Optimizing Service Productivity



As service becomes an ever larger part of every developed economy, service productivity increasingly becomes the focus of attention. Many companies are using information technology to utilize automation more extensively, reduce the use of labor and increase service productivity. We build a rigorous theory of service productivity, and use it to derive testable empirical propositions. The propositions are tested using data from over 700 service companies in each of two different time periods. The empirical analysis largely supports the theory. Many important managerial implications emerge from the research, including 1) for a given level of technology, firms should seek an optimal level of productivity rather than trying to maximize productivity, 2) as technology advances and automation costs decrease over time, the optimal level of productivity increases, 3) as price increases, the optimal level of productivity decreases, 4) as the future is given more weight, the optimal productivity level decreases, 5) as customer retention is more sensitive to the level of service, the optimal level of productivity decreases, 6) as wages rise, the optimal level of productivity increases, and 7) for firms with higher sales and market share, the optimal productivity level increases. We show that if the firm has too myopic a viewpoint and/or seeks too high a level of productivity, this boosts current sales at the cost of reducing the service level and future sales. Specifically, large service companies tend to be too productive, relative to the optimal level, and should place less emphasis on cost reduction through automation and more emphasis on providing good service. We also show that in a recession, relative use of labor should be greater and automation should be used relatively less.
Contact information:
Dr. S. Puntoni