Its our opInIon SErVIcE INDUStrIaLISatIoN

Creating the service factory

Successful industrialisation in service organisations

Service organisations are jealous of the dramatic productivity and quality advances made by manufacturing companies. But can they import the factory approach to the services world and reap the same benefits? Its our opinion that turning the right processes into factory processes can unlock great value, but that shoehorning the wrong processes into a factory mindset will only damage the business. How you determine the right mix depends on how you view the business from strategy all the way to operations and how you choose to balance operational excellence with customer intimacy.
Phil falato and Mark Kell

UNPREDICTABILITY The success of companies such as GE and Toyota in using approaches like Six Sigma and lean has tempted decision makers in service organisations to cast their own enterprises as factories:1 factories that process information rather than steel. Aware that the complexity they grapple with every day is often a result of past organisational decisions or poor articulation of the businesss needs, leaders look to simplify reality with a simple model. But while manufacturing and service processes share many common features, they differ in one significant aspect: a manufacturing environment tends to be a closed system characterised by relatively high levels of predictability while a service environment tends to be the opposite. Moreover, manufacturing companies deliver a product experience, while service companies deliver a customer experience. What makes service environments so unpredictable? Customers: what customers do, and what customers need. Its this very unpredictability that drives service value. And its the management of unpredictability that can create the edge for service organisations.

Financial Services Factory, Suresh Gupta, The Capco Institute of Financial Transformation, November 2006

Its our opInIon SErVIcE INDUStrIaLISatIoN

SORTING FACTORY FROM NON-FACTORY PROCESSES Imagine a factory that lets customers range freely along the production line, changing here, tweaking there, stopping and starting the line at will. Even the most customer-focused, just-in-time manufacturing companies control the customers input to their processes better than this. Yet service organisations face this situation every day. They only exist to serve their customers, and customers are all different up to a point. The degree to which we can automate a service organisation depends on our ability to categorise customer behaviours, and to isolate processes that have minimal need for customer interaction. These latter processes are ideal factory processes. We can design them for optimal performance, and leave them to run. When looking at a service process, therefore, we need to be clear which components can be treated as if they are part of a factory, and which can not. We can then find ways to implement lean techniques in both classes of component. Any end-to-end process can be decomposed into a number of constituent steps, each of which will fall into one of three categories: Factory Process characterised by high levels of predictability in input, process and output Physical Service Process dealing with the flow of people and goods (such as logistics, fulfilment and mobile engineers) Contact Service Process dealing directly with the customer (and therefore highly unpredictable) Figure 1 shows a decomposed mortgage application process organised according to these categories. FIGURE 1: DECOMPOSITION MAP FOR A MORTGAGE APPLICATION PROCESS
Process steps Gather data and recommend product open application send pre-filled form
receive and Value acknowledge property form

Conduct underwrite credit check loan

negotiate terms

Cross-sell

Dispatch formal offer

open transfer account and funds payment

Factory

receive and acknowledge form

Conduct underwrite credit check loan

open transfer account and funds payment

Physical

send pre-filled form

Value property

Dispatch formal offer

Contact

Gather data and recommend product

open application

negotiate terms

Cross-sell

THE RISKS OF SKIPPED ANALYSIS organisations court trouble by skipping process analysis, and assuming that a highvolume process is necessarily a factory process. A classic example is the recent trend towards outsourcing customer contact centres to India. By assuming the relevant processes are highly predictable, with low customer-introduced variability and insignificant levels of customer interaction, decision makers believed they could simply drop their contact centres into a lower-cost environment. Customer-facing processes are now moving back onshore as their nonfactory nature is becoming apparent. Were not claiming that contact service processes can never be treated as factory processes but organisations do need to realise the implications of applying a factory approach to non-factory processes and apply their solutions at the appropriate levels.

The organisation now has a strategic choice. It can convert as closely as possible all non-factory processes into factory processes and then apply lean techniques by eliminating the opportunity for customer variability through restricting customer choice; or it can treat each step with the most appropriate approach, resulting in a hybrid model in which contact processes manage customer variability through Sense and Respond techniques that aim to limit the operational impact of giving choices to customers. The decision path is shown in Figure 2. FIGURE 2: THE DECOMPOSITION PROCESS
Decompose process

Categorise

Limit the choices

Build decomposition map

Limit the impact of choices

Implement variability reduction strategies

Factory process

Apply traditional lean

Make all processes pure factory

physical process

Apply supply chain lean

Assess market and brand impact

Apply lean to all components

Contact process: Implement variability management strategies

Apply sense and respond

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UNDERSTANDING CUSTOMER-INTRODUCED VARIABILITY One of the principal differences between a factory process and a non-factory process is the level of variability created by customers. There are five main types2 of customer-introduced variability: Arrival Variability customers create demand on a process when they want to. This is not always the most convenient time for the provider as anyone who has visited a bank at lunchtime will confirm. Request Variability no two customers have exactly the same requirements and desires, and these can vary widely. One customer might stay at home all day for their new credit card delivery; another might want it delivered to their work address between specific times. Capability Variability customers vary widely in their abilities to handle different situations. In a technical support environment, some customers have a very basic understanding of the technology they use and need to be carefully led through the steps to resolve their issues, while others are extremely technologyliterate and feel patronised if every little step is explained. Effort Variability some customers are happy to put in extra effort to receive a service, many are not. Online services such as travel booking have boomed over the last few years, but these companies still need to maintain contact centres for the customers who would rather someone else searched and booked their arrangements for them. Subjective Preference Variability this type of variability arises from customers highly diverse expectations of personal service. In a high quality restaurant, for instance, one customer might demand constant attention from the waiter while the one sitting at the next table might find such attention bothersome and intrusive. Natural factory processes have low customer-introduced variability, whereas contact service processes have the highest. For organisations that want to shift toward service factory operation, the key is to identify which types of variability are prevalent in their operations, and then find ways to reduce or eliminate them.

Breaking the Trade-Off Between Efficiency and Service, Frances X Frei, Harvard Business Review, November 2006

THE SERVICE FACTORY: LIMITING CHOICE The real choice facing organisations wanting to move towards a service factory approach is whether to seek renown for operational excellence or customer intimacy. As Figure 3 shows, theres a tension between these two strategic poles. The value released by the service factory approach drains the richness of the customer relationship. The dynamic suggests that contact service processes can be converted to factory processes by eliminating as far as possible customer-introduced variability by fundamentally limiting choice, as shown in Table 1. Conversely, the businesss level of customer intimacy can be increased by accommodating variability. FIGURE 3 MOVING TO FACTORY PROCESSES COMES AT A PRICE
Operational excellence Customer intimacy

Increase customer accommodation Factory process Interactive service process

Reduce customer-introduced variability

But the choice isnt a dry, logical one. Its whether or not the organisation is prepared to risk treating its customers as raw materials or tools and to manage expectations accordingly.

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TABLE 1: REDUCING CUSTOMER-INTRODUCED VARIABILITY CUSTOMER-INTRODUCED VARIABILITY TYPE Arrival variability POTENTIAL REDUCTION STRATEGIES schedule appointments provide off-peak pricing Limit service availability Limit service or product range use product components offer incentives for standard option offer incentives or force customers to increase their capabilities provide customer education offer product or service to limited range of customers provide incentives and penalties to encourage customers to increase their effort simplify service to require minimal effort Manage customer expectations of the value proposition

Request variability

Capability variability

Effort variability

Subjective preference variability

Some companies have scored great successes with the service factory approach. Their customers are prepared to be processed in return for exceptional valuefor-money, quality of product or speed (see Table 2). Ryanair, for example, has all but removed request variability by offering an extremely basic service and charging customers extra for everything else. Seats are unallocated and you are charged for hold-baggage, drinks and food. Even the ordering process is charged at a premium rate if customers choose not to book online. Customers accept these restrictions in exchange for very low prices. The company is clear even vocal about the virtues of its no-frills philosophy. Starbucks is more subtle in its approach and appears to offer a considerable range of products. In fact, most beverage options are composed of a few basic components that can be combined into a myriad of options and given distinctive names. Starbucks also further reduces capability variability with its own special language which it teaches customers subliminally. When ordering a drink, the order-taker shouts out the order in Starbucksese, which is then echoed by the barista. After a number of visits, most customers pick up the fact that this is the fastest way to order their beverage and adopt the code. The customer is even corralled towards the delivery station in time to receive their drink when it is ready. He or she has effectively become a component of the factory process. In this case, it isnt price that compensates the customer for this treatment, but the quality of the product and its associated lifestyle message.

At McDonalds, the pioneer of fast food, arrival variability is countered by having food ready and waiting. Request variability is reduced by having a limited number of popular core products. Effort variability is handled by drive-through options, serviced by a process parallel to the walk-up counter. Here, as well as encouraging customers to accept their treatment from an early age through offers aimed at children, the deal is one of cheapness, taste and speed. TABLE 2: HOw THE EXPERTS DO IT RYANAIR Arrival variability STARBUCKS MCDONALDS primarily web separate processes Carefully monitor interface for high volume times demand Early check-in desk till is bottleneck so prepare food in closure introduced cash card advance and shelve it seating on first-come shift patterns first-served basis You get what you Variety of products pay for but all formed from Anything above basic limited number product has to be of components purchased at a Any variation causes premium problems Website booking is Customers taught free, call centre to order drinks in booking costs specific way Customers expected stores designed to to adhere to company funnel customers policy through the process Medium range of products Variation from core requirements tolerated but difficult strict time rules Bundled products (meal deals) encouraged Core menu rarely changes

Request variability

Capability variability

Effort variability

simple web-interface simple visual process Drive-through and Limited choices starbucks language counter service highly integrated Limited choices surroundings, marketing and tone of shops more upmarket Very high quality product Is generally perceived as highly customer focused through clever positioning Does not have pretensions above its station

Subjective Corporate take it or preference leave it attitude variability promotes the basic level of service

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THE LEAN SERVICE FACTORY: LIMITING THE IMPACT OF CHOICE The decision to transform an organisation into a service factory is not a tactical, technical decision. Its not about point-fix process re-engineering. Its a strategic choice about brand positioning about the businesss offer to its market. So what about the company that chooses to retain a greater degree of customer intimacy in its service delivery, one in which variability is managed and not altogether eliminated? Can lean techniques be applied to these environments? The answer is yes, by complementing traditional lean manufacturing techniques with Sense and Respond techniques which allow the service organisation to effectively reduce the operational impacts of customer variability without necessarily limiting the choices available to the customer. Potential management strategies are shown in Table 3 below: TABLE 3: STRATEGIES FOR MANAGING CUSTOMER-INTRODUCED VARIABILITY CUSTOMER-INTRODUCED VARIABILITY TYPE Arrival variability POTENTIAL MANAGEMENT STRATEGIES route customers to alternative and/or automated channels for simple requests provide incentives for customers to use alternative channels such as self-service Categorise requests by type on an ongoing basis spot new trends in the demand environment Continually optimise and standardise the processes by which each request category is served offer to educate the customer at the point of contact speak in the customers language, avoid technospeak Identify common capability problems and address these provide simple to use channels such as self-service offer to do the work for the customer train the front line to recognise differences in expectations and adapt accordingly

Request variability

Capability variability

Effort variability Subjective preference variability

Within the contact process of such an environment people are trained to continually sense trends and changes in customer variability and respond in the most appropriate manner through lean techniques such as kaizen. At the same time a range of alternative channels is made available to the customers so they can help themselves when dealing with more standard requests: put simply, you can avoid that call to ask why the broadband engineer is late by proactively sending a text message to a customers mobile phone. In this type of services factory traditional lean techniques are complemented by Sense and Respond ones to deliver lean service. While lean in manufacturing deals with the elimination of process waste, lean in service needs to additionally deal with the reduction and management of customer variability, and the empowerment of a highly trained, intelligent front line skilled in the use of lean continuous improvement techniques. Your differentiators are lodged in your processes: dont rush to erase them. Industrialise the processes that are amenable to industrialisation; temper variability where it is safe to do so; but support your high-value, high-variability processes with your best organisational efforts. Do what you love best, and be loved for what you do best.

Its our opInIon SErVIcE INDUStrIaLISatIoN

Whose oPINIoN?
PHIL FALATO MARK KELL

phil is a partner in our Business transformation Group, and also heads up the Lean solutions Group. Based in London, he specialises in lean service transformation and business change. He has a strong interest in food and wine, and is a keen cook; having been trained at the Cordon Bleu school in London there is little in his cuisine which is lean!

Mark is a consultant in our Lean solutions Group. Having worked in the service industry for many years his expertise lies in the areas of lean service, 6 sigma and business process reengineering. When not drowning in a sea of data, Mark can usually be found scuba diving in some distant ocean!

phil.falato@uk.fujitsu.com

mark.kell@uk.fujitsu.com

YOUR OPINION phil and Mark would welcome your comments by email (phil.falato@uk.fujitsu.com, mark.kell@uk.fujitsu.com) or at uk.fujitsu.com/opinion

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