Service productivity: A call for action!

By Tor W. Andreassen

28 May 2021 12:19

Service productivity: A call for action!

"When services make up 80% of most modern economies’ GDP, we need to see and measure value creation through new lenses" says DIG Professor Tor W. Andreassen.

First published in AMASERVSIG

Since the crawling out period of service marketing in the early 1980s (Fisk et al 1993), service researchers have informed policymakers and leaders with vital insight enabling them to advance societies and organizations. We have developed seminal knowledge related to service quality, e.g., defining it (Grönroos 1984), measuring it (Parasuraman et al 1985), and linking it to firms’ performance (Rust et al 1995). Return on Quality became a term. In recent years we have seen seminal research related to transformative services (Anderson et al 2013), new business models (Benoit et al 2017), automating the front-end with robots and technology (Wirtz 2016), and the role of Artificial Intelligence (Rust and Huang 2019). High tech/high touch became a term.

Nevertheless, with emerging success comes new challenges: Service productivity was much lower than goods productivity (Brynjolfsson 1993, 1994). Sadly, the picture has not changed. Recent OECD-data for Norway, which are not unique, indicates a change in total factor productivity (capital, labor, energy, materials, etc) hovering around 0% for the last four years. OECD-predictions for the Eurozone toward 2022 regarding labor productivity development is 1,036 %. Krugman (1994) elegantly expressed concern about the severity of this “lack of productivity”: 

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” 

Where did we go wrong?

Well, we did not. It was destined to happen, and now we must find a solution. As economies transformed from agriculture and manufacturing to service, the transfer of capital and labor followed suit. In the process, we contracted “the Baumol’s cost disease” (or the Baumol effect), i.e., the rise of salaries in jobs that have experienced no or low increase of labor productivity, in response to rising salaries in other jobs that have experienced higher labor productivity growth.

With the growth of services and the decline of manufacturing, resources gradually transferred from high-productive sectors to low or negative productive sectors. For example, in the USA productivity from 2005 to 2018 was 1,3%, down from 2,8% from the previous period 1995 to 2004. In OECD, 29 out of 30 countries saw the same pattern after 2004. This is a «Houston, we have a problem» situation!

Measuring productivity and digital services

According to the US Bureau of Labor Statistics (BLS), we measure productivity by comparing the amount of goods and services produced with the input, which were used in production. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output. Consequently, a change in productivity ΔP = ⨐(ΔOutput/ΔInput). Output = Units sold x price per unit. Input = Labor x wages. 

From this, we can draw that productivity increases when firms can produce the same output with less Input, or more output can be produced with the same input or combinations thereof. 

It may be true that service sector productivity is low or negative. However, it may also be due to the transactional nature of services and a measurement problem related to the advent of new and higher-quality ICT goods and services. Reflecting the latter, Robert Solow, a Nobel laureate in economics, commented:  “You can see the computer age everywhere but in the productivity statistics.”

Parasuraman (2002) was the first service researcher who identified a measurement problem with productivity when he elegantly pointed to customers’ input in service production. With customers as co-creators of value, total productivity is, in his argument, a function of firms and customers’ joint productivity. When organizations outsource production tasks to customers, they reduce their own input for the same output. Nevertheless, customers, who have to increase their input (i.e., time and effort) for the same output, may experience a drop in productivity and customer satisfaction. Building on the dynamic two-sidedness of productivity, Andreassen, van Oest, and Lervik-Olsen (2017) found, contrary to contemporary thinking, that firms can benefit from a short-term drop in productivity, i.e., increase input, if customers experience an increase in productivity, e.g., reduced input.

A second measurement challenge is related to social media where consumers are increasingly using free software like Facebook, Instagram, and Google. While this is fantastic, no transaction has taken place and no value is registered. However, value is created. Brynjolfsson et al (2019) responded to this and developed a new measure – GDP-B (for benefits) and estimated that including the welfare gains from Facebook would have added between 0.05 and 0.11 percentage points to GDP-B growth per year in the US.

A call for action

The above raises numerous questions: How do we account for customers’ input, how do we set the value of their time, and what is the value of ICT in creating value rather than merely reducing costs, and what are the most important capabilities that organizations need to add?

As researchers, we need to develop a deeper understanding of digital value creation, innovation, business models, and transformation for sustainable growth. In my view, this is the roadmap to better measurement of productivity and value creation in a digital service economy. 

We are indebted to the social economists who served us well as long as farming and industry were the dominant parts of GDP. However, when services make up 80% of most modern economies’ GDP, we need to see and measure value creation through new lenses. To quote Albert Einstein «Insanity is doing the same thing over and over again and expecting different results. » Bottom line: The future of our children’s children is dependent on their grandparents solving the productivity challenge today! There is no time to lose.