Guaranteed results - service guarantees

Nation's Business, Feb, 1990 by Charles A. Jaffe

Guaranteed Results

In September 1988, JWS Technologies Inc., a Piscataway, N.J., industrial gas distributor, was late on 311 of its roughly 7,500 scheduled deliveries. Although that late-delivery rate of 4.85 percent didn't send customers bolting to the competition - after all, late deliveries sometimes have to be expected - JWS's president, James P. Lyons, wasn't satisfied. He believed a service company like his needed a superior delivery record to keep customers happy and expand its market. So Lyons developed a simple service guarantee: If JWS was late with a delivery for any reason, the customer would get the ordered gas for free.

To motivate his employees, Lyons set aside $4 per worker for each day that no deliveries were missed. At the end of every quarter, employees would share the money as a performance bonus.

During September 1989, nine months after putting the guarantee in place, JWS Technologies made 99.76 percent of its deliveries on time, missing just 17. JWS's Allentown, Pa., subsidiary, Blue Valley Welding Supplies Inc., which gets about 1,200 orders per month, missed just six deliveries during the first nine months of the guarantee. Blue Valley gave away approximately $250 in gas for late deliveries.

Moreover, with establishment of the guarantee, "our criteria for measuring [on-time deliveries] had become more stringent," says Mike Kaputa, JWS's general manager of operations. "Our improvement is even bigger than the numbers show."

Lyons of JWS is among a growing number of executives willing to risk offering an unconditional service guarantee in exchange for the improved efficiency, marketing advantages, customer satisfaction, and worker morale that go with keeping service promises.

Manufacturers have provided product warranties for years, but conventional business wisdom has long held that service can't be guaranteed. Unlike hard goods, services are generally produced and consumed at the same time; an auto part can be inspected and returned to the factory, but installation of that part can't be checked in advance to ensure that it is done properly. And while on-time deliveries are easily measured, many other standards of good service are not so objective. Who decides the "proper" amount of courtesy? How can you guarantee performance that may hinge on a worker's mood?

Since the criteria can be so subjective, the potential losses from the service guarantee are less predictable than those from a manufacturer's warranty. Because of that variable and the potentially high level of risk, business traditionally has shied away from providing service guarantees.

But when a service company wants to distinguish itself from its competitor, it typically finds few if any options other than offering a service guarantee.

"A service guarantee can be a turbocharger to force change and quality improvement, making a good company much better," says Christopher W.L. Hart, assistant professor at the Harvard Business School and head of the TQM Group, a service-management consulting firm in Cambridge, Mass. "Companies that pride themselves on should try to develop breakthrough performance. Committing to perfect service forces you to actually do it, and the benefits from success can be enormous."

Service can be guaranteed in various ways. Many restaurants promise a free meal or dessert if service isn't fast. Some hotels cancel charges when a guest is disappointed with service. Some banks hand out coffee mugs or dollar bills if customers aren't greeted by name and with a smile. Toronto-based Speedy Muffler King and Car-X auto-repair shops - separate operations under joint ownership - go even further, offering a 110-percent refund; a dissatisfied customer is refunded the cost of the service plus 10 percent for the inconvenience.

Quality experts and executives at companies making unconditional service promises agree that the guarantee-development process starts with a difficult question: Might the demands of perfect service be met without major losses?

Says Hart: "When I sat down and wrote the words to my guarantee - if you're not 100-percent satisfied, you can choose to either pay me nothing or a percentage between 0 and 100 percent of my fee - I froze. It forced me to think about my service in a way I never did before. It forced me to think of every conceivable source of client dissatisfaction.

"A service guarantee should become a line item on the balance sheet, so any executive who goes through the process should get scared. But if [the executive] can provide service commensurate with a very strong guarantee, the risks are worth it."

Guarantees are often instituted to create marketing advantages, but a well-planned program changes the entire service-delivery system, making it better at every turn. Federal Express Corp. developed methods for efficient package handling, capitalizing on its success by promising "absolutely, positively" that packages will arrive overnight or the customer won't pay.

"A lot of companies look at a guarantee only as a marketing effort, but it works best when it is a two-pronged program," says John Haywood-Farmer, an associate professor at the University of Western Ontario School of Business Administration. "The best approach is starting with the philosophy of providing outstanding, guaranteed service and then building the organization around it."