My wife approached the checkout line with our two toddlers cascading towards full meltdown. 

The store manager saw her plight, quickly pulled her aside, and opened an additional register. She was on her way in moments. Ask my wife today why she shops at Publix, that’s the story she tells.

Fast forward a couple of years. We were staying in a London flat—a summer trip we’d been planning for months. During dinner on our first night, there was a knock at the door. The entire building was gathered on the stoop to tell us we couldn’t stay there because of an ongoing legal dispute between them and the flat’s owner. Dismay turned to anger as we went back and forth over the next 7 days with dozens of calls to a VRBO call center back in the US trying to secure alternative lodging and a refund. 

We know the difference between good service and bad. But why is bad service so commonplace and good service so rare?

The answer is that many leaders don’t think much about the type of business they’re running. 

They know they’re running, say, a law firm, or a restaurant, a nail salon, or an environmental-services company. They know their industry’s tools, regulations, equipment and jargon. But they don’t consider whether they’re managing a product-based business or a service-based business.

Leaders who do not understand the key differentiators of services businesses fundamentally do not understand how and nor why their organizations work. As a result, they cannot effectively make key resource allocation decisions, nor position their businesses for success.

The difference is real

If you were like me, you probably do not think a lot about the difference between product and service businesses.  Business is just business. And years ago that may have been true. But consider, US Gross Domestic Product is 77.6% generated by services now, and 4 of 5 employees work in the services sector.  98% of businesses in the US have fewer than 100 employees, so odds are if you are reading this, you work in a small services business!

Product businesses are what they sound like: organizations engaged in the design, manufacture, sales and support of a product, a good that is used to do something. Services are fundamentally different. Services are actually events in which the service is produced and consumed at the same time. Products endure, services evaporate.  

Products benefit from the cumulative total of all the work that went into producing the item.  Each iPhone you purchase inherits all the knowledge embedded into Apple about what makes a great iPhone.  Manufacturing itself is so highly standardized and managed, that even if any of the persons who touched your phone on the assembly line was having a bad day, it did not affect the quality of your new phone.

Products actually don’t have to be physical goods anymore.  Software is a great example of an intangible product. It is something you purchase that is complete in itself. 

Services are not complete in themselves. In a service, there is a direct relationship between the employee and customer. It all hangs on the employee and what they bring to the interaction. Employee having a bad day? Service will suffer. Find an employee that loves their job and they will serve the customer above and beyond.

Services are exceptionally broad.  But no matter the industry, there are very real differences between a product business and a service business. Consider:

• Boeing manufacturers airplanes (product) vs. Delta/America/United/Southwest which deliver transportation as a service
  • The plane is immaterial to the experience – we assume that it is going to take off, fly and land without incident.  The service is in delivering us from one location to another. Flight attendants can have a tremendous impact on how we feel about the experience.
• Intuitive Surgical’s Da Vinci makes a surgical robot (product) vs. the Mayo Clinic which delivers ‘healing’ as a service.
• McDonald delivers food as a product. A Michelin 3-star delivers a hospitality service using food.

If money has changed hands and you do not walk away with anything, odds are you are dealing with a service. The type of business you are operating means that there is in fact a way in which these businesses run best. 

Let’s unpack three common mistakes that arise from this lack of understanding:

• Leaders squander their time
• Leaders waste money investing in the wrong place
• Leaders have the wrong team in place 

First, leaders unknowingly squander their time.  This commonly plays out in a few ways.  There’s often an excessive focus on doing the work, rather than grooming the customer experience.  

Consider attorneys who do complex tax planning. The complexity of the planning problem and the novelty of discovering the solution makes for exceptionally stimulating work. Far too many attorneys are focused on this aspect, as opposed to how the customer is experiencing the work. 

Contrast the attorney’s perspective with their client’s. The client may be nervous about the ramifications of the planning, concerned with their own mortality, or a myriad of other things. Presenting the client with a novel, well-constructed plan may answer the question of why they engaged your firm to begin with, but does the client walk out of the conference room reassured? Confident in their path forward? Does their spouse understand the decisions made if it applies?

There is a gap between how the attorney spends their time versus what the client ultimately wants the plan to deliver.

Leaders also squander their time focusing on adding features. They will declare to all who hear about all the delightful bells and whistles they have incorporated into their work. A personal trainer can tell you about all their fancy equipment or the novel application of a new therapy to stimulate muscle growth. But clients don’t care about features, they care about results (lose weight, gain muscle, get healthy).  

Experts appreciate the nuance of a new feature. But the average person doesn’t. They lack the context to understand the implications of the feature. They just care about the big picture. An excessive focus on features misses the forest for the trees.

Second, leaders will waste money investing in the wrong place. If you don’t understand what creates value in your business (e.g. the relationship between your employees and your customers), it is hard to know what to invest in. 

Services businesses require a delicate balance in value delivered to the customer, value paid out to the employee for excellent service rendered, and value retained by the owner (whether to be distributed or reinvested).  There is a very real risk that you will pour resources into something that is not actually creating value, and simultaneously deprive the value-creating parts of your organization of the resources they need to be successful.  

If the firm takes too much, their employees will leave because they can do better on their own without the firm.  An attorney friend of mine saw this to be the case, and ultimately left a larger legal firm because that firm’s cut was far too large.  My friend left, and took essentially all his clients. Why? The firm was just a platform. The client cared little about the name on the letterhead.  

Often in services orgs, high-level management has a quality of life that they don’t want to give up. They don’t want to grow the business beyond its current dimensions because that would compromise the status quo. So they decide to stay at the size they’re at rather than growing. As a result, they often can’t retain the best people for the job, because there is not enough growth to make it worth their while.

What if the customer takes too much?  Arguably the severe downturn in technology companies in the last few years is a great example of this. For much of its life, Uber either lost or made essentially no money on the service it provided. This was a clear case of excessive customer surplus. 

Providing value above and beyond what the customer is willing to pay for is a dangerous game. In the long run, the firm can suffer acutely. In the short run, you also risk training the customer to expect certain things that are not actually economically feasible. As the saying goes, the first time someone receives something it is a gift, the second is an expectation, and the third, an entitlement.

The value the customer receives must be balanced with what is required to deliver it – namely appropriate rewards to both owner and employees.

Finally (and less commonly) if the employee takes too much of the value, there is not a lot of incentive to do anything – think academics with tenure. To provide a service, you must be willing to serve. For some, absent external incentive, they default to doing poor work or no work at all. 

Third, leaders will have the wrong team in place. Recall, service organizations are 100% about relationships—the core being between customers and employees. As a result, it is mission critical to attract the right people to the organization—people who are capable of delivering the service you want to deliver in the way you want it delivered.  But it is even bigger than that. Employees that are aligned, bought in, and are engaged often deliver extra value: they will volunteer above and beyond to serve the client. 

It is paramount to understand which types of employees translate to best customer experience.

Even if you have these right people, your compensation program may inadvertently work against the culture.  An eat-what-you-kill pay model may conflict with promoting a culture of collaboration between employees. The team can be made wrong by a misaligned way of paying folks.

Attracting and compensating the right team is frequently complicated by the presence of a singular, charismatic founder/leader. These larger than life individuals are massively important in getting a new venture off the ground. The challenge is that they may not fully understand why they were successful. For example, the founder may have a natural facility for sales or an innate understanding of the client’s point of view based on prior life experience. 

It will require work to transform this tacit knowledge into something that can be shared and scaled by a broader team. Far too often, this does not occur. While this may keep the founder in demand to step in to solve problems, it also means they can never leave.

Each of these mistakes is fundamentally about misallocating resources.  The resources of time, team, and money should be invested in the organization to generate a return. But these mistakes discussed limit the ability for these investments to pay off.

Instead they function like symptoms of a disease, keeping the patient from functioning at their full potential. Similar to how plaque prevents blood from easily circulating, the disease for service organization is an imbalance, a plaque, that limits the organization. Because of the ephemeral nature of services – created in a moment between customer and employee – service businesses require a careful balance between the firm, the customer and the employee. 

The great service organizations see a beautiful, reinforcing flow where great firms create great workplaces for their employees. These employees are ready and able to deliver a service experience that wows their customers. The firm receives the economic benefit from this service delivery. 

In the long run, satisfied customers tell their friends about their great experience and drive further growth. Each step reinforces the next, and as the firm gets better and better, the energy that emerges is best characterized as excellence.

The Path Forward

So if leaders are at risk of squandering their time, wasting their money, and building the wrong teams of their organizations by not appreciating the uniqueness of being in a service business, how do they move forward? 

The answer is not to just do better or work harder.

Instead, the answer must be paired with an understanding of where these key resources (time, money, culture) should be applied.  In a service business, there are three primary domains where these resources can be deployed: the employee search process, the customer search process, and into the organization itself.

Service excellence emerges by deploying resources in a balanced way to these domains.

The customer search process

The late Clayton Christensen described customers as “hiring” products and services for a ‘job to be done?’ A fast food burger’s job to be done? Filling an empty stomach. Same as hiring a lawn care service to cut an overgrown yard.

The first place a leader should deploy resources is to understand what ‘job’ your firm is being hired to do and why? This question is best answered by diving deeply into the customer’s journey from need to hiring your firm.  With this information, you can craft a better experience for the customer – from start to finish. And in services, experience is everything. 

Product businesses generally are better about understanding the customer journey. They’re developing the product’s features specifically to address customer  needs. By contrast, services businesses often don’t fully understand  why their clients hire them.

Consider how Proctor and Gamble will embed teams in the households of American families to understand how everyday tasks like loading the dishwasher and doing the laundry are done in the context of shuttling kids to/from sports, a barking dog, etc. 

A service business can adapt this approach through a tool such as a customer journey map. This map analyzes each stage in a customer’s journey from:

• Need identification – “I have a problem”
• Requirement specification – “This is what it will take to solve my problem”
• Solutions research – “Who can do what I need?”
• Provider evaluation – “You say you can, but can you really?”
• Decision – “ok, it’s you, let’s go”
• Service delivery
• Evaluation – “did that do what I thought it would?”

At each step along the way, you should understand how and why a customer is behaving and making the decisions they are.  For most businesses, what emerges are several common patterns or archetypes. These are similar types of clients that engage your firm for similar reasons.  Understanding these major customer groups can allow you to better tailor your offerings to better hit their potential needs.

The employee search process

Recall that employees are the lynchpin of a service business. The ones actually delivering the service to the customer are representing the entire organization. In that moment, they are the organization’s face. No one cares about the corporate parent of the restaurant if your server is a monster. 

Attracting the right employees who are aligned with your culture and capable of delivering quality service is critical. 

In the same way that customers have a ‘job to be done’ that drives their search for a firm, employees are searching for a ‘job to have’ that provides fulfillment, compensation, and opportunity. 

The leader of a service organization can and should think about this career journey of an employee.  Consider these stages:

• Self-evaluation and career research – “Who am I and what do I enjoy doing?”
• Opportunity research via networking or job postings – “Who is hiring”
• Mutual evaluation in an interview process – “Is this the right place for me?”
• Offer and acceptance – “Do they want me and is my pay fair?”
• Employee on-boarding – “How do I get up to speed and contribute?”
• On-going talent development and performance management – “How do I get better at my job?”

At each point along the way, resources can be utilized to help attract and retain the right sorts of employees. This can be a differentiated way to source unique talent.

For example, Alpine Investors, a private equity firm, has a CEO-in-training program designed to appeal to recent graduates of top-tier business schools.  Upon completion of this program, these students are equipped and ready to be deployed in a C-suite role within Alpine’s portfolio companies.  From the employee-side, the program dramatically accelerates how quickly they are able to move into a senior level role. 

From Alpine’s perspective, there is tremendous value added as well.  They are identifying talent before it has a permanent home. They are able to instill the core values, approach, and process that correlates with success in their system. 

This is a great example of a creative way to change the traditional employee search process. 

The firm itself 

Deploying resources externally around customers and employees should also be paired with an internal focus to improve.  Internally, a leader can focus on two primary things – the culture of the firm and the operational processes driving service delivery. 

There is nothing more important than culture to the long-term success of the firm. Seriously, nothing. The great Peter Drucker framed it this way ‘culture eats strategy for breakfast.’ Culture is that important.

But far too often the culture conflicts with the value trying to be delivered. Consider the common ‘billable hour’ of an attorney.  This method of compensation is in direct conflict with becoming the trusted advisor of the client. Trust takes time to develop, a mechanism that is now penalized. 

Culture is what attracts employees to a firm and what keeps them there. Customers can sense whether the culture is promoting alignment between employee and firm. Culture has to be in sync with what drives success for your specific business and service.

Leaders must understand their culture and carefully craft it.  

Leaders must also focus on the process of service delivery. Talking about “process” feels restrictive and constrained.  But thoughtful processes can help ensure consistency of service delivery. Good process ensures that the customer gets similar value each time – paving the way for easy referrals of new customers.

As well, consistency lowers cost.  It also allows a service to be replicable and scale with the firm as it grows. Good process also can address ‘service recovery,’ the manner by which the firm recovers from mistakes.  Research has shown that a mistake well resolved can generate a more valuable long-term customer than even a customer who had no issues.

The thoughtful leader deploys resources to support enough processes to be useful, but not so much to create excessive bureaucracy. 

Conclusion

Far too often the differences between product businesses and service businesses fly under the radar. We live in a world where product businesses implicitly dominate the narrative.

The onus then is on leaders to grow their thinking, if they want to break through to the next level. These leaders have three primary areas they can focus on: the customer search process, the employee search process, and the internal culture/processes of the firm. Deploying the resources of time, team, and treasure into a clearly articulated service model balances the interests of customer, firm and employee. 

Done well, this creates a flywheel driving value for all parties involved. But that is just the beginning. Getting your service business to this place of balance may open up entirely new doors to explore. 

Consider the story of the restaurant Alinea in Chicago. Alinea is a three-Michelin starred restaurant whose head chef, Grant Achatz, is known the world over for his paradigm breaking cuisine. The restaurant has surprised and delighted customers since its founding. 

What is less well known is that Alinea was one of the earliest restaurants to begin pre-selling its prix fixe menu. Instead of waiting until after the meal to collect the bill, at the time of reservation, diners pre-pay for their dining experience. This sort of “ask” would be unthinkable in a setting that lacked the tremendous reputation of Alinea.

By implementing this change in the typical sequence of dining at a restaurant, it unlocked massive leverage within their business. Suddenly, the restaurant went from being relatively cash poor to cash rich. It was able to change its payment terms to suppliers and negotiate better pricing.  Better pricing results in enhanced profits, driving new lines of business along with further enhancing the client experience.

Building a great service business opens new doors for creativity – creating a better place to work and ultimately a better world for us all.

Won’t you get started today?