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Cutting Corners and Working Overtime: Quality Erosion in the Service Industry

Author

Listed:
  • Rogelio Oliva

    (Harvard Business School, Morgan Hall T87, Boston, Massachusetts 02163)

  • John D. Sterman

    (MIT Sloan School of Management, 30 Wadsworth Street, E53-351, Cambridge, Massachusetts 02142)

Abstract

The erosion of service quality throughout the economy is a frequent concern in the popular press. The American Customer Satisfaction Index for services fell in 2000 to 69.4%, down 5 percentage points from 1994. We hypothesize that the characteristics of services---inseparability, intangibility, and labor intensity---interact with management practices to bias service providers toward reducing the level of service they deliver, often locking entire industries into a vicious cycle of eroding service standards. To explore this proposition we develop a formal model that integrates the structural elements of service delivery. We use econometric estimation, interviews, observations, and archival data to calibrate the model for a consumer-lending service center in a major bank in the United Kingdom. We find that temporary imbalances between service capacity and demand interact with decision rules for effort allocation, capacity management, overtime, and quality aspirations to yield permanent erosion of the service standards and loss of revenue. We explore policies to improve performance and implications for organizational design in the service sector.

Suggested Citation

  • Rogelio Oliva & John D. Sterman, 2001. "Cutting Corners and Working Overtime: Quality Erosion in the Service Industry," Management Science, INFORMS, vol. 47(7), pages 894-914, July.
    • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:7:p:894-914
    DOI: 10.1287/mnsc.47.7.894.9807
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    References listed on IDEAS

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