Why CEOs should care about service operations

Why CEOs should care about service operations

By Matt Dallisson, 23/05/2022

As a CEO, you have a lot of ground to cover, and the way your organization defines, designs, and delivers services has a significant impact on almost all of it. Services matter in every industry, both as a direct source of value and as an enabler of value creation. For some businesses, services are the only thing they sell. But even the most product-focused companies also rely on a wide range of service capabilities, from their customer-support activities to critical internal functions such as finance and HR.

Any executive who has risen to the top of an organization already has compelling reasons to focus on service operations. The business of service operations has always had an outsize impact on costs, for example. Service operations account for at least 80 percent of operating expenses at major banks, healthcare providers, and telecommunications companies. In retail, that figure can reach 98 percent.

Services have an outsize effect on customer satisfaction too. At one global fast-food chain, helpful and courteous service staff was the number-one contributor to customer satisfaction at drive-through restaurants in the United States, Australia, and Canada. For a major retailer, five of the top six drivers of customer satisfaction relate directly to the skills and behaviors of in-store sales representatives.

While cost and customer experience are perennial topics, the post-COVID-19 era has pushed two other service operations issues to the top of the senior-management agenda. The bumpy global economic recovery means that many organizations are seeing rapid growth in demand, alongside significantly increased risk and volatility.

An organization’s growth is inextricably linked to its ability to deliver frontline services: companies will not retain customers that they cannot support. Heightened risks, meanwhile, are coming from a variety of sources, including increased regulatory oversight (such as the European Union’s General Data Protection Regulations) and cybersecurity threats. Moreover, because services tend to be highly labor-intensive, service delivery exposes companies to a host of people-related risks, from inconsistent performance to staff shortages. Those challenges have been exacerbated in many sectors by the pandemic-driven transition to home and remote working, which can make it harder to manage, motivate, and upskill big services teams.

The reinvention imperative

For decades, managing performance, cost, and risk trade-offs has been the name of the game in service operations, and many CEOs have been happy to leave that delicate balancing act to their COO and functional leadership teams. Today, however, the playing field is shifting. The confluence of four big trends—rapid and extreme digitization, workspace virtualization, contactless operations, and new sources for talent—is rewriting the service operations rule book, creating both an opportunity and an imperative for reinvention.

These trends have been on the horizon for some time, but COVID-19 dramatically accelerated their adoption, as companies moved from experiments and pilot studies to at-scale rollouts of new technologies and approaches in weeks or months (Exhibit 1). It’s increasingly clear that this acceleration has sufficient momentum to make the trends irreversible.

Taken together, this new world of highly digitized, AI-assisted services, contactless operations, and flexible, agile working practices requires companies to think about service delivery in an entirely new way. Instead of the traditional operations perspective, in which activities are managed, executed, and optimized piece by piece, the industrial revolution in services allows organizations to build a unified and seamless “execution engine” that integrates the whole services value chain from end to end.

That shift creates huge opportunities for those that master it. Integrated, highly automated services can scale extremely rapidly, for example, allowing companies to achieve competitive advantage by capturing growth opportunities that their slower-moving competitors cannot.

Truly end-to-end service delivery creates challenges too, especially for large organizations where operations are distributed across a broad ecosystem of global, regional, franchised, and outsourced entities. All these components of the execution engine need to work together, which demands close oversight and sophisticated coordination mechanisms from the top of the organization to the front line.

The transition to the post-COVID-19 next normal will be a critical inflection point for service-based organizations. Pandemic restrictions forced them to transform their operations at an unprecedented rate. Continuing that transformation is now a choice. There is a real risk that companies ignore the big decisions needed to capture the benefits of the industrial revolution in services, allowing competitors to move ahead. Without a crisis to force action, it is down to the CEO to provide the radical vision, the space, and the resources service organizations need to remake themselves for a new era.

Rapid and extreme digitization

The year 2020 may be remembered as when business finally “got” digitization. In a McKinsey survey of senior executives conducted at the height of the COVID-19 pandemic, most respondents said they expected their organizations to invest more in technology to maintain or improve their postcrisis competitive advantage. And a sizeable minority—almost 20 percent—said they were refocusing their business around digital technologies.

This refocusing will be critical. Digital technologies have become dramatically cheaper, more capable, and easier to implement in recent years. The increasing power of AI is helping companies to automate many complex and formerly labor-intensive tasks. That means the limiting factor to digital potential in many service sectors is not the technology but the underlying business process. The biggest leaps in service performance, customer experience, and cost efficiency come when companies redesign their end-to-end processes for the digital environment.

The limiting factor to digital potential in many service sectors is not the technology but the underlying business process.

One leading global bank has done just that, with a project to develop best-in-class digital capabilities to serve some existing and new customer segments at low cost. Following the model first pioneered by leading tech companies, the bank aligned its organization with the journeys its customers took and promoted a start-up mindset in its teams.

The results were startling. The cost-to-income ratio for customers in the bank’s new digital segment is 20 percent lower than for traditional customers. And the greater agility of its new structures has allowed it to launch new products extremely rapidly in major emerging markets.

The AI-powered, digital-first approach also paves the way for continual improvements to service efficiency and personalization. Companies can use the proliferation of data generated during service interactions to identify and address pain points, both for customers and for the company. And combining smart analytics with operational agility enables services to be customized to meet the needs of specific user groups or individuals. Companies are already making use of AI techniques to predict user needs based on real-time product performance, for example, allowing them to automate timely, targeted interventions that solve problems quickly and boost customer satisfaction.

The virtualization of workplaces

The COVID-19 pandemic transformed workplaces. According to a global survey of 10,000 workers at companies with at least 100 employees, the percentage of workers using online collaboration tools rose from 55 percent in 2019 to almost 80 percent in 2021. The mass transition to home working for millions of service- and knowledge-based roles was a technological success story, and a vindication for proponents of flexible working models. In a 2020–21 global survey of 100 executives across industries and geographies, almost 90 percent of respondents said that working from home had little or no negative impact on employee productivity, with more than half reporting productivity improvement after the change.

Now companies can take the lessons they have learned during the crisis and find new approaches that serve the long-term interests of the business, its employees, and its customers. For many service organizations, the answer is likely to be a hybrid approach, using a mixture of on-site, remote, and flexible working models.

To ensure employee safety during the pandemic, one Fortune 500 insurance company transferred 98 percent of its more than 20,000 employees to home working—supporting the shift with investments in new digital infrastructure and tools. After several months of the new working arrangements, the company saw no falls in its key performance indicators. It decided to make the new arrangements permanent. It plans to close 75 percent of its offices, saving significant real-estate costs. Leaders also believe that the additional flexibility offered by remote working will help the organization to attract new talent.

The growth of hybrid and remote working arrangements has clear potential benefits for both employers and employees, but it creates challenges too. Retaining talent is a big one: 19 million US workers quit their jobs between April and September 2021. McKinsey research into the underlying drivers of the “Great Attrition” suggests that companies may be focusing on the wrong things in their efforts to engage their staff. While employers tend to focus on transactional factors, such as remuneration, employees place much more emphasis on the quality of interactions in their role, including relationships with managers and coworkers, and a sense of being valued by their organization.

People have always been critical to the performance of service operations—even the most highly automated, AI-driven execution engine will require high-quality talent to design, operate, and improve it. To attract and retain that talent, companies will need a holistic approach that encompasses every part of the employee experience, from management practice to the design of workspaces and the quality of the technology and tools provided to staff.

The ascent of contactless operations

When the pandemic made in-person service and sales interactions impossible or undesirable, people had little choice but to go online. For many, the shift was a revelation. About 40 percent of US consumers tried a new online shopping method during the pandemic, and almost three-quarters of them say they intend to stick with change. The e-commerce sector grew as much in the first half of 2020 as it had in the entire prior decade.

For service operations, the lesson is clear. Increasingly, customers don’t just tolerate online service delivery, they often prefer it. As with other aspects of digitization, however, effective contactless service requires companies to redesign their systems and their customer journeys. It calls for thoughtful use of automation, customer self-service, and human engagement, all delivered using the channels that customers prefer.

During the pandemic, one telecommunications provider needed a way to support its residential and small business customers at a time when face-to-face visits by service engineers were extremely difficult. The company rapidly implemented a new remote virtual-assistance tool, which combined self-service capabilities with video chat and augmented reality. The new approach allowed the company to resolve nine out of ten customer issues without the need to visit the premises, improving customer satisfaction and reducing overall service costs.

Done well, contactless operations can enable companies to forge closer relationships with their customers, tailoring their service offerings more precisely to individual needs. In Los Angeles, for example, sportswear company Nike has opened an experience store for local members of its Nike+ online community. The store will host social events and offer a product assortment that is determined by the online habits and preferences of Nike+ members who live and work in the locality.

The rise in dynamic talent management

The changing nature of service operations is driving a significant shift in talent requirements. Automation and self-service over digital channels reduce the need for people to complete simple, transactional tasks, but increase demand for specialized skills in areas such as technology, customer-experience design, and data analytics.

Talent requirements become more variable, too, ebbing and flowing with the implementation of new technology platforms and the development of new services. As a result, companies will need to rethink their approach to staffing, with a focus on agility and flexibility across their service operations.

That shift is already happening. During the early days of the COVID-19 pandemic, one North American Bank faced a rise in call volumes after safety restrictions forced branches to close. The bank created a streamlined training module to cross-train branch workers to act as call handlers and adapted its routing software to shift calls between full-time call-center staff and branch workers logging in from home.

The extra support from branch colleagues helped the bank manage the high volume. And because the supporting workers were branch personnel, their knowledge of the bank’s processes, products, and culture helped maintain the high level of customer satisfaction that the bank had worked hard to achieve. Leaders learned that this internal “gig worker” approach could be a solution for managing future spikes in demand, whether from unforeseen events or seasonally based capacity increases.

Some services companies are going all-in on the flexible workforce approach, adopting “flow to work” models in which teams are assembled from pools of personnel with appropriate skills, and allocated to different projects or parts of the business as needed. Where the necessary capabilities are rare, in-house teams can be supplemented by external specialists working on a contract basis.

The transition to dynamic staffing and talent management is aided by advances in technology, including the widespread availability of digital collaboration tools and the provision of secure, remote access to in-house systems. Companies can also benefit from the growth of specialized talent marketplaces, which help to match skill demand and supply, while also simplifying contract administration.

The window is open, for now

We believe that existing service-based businesses, and the service operations functions of all businesses, now have a rare opportunity to transform the way they work. In each of the four areas outlined above, companies have access to powerful new tools and approaches, and broad support for their use from both customers and internal stakeholders.

Furthermore, many service-based companies have enjoyed a sustained period of robust demand and rapid growth. That puts them in a strong position today, with the financial firepower to make significant investments in new technologies, new operating models, and new customer offerings.

That situation may not last for long. While many established businesses made it through the COVID-19 crisis very well, the same is true of their emerging competitors. A new generation of digital-first businesses is enjoying rapid growth and grabbing market share in sectors from insurance and apparel to home furnishings and pet food. With no legacy networks of retail sites, customer service teams, or supply chain infrastructure, these companies have been able to move fast, adopting new technologies, new service models, and new routes to market. Meanwhile, the incumbent players that had already begun to transform their service operations before 2020 have used the challenges of the pandemic to extend their lead over rivals.

Companies with significant legacy service operations now need to choose the best route forward. Do they transform their existing operations, introducing new technologies and new operating models? Or do they take a greenfield approach, building an entirely new service-delivery infrastructure from the ground up? We’ve seen both approaches succeed. Long-established service units have boosted their productivity by up to 40 percent using a combination of technology, process redesign, and management innovation. Starting from a clean sheet is more challenging in the short term, as organizations must run two operations in parallel and manage the transition between them over time. The greenfield approach has allowed some businesses to boost productivity by 70 percent, however, while also making their operations dramatically more flexible, scalable, and robust.

Every CEO should have a vision and a plan for the industrial revolution in services. That will likely involve a significant change in the way services are designed, in the tools and technologies they need, and in the teams that deliver them.

If you aren’t there yet, it’s time to sit down with your COO and other leaders to answer a few key questions. What are the strategically important elements of our service operations? What are the critical attributes we need to drive competitive advantage in those operations? Do we have the tools, capabilities, and talent we need to be successful? Should we transform our existing operations or use industrial revolution in services principles to build entirely new businesses?

This content was originally published here.