Death Spirals and Virtuous Cycles [chapter]

Rogelio Oliva, John D. Sterman
2010 Handbook of Service Science  
While the productivity and quality of manufactured products steadily improve, service sector productivity lags and quality has fallen. Many service organizations fall into "death spirals" in which pressure to boost throughput and control costs leads to worker burnout and corner cutting, lowering service quality, raising costs while revenue falls, forcing still greater cuts in capacity and even lower quality. We present a formal model to explore the dynamics of service delivery and quality,
more » ... y and quality, focusing on the service quality death spiral and how it can be overcome. We use the system dynamics modeling method as it is well suited to dynamic environments in which human behavior interacts with the physics of an operation, and in which there are multiple feedbacks connecting servers, managers, customers, and other actors. Through simulations we demonstrate that major recurring problems in the service industry-erosion of service quality, high turnover, and low profitability-can be explained by the organization's internal responses to work pressure. Although the reinforcing feedbacks can operate as virtuous as well as vicious cycles, the system is biased toward quality erosion by basic asymmetries and nonlinearities. We show how, with the right mix of policies, these same feedbacks can become virtuous cycles that lead to higher employee, customer satisfaction and additional resources to invest in still greater service quality improvement. 3 behavior interacts with the physics of an operation, and in which there are multiple feedbacks connecting servers, managers, customers, and other actors. We seek to understand the persistence of capacity problems in services and the persistent failure of service quality to improve over the past few decades. The tools of process improvement and the quality movement have been applied to service delivery just as they have to manufacturing, yet the quality gap continues to widen. Why? Since services are produced and consumed simultaneously, with no finished goods inventory, service providers are particularly vulnerable to imbalances between supply and demand. The problem of balancing supply and demand in services, however, is not simply a matter of absorbing short-term variations in customer orders. Rather, chronic undercapacity persists for two reasons. First, organizations facing growing service demands struggle to acquire capacity fast enough. Over the last fifty years, the service sector has consistently been the fastest growing in the economy. Second, service-sector productivity improves slowly compared to manufacturing (Baumol et al., 1991) . Technological progress has dramatically increased output per person in manufacturing, but one taxi driver is still needed per taxi. Low productivity growth drives service organizations to seek efficiency gains and impose cost containment initiatives. The continuous pressure to "do more with less" pushes service organizations to operate with little margin to accommodate demand variability. We show that such policies not only lead to poor quality when demand temporarily rises, but can trigger a set of selfreinforcing processes that lead to the persistent, continual erosion of service quality, service capacity, and the customer base. These positive feedbacks operate as vicious cycles that can drag an organization into a death spiral of declining quality, customer loss, budget cuts, higher work pressure, poor morale, higher employee attrition, and still lower quality. Poor service can destroy a firm's brand and erode sales. In contrast, high quality service boosts customer loyalty, repeat business and favorable word of mouth that can increase growth and market share. Here we present a formal model to explore the dynamics of service delivery and quality, focusing on the service quality death spiral and how it can be overcome. The work builds on foundations presented elsewhere (e.g., Oliva, 2001; Oliva and Bean, 2008; Oliva and Sterman, 2001; Sterman, 2000, Chapters 12 and 14), but adds additional structure we have identified over the last ten years working with organizations that provide knowledge-based services. We present the model iteratively, beginning with the dynamics of human capital. We then add additional structures, including the interactions of employees and customers, the workweek, standards for customer service, hiring and training, customer responses to service quality, and budgeting. We explore how the dynamics change as the model boundary expands. A documented version of the model is available for experimentation under different assumptions. 1 The paper is structured as follows. We first present a structure that captures the dynamics of the experience learning curve. We then introduce notion of work pressure, the gap between required and available service capacity, and explore the service providers respond to imbalances. We next expand the model to include the 1
doi:10.1007/978-1-4419-1628-0_15 fatcat:tgpo7bbym5f5xd7jywlp2moysy