Uday S. Karmarkar LA Times Professor of Technology and Strategy Research Director, Center for Management in the Information Economy The Anderson School, UCLA Frankly, I’m more worried about the professors Evolving Economies • Economies around the world continue to develop at a tremendous pace • The major trends – The shift to services (mature in developed economies) – The new shift to the information economy – Waking giants, growing rapidly – Changes in tariffs and multi-lateral agreements – Huge shifts in trade and global commerce – Worries about jobs and the “O” words • What does all this mean for managers? For policy makers? For entrepreneurs? The Business and Information Technologies (BIT) Project • Global survey of industry practices (actual) – CIO’s, CTO’s, Senior Information Officers • GNP/Labor/Trade studies of economic evolution by country • Technical, Business Issues and Sector Studies – Interviews, cases, data bases • Global research partners – Replication of survey and GNP studies – Comparative data on business practice – Best practices and leading edge solutions Global Research Partners • IAE, Buenos Aires, Argentina • PUC, Santiago, Chile • CEIBS, Shanghai, China (to be confirmed) • Theseus Institute, Sophia Antipolis, France • European Institute for Media, Dusseldorf, Germany • University of Athens, Athens, Greece • IIT-B, Mumbai, India • SDA Bocconi, Milano, Italy • Korea University Business School, Seoul, Korea • IESE, Barcelona, Spain • World Internet Institute, Uppsala, Sweden • U.of Lugano, Lugano, Switzerland (to be confirmed) • LBS, London, UK (to be confirmed) The BIT Study Sector Studies: Technology Impact on End-to-end Value Chain • Financial services – Retail banking – Insurance – Mortgage banking: origination, securitization and servicing • Entertainment and Media – Film, TV and Video: distribution technologies – New business models for video products (with Entertainment/Media Center, UCLA) • Telecommunications and related services • Publishing – Electronic publishing; technical and legal • Retail – Business continuity planning (funded by AT&T Foundation) – RFID implementation (projects with WINMEC, UCLA Engineering) • Health care – Systems and quality of care (with VA, UCLA Med School, Rand Corp) • Electronics, Discrete Manufacturing, Supply Chain, Government, Education, Design, Furniture/Household, National Security, Business Services, Tourism, Hospitality/Leisure The Information Economy • All industry sectors that address the eventual production of information goods and services • Including – Pure information goods: data bases, books – Information services: news broadcasts – Transactions services: financial services – Experiential information goods: music – Knowledge based professional services – Information transportation: telecommunications – Information processing tools: computers Picturing Economic Evolution US GNP Today and in the Future US GNP Breakdown (1997 data) The New US Economy • The US is now an “information economy” • Manufacturing continues to shrink, while services grow • Information sectors comprise over 60% of total GNP value added in the private sector • Information Services exceed 50% of the total • Information products can become services • Information services (consumer and industrial) dominate the US economy Trends and Drivers • Productivity growth in manufacturing • Manufacturing to services shift • From a material to an information economy • Globalization: diffusion of capability and global competition • Technology: information technologies leading to the industrialization of services Service Industrialization • What is “industrialization”? – Standardization • of products and functionality • of components and piece parts • of work processes and capabilities – The ability to specify and test output requirements – The ability to package and ship output • Competitive Conditions – Diffusion of capabilities and technology – Low cost, reliable logistics (bandwidth) – Competition driven innovation, productivity Service Transformation • Technology driven change • Looks like manufacturing in the 70’s – Automation – Out-sourcing and virtualization – Off-shore sourcing – New processes and new services – Self service (shift processes to consumers) • All driven by – Global diffusion and competition Service Productivity • Service productivity has long been a laggard, technology has not helped “We see computers everywhere, except in the productivity statistics” - Solow • The picture has changed; post 1995 evidence of productivity gains (Jorgenson et al., Brynjolffson) • Driven by competition, globalization, technology • Achieved by out-sourcing, off shore, re-engineering, automation and self-service (IT enabled) • Unfortunately, productivity without market growth can mean a loss of jobs Major Impacted Sectors • Financial Services • Software and IS/IT services • Business Services (internal and external) • Business and commercial data management • Publishing and Media; communications • CRM • Health, education The Consequences of Productivity • Our study estimates: Around 10% of service jobs could be affected (over 10 million jobs) • Perhaps 4% could move off-shore • Possibly 2-4 million jobs could be affected by automation and self service • Possible losses of 300-500,000 jobs per year for several years • Is this a problem for the US? In the large …No! • Starting in 2007, baby boomer retirements will more than compensate for job losses • By 2010, labor shortages may appear • Each dollar of payroll that goes off-shore returns more to the US economy in saving and reinvestment (McKinsey study) • Annual cost savings of about $200 billion? • Foreign workers substitute for immigration • They don’t consume public goods, welfare, social security or medicare US 2005 US 2010 …and well, Yes • There will be real dislocations at the individual level, with significant adjustment costs • Losses in highly visible, urban, white collar, middle class jobs • Backlash and political agendas • The new and replacement jobs may not be very attractive • Competition and price cutting – cost savings don’t equate to profits! • Unknown consequences for income distribution, tax collection, social patterns The Productivity Paradox • Low productivity in services meant that the service sector was a powerful job creation engine • The growth was especially high after the 1960’s due to the demands of the baby boom • Government programs in health, education and welfare also grew in response • So did many other commercial services Job Growth? • After 1975, about 2 million jobs per year were created till 2000 • This growth absorbed baby boomers, women entering the work force, movement out of manufacturing, and immigration • Many of the new jobs were urban, white collar; suited to college educated youth • What happens now with increasing service productivity? US Service Sector Employment 1954-2004 US private service sector employment US private information sector employment Serious issues in manufacturing • Manufacturing decline continues • Largest manufacturing job losses have been recent; far worse than services • Due to the entry of China ($180bn imports) • Current trade deficit ($150bn) is untenable • But recovery of manufacturing jobs is unlikely • Many jobs go to Canada and Mexico too US private manufacturing sector employment US Manufacturing Employment, (1955-2004) Burning Questions • What will be the consequences of productivity growth in services? • What will happen to the job creation engine that the service sector provided? • Where does one go after “services” • What will be the changed balance for sectors in the economy? • What does this mean for society, education, politics, markets? • What will we see in global services, and trade? The Global Information Economy • Changes in every sector of industry • Industrialization of service industries and service functions in all companies • Global service trade and competition • Outsourcing and off-shore provision • Employment impacts are substantial • Internal factors: automation and self-service Global Information Chains • Feasibility of outsourcing, off-shore production • Initially: simple data entry and data processing • Evolving: information and knowledge based areas; content management and creation • Lower fixed costs of entry (equipment) • Critical factors shift – From hardware to software to labor – Logistics costs are negligible – From software to IT enabled services – From products to services, maintenance and operations Globalization of Services • Simpler commodity services globalize first – Logistics oriented; telecom – Basic: search and match, web functions and services – Transaction oriented: banking and financial • “Definable” and “Specifiable” next – Business services: data, IT, formal processes, research – Technology based: medical, telecom, engineering, research IT-enabled Services Patterns of Globalization and Trade • The topography of information trade is not dependent on oceans and mountains • Rather it is defined by language, culture and relationships • In industrial services the languages are Java, C++; the culture is protocols and standards • In people services, languages and history play a role; the colonial past is reflected Most Widely Spoken Languages Major Language Groups (per capita GNP and Population) The English World The Spanish World Global Service Markets • Increasing trade: services are the largest growing segment (though on a small base) • Largest markets (linguistic/cultural patterns, colonial history) – English (open) – Chinese (localized) – Spanish (open) – European languages (localized) – Russian, Arabic, Indian and Asian languages (localized) • Technical services: India, China, Russia, Israel many others Key Takeaways • The shift to the “information economy” • Information services: the dominant sector • Information commercialization is advancing from data to knowledge and experience • Substantial impacts on globalization, trade, industry structure, and employment • The structure of information services trade follows linguistic and colonial patterns • New challenges for service management: old experience doesn’t work Uday S. Karmarkar LA Times Professor of Technology and Strategy Research Director, Center for Management in the Information Economy The Anderson School, UCLA Organizational Design and Architecture • Most firms are not organized very well • A “science”, “architecture” or “engineering methodology” for organizations is non-existent • Organizations work, because people work around the “organization” • Service organizations are particularly poor • This will start to matter in an industrialized, globally competitive environment • Remember what happened to manufacturing in the ’70’s and after Assertions • Organizations ought to look the way they are supposed to work • Work requires processes: formal or informal, known or unknown, static or dynamic, continuous or intermittent • Effective organizational structure follows work process structure • Process structure should be designed to serve missions and objectives • Technology and environment affect processes How to Design an Organization • Mission, Vision, Goals, Objectives • Performance Measures (score card) • Core Work Processes • Tie Processes to Performance • Design organizations to follow work processes • Tie responsibility and authority to performance measures • Deploy performance measures down to individual tasks and jobs New Processes, Interfaces and Silos • New communication paths between customers and firm; multiple “faces” • De-integration of service chain; customer hand-off • Rapid changes require rapid responses • New integration needs – Customer touch-points (e.g. web and phone) – Customer data bases (e.g. multiple accounts) – Service chain integration – Quality integration – Customer experience integration – Market intelligence to design – Technology and process to service and customer experience Start at the Top • Traditional executive roles are not well designed for the industrial service organization • For example: the face of the organization, may now be a web site, not a sales force, not a building (e.g. a bank) • Very few service organizations have a senior manager that understands both the technology and capability, as well as the market place • And let’s not forget that a marketing organization in any firm, is a service organization New Job Descriptions? • Customer Experience Officer • Global Service Delivery Manager • VP Service Engineering • Customer Relationship Manager • New Services Design Manager • VP Service Quality Integration • Service Chain Manager Re-thinking Strategy • Service positioning (cost, quality, customer partnership, focus) • Service envelopes for products • Balancing cost, quality, focus, variety • Service/supply chain redesign (end-to-end) • Appropriate globalization, industrialization • Appropriate use of technology, automation and self-service Examples Industrialization Strategies Service Markets, Competition and Design Uday S. Karmarkar L.A.Times Professor of Technology and Strategy Service Process Model Characteristics of Services • Intangible output ; hard to quantify, measure • No inventories • Lack of portability • Simultaneous production, consumption • Customer is “on-line” • Customer may be co-producer • Complex specifications Variations and Exceptions • Preproduction? scheduled transport • Tangible output? ditch digging • Portability? Assessments, reports • Remote access? Help desks, hot-lines • Customer presence? check processing • Complex specs? overnight delivery • Measurability? phone response When is a service not a service • No pre-production? web pages, XML • Intangible output? photos, documents • Not portable? packaged content on-line • No remote access? on-line technologies • Customer presence? web transactions • Concurrent consumption? TiVo, music • Complex spec? downloads, transactions • Quantification? bits and bytes?? Not quite Strategy & Service Characteristics • The operational implications are known: – No inventories, lack of portability => queues and congestion – Complexity => customization, interaction • What are the implications for strategy? – Capacity, location, system configuration – Process design, service design, capability – Market segments, pricing, positioning Standard (Economic) Market Model • Price-quantity negotiation • Neither consumption nor production process is relevant to transaction • Production and consumption do not interact • Market transaction is simple • Costs, prices typically tied to quantities • But quantification of services is hard Market Transactions Service Competition • If quantity cannot be measured, agreed upon, difficult to use unit pricing • Lack of inventory can mean that production is post contractual • Contract enforcement is difficult • Alternatives to unit pricing: – Input pricing (time and materials) – Contingent contracts (legal, profit sharing) – Process pricing (medical, education) Pricing & Contracting • Risk of unit pricing to producer: cost risk, adverse selection • Risk to buyer: non-performance, moral hazard • Unit pricing can work when we have: – Standardized, measurable outcomes – High volume, repeat purchase (inducing market discipline) – Third party arbitration Pricing Alternatives • Input pricing – Shirking, cost inflation – No incentive for productivity, innovation • Market discipline and competition – many suppliers (standard service) – repeat purchase • Process based pricing – Shirking, rituals; difficulty of specification Product/Service Paradigm • Classical: Product is a commodity, customer values quantity, relative to price • Marketing, Hedonic Price, Lancaster: Product is a bundle of attributes, customer value function defined on attributes • Quality, TQM: Attributes are uncertain (Conformance), customer attributes different from production specs (QFD) • Emerging View of Services (and products): Customer participates in process. Values total experience Intangibility & Complexity • Difficult to establish performance measures, standards • Productivity comparisons and benchmarking are difficult • Focus on input rather than output management • Communication with customer is harder (nature of service, value) • Harder to agree on what was delivered No Inventories • No decoupling, processes subject to demand and supply variations • Instead create demand buffers: queues • Can’t separate, decentralize stages • Seasonal variations cannot be absorbed; capacity must be set at peak load level • Mix, response cannot be provided through inventories; process flexibility is needed • I.e. operational decisions become strategic decisions Lack of Portability • Cannot use third party distributors, channels • Retail channel cannot provide mix; up to either customer or provider • Cannot centralize production away from markets; lose economies of scale • Must create network of service access points to reach markets => compete on location Simultaneous Production & Consumption • Production site may be consumption site too • Process is visible to customer; may be part of attributes evaluated • Pace of production process may depend on consumption (e.g. food services) • Shop floor people are closest to the customer (unlike manufacturing) The Customer is Present • Production protocols are affected; specialization of labor is difficult • Waiting time of customer becomes important • Customers can interact, trade information, compare service, form coalitions, affect other customers positively or negatively Joint Production • Customer may participate in service production – Passive participation: medical operation – Active participation: self service – Joint participation: education • How to manage customer’s role in production process? He/she is “customer oriented” but unskilled • Responsibility for productivity, quality? Service Production Process • All stages or phases may not exist • May have different providers at each stage, including self service • Customer may choose to exit process at several points (retention strategy?) • Third party integration is difficult; either provider or customer is best integrator Service Objectives • Cost, quality, time and flexibility and risk all still apply; but emphasis changes • The customer is more understanding of costs, and tradeoff with quality (joint producer) • BUT: can also see obvious process failures • Process quality, Time and “WIP” become more important because of on-line customers • Marketing and revenue enhancement are interlinked with operations Strategic Service Programs • In manufacturing: the production facility does not see the customer; need to communicate, integrate process across functions • In services: operations and sales are interlinked; the shop floor sees the customer but management may not • Need vertical integration; functional integration for upper management Service Program Aims • Bring managers to the “shop floor” • Integrate functions at managerial and technical levels (customer awareness) • Back room needs manufacturing-like programs to appreciate market and revenue concerns • Technical professionals are often resistant (engineers, doctors, lawyers) Service Quality is Different • Cannot neatly distinguish between “product” and “process” • Performance quality can be an operational issue (not primarily a design issue) • Process attributes are included in performance evaluation • Experience is a crucial factor • Difficulty of measurement; quantity and quality are confounded Process Conformance • Specifications and standards hard to establish (measurement, complexity) • Intangibility: can’t test objectively or externally for conformance to specs • Cannot inspect and reject or rework • Approaches: – Set standards for inputs, process – Self inspection, customer monitoring Conformance to Expectations • Customers’ current expectations matter • Perceptions and first impressions count; service output cannot be re-examined • Manage customers’ expectations in real time and on-site • Shift attention to process attributes • Caution: appearance, personal service attributes may be weighted heavily Process Improvement • Emphasis on process improvement • “Show time”: use of scripts, protocols to sytematize and standardize process • Teams, empowerment, learning issues • Customer participation increases customization, but makes QC difficult • Assign responsibility for performance, conformance; externalities of behavior Service Technologies • Automation of physical processes – Vending machines – Check processing – Transportation • Automation of information processing – Voice response – Electronic publishing – Expert systems (diagnosis) Automation changes Services • Changing the process means changing service • Automation is very effective in the “back room” for efficiency • However, care must be taken in automating the “front office” • Changes in quality and satisfaction; change in the basic service Changes due to Automation • Poorer “front-office”; customized performance, touch, diagnosis, support • More capacity (potentially); less cost? • Better conformance quality; more standardized • Strengths: memory, reach, access, availability, “patience”, precision, learning, flexibility Summary • Services – Paradigms – Characteristics – Processes • Implications for Service Strategy • Programs: vertical communication • Quality: process and the customer; the importance of customer experience Service Paradigms • Front office --- Back room – Front office is where the customer is present; focus is on the customer and on marketing – Back room is where supporting processes, invisible to the customer, are carried out; focus on efficiency and productivity – Useful for categorizing and strategizing – Incomplete and simplistic Customer Contact • Categorize services by the degree of contact with the customer (high to low) – High contact: low efficiency, but opportunities for revenue enhancement – Low contact: high efficiency, low marketing opportunities – Intuitive; useful for a quick analysis – Modern views: joint production and information based perspectives Joint Production • Joint production with customer (Fuchs) – Clarifies “contact” paradigm. Is customer • Involved in production? • An input to the process? • Providing inputs to the process? • Working with other customers? – Useful for operations analysis, design, strategy, industry structure, competitive analysis Process Perspective • Similar to analysis in manufacturing – Consider customers or information rather than materials flow – More emphasis on waiting time, queues, congestion, customer perceptions – Not as simple to analyze • measurement of quantities • relation to cost, resource consumption, performance measures, revenues Information Based View • Central issue for many services – Information transfer to customer • About service, process, value – Information collection from customer • Needs, preferences, expectations • Input information (financial, personal) – Information processing, off-line back room – Increasingly vital for process design, strategy, technology management, competitive strategy, sector analysis Physical Services Physical Service Categories • B2C vs B2B • System based – Power, water, roads, transportation • Site based – Home services, construction, janitorial, parking, security • Person based – Health care, restaurants, hospitality, personal care • Product based – Financing, repair, installation, post sales support Key Strategic Issues • Vary widely depending on the nature of the service • In network based systems, design of the network, network economies, technical expertise, engineering, automation • In site based systems: delivery and logistics, work management systems • In B2C personal: access and branding, trust, service design (physical), self service and joint process, relationships and interaction Globalization? Outsourcing? • In general, physical services do not move off shore • Significant local government control and involvement (police, utilities, transportation) • Harder for foreign firms to compete (counterexamples: construction, printing, some retail) • As a result, this sector will not shrink and will continue to provide local employment • BUT: poor career paths, low return for higher education • These services are often outsourced – Economies of scale, network and scope – Technical know-how or experience – Jobs can be difficult, outdoors, physical – Fragmented due to localization (e.g. home services) Multi-site Service Systems