Service companies can use the same principles as manufacturers to boost productivity, according to international business consultant, McKinsey.

Manufacturers may try to do this by minimising resource waste. Some have focused almost solely on waste elimination within the transformation process (from raw material procurement to delivery of finished item) with success.

Toyota, for example, considered the value of time in the production process. It expanded its focus on waste to include improvements not only in tangible resources, but also in the elimination of delays in production. By rescheduling elements of its production process, Toyota was able to respond almost immediately to changing customer demands. It implemented what came to be known as lean management. According to McKinsey, the principles behind this practice have lessons for service-based organisations, too.

The principles of lean management are:

• eliminate waste
• minimise inventory
• maximise flow
• pull production from customer demand
• meet customer requirements
• do it right the first time
• empower workers
• design for rapid changeover
• partner with suppliers
• create a culture of continuous improvement.

The production of services also relies on effective measurement and management. These are the three steps advocated by McKinsey for successful performance measurement in service organisations:

1. Go back to the cost source, and benchmark wisely
   
   Organisations should benchmark performance activity wisely. They should not try to compare internal performance results and processes against poorly-defined ‘best in class’ external measures, or against apparently identical internal service functions, without confirming that like is being compared with like. Often it isn’t.
   
   Differences in reported performance levels both between and within organisations may arise from unique elements of the transformation process. They may also be attributed to the varying degrees of customer involvement, and especially customisation, within it.
   
   Organisations may be tempted to tailor their offering to the needs of individual customers. In some cases this may be vital and achieved simply and relatively cheaply (for example in selecting fillings and types of bread in a sandwich bar). For many organisations, however, the Pareto principle, or 80:20 rule of resource optimisation to customising offerings, applies. There is a trade-off between delighting the marginal customer and maximising profitability. In such cases, striving to please the marginal customer may mean incurring additional expenditure which is not matched by a similar increase in income: it is simply not profitable.
   
   
2. Define metrics carefully, and accept unavoidable base level variances which are unique to your conditions
   
   The second step in successfully measuring services lies in carefully defining performance metrics and collecting accurate data. Here it is helpful to use cost trees which, while detailed enough to spot efficiency problems, are also broad enough to be comparable throughout the organisation.
   
   Some variance between performance levels of the same function within different elements of the organisation is arguably inherent and unavoidable. Cost variances between different sites may arise from (unavoidable) regional variations in labour costs, workload mixes and differences in the nature of capital used, for example. As a general rule, the more structurally complex an organisation, the greater variance levels will be.
   
   This issue is further compounded by differences in the method of data collection. Data is rarely collected uniformly across an organisation, and what makes sense for one site may be anathema for another. However, it is not until base level variances are measured, understood and accepted, that executives can begin to manage processes to eliminate waste, improve services and price them more accurately.
   
   
3. Institutionalise performance measurement
   
   Steps should be taken to institutionalise measurement practice. It is down to top level management to infuse the organisation with a measurement and improvement culture. Sharing performance information with regional and account managers and linking executive compensation to performance metrics sends a clear message that a company is intent on identifying variance and improving performance.
   
   The measures that an organisation can take to control variance within service delivery fall into three areas: managing demand, standardising environments and allocating appropriate resources to each task.
   
   Again, rigorous analysis through detailed cost tracking, and the formulation of cost trees which include all elements of the transformation process, may help manage demand for services. This may also reveal cost sources previously unaccounted for, including faulty products and poorly performing service units.
   
   Such costs may be remedied either elsewhere in the organisation, via the procurement of different raw materials, for example, or by shaping the behaviour of customers. They could, for example, be encouraged to use telephone or internet-based services for banking and other financial services.

---

Liz Murby is Project Manager, CIMA Technical Services. This article is contributed by CIMA (The Chartered Institute of Management Accountants) and it first appeared in Insight, CIMA’s on-line newsletter for its members. Insight is accessible at www.cimaglobal.com/insight.