Why are service turnarounds so tough?

Because you are trying to balance customer satisfaction, employee morale, and shareholder returns

It's very easy to start a vicious cycle of deteriorating performance

Taking out the right costs

Resuscitating a failing company is one of the supreme challenges in any business. Nowhere is this more true than in the service sector. If we compare Fortune s Most Admired service companies of ten years ago with today's list, we see that virtually every company near the bottom a decade ago has stayed there, gone bankrupt, or been acquired.

Why are service turnarounds so tough? One reason may be that the front line at a service company is the product. A manufacturer's customers can't usually tell when workers at its production plant are unhappy. At a service company, on the other hand, any dip in morale is painfully obvious.

Another reason is that frontline staff control communication with customers. One of their jobs is to keep customers informed when things go wrong. In the mid-1980s, when Continental Airlines was experiencing service problems, one of us was told by a gate agent, "If you didn't want your flight canceled, you should have picked another airline" - hardly an inducement to repurchase. By contrast, manufacturing companies can manage customer communication much more directly through their head office and salesforce. Since most management thinking about turnarounds is based on manufacturing companies, the strategies usually advocated may be counterproductive in a service context. Bring in a new management team? Better make sure you can do so without wounding the confidence of frontline employees. Reduce costs? You could, but you risk undermining morale, which will impair product delivery and disappoint customers. Establish tight control over day-to-day operations? Easier said than done when your key frontline employees are remote from management.

To make matters worse, service company turnarounds are far more likely than manufacturing turnarounds to become caught in a vicious cycle of deteriorating performance. Faced with poor results, managers cut costs, slashing headcount and trimming service. This damages the product and disheartens frontline employees. Poor morale translates into poor service. Customers lose confidence and defect to competitors, and the bottom line suffers.

But the fact that service company turnarounds are difficult does not mean they should be written off. Companies from a variety of industries have shown the way. BankAmerica, Sears, Safeway, Dollar General, Taco Bell, Wells Fargo Armored Car, and Continental Airlines have all completed successful turnarounds in the past decade.

What these cases have in common is that turnaround efforts have been concentrated on five key areas: …