What's Measured Can Be Managed
Once executives have learned to measure the variance inherent in service companies, they can begin to manage processes to eliminate waste, to improve the delivery of services, to price services more accurately, and to write better contracts. Although a company can do many things to control the variance of its service delivery, most of them fall into three main areas: managing demand, standardizing environments, and applying appropriate resources to tasks.

Managing demand offers the biggest potential for improvement. Cost trees help managers identify the sources of demand for services — sources that might include faulty products, poorly performing service units, or any number of other causes. Some fixes must be made within the organization (better training, better products, automated-response systems); others depend on shaping the behavior of customers (for instance, by offering tools and guidance to help them resolve problems themselves).

Standardizing operating environments requires the most discipline, since salespeople are strongly tempted to sell as much customization as a client wants. Standardization can yield enormous results: in addition to raising productivity, it helps the workforce become more flexible because people can transfer with less retraining. Where possible, companies should standardize not only service product lines and tasks but also the work environments of employees and the equipment they use to deliver services. Scripted routines help eliminate errors and allow employees to emulate high performers. Furthermore, clearly defined programs limit overdelivery, a common problem in service companies.

What's more, identifying cost variances can help companies allocate their human resources more effectively. In general, it's more productive to handle problems with the least expensive resources that can resolve them: calling in experts or sending out field technicians increases costs and slows response times—and therefore makes customers less satisfied. Metrics on costs per call or device demonstrate the benefits of using less expensive labor, thus encouraging companies to keep requests upstream and to place first responders (often a call center) in less costly regions to further increase savings and productivity.

Finally, companies that have a better picture of where costs are incurred can price services more accurately to avoid losing revenue on unprofitable activities. They can write better contracts that take into account cost drivers hitherto written off as inescapable variance.

As services become an ever larger part of the global economy, managers are rightly looking for ways to improve productivity and efficiency. Services may be more difficult to measure and standardize than the manufacture of products, but executives should not abandon hope. Adopting the principles set forth in this article will help companies improve the delivery, pricing, and sales and marketing of services.

About the Authors
Eric Harmon is an associate principal in McKinsey's Dallas office, Schott Hensel is an associate principal in the Stamford office, and Tim Lukes is a consultant in the Miami office.

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