The & Art & Science of Service Management:

1. The & Art & Science of Service Management: Customer Efficiency Management Patrick T. Harker President University of Delaware June 19, 2009 Bentley University

2. Outline of Presentation • The Rise of Services in OR/MS

3. Outline of Presentation • The Rise of Services in OR/MS • The Evolution of Service Management

4. Outline of Presentation • The Rise of Services in OR/MS • The Evolution of Service Management • CRM to the Rescue

5. Outline of Presentation • The Rise of Services in OR/MS • The Evolution of Service Management • CRM to the Rescue • What’s Next: Making Customers Efficient

6. Outline of Presentation • The Rise of Services in OR/MS • The Evolution of Service Management • CRM to the Rescue • What’s Next: Making Customers Efficient • Example: Retail Financial Services

7. Outline of Presentation • The Rise of Services in OR/MS • The Evolution of Service Management • CRM to the Rescue • What’s Next: Making Customers Efficient • Example: Retail Financial Services • Implications for Higher Education

8. The Rise of Services in OR/MS

9. A Very Brief History of OR/MS in Services The work in OR/MS is driven by the desire to overcome Baumol’s Cost Disease

10. Hypothetical Changes in Total Output50 Years, Assuming Historic Sectoral Productivity Rates

11. Hypothetical Change in Total Spending50 Years, Assuming Historic Sectoral Productivity Rates

12. Growth in the Share of U.S. Service Jobs

13. Our Profession Has Responded Call center optimization Optimizing hospital operations Emergency response location What is the next frontier?

14. Evolution of Service Management Delighting the Customer

15. Evolution of Service Management Delighting the Customer Firing the Customer

16. Simplistic Profit Cycle: People Happy employees make customers happy Firm makes employees happy Customer Employee Firm Happy customers express their joy by increasing a firm’s profits Warning: This can lead to inconsistent customer experiences

17. Realistic Profit Cycle: Process Firm puts systems in place so that employees can consistently deliver good service Well-equipped employees deliver consistently good service Customer Employee Firm Satisfied customers enhance their relationship with the firm Firms should provide the ability to deliver consistent service (in addition to having good morale)

18. CRM to the Rescue Customer Relationship Management (IBM): “a business strategy designed to optimize revenue and profits by increasing customer satisfaction, attracting new customers, retaining existing customers, and understanding customers better”

19. Beyond CRM … • Customers are true co-producers, not just recipients of a service • That is, customers can be managed with tools from HR as well as from Marketing… Customer Efficiency Management

20. Customer Efficiency: Concept An efficient customer is a customer who uses less of their resources (time, etc.) while accomplishing more in service co-productions.

21. Customer Efficiency Management (CEM) A business strategy based on developing an efficient customer base in order to simultaneously improve firm productivity, profitability, and customer equity. This goal is achieved through the seamless integration of service supply chain management, marketing strategy, and information technology designed to actively engage customers in the co-production of service in order to stimulate or facilitate the improvement of customer efficiency. --- (Xue and Harker (2002) “Customer Efficiency: Concept and Its Impact on E-business Management” Journal of Service Research)

22. CEM Profit Cycle: Customer Efficiency Firm puts systems in place so that employees and customers can consistently deliver good service Employee Well-equipped employees deliver consistently good service Firm Efficient customers deliver consistently good service using the firm’s infrastructure Customer Satisfied customers enhance their relationship with the firm and with other customers

23. Customer Efficiency: Motivation Questions: • Is there a conflict between corporate productivity and “customer efficiency”? • Is there a tradeoff between being productive and profitable and making your customer happy? Companies argue that some of the customers are just too expensive to serve …

24. Customer Efficiency Management (CEM) Framework

25. Measuring Customer Efficiency (CE) and its Impact on Firm Performance • CE and CEM • Direct and Indirect Measurement of CE • The impact of CE on firm performance • (Xue and Harker 2002b, Journal of Service Research; Xue, Heim, Harker 2005, IJEB, Xue, Hitt, Harker 2007, Manufacturing & Service Operations Management)

26. CEM Framework

27. CEM Framework • Managing Customer Participation in Service Co-production • Channel Adoption and Use • Service Encounter, Process and Contract Design • Customer Learning • (Xue, Hitt, Chen 2008, conditional acceptance at Management Science and MSI Working Paper, ,Xue, Heim , Harker2005 IJEB , Xue and Field 2008, Production and Operations Management, Field and Xue 2008)

28. CEM Framework

29. CEM Framework • Managing Channel Integration • Inter-channel Relationships • Optimal Resource Allocation across Channels • (Xue, Zhang, Hitt 2008, Zhang and Xue 2008)

30. CEM Framework

31. CEM Framework • Firm Competition • Service and Capacity Competition • Product offering and pricing competition • (Xue and Harker 2006, Xue, Zhang, Hitt 2008, Gu, Xue, Hitt, 2008)

32. An industry’s never diminishing quest for self-service has resulted in a multi-channel service delivery system mainly consisting of Branch Call center (live CSR) ATM Voice Response Units Internet (“Customer Efficiency, Channel Usage and Firm Performance in Retail Banking” Mei Xue, Lorin M. Hitt and Patrick T. Harker, 2007, Manufacturing & Service Operations Management) Example: Retail Financial Services

33. Service Delivery in Retail Banking

34. Retail Bank Multi-Channel Service Delivery System Physical Channel Virtual Channel Self-service Employee service Self-service Employee service ATM Branch/teller Internet CSR Branch/platform VRU ACH The Multi-channel Service Delivery System

36. What Matters: Customer’s Choice • Empowered customers choose the channel of service delivery, not the bank. • How efficiently a customer utilizes the multi-channel system to meet her service demand is crucial for both. • A self-service oriented customer is expected to be more efficient from both time-saving and cost-saving perspectives.

37. “Customer Efficiency, Channel Usage and Firm Performance in Retail Banking” by Mei Xue, Lorin M. Hitt and Patrick T. Harker, 2007, Manufacturing & Service Operations Management Questions • What drives a customer’s channel usage in a multi-channel service delivery system? In particular, what is the role of customer efficiency in her channel choice? • Is a more efficient customer a better (more profitable and loyal) or a worse customer?

38. Hypothesized relationships between efficiency, channel usage, and firm performance • Customer Factors • Customer Efficiency • (Customer View) • Customer Time Opportunity Cost • Transaction Value • Service Requirements • Combined Factors • (Firm and Customer) • Channel Access • Firm Factors • Channel Design • Product/Process Design • Customer Channel Use • Transaction Counts • Allocation across Channels • Firm Performance/Firm-view Customer Efficiency • Profitability • Product Utilization • Loyalty

39. Major Hypotheses • Hypothesis 1: Factors associated with customer efficiency (age, tenure, education, skill) are positively correlated with self-service channel use and negatively correlated with employee-service channel use. • Hypothesis 2: Customer efficiency, as defined and measured in this analysis, is positively correlated with tenure, education, and computer skill, and negatively correlated with age. • Hypothesis 3: Customer efficiency is positively correlated with customer profitability, product utilization and retention.

40. Data and Background • The data set includes the information of a random sample of 25,000 customers (primary account holders) of one of the largest retail banks in the US that covers monthly transaction counts, product utilizations, profitability and demographics. • Panel Data (July 2002 ~ June 2003)

41. A Service Co-production Model • f (K, H) – firm portion of the co-production function (K is the firm’s capital investment and H is firm employee labor) • g (R, L) – customer portion of the production function (R is a customer’s capital investment and L is customer labor input) which takes C-bb-Douglas form by assumption: where A indicates customer efficiency, and alpha and beta are the elasticity parameters. And the optimal channel use that maximizes customer utility is ( in logarithm): W – customer opportunity cost; V – transaction type control

42. Analysis • Stage 1: Channel Use Analysis • Stage 2: Measure Customer Efficiency • Stage 3: Customer Efficiency vs. Firm Performance (Customer Profitability, Product Utilization and Loyalty)

43. Analysis Stage 1: Channel Use Analysis • Dependent variables: channel usage • Independent variables: • Transaction type controls • Customer Efficiency Correlates: age, interest in computer, education, tenure with bank, Internet banking tenure, • Channel Access: ATM and branch density, access to Internet banking • Other Customer Characters: income, gender, marital status, children, residence state • Seasonality controls

44. Analysis Stage 1: Channel Use Analysis • Results: Hypothesis 1 is generally supported • Older customers use more full service but less self-service channels • With longer online banking tenure (experience), a customer uses tellers less. A customer’s use of online banking has a convex relationship with her tenure which suggests a learning curve effect. • Customers with a graduate degree performs 12% fewer teller transactions but 15% more ATM transactions. • Channel Access (facility location and layout): • One additional ATM available in the zip code area is associated with about 1 % decline in teller transactions and 2% increase in ATM transactions per customer per month. • A customer with on-line banking account performs 13% fewer teller transactions per month.

45. Analysis Stage 2: Measure Customer Efficiency • A residual based customer efficiency measure • Why residual-based measure? The difficulty/infeasibility of obtaining a direct measure in practical settings, e.g. the direct observation of customer inputs Empirical Model: - The residual term of the reduced model with CE correlates excluded that offers a measure of customer efficiency per channel

46. Analysis Stage 2: Measure Customer Efficiency • We construct an overall efficiency measure as a weighted difference between the residuals in full service (C’’) versus self-service (C’) channels to control for unobserved cross-channel heterogeneity: Hypothesis 2 is supported: Customer efficiency, as defined and measured in this analysis, is positively correlated with tenure, education, and computer skill, and negatively correlated with age.

47. Analysis Stage 3: Customer Efficiency vs. Firm Performance (Profitability, Attrition and Product Utilization) • Customer Efficiency vs. Profitability More efficient customers are more profitable --- A customer who is one standard deviation above the mean in efficiency contributes $4.76 of additional monthly profit

48. Analysis Stage 3: Customer Efficiency vs. Firm Performance (Profitability, Attrition and Product Utilization) • Customer Efficiency vs. Attrition Rate (the probability of departing the bank) • A convex relationship with a negative relationship between attrition and efficiency over almost the entire sample: --- The more efficient the customer is, the less likely for her to leave the bank for most of the sample population --- While the general relationship between efficiency and departure is negative, the very lowest and highest efficiency customers show greater attrition.

49. Analysis Stage 3: Customer Efficiency vs. Firm Performance (Profitability, Attrition and Product Utilization) • Customer Efficiency vs. Product Utilization • A concave relationship between product use and efficiency where account balances are maximized around or above the sample mean. • The very lowest and highest efficiency customers keep lower account balances.

50. Analysis Stage 3: Customer Efficiency vs. Firm Performance (Profitability, Attrition and Product Utilization) • Summary: Hypothesis 3 is partially supported: • A more efficient customer is more profitable. • The relationship between customer efficiency and loyalty and the relationship between customer efficiency and product utilization are more complex.