Academic journal article The McKinsey Quarterly

Why Are Service Turnarounds So Tough?

Academic journal article The McKinsey Quarterly

Why Are Service Turnarounds So Tough?

Article excerpt

Because you are trying to balance customer satisfaction, employee morale, and shareholder returns

It's very easy to start a vicious cycle of deteriorating performance

Taking out the right costs

Resuscitating a failing company is one of the supreme challenges in any business. Nowhere is this more true than in the service sector. If we compare Fortune s Most Admired service companies of ten years ago with today's list, we see that virtually every company near the bottom a decade ago has stayed there, gone bankrupt, or been acquired.

Why are service turnarounds so tough? One reason may be that the front line at a service company is the product. A manufacturer's customers can't usually tell when workers at its production plant are unhappy. At a service company, on the other hand, any dip in morale is painfully obvious.

Another reason is that frontline staff control communication with customers. One of their jobs is to keep customers informed when things go wrong. In the mid-1980s, when Continental Airlines was experiencing service problems, one of us was told by a gate agent, "If you didn't want your flight canceled, you should have picked another airline" - hardly an inducement to repurchase. By contrast, manufacturing companies can manage customer communication much more directly through their head office and salesforce. Since most management thinking about turnarounds is based on manufacturing companies, the strategies usually advocated may be counterproductive in a service context. Bring in a new management team? Better make sure you can do so without wounding the confidence of frontline employees. Reduce costs? You could, but you risk undermining morale, which will impair product delivery and disappoint customers. Establish tight control over day-to-day operations? Easier said than done when your key frontline employees are remote from management.

To make matters worse, service company turnarounds are far more likely than manufacturing turnarounds to become caught in a vicious cycle of deteriorating performance. Faced with poor results, managers cut costs, slashing headcount and trimming service. This damages the product and disheartens frontline employees. Poor morale translates into poor service. Customers lose confidence and defect to competitors, and the bottom line suffers.

But the fact that service company turnarounds are difficult does not mean they should be written off. Companies from a variety of industries have shown the way. BankAmerica, Sears, Safeway, Dollar General, Taco Bell, Wells Fargo Armored Car, and Continental Airlines have all completed successful turnarounds in the past decade.

What these cases have in common is that turnaround efforts have been concentrated on five key areas: restructuring the portfolio, creating a sense of urgency at the front line, reducing costs, revitalizing the product, and reinforcing the focus on customer service. Though most of these levers are also important in a manufacturing context, they must be tackled in a specific fashion in service companies.

Restructuring the portfolio

The sale of assets or business units allows management to focus on the core activities that remain, and can provide a much-needed financial boost early in the turnaround process. This is particularly important for service companies because it allows them to shore up their balance sheet without damaging the morale of frontline employees.

The supermarket chain Safeway provides an interesting example. Following its leveraged buyout in 1986, Safeway was saddled with $5.7 billion in debt. It responded by selling its profitable but non-core operations in the United Kingdom and a number of underperforming stores in areas far from its West Coast base, including New Mexico, Texas, Oklahoma, Kansas, and Arkansas. It also sold the Food Barn and Liquor Barn chains. All told, Safeway divested 1,182 of its 2,325 outlets - more than half of the total - yet the remaining stores generated almost 70 percent of total revenue. …

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