible to think of these five forms of variability sequentially because they reflect the process by which many service transactions unfold. The customer arrives, makes a request, plays a part in the process requiring some level of capability and effort, and assesses the experience according to personal preferences. At any of these points, life is easier for a service provider if it is dealing with a narrow band of variability. Where the band is wide, service quality and efficiency are at risk.

The taxonomy above is important because operational issues in a service business can often be traced to problems created by customer-introduced variability. But the right strategies to manage, say, effort variability (often involving incentives) can be completely different from the strategies for dealing with capability variability (typically some sort of training). Before managers can draft an appropriate response, they must diagnose which variability is at issue.

A Classic Trade-Off
Wherever customer-introduced variability creates operational issues for a company, managers face a choice: Do they want to accommodate that variability or reduce it? Generally, companies that emphasize the service experience tend toward accommodation, and those that emphasize operational simplicity—usually as a means to keep costs low—tend toward reduction. The two approaches are in constant tension.

Wherever customer-introduced variability creates operational issues for a company, managers face a choice: Do they want to accommodate that variability or reduce it?

Consider a classic illustration of a reduction strategy: the restaurant menu. Menus, by their nature, are a way to constrain request variability. They put a limit on what would otherwise be an infinite number of potential orders and therefore make it possible for a restaurant to offer meals of consistent quality at a reasonable cost. But customers chafe under too many constraints (again, recall Jack Nicholson’s rage in Five Easy Pieces). For them, the ability to request variations in preparation, ingredients, and side dishes—or to order off the menu entirely—is part of a premier dining experience. When restaurants do not accommodate special orders, they reduce the complexity of the operating environment but also may diminish service quality. Companies that use reduction strategies tend to attract price-conscious customers who are willing to trade off an excellent service experience for low prices. People who choose discount airlines, bulk retailers, movie matinees, and off-peak travel options essentially reduce their collective variability by conforming to a company’s operational needs, even at the risk of an inferior service experience.

Accommodation strategies take different forms, depending on the business and type of customer-introduced variability. Very often, accommodation involves asking experienced employees to compensate for the variations among customers. For example, in a business where customers have divergent views of how service should be delivered (a business, that is, with high subjective-preference variability), a veteran employee learns to diagnose customer types. By making on-the-fly adaptations to suit their preferences, he essentially “protects” the customers from having to make many adjustments of their own.

It costs more, of course, to hire, train, and keep employees who can compensate for customers. Like most accommodation strategies, this one forces the company to bear the brunt of the variability. Therefore, the success of an accommodation strategy usually hinges on a company’s ability to persuade customers to pay more to cover the added expense. Generally, only companies at the high end of their competitive landscape can command such a premium. Those at the low end must rely on strategies to reduce variability.
Managing customer-introduced variability does not have to come down to a stark trade-off between cost and quality.

But managing customer-introduced variability does not have to come down to a stark trade-off between cost and quality. Some companies have met the challenge without damaging either the service experiences they provide or their operating environments. In a matrix representing the classic trade-off as a linear function of cost to serve versus the quality of the service experience, these companies have gone “above the diagonal.” (See the exhibit “Overcoming the Trade-Off.”) The matrix shows possibilities beyond classic reduction and classic accommodation strategies: the potential for what can be termed uncompromised reduction and low-cost accommodation.

Overcoming the Trade-Off
Managers in service businesses often assume that they face a tough choice: either accommodate customers’ ...

Here’s an example of an uncompromised reduction approach. A company can greatly reduce the impact of variability on its operating environment without compromising the service experience by targeting customers on the basis of variability type. If, for example, a college fears that admitting students of varying intellectual capabilities will complicate its operations, it can choose only students whose standardized test scores fall within a narrow band. The students get the benefit of a tailored curriculum without the school’s having to support more than one. Likewise, a company faced with subjective preference variability can target customers who are predisposed to want service to be delivered the same way. It isn’t always easy to know where customers fall on the relevant spectrum of variability, and there isn’t always sufficient demand within a given band of customers to sustain a business. However, companies that find such a niche can benefit from reduced variability without requiring customers to adjust.