The dilemmas of a service economy

One of the biggest challenges we face at the moment is the shift towards a service economy. Depending on the statistics that you read, about 70% of American jobs, and 80% of US GDP, are based on services.  It’s not much different for many other “developed” (3rd World, OECD…) countries.  That information, though, only generates a lot more questions. For instance:

1. What constitutes services?  The answer varies a great deal.  In the broadest economic terms, activities get lumped into two very general categories:  goods and services.  Everything that is not a physical product can be considered a service.  Those get categorized and counted quite differently, though, by different organizations and agencies.  And it still leaves a lot of questions.  If I hire someone to clean my house that seems clearly to be a service.  But if medical care is not a tangible product, is the open-heart surgery that my doctor performs really counted in the same category, and evaluated the same way?  How do those jobs differ from installing a computer system, or managing a major hedge fund, in terms of how we count and evaluate them?
2. If services are so important, can we get better at delivering them?  We know how to do research in science and technology.  We also know how to improve efficiency in manufacturing, both in processes and the products.  Do the same principles apply for services?  Is better service just a matter of greater output in less time at the specified level of quality?  (Think not just about your housekeeping, but also about your surgery.)
3. If we can no longer compete with fast-developing countries in terms of manufacturing exports, can we make up the difference in services?  It’s a dilemma for the US.  It’s an even bigger issue for countries like Japan, which have relied extensively on manufacturing exports for a generation.

The most difficult problem is asking the initial questions in the right way.  What really is the problem?  Actually, what is service?

As consumers, we buy things in order to meet some need or achieve some purpose.  Whether I buy a car (purchase of a good) or rent a car (a service) or lease a car, for instance, is primarily a matter of accounting.  Each has different costs and different contractual rights, but if what I need is the utility of the car to get me from one location to another, it doesn’t change much about the car.  Ultimately, I am more concerned about the utility of what I pay for – about achieving the end result that I want at a cost that I am willing to pay – than I am about ownership, per se.  It’s the same when a business decides to outsource a process, or to partner with another company rather than acquire one.  Again, it’s primarily a matter of accounting (and a perception about control.)

In the end, then, there is little difference between tangible and intangible products.  Both are meant to achieve certain results, hopefully producing the satisfaction that I seek as a consumer.

One way to think about service, then, is as the set of activities that fills the gap between the thing that I purchase and the result that I want.  If I buy a new car and it operates the way that other cars I have owned do, then there is little that I have to learn in order to drive it.  I just want it to run as dependably as I think it should, based on what I paid for it.  On the other hand, if I buy a new software program I may or may not know how to operate it.  If I’m savvy with software programs, learning to use it may be fairly intuitive.  If not, I may need more help.  If what I bought is a payroll program, and my business has been using a manual accounting program up to now, I will probably need a lot more service.  If you follow this thinking, service can’t help but be individualized, at least to some degree.  That’s why it is complicated and often expensive to do well.

There are other ways to think about service.  One is that service is the co-creation of value (Jim, Spohrer, IBM Research).  Another is that service is the creation of shared experience, based on shared mental models or understanding (Kyoichi Kijima, Tokyo Institute of Technology).

The difficult shift is that all of these move beyond the level of transactions to the nature of the relationships involved.  The better that you know customers and partners, the easier it is to understand and anticipate needs.  Transactions, to some degree, can rely on manipulation of consumers in markets.  Service really cannot.  Transaction-based business can get away with “buyer beware” strategies.  Relation-based business has to address trust.  If you want me to participate with you, we both have to have something to gain.  Quality, efficiency and economies of scale don’t stop being important in this new economy, they just aren’t enough by themselves.