week3dqs

part_3_connectch3.docx

Home >Business & Finance homework help >Management homework help >week3dqs

Pick 8 topics and discuss/talk about the topics. No plagiarism will use checker tool. Due in 36 hours.

Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

A ‘customer’ is the recipient and often also a provider (co-producer) in a service process. Thus

we use the word ‘customer’ to refer to all the individuals, units or even organisations to whom,

and often with whom, an individual, unit or organisation provides service.

Take the seemingly simple example of booking a holiday. Let’s imagine you are booking a

holiday for your friends or family using a travel agent. You are the customer of the travel agent

and they provide you with a service (see Figure 4.1 ). Both parties are involved in this service

(the activity of discussing options). Things fl ows both ways as you explain what you want and

later make a payment; they provide ideas and later provide the tickets. Your friends or family

are also your ‘customers’ – you are providing a service to them by arranging the holiday for

them. They discuss the options the travel agent provides, take your opinions and provide you

with their decisions or preferences (again service is a two-way fl ow with customers receiving

and providing service). The tour operator is also the customer of the hotel and the airline.

They make the booking with the hotel and the airline, providing them with your details and

dates of travel and preferences, and the hotel and airline give them the booking (an agreement)

which they then pass on to you. At the start of the holiday the airline provides you and

your friends or family with service. They process you by gathering (batching) you up with

other passengers to get onto the aircraft and transport you to your destination. You and your

friends or family do your bit by turning up on time and reporting to the gate for the fl ight and

getting on and off the plane in an orderly fashion. The airline is supported by many internal

services such as HR, IT and training. They also require the services of many other organisations

to do all this, such as the airport, ground handling services, the aviation authority, catering

service etc. The hotel provides your party with a range of services involving many internal

service providers, such as their restaurant and bar services, housekeeping and laundry services

4.2 Customers, who are they?

Figure 4.1 Customers and services in booking a holiday

Training HR

You

Housekeeping Bar

IT services Restaurant

Grocer

Fish

supplier

Airline Hotel

Aviation

authority

Baggage

handling

Beverage

supplier

Turn up

and use

the

facilities

Suggestions

Tour

operator

Discuss

options

Requests

and

payment

Ideas

and

tickets

Turn up

on time

get on

and off

plane

Air travel to

destination

Hotel

services

Discuss

options

Holiday

booked

Friends or

family

Catering

services

Turn up

on time

get on

and off

plane

Information

and booking

Information

and payment

Information

and booking

Information

and payment

Hotel

services

Turn up

and use

the

Air travel to facilities

destination

Chapter 4 Understanding customers and relationships 69

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

and external services such as grocers, fi sh suppliers, beverage suppliers etc. You all turn up at

the hotel, provide information, and use the restaurant and bar etc.

There are a few important things to take away from this example:

● Everyone in the diagram is a customer of somebody. You (in the diagram) are of course

the ‘customer’, but you are also a supplier, providing service to others, the service providers

and your friends/family; they are your customers.

● Some customers are individuals, some are units and some are organisations.

● Service is usually a two-way process; i.e., things fl ow both ways. You provide information

to the tour operator and the tour operator gives you a booking; in essence both parties are

‘customers’ of each other as they are both recipients and providers.

● Services are delivered through networks, like Figure 4.1 , and we will return to how we manage

these networks in Chapter 6 . It is important to note that service is provided (to you) by

many organisations working together and providing each other with services.

● There are internal service providers, such as the restaurant in the hotel, and also external

service providers such as their beverage supplier. Thus there are both external and internal

customers.

● Different organisations use different names for their customers; to the airline you are a

passenger, to the tour operator you are a client, to the hotel you are a guest.

Thus, to reiterate, the word ‘customer’ refers to all the individuals, units or organisations to

whom, and often with whom, an individual, unit or organisation provides service.

4.2.1 Classifying customers

We can classify our customers into several broad and overlapping types:

● external or internal customers

● intermediaries or end users or consumers

● stakeholders: payers, benefi ciaries or participants

● valuable or not-so-valuable customers.

External or internal customers

In many service sectors, particularly consumer services such as banks and restaurants, the customers

are the individuals or groups of people, external to the organisation, who are receiving

and often paying for the service. In many of these situations there is a clear time connection in

the sense that service will be provided on receipt of the required price, as in a fast-food restaurant

or a retail store. These customers are sometimes referred to as users, end users, or consumers;

they tend to be the people in mind when managers and employees talk about customers.

However, when we talk about customers, we are referring to both external and internal

customers, and much of the material in this book can be applied to both internal and external

customers. Internal customers are individuals or groups of individuals who are a part of

the same organisation but from a different unit or operation. For example, the accountancy

department, the personnel department and the IT department all in their own way provide

services to the other parts of the organisation, just as they also require services from the rest

of the organisation. The recognition of internal customers, and the need to provide them with

services and good experiences, is one of the key elements of many quality improvement programmes.

These programmes are based on the important premise that the quality and cost

of service provided to external customers depends upon the quality of the service provided

to and by the network of internal customers. Or put simply, the level of external customer

service will never exceed the level of internal customer service; this is referred to as the Internal

Service Rule.

70 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

Many organisations recognise the value in refocusing their ‘putting customer fi rst’ philosophies

to ‘putting employees fi rst’, realising that the level of external service is constrained by

the level of internal service. While many organisations see their quality improvement activities

(see Chapters 5 and 12 ) being about improving the quality for external customers, we believe

that organisations should start by improving their levels of internal customer service. We

often fi nd that it is management’s internal policies, procedures and practices that constrain

the service providers’ ability, and interest, in delivering good service to external customers. 1

Intermediaries or end users or consumers

One of the design issues under debate for many service supply chains (see also Chapter 6 ) is

the question of whether or not to use intermediaries – the ‘middlemen’ who sell a product

or service to an end customer on behalf of one or more suppliers. Some fi nancial services, for

example, have recently removed the intermediary stage of an independent insurance broker

to set up their own direct operations. They have done this largely to reduce the transaction

costs for commodity-type services such as car insurance, but also to gain ownership of the

end customer. This has been possible to achieve as increasing customer knowledge about

industry prices has forced companies and customers alike to re-evaluate the worth of the

broker network.

The situation that many organisations face is the need to manage their direct customers,

such as brokers or retailers, while at the same time being aware of the needs of the end consumer

or user; therefore they have to encourage the intermediaries to give the desired service

to their customers. In theory this should make perfect sense though, as GSV Software found,

this is not always straightforward (see Case Example 4.1 ).

Sara Sheppard, ITSMA, Europe

As a global software vendor with a wellestablished

range of software products for

desktops and laptops, GSV Software had

developed a largely channel-centric model

to meet its broad range of customer technical

services requirements. Service and

support were allied to specifi c software

products and were delivered by third parties.

GSV put most of its service and support

efforts into selecting the right intermediaries

to deal directly with its user base, and also

into providing any product training required

to ensure that the intermediaries were effective.

The advantage of this approach was

that GSV had a limited number of support relationships to deal with.

This strategy to develop and support the channels to customers was supplemented by the provision of a

limited range of direct technical services targeted at large accounts or provided to those few customers who

wanted to come directly to the GSV for ‘paid for’ support at premium rates. Individual customers normally

dealt with GSV’s accredited agents or other partners such as value-added retailers (VARs) for service and

support.

This model worked well: the software applications were relatively simple and there was very little customisation

or integration with other software products. However, as GSV’s target market was moving towards

Case Example 4.1 GSV Software

Source: Pearson Education Ltd/Thinkstock/Alamy

Chapter 4 Understanding customers and relationships 71

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

‘enterprise class software’, its service and support model needed to be revisited. Its software offerings were

moving from largely standalone products to being part of a business solution, and enterprise class software

implied signifi cant amounts of customisation for each client. As a consequence, the ultimate support accountability

for the performance of the solution, and type of technical support required, was becoming less clear.

In some cases a client would be acquired by one of GSV’s agents and not unreasonably would expect a

share of revenue. However, the support requirements for these ‘enterprise’ or bespoke systems could not be

fully anticipated at point of sale, though it was recognised that some elements would be beyond the capability

of GSV’s agent. This was not an issue that could be just fi xed behind the scenes as the possibility of ‘fl ip

fl op accountability’ (or nobody taking full responsibility) was becoming a major purchasing concern for major

customers. It needed to be clearly articulated where responsibility lay, not least because these customers

represented a signifi cant part of GSV’s business.

Customers were asking GSV to take ‘more skin in the game’. This is an American term that means taking

more business exposure themselves or shared risk – particularly in innovative business solutions that were

using leading-edge technology. At the same time GSV knew that its own business model, with a high commitment

to continuing a channel-centric services model, would not support a heavy investment in a direct

services business. There needed to be a hybrid model between a pure channel-based service and a directto-

vendor model. It needed to be a way that improved customer confi dence in the more complex solutions

world: allowing GSV to encourage a healthy channel-orientated services business, and at the same time

offering a way of improving customer satisfaction, with the level of responsibility being taken by GSV.

One of the solutions has been with ‘leading-edge solutions’ (which are seen to be breaking into new

markets): the software vendor will commit to either taking the lead in the solution development or playing a

signifi cant role, alongside other channel partners. The role of the vendor is to transfer its superior knowledge

of its software product into the solution being developed, and to pass this intellectual property on to the

partners (which could also be the IT development group within a customer). This defi ned role then changes

once the solution moves from the development and build stage to roll-out and management. The software

vendor then plays a more ‘behind the scenes’ role, providing a back-up and escalation support route to the

chosen third-party IT service provider, with contractually agreed service level agreements.

The customer sees GSV software playing a key role in the solution development, and therefore ensuring

that the long-term supportability of the ultimate business solution is built into the design. Once the solution

moves into roll-out stage, an IT service provider is selected with the appropriate competencies, but with a

clear route back to the software vendor if required.

Source: This illustration is used with permission from ITSMA Europe.

Stakeholders: payers, benefi ciaries or participants

This categorisation explores the customers’ extent of involvement with the service. In many

services the customer participating in the service expects benefi t from the service and also is

required to pay for it. In the case of a restaurant, if there is a problem with the food or the service,

customers are aware of it because they participate in the service, and care about the outcome

because they are benefi ciaries. Because they are also paying for the service, they are able to take

appropriate action.

In many service situations, for example prisons, public health services and voluntary services,

there may be a clear distinction between and indeed confl icts among payer, benefi ciary

and participant. This is not only the case in not-for-profi t organisations. In business-tobusiness

services, such as photocopier leasing, it is possible that the purchasing department

may have cost reduction targets for its overall spend which may confl ict with the need for high

copy quality in the user functions.

However, the links between purchaser and benefi ciary can become extremely diffi cult when

we consider public services. These are funded by taxpayers, but the budget is determined by

politicians who (supposedly) represent the views and interests of their constituents. In the case

of the police service, the benefi ciary is again society at large, although the participants (criminals

72 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

and offenders) may not see the actions of the police as a benefi t! Even the most law-abiding citizens

may be annoyed when stopped by the police for what seems to them to be a trivial matter.

As another example, the UK Benefi ts Agency is responsible for distributing money to the unemployed,

those receiving disability benefi t, etc. The Agency has invested heavily in improving its

service standards for those who are out of work. This stems from a belief that all members of society

deserve to be treated as human beings and also that better service will elicit a less aggressive

response from individuals who may be under stress from their diffi cult circumstances.

This approach can be expanded. We can identify all the stakeholders of a service and understand

their different perspectives. Case Example 4.2 describes the stakeholders for a prison

service, and recognises that not all stakeholders will be willing participants. The value of this

type of analysis is that it then allows the operations manager to identify the varying (and

sometimes confl icting) requirements of each stakeholder group.

The prison service provides an excellent example

of the complexity of stakeholder requirements,

to some extent refl ecting the mixed

task it faces. Society requires the service to

carry out potentially confl icting activities:

● to ensure that ‘dangerous criminals’ are

locked up for the safety of society

● to provide a regime that will punish

wrongdoers as a means of payment for

their crimes

● to support inmates, providing counselling

and training to rehabilitate and reform

them, to reduce the likelihood of

re- offending.

The principal stakeholders and their requirements are as follows:

● Government ministers with responsibility for the prison service will be concerned to fulfi l manifesto promises

while meeting spending targets. At the same time they will be concerned about stories of prisoner escapes

or drug abuse that may be damaging to their personal reputation, possibly forcing their resignation.

● Prison governors will seek to provide an appropriate environment for inmates, while keeping to strict

operating budgets.

● Prison offi cers will be concerned to strike a balance between building a rapport with inmates and enforcing

discipline.

● Offenders will have a wide range of requirements depending on the nature of the offence, length of term,

desire to change, and so on.

● Families of offenders may wish to maintain contact with inmates.

● Members of society want to feel safe from criminals, but will also believe that some help should be provided

for those who wish to reform.

The relationships between these stakeholder groups are often complex. Clearly, politicians ultimately

report to those who elect them, including prison offi cers and families of offenders. Prison governors, with

hopes of career advancement, may feel that they must satisfy the demands of the current party in power,

which may be at odds with the requirements of other groups.

Case Example 4.2 The Prison Service

Source: Pearson Education Ltd/Andy Myatt/Alamy

Chapter 4 Understanding customers and relationships 73

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

Valuable or not-so-valuable customers

The service marketing literature proposes that organisations prioritise service towards customers

who can create the most value for the organisation. 2 Given that any operation has

fi nite resources, it would seem sensible to ensure that any prioritisation safeguards long-term

business interests. The problem is that what is meant by value is not always clear.

We defi ne a valuable customer as one that is either of high value and/or valued. Note that

we use the term valuable rather than loyal. While some customers are loyal, in the sense that

they frequently use the organisation, they may also have other loyalties and may also not be

very profi table or helpful to the organisation. 3

● High value means that the fi nancial value of the customer, over the long term, is of value to the

organisation. This view links with the idea of assessing the lifetime value of a customer (see

Section 4.3 ). For organisations that deal with many relatively small (in value) transactions

it has been found useful to calculate the lifetime value (the historic value plus extrapolated

value of a customer over time). For example, a customer with a weekly supermarket spend

of £100 represents annual revenues of £5,000 and lifetime revenue in excess of £250,000.

Some service organisations claim that this understanding helps motivate managers and

front-line employees to treat customers with respect – it certainly may help justify investment

in customer service. Equipment-related services have been used to this approach

for some years, since their customers understand the difference between lifetime cost of

ownership as against the cost of acquisition. Indeed it is common in some industries for

companies to make a loss on the sale of original equipment, knowing that 25 years of

spares and service contracts would ensure long-term profi tability.

The diffi culty with this approach is that it is not always obvious who are the high-value

and low-value customers. Again, business-to-business services may have a reasonable idea

about customer value, perhaps represented by size of contracts; indeed, in some cases these

organisations may have only one customer. Consumer services may have more diffi culty.

Financial services, for example, may be able to classify customers according to social economic

groups, credit ratings or spending habits and make judgements accordingly. However,

just because an individual is, for example, earning a relatively small sum today, it does

not mean they will not be a millionaire in a few years’ time, or indeed vice versa.

High-value customers are also those that tend to spend more per transaction than other

customers (incremental value) and purchase additional services (strategic value); and,

importantly, they may also act as an advocate for the organisation encouraging or recommending

others, by word-of-mouth for example, to use the service (social network value).

They may also be prepared to pay premium prices for the service.

● Valued customers are those individuals who are positively disposed to the organisation

and are thus relatively easy to deal with (see the discussion of Allies and Champions

below). They appear to appreciate the service and interact helpfully and pleasantly with

employees.

Valued customers are not only a pleasure to deal with, they can also create fi nancial

value for the organisation. They could be involved in cost reduction by taking time to

help the organisation and its staff by, for example, clearing tables after use, or reporting

incorrectly functioning equipment. They are also usually cheaper to service since it can be

costly to recruit new customers into an organisation. Valued customers can be involved in

revenue generation by providing positive word-of-mouth advertising and by encouraging

others to use or support the service. 4

Valued customers are also supporters of the organisation and are ready and willing to

help the organisation and to maintain and improve its service, for example by completing

questionnaires and providing suggestions. Valued customers also do not place undue

demands on the service. For public sector organisations, such as a hospital, this might

mean not using the service more than is necessary. For all organisations it might mean not

asking for, or expecting, more than the service can provide.

74 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

4.2.2 Customer segmentation – an operation’s view

Marketing has long devoted attention to segmenting its customers. Market segmentation is

traditionally based on customer characteristics. Thus organisations will focus on particular

economic groups or target a geographic region. Other marketing approaches will consider

lifestyles, family circumstances (for example single parents, empty-nesters or economising

customers) or the reasons why customers buy a service (for example for its benefi ts or utility

or in response to promotion).

Clearly, service operations managers must be aware of the emphasis behind the marketing

approach adopted by the organisation. Not only does it make sense to target marketing effort

on people most likely to buy the service, but market segmentation also helps operations managers

design their facilities appropriately and provide the right service, experience and outcomes.

A restaurant provides a simple example. If the restaurant is targeting couples for romantic

dinners for two, the design of seating and ambience will be rather different from a restaurant

that considers families as its prime source of revenue. The type of food served and the way

in which it is served – for example speed, manner and information provided – will be different.

In the case of a family restaurant, easy-to-clean facilities with fl exible seating will be

required, together with value-for-money meals served effi ciently. The romantic restaurant

will require different furnishings, lighting, music, staff competencies and food. Clearly, a wide

range of other decisions fl ows from this initial identifi cation of the customer group to be

served. Some restaurants manage to adapt to changing needs, providing classical music and

reasonably bright lighting for early evening family groups and more elderly diners, moving

to more upbeat music and dimmer lighting for younger couples as the evening progresses.

Thus decisions about market segmentation may defi ne the target customers, such as families

or romantic diners, and drive key decisions such as process and resource management

(see Chapters 8 and 11 ) and staff competencies (see Chapter 10 ). However, once the operation

is up and running, customers can be reclassifi ed to allow the operations manager to identify

issues critical to service delivery.

Customer types

We believe that operations managers and their staff need to develop an understanding of

the nature of individual customers and their resultant behaviour, particularly when these

customers are the direct recipient of the service delivery process, and may in fact be an integral

part of it. The nature of the customer could signifi cantly infl uence the type of service

provided, how they need to be dealt with by staff, and their potential impact on other customers

in the operation. Possible categories of customers classifi ed by behaviour or attitude (see

Figure 4.2 ) could include:

● The Ally . These valued customers usually arrive in a positive frame of mind, willing to help

and give positive feedback to facilitate the service. The most helpful Ally is the customer

whose opinion is respected by others. If the Ally is happy, then other customers will infer

that the service must be good.

● The Hostage . These customers require service, but may be ‘locked in’ to a particular service

provider contractually. An example is customers who must have their car serviced by the

dealer appointed by the manufacturer. The service may cost rather more, but if an approved

dealer is not used, their warranty will be invalid. These customers may not be in the most

positive moods and will become very diffi cult whenever service performance deteriorates.

● The Anarchist . These customers dislike rules and systems. Indeed, notices suggesting what

should and should not be done present a challenge. It is tempting to let the customer ‘get

away’ with not following the system, but this may set up problems with other customers

who feel that they have not been treated fairly.

● The Patient . These customers are very similar to the Hostage in that they are locked into the

service; examples are hospital patients or students at school or university. These customers

Chapter 4 Understanding customers and relationships 75

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

may be positively or unequivocally oriented towards the organisation and are willing to

submit themselves to rules and regulations. However, unnecessary restrictions may turn

them into a Hostage or Anarchist.

● The Tolerant . These customers may be passive, always waiting patiently for service providers

to acknowledge their presence and deliver service. In fact they may be so patient that

they become invisible to service staff and get ignored as a result. It may be dangerous to

trade on their apparent goodwill.

● The Intolerant . These customers are seldom passive or patient, and often cause stress and

problems within the service for themselves, the service providers and other customers.

Although initially they may be positively disposed to the organisation, without careful

handling these people can easily turn into Terrorists.

● The Victim . When something goes wrong in service organisations, some customers appear

to attract bad luck. Some jobs seem to be dogged by ill fortune. Victims may react in

a number of ways, perhaps blowing incidents up out of all proportion or alternatively

becoming resigned to their inevitable fate.

● The Terrorist . The Terrorist is the customer who mounts a damaging attack when you least

expect it. An example might be the customer who declares their dissatisfaction loudly in

the middle of a crowded restaurant, having said earlier how good the food was.

● The Incompetent . Front-line staff should pay particular attention to these customers.

It is possible that new customers may be confused by the organisation’s procedures

and, if not ‘trained’ by staff, may find the experience threatening, with the result that

they do not return. It is possible, of course, that some customers are incapable of being

trained.

● The Champion . What all organisations want – valued customers who are not only supportive

of their staff and its service and helpfully participate in the process, but who also

make a point of providing positive word-of-mouth about the organisation, its services

and staff.

Creating Allies

Converting customers from the top left quadrant of Figure 4.2 into Allies is the easiest of

the tasks. Allies are already positively disposed to the organisation but require engaging in

the service process. Providing information, good communication and explanations and involving

them in process development through soliciting feedback may easily convert these

customers.

Figure 4.2 Customer types

Tolerant Champion

Positive Ally

ATTITUDE

Incompetent Hostage

Negative Victim Anarchist

Intolerant

Passive Active

Terrorist

ACTIVITY

Patient

76 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

The negatively disposed victims in the bottom left quadrant may require counselling and

support to turn them into Allies. The risk here is that even after considerable effort Victims

can easily turn into Hostages or Anarchists.

Anarchists and Terrorists are the most diffi cult, yet most important, group of customers

for the operation to deal with. De-selection (removal from the organisation) may be the best

way out (see Chapter 10 ). On the other hand, if these activists can be employed to the good of

the organisation by harnessing their negative energy through personal involvement in the organisation

and its processes, they can make powerful Allies, or even Champions, for the organisation

and its cause (see Figure 4.3 ).

4.3 What are the benefits of retaining good customers?

A key task for some operations managers is retaining their valuable customers. It should be

noted that retention may be of limited concern to some service organisations, such as local

government services, housing associations, police, charities and health services, who may not

be able to choose their customers, or whose customers have no or little choice. These organisations

have to accept and deal with whoever ‘comes through the door’. However, they still

have to have relationships with them (see later) and manage those customers as well as they

can (see Chapter 10 ).

Retaining valuable customers, for those organisations that wish to retain their customers,

provides signifi cant benefi ts, as we saw in Section 4.2.1 . In summary, valuable customers:

● are easy to deal with

● act as advocates and provide positive word-of-mouth advertising

● assist in service provision

● reduce operating costs

● increase revenues

● help the organisation maintain and improve its services

● do not place undue demands on the service

● generate long-term revenue streams (high lifetime values)

● spend more than other customers

Figure 4.3 Creating Allies

Positive

ATTITUDE

Negative

Passive Active

ACTIVITY

COMMUNICATION

COUNSELLING

INVOLVEMENT

EJECT

Chapter 4 Understanding customers and relationships 77

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

● increase spending over time

● may pay premium prices.

A key problem in changing the emphasis to retention and/or building relationships with

customers is that many organisations do not have adequate means of either measuring retention

or calculating the value of loyal and valuable customers. Few companies know the value of

a loyal customer or the true cost of a lost customer, or even worse the cost of an upset customer

who stays. If organisations could calculate these values they might be in a position to make

more accurate evaluations of investments designed to develop relationships with customers. 5

4.3.1 Measuring customer retention

There are some simple measures of customer retention to put alongside sales or revenue

fi gures. Retention, for example, may be assessed on an annual basis, for instance by tracking

the number of customer accounts still ‘active’ during the year. In practice, of course,

this is not always so straightforward. Retail customers frequently shop at more than one

store, continuing to make regular purchases in each. Some customers hold several ‘loyalty’

cards – undermining the very concept! Indeed studies into the behaviour of supermarket

customers 6 have identifi ed large segments of ‘promiscuous customers’ who switch loyalty to

whichever provider is currently offering the best deal. In this case the issue is more ‘share of

the wallet’ than customer loyalty. Information systems linked to loyalty cards enable retailers

to track trends in spending patterns to assess the ‘loyalty’ of various customer segments.

For some business-to-business services, customer retention is easy to measure because the

organisation may have only one or two major accounts. Loss of a customer in these cases

will mean that the business will probably not survive. This is not the case for many midrange

businesses. One company that supplied chemicals to a wide range of business customers

appeared, superfi cially, to be healthy with reasonable annual sales growth. This hid the fact

that of a nominal customer base of over a hundred business accounts, more than 20 per cent

had not placed an order in the last twelve months and a further 15 per cent had reduced their

order value in the last six months. This analysis prompted the organisation to re-examine the

nature of its customer relationships in order to reverse what had become a trend that threatened

the business’s future profi tability.

The Net Promoter Score TM

One useful measure, though not without its detractors, 7 is the Net Promoter Score TM . 8 This

suggests that organisations measure their customers’ willingness to recommend the organisation

and/or its services. The usual question asked is ‘How likely is it that you would recommend

us to a friend or colleague?’ This question is clearly aimed at those organisations for

which retention is important. We would suggest that a good question to ask for customers of

organisations where retention is not an issue (such as monopoly services) or where customer

retention is not desirable (such as fi re and rescue services) is ‘How likely is it that you would

speak highly of us?’ By measuring the answers on a 0 (not at all likely) to 10 (extremely likely)

scale, organisations can calculate and track, and compare with other organisations, their net

promoter score (NPS). NPS is calculated at the percentage of ‘promoters’ (those scoring the

organisation 9 or 10) minus the percentage of ‘detractors’ (those scoring the organisation

from 0 to 6 inclusive).

Calculating the lifetime value of a customer

Lifetime value of a customer is of particular interest to high-volume consumer services, for

two reasons:

● It provides a degree of motivation for personnel who may deal with high numbers of

short customer transactions each day. The customer who makes a regular £4 purchase

78 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

may not seem that important in the grand scheme of things, but this viewpoint might be

changed if this equates to £1,000 annual spend multiplied by the expected loyalty lifetime

in years.

● Calculating the lifetime value gives focus to marketing activities.

As indicated above, there are a number of issues to be resolved when examining lifetime

value. The fi rst is to understand what ‘lifetime’ really means, and to what extent this can

really help in marketing and providing service. If the argument about lifetime value is followed

to its logical conclusion, would this lead service providers to ignore all customers

over a certain age? Clearly not, because the direct revenue gained is still valuable, and the

value of word-of-mouth advertising and referrals (social network value) is impossible to

calculate.

For the purposes of employee motivation, it may be useful to calculate a value such as annual

spend. This makes the point that this £4 transaction customer is someone worth looking

after; at the same time it does not make potentially exaggerated claims about worth.

Equipment-based service providers have for a long time calculated lifetime revenues based

on the economic life of the piece of capital equipment, its original sales price plus expected

service, maintenance and repair revenues. This has enabled them to create competitive original

equipment-pricing strategies, and to understand that signifi cant resources must be made

available to support these revenue streams.

More recently, mobile phone service providers had to use customer value information

more defensively. In the rapid growth of the mobile phone market, providers supplied handsets

free or at a fraction of their manufacturing cost in a bid to gain a signifi cant market

share. They discovered that many customers were not paying line rentals for a suffi ciently

long period to enable the promotional equipment discount costs to be recouped. As a result,

a wider range of tariffs and contracts was introduced to reduce this defi cit.

When thinking about the value of the customer it is therefore useful to generate estimates

of the following:

● Current and potential annual spend of customer segments, recognising that customers

may use more than one service provider.

● The duration and durability of customer relationships. How long do customers remain

loyal and is there potential for this to be extended?

● The number of points of contact with customers. How many different services do they

buy? Is there potential for cross-selling of service?

● What is the current profi tability of the customer? Is it costing more to keep this customer

than we are likely to recoup?

Financial services providers are particularly sensitive to this type of analysis. Although the

company may offer a number of products from loans and mortgages through to pensions and

insurance products, many fi nd that a typical customer only takes one product from the range.

They fi nd, though, that once a customer buys two or three products, they tend to stay loyal for

rather longer than the single-product customer.

4.4 How can managers develop good customer relationships?

It is important to note that there is a difference between customer loyalty and having a relationship

with the customer; it is easy to confuse the two, particularly in high-volume services

delivered to the mass consumer market. For organisations such as train companies, mass

transit systems and even fi nancial service providers, customers may be extremely loyal (and

use them every day) but not have a ‘relationship’ with the organisation (indeed they may

despise the company!).

Chapter 4 Understanding customers and relationships 79

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

Managing customer relationships (sometimes referred to as relationship marketing) is

about establishing, maintaining and enhancing relationships with customers for mutual benefi

t. The emphasis in relationship marketing is on the requirement to develop relationships

with individual customers – one-to-one marketing – and with groups of like-minded people –

affi nity groups – rather than see any and every service as a one-off transaction.

While the notion of relationship marketing appears to be very attractive, it is not appropriate

in all situations. For example, in high-volume or commodity-based services, such as retail

operations or mass transit systems, many customers may be more infl uenced by value for

money than by a concept as intangible as a relationship. Indeed, many customers do not wish

for a relationship with some organisations and their staff. Despite this, there is no doubt that

people often make decisions based on emotional or unconscious factors, even when they think

that they have been driven totally by logic. Indeed some marketing professionals believe that

brands and brand values far outweigh any other factor in customer decision-making.

Three types of customer relationships

There are essentially three main types of customer relationships. Firstly, there is a relationship

based on a portfolio of services or products frequently found in higher-volume operations.

Secondly, there is a personal relationship created between an individual customer and an

employee, particularly prevalent in low-volume professional organisations. Thirdly, we also

cover here temporary customer relationships, recognising the transactional, one-off nature

of many services. We will also cover the risk in a customer relationship and the means of

managing customer relationships in high-volume consumer services – customer relationship

management (CRM).

4.4.1 Portfolio relationships

Portfolio relationships involve the ‘capture’ of the customer using a variety of products or

services. Banks, for example, work hard to establish a relationship with their customers by

selling (and in order to sell) multiple ‘products’, such as current accounts, loans, house loans,

insurance and executor services. This provides the customer with benefi ts such as a single

point of contact for their service/product portfolio, discounts for new services/products

bought, loyalty bonuses etc. The downside for customers who wish to switch is often

the diffi culty in untying themselves from the set of services/products. The benefi ts for the

organisation are that portfolio relationships provide higher-value customers, a longer-term

revenue stream, opportunities to cross-sell other services or products to customers who are

already engaged with the organisation, and also valuable information from and about that

customer base.

Many service providers, such as retailers, airlines and restaurant chains, actively promote

portfolio relationships and loyalty on existing services and products through loyalty schemes

such as frequent-fl yer programmes or ‘club’ cards for supermarkets. Most of these are in

essence discount schemes encouraging the customer to earn points by spending more money

with a particular provider rather than the competition. Such providers are ‘buying loyalty’

rather than building relationships. However, the relationship can be developed by holding information

about a customer’s needs: for example, some hotels store information about their

card-holding customers so that these customers are provided with a room that meets their

requirements. Customers may also gain certain privileges: airline loyalty customers may be

provided with access to executive lounges, free seat reservations, cheque-cashing facilities,

company newsletters, opportunities to participate in special events and opportunities to provide

information to the organisation.

The Harley Owners Group ( Case Example 4.3 ) demonstrates that there is more than one

way to build loyalty with customers who have some affi nity with the company, its products

and services, and with each other. This case demonstrates that Harley-Davidson has clearly

80 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

4.4.2 Personal relationships

Personal relationships exist in many professional and low-volume, high-margin services,

where there is time and value in developing one-on-one relationships with clients or customers.

These relationships, often using key account managers (see later), create multilayered or

deep personal relationships with customers.

The objective on the service provider’s part is to create a situation where the customer

thinks of them when the customer next needs the service, or when planning to place more

orders. For personal relationships in B2B organisations there are advantages on both sides.

Harley-Davidson does not just make worldfamous

motorbikes – it sells a dream. From

its start more than 100 years ago, Harley-

Davidson has had a profound impact on the

sport of motorcycling and the people who

ride motorbikes.

From its humble beginnings in a small

shed in Milwaukee where three friends

turned out their fi rst bike, the company

now produces over 300,000 bikes a year.

The company’s turnover for the year ending

2010 was around $4 billion, generating

a gross profi t of around $1.4 billion. Besides

making its famous bikes, such as the Ultra

Classic Electra Glide touring bike weighing

over 370 kilograms with a twin-cam 1500 cc

engine, the company also produces parts and accessories and a range of branded clothes and collectables.

It is a global company, selling bikes all over the world; the fastest growth area in bike sales is currently in Asia.

Not content with simply owning a bike, Harley owners wanted to have an organised way to share their

passion and show pride in their bikes so, in 1983, Harley-Davidson established the Harley Owners Group

(HOG). By 1985, 49 local chapters had sprouted around the USA, with a total membership of 60,000. By

2010 HOG had over 1 million members worldwide, making HOG the largest factory-sponsored motorcycle

organisation in the world.

HOG has a simple intent: ‘To ride and have fun’. The organisation is split into local chapters where people

who share the Harley passion come together. Each chapter is sponsored by a local dealership with events

organised by the members. Membership (which costs around $45/£50 a year) provides a range of benefi ts,

including HOG Magazine, the offi cial publication of the Harley Owners Group. A HOG handbook provides

maps, dealer locations, climate information and riding laws for members planning long-distance trips. The

local chapters organise member events, including national and international rallies, touring rallies, open

houses and pit stops. There is also a members’ website with details, dates and information about all HOG

activities and events.

Source: This illustration is based on information from www.harley-davidson.com and www.hog.com.

Case Example 4.3 Harley Owners Group (HOG)

Source: Shutterstock.com/Adriano Castelli

Chapter 4 Understanding customers and relationships 81

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN

The provider gets to know the customer’s business well and this leads to a more effective service

with a faster response, because providers do not have to go through another development

phase. Many B2B services take place over weeks, months and in some cases years. Management

consultants may work alongside the client’s employees and it is frequently critical that

effective relationships are built in order to carry out the assignment. Technical expertise is

clearly only part of the requirement for an effective consultant; the ability to build personal

relationships with clients and clients’ employees is also essential.

There are four key elements to a personal relationship between service provider and

customer: 9

● Communication . The extent to which there is two-way communication; the ability to

deliver clear messages and the ability to listen carefully.

● Trust . The degree to which one partner depends on the work or recommendation of the

other, without seeking extra justifi cation or collaboration. In some cases, the partner may

commit the other to work without prior consultation.

● Intimacy . The extent to which each partner shares their plans, strategies, profi ts, etc.

● Rules . A mutual acceptance of how this particular relationship operates: what is acceptable

and desirable, and what is not.

Developing personal relationships often has signifi cant operational implications. In

Table 4.1 we compare two organisations, one a professional service (business-to-business),

the other a high-volume consumer service (business-to-customer), and identify the issues

that must be dealt with by operations managers. As we can see from Table 4.1 , there may be

Table 4.1 Developing personal relationships

Professional service: management

consultant Consumer service: restaurant chain

Communication Two-way

Free fl owing

Transfer of knowledge

Relates to business possibilities as well as

current contracts

A signifi cant amount of time is devoted to

communication

Largely one-way – from provider to customer,

apart from order-giving and paying

Formal communication

Relates to formal service offer

No budget for signifi cant informal

communication

Trust Built between individuals (clients and

consultants) in the course of the involvement

Built between customer and organisation

largely by reliability (delivery to promise)

May involve signifi cant amounts of

confi dential and sensitive information

Scope strictly limited to providing value-formoney

meals in safe surroundings

Intimacy Consultants become completely involved

with the life of the client’s organisation and

are often regarded as semi-permanent

employees

Part of the team

Involvement between employees and

customers may be limited to order-taking

and basic service

Customer intimacy is often linked to fortuitous

discovery of common interests

Rules May be developed as part of the initial

relationship-forming process

Largely set by the organisation or service

sector

Negotiation as to who does what is often part

of initial evaluation, but the brief may change

as the relationship develops

Based on established ‘scripts’, expected

behaviour and assumed knowledge

82 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

considerable resource implications in adopting an approach based on broadening the relationship

between customer and provider. Some of these implications are:

● Processes and activities become less well defi ned and harder to predict.

● Capacity management is less precise and effi ciency goals become harder to achieve.

● Processes must be more fl exible in order to meet requirements that are ill-defi ned at the

start of the relationship.

● Staff will require a different set of competencies.

4.4.3 Temporary customer relationships

High-volume consumer services often require the formation of temporary relationships,

where customer connections are made quickly. Many sales processes depend on the ability

of the salesperson to establish common ground with the prospective customer. When the

customer is buying something that cannot be readily assessed, part of the purchasing process

may include a conscious or unconscious assessment of the competence and honesty of the

organisation’s representative.

A combination of perceived risk and lack of knowledge on the customer’s part will mean

that the possibility for a relationship will increase, given the need for reassurance on the customer’s

part. Examples might include purchasing a used car or a personal pension, where the

customer is often incapable of making a totally informed decision.

These relationships might, at face value, appear relatively shallow, but there are clear implications

for the service operation that recognises their value. The development of information

systems to give customer history, training of customer contact staff and allocated time for

each customer transaction (performance targets) are examples of areas that can be addressed.

Some contact centres have intentionally relaxed their ‘talk time’ targets to allow more space

for these temporary relationships and have found that although each agent may talk to fewer

customers, orders of higher value are being taken as a result of the effectiveness of the temporary

relationship.

4.4.4 Risk and relationships

There is often a link between customers’ perceived risk in purchasing or using the service

and their desire for a personal relationship with the provider (see Table 4.2 ). Where the customer

does not feel that there is much risk, either in making the purchase or in receiving the

service, there may be limited opportunity for relationship building. The majority of supermarket

customers probably do not have any depth of relationship with Tesco or Walmart,

though they may have preferences as to which store they shop in. This reluctance on the part

of supermarket customers to build a meaningful relationship with Tesco or Walmart only

applies, of course, when things are going well. If there is a signifi cant service failure, customers

may move quickly from low to high perceived risk. We will discuss this in more depth in

the section on learning from problems in Chapter 13 . Where there is high customer perceived

risk, but as yet a weak, transaction-based relationship, there is an opportunity for the organisation

to build stronger links.

Table 4.2 Links between customer relationship and customer perceived risk

Weak relationship

(transaction-based)

Strong relationship

(partnership-based)

High customer perceived risk Opportunity Protected

Low customer perceived risk Buy loyalty Familiarity

Chapter 4 Understanding customers and relationships 83

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

Where there are strong personal relationships in situations where the customer feels there

is signifi cant risk, the emotional switching costs for customers are high. It is likely that these

customers will not move unless the relationship is signifi cantly damaged in some way. An

example of services of this type is a consultant who may have both a particular expertise and

intimate knowledge of the client’s company and markets. These relationships are most common

in professional services and/or B2B services.

Of course, strong personal relationships may exist where there is low perceived risk, though

they are probably rare in commodity services. In many cases these may be one-sided relationships

where the customer has a stronger emotional bond to the company than is possible for

any one employee to reciprocate. Again, we will return to these customers in our discussion

of service recovery in Chapter 13 , but it is suffi cient to say that if there is service failure, these

customers may feel let down, rather than merely angry that something has gone wrong.

It is important to recognise that in many cases the relationship is formed at the deepest

level between individuals rather than with the organisation as a whole. This is particularly

true with professional services. When a senior partner leaves to join another fi rm, their clients

may follow them. The risk for the client in forming a relationship with an unknown quantity,

even from the same organisation, may be too great.

In this instance, risk may also have an explicit or implicit cost dimension. The time spent

on the client’s behalf so that the professional can understand the issues fully in order to make

informed judgements will represent a personal investment that will not be undertaken lightly.

Cost is clearly not the only issue. If the process demands that client and professional work

together for signifi cant periods of time, personal chemistry may well be a signifi cant factor.

4.4.5 Customer relationship management (CRM)

Customer relationship management (CRM) is a term given to the management of customer

relationships in high-volume consumer services, with the objective of growing a more profi table

business and trying to form some closer understanding of the needs of individual customers.

The essential difference between CRM and other approaches to customer retention is

that the identifi cation and enhancement of customer relationships is facilitated by technology.

CRM attempts to integrate the many communication channels between an organisation’s

units and its customers, for example recording information about customer preferences and

then using the information to develop and strengthen the relationship and the profi tability

of the customer.

The aim of CRM is to collect data from all parts of the organisation to enable tracking and

analysis of a single customer relationship, as well as the identifi cation of more general trends.

For example, until recently it was possible that a customer of a fi nancial services company

would have a number of the products – a mortgage (house loan), savings accounts and insurance.

Each of these products would be handled by separate parts of the business, with no

knowledge of the others. As a result, customers rarely felt that they had a relationship with

‘the company’.

To redress this, many fi nancial service organisations are turning to data warehousing.

A data warehouse is an integrated source of data that collects, cleans and stores information

about customers. This is sometimes referred to as ‘information-based continuous

relationship marketing’. 10 Data warehousing allows the organisation to view relationships

and profi tability across the organisation.

Companies are now moving to integrated CRM solutions with the advent of e-commerce.

Internet-enabled activity allows companies to give information to their customers and collect

data from them in a much more structured manner than previously. A smaller version

of the data warehouse is the data mart. This serves a division or department of the organisation

and should ideally be integrated with the enterprise’s data warehouse. Such integration

avoids repetition of the original problem of invisibility of customer relationships across the

company.

84 Part 3 Connect

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5

Finally, these data marts and warehouses are linked to the various forms of technology at

the customer interface. Telephone contact centres are rapidly being replaced by multimedia

contact centres. Customers have a choice of routes into the organisation, whether by letter,

phone or internet. Paper-based transactions have virtually disappeared from most organisations,

though companies must guard against devaluing such transactions to the extent that

insuffi cient attention is paid to them. An increasing number of transactions are carried out

electronically. Computer telephony integration (CTI) allows the customer to browse the company

website and to make contact with a human agent only if required.

CRM is therefore aimed at both customer retention and relationship growth approaches.

CRM is defi ned as ‘the management process that uses individual customer data to enable a

tailored and mutually trusting and valuable proposition. In all but the smallest of organisations,

CRM is characterised by the IT enabled integration of customer data from multiple

sources .11 Case Example 4.4 demonstrates that CRM demands much more than the introduction

of an IT system, but also demands signifi cant changes in the way the company operates.

Not least, CRM requires the commitment of customer-facing staff to think behind the raw

data from IT systems to apply insight to each customer transaction.

Moira Clark, Director of the Henley Centre

for Customer Management

Travelco is a large UK package holiday company that has

experienced diffi cult times since September 11th, SARS, the

Iraq War and the economic recession. Travelco’s customer

retention rate was around 20 per cent annually and its market

was declining by 10 per cent annually. As a result of this the

company had focused predominantly on a sales-led strategy

and very little attention had been devoted to customer relationship

management (CRM). However, this changed with the

implementation of a comprehensive CRM strategy.

The company began with a thorough audit of its state of

readiness for CRM. This included an assessment of its marketing

strategy conditions, its culture and climate conditions and

its IT system conditions (see Figure 4.4). These conditions are

defi ned as follows:

● Marketing strategy . This is the set of management decisions concerning the defi nition and selection of

target customers and the value propositions made for them. CRM will only work in situations where the

target markets are homogeneous, distinct segments and the propositions are segment-specifi c.

● Culture and climate . The values of organisational culture must be aligned to the marketplace and be

commonly held throughout the company, yet still remain fl exible. Without these attributes, culture will

hinder CRM progress. Similarly, the best CRM systems will fail if the organisational climate, that is the

practices, procedures and rewards of the company, are not aligned to the organisation culture. In these

circumstances tension will occur and a negative climate will lead to failures in CRM.

● IT systems . In effective CRM companies these include not just the software and hardware systems

but also all data and information processes connected to customer contact and proposition delivery.

They also include organisational structures and systems that support the IT process, such as internal

intranets.

Case Example 4.4 Travelco Ltd

Source: iStockphoto/istrejman

Chapter 4 Understanding customers and relationships 85

Service Operations Management: Improving Service Delivery, Fourth Edition, by Robert Johnston, Graham Clark, and Michael Shulver. Published by Prentice Hall.

ISBN 1-323-17409-5