Services Sector Goes High Tech to Stay Ahead of Global Rivals
Ask your insurance man a tough question about your policy these days and you’re likely to get a long answer in short order. If Bill Pfordt has his way, you’ll get a complete computer printout, too.
F. William Pfordt, director of computer systems at Philadelphia’s Provident Mutual, is planning the company’s third-generation computer system, to be installed in a year or so. He envisions the day when every field agent will be able to work out all the financial and actuarial details of a policy within minutes by tapping into the company’s electronic data bank with a portable laptop computer.
“We all realize now we’re in a fight competitively for our lives,” said David Mahan, Provident’s director of policy services, whose 800-member staff is closely wedded to Pfordt’s computer bank so that it can generate continuously updated information about every policy and every client on the company’s books.
What is happening in the insurance business is happening in newly competitive service industries across the board.
At the beginning of the decade, it was the U.S. manufacturing sector that first felt the lash of global competition. But now the economy’s huge service sector, responsible for more than 70% of the country’s economic output and about three-fourths of all jobs, is well along toward a radical restructuring.
Signs of this are everywhere. Automated teller machines on every other downtown street corner make 24-hour bank services commonplace in most cities. Travel agents equipped to calculate the cheapest and most direct air fares And routings with the flick of a computer key also make and confirm hotel reservations worldwide.
Becoming More Useful
Arnold & Porter, Washington’s largest law firm, is busily redefining and expanding what a lawyer can do for a client, offering real estate and financial management, market research and public relations counseling.
Laser scanners have speeded supermarket checkout lines for 10 years, but industry leaders are now using them to track selling patterns, control inventory and provide store managers with a complete database from which to plan orders.
For manufacturing industries, the payoff of modernization is already clear. Manufacturers, particularly of durable equipment, have rebounded so thoroughly from the productivity slump of the inflation-ridden 1970s that increases in output per hour since 1981 have outstripped the legendary productivity record of the 1950s and 1960s.
Between 1981 and 1987, according to the Labor Department, manufacturing productivity soared 4.8% a year, compared to a growth rate of 2.8% from 1948 to 1973.
Yet by official measures, productivity in the services sector lags. In the aggregate, the Labor Department says, services productivity advanced only 1.2% a year between 1981 and 1987, substantially short of the 2.6% annual growth rate from 1948 to 1973.
Stranger still, the productivity record is poorest for some of the service industries--such as financial services, insurance and retail food marketing--where new techniques and technologies have led to improvements that are obvious to any client or customer.
By some measures, productivity of insurance companies and supermarkets has actually declined over the past 15 years or more.
Difficult to Measure
But tell that to managers at Provident Mutual or Washington’s Giant Food, and they will stare at you in bewilderment. They know that they are operating more productively, and they have balance sheets to prove it.
One cause of the apparent contradiction lies with the way productivity is measured in the services sector. For manufacturers, it is easy to count the number of widgets produced per man-hour. And it is even possible to take into account the quality of the widgets.
“To improve productivity in manufacturing, it’s obvious enough that you substitute a machine for a person,” says David L. Birch, a one-time Massachusetts Institute of Technology economist who runs a consulting firm in Cambridge, Mass. “But what do you do to improve service productivity?”
Apparently, you do not do what the insurance industry and supermarket business have done. By one measure--value added per person employed--productivity among insurance agents declined by 0.4% a year from 1979 to 1987. And productivity declined about 0.1% a year for retail food stores.
“The insurance industry seems ideally suited to the data-handling capabilities of modern computers,” Brookings Institution economist Martin Neil Baily has written. It is “implausible,” he argues, that the insurance industry should show up as unproductive as the statistics suggest.
As for the grocery business, Baily observes that the advent of the supermarket after World War II boosted productivity substantially. But “we could only invent the supermarket once,” he says, and the supermarket so raised productivity that future growth was difficult to achieve even though the range and quality of products and the ease of shopping for them have continued to improve.
Problems With Standards In fact, most successful supermarket operations, such as Giant, have deliberately added personnel to their retail stores--and therefore, by definition, made them less productive--in the interest of providing better quality service to customers. That has more than offset streamlining in the inventory and management ends of the business.
But if measurements of insurance industry and supermarket productivity do not square with what seems to be going on, the fault may lie with the measurements. As Baily of the Brookings Institution concedes, there are serious problems with the standards used to measure exactly what it is that many service industries produce.
Should the output of a school teacher be measured by the number of students in the class? Should the output of a government worker be measured by the number of memos that move from the in-box to the out-box?
Harder yet are measurements of quality. When is one supermarket twice as good as another? What makes one insurance policy twice as good as another?
The dollar value that society attaches to services might provide one means of measuring them. But University of Maryland economist Mancur Olson argues that the value of many services simply cannot be “brought under the measuring rod of money.”
Money, by Olson’s reasoning, is not an adequate measure when an insurance company improves the quality of service to its customers. Nor does the price of food reflect the added attractions of a food store that offers customers an opportunity to buy a wider variety of goods more quickly in a more pleasant setting.
Regardless of how productivity is measured, service companies make management decisions to improve the product, increase market share, speed up profits--whatever meets the competitive needs facing the industry.
Efficiencies Aren’t Visible
Giant’s management team, operating from unpretentious company headquarters in Landover, Md., have other objectives than improving their formally measured productivity as they seek to dominate the grocery business in the Washington area.
“If anything, we are today more labor-intensive in all our stores than we have been in years,” says Alvin Dobbin, senior vice president for operations. Most Giant stores have been adding behind-the-counter butchers, fresh seafood, salad bars and ready-to-cook specialty foods.
The efficiencies are behind the scenes: in the automated warehouses, the in-house production of dairy and bakery products, a radio-controlled trucking fleet and the computer-linked central inventory control system. Yet the government statistics that measure productivity show that the supermarket industry has one of the worst records in the services sector.
Department stores, by contrast, show improving productivity.
“But have you tried to buy anything in a department store lately?” Dobbin asks. “There’s nobody to help you find what you want, and when you find it there’s nobody to buy it from.”
At Provident Mutual, an old-line, middle-sized life insurance company that recently abandoned a wooded campus in a posh Main Line suburb for a sleek glass tower in Philadelphia’s regenerate downtown, the company’s main object these days is to improve services to old customers and devise ever more flexible insurance products to attract new customers.
That is the point of the computers, the newly experimental telephone service call with the electronic simulated voice that reads out the status-to-date of each client’s account, the laser printouts, the laptop computer each sales agent is urged to carry.
“Even 10 years ago,” says Pfordt, “we couldn’t do any of this.”
In the insurance industry as with supermarkets, official productivity is lagging. But with Provident, as with Giant, the services being offered are succeeding in the one place that counts--the marketplace.
“If you’re going to measure the service sector by productivity,” consultant Birch says, “and the future of America is supposed to hinge on that, then you’d better eliminate the best hospitals, the best schools, the best newspapers--because none of these is productive if you apply an industrial standard.”
