How CEOs can win the new service game

Revolutions happen gradually, then suddenly. For the industrial revolution in services, we believe that a crucial tipping point has just passed. After decades of incremental change, service delivery is now set on an irreversible path to radical reinvention. That reinvention will be powered by new technologies, especially artificial intelligence. But it will be enabled by people, whose attitudes and aspirations have shifted significantly throughout the COVID-19 pandemic.

As a CEO, you have a lot of ground to cover, and the way your organization defines, designs, and delivers services has a significant impact on almost all of it. Services matter in every industry, both as a direct source of value and as an enabler of value creation. For some businesses, services are the only thing they sell. But even the most product-focused companies also rely on a wide range of service capabilities, from their customer-support activities to critical internal functions such as finance and HR.

Any executive who has risen to the top of an organization already has compelling reasons to focus on service operations. The business of service operations has always had an outsize impact on costs, for example. Service operations account for at least 80 percent of operating expenses at major banks, healthcare providers, and telecommunications companies. In retail, that figure can reach 98 percent.

Services have an outsize effect on customer satisfaction too. At one global fast-food chain, helpful and courteous service staff was the number-one contributor to customer satisfaction at drive-through restaurants in the United States, Australia, and Canada. For a major retailer, five of the top six drivers of customer satisfaction relate directly to the skills and behaviors of in-store sales representatives.

While cost and customer experience are perennial topics, the post-COVID-19 era has pushed two other service operations issues to the top of the senior-management agenda. The bumpy global economic recovery means that many organizations are seeing rapid growth in demand, alongside significantly increased risk and volatility.

An organization’s growth is inextricably linked to its ability to deliver frontline services: companies will not retain customers that they cannot support. Heightened risks, meanwhile, are coming from a variety of sources, including increased regulatory oversight (such as the European Union’s General Data Protection Regulations) and cybersecurity threats. Moreover, because services tend to be highly labor-intensive, service delivery exposes companies to a host of people-related risks, from inconsistent performance to staff shortages. Those challenges have been exacerbated in many sectors by the pandemic-driven transition to home and remote working, which can make it harder to manage, motivate, and upskill big services teams.

The reinvention imperative

For decades, managing performance, cost, and risk trade-offs has been the name of the game in service operations, and many CEOs have been happy to leave that delicate balancing act to their COO and functional leadership teams. Today, however, the playing field is shifting. The confluence of four big trends—rapid and extreme digitization, workspace virtualization, contactless operations, and new sources for talent—is rewriting the service operations rule book, creating both an opportunity and an imperative for reinvention.

These trends have been on the horizon for some time, but COVID-19 dramatically accelerated their adoption, as companies moved from experiments and pilot studies to at-scale rollouts of new technologies and approaches in weeks or months (Exhibit 1). It’s increasingly clear that this acceleration has sufficient momentum to make the trends irreversible.

Taken together, this new world of highly digitized, AI-assisted services, contactless operations, and flexible, agile working practices requires companies to think about service delivery in an entirely new way. Instead of the traditional operations perspective, in which activities are managed, executed, and optimized piece by piece, the industrial revolution in services allows organizations to build a unified and seamless “execution engine” that integrates the whole services value chain from end to end.

That shift creates huge opportunities for those that master it. Integrated, highly automated services can scale extremely rapidly, for example, allowing companies to achieve competitive advantage by capturing growth opportunities that their slower-moving competitors cannot.

Truly end-to-end service delivery creates challenges too, especially for large organizations where operations are distributed across a broad ecosystem of global, regional, franchised, and outsourced entities. All these components of the execution engine need to work together, which demands close oversight and sophisticated coordination mechanisms from the top of the organization to the front line.

The transition to the post-COVID-19 next normal will be a critical inflection point for service-based organizations. Pandemic restrictions forced them to transform their operations at an unprecedented rate. Continuing that transformation is now a choice. There is a real risk that companies ignore the big decisions needed to capture the benefits of the industrial revolution in services, allowing competitors to move ahead. Without a crisis to force action, it is down to the CEO to provide the radical vision, the space, and the resources service organizations need to remake themselves for a new era.

Rapid and extreme digitization

The year 2020 may be remembered as when business finally “got” digitization. In a McKinsey survey of senior executives conducted at the height of the COVID-19 pandemic, most respondents said they expected their organizations to invest more in technology to maintain or improve their postcrisis competitive advantage. And a sizeable minority—almost 20 percent—said they were refocusing their business around digital technologies.

This refocusing will be critical. Digital technologies have become dramatically cheaper, more capable, and easier to implement in recent years. The increasing power of AI is helping companies to automate many complex and formerly labor-intensive tasks. That means the limiting factor to digital potential in many service sectors is not the technology but the underlying business process. The biggest leaps in service performance, customer experience, and cost efficiency come when companies redesign their end-to-end processes for the digital environment.

The limiting factor to digital potential in many service sectors is not the technology but the underlying business process.

One leading global bank has done just that, with a project to develop best-in-class digital capabilities to serve some existing and new customer segments at low cost. Following the model first pioneered by leading tech companies, the bank aligned its organization with the journeys its customers took and promoted a start-up mindset in its teams.

The results were startling. The cost-to-income ratio for customers in the bank’s new digital segment is 20 percent lower than for traditional customers. And the greater agility of its new structures has allowed it to launch new products extremely rapidly in major emerging markets.

The AI-powered, digital-first approach also paves the way for continual improvements to service efficiency and personalization. Companies can use the proliferation of data generated during service interactions to identify and address pain points, both for customers and for the company. And combining smart analytics with operational agility enables services to be customized to meet the needs of specific user groups or individuals. Companies are already making use of AI techniques to predict user needs based on real-time product performance, for example, allowing them to automate timely, targeted interventions that solve problems quickly and boost customer satisfaction (Exhibit 2).

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