Recipe for Survival : Service Sector Forced to Slim Down, Work Smarter

To open her Mrs. Fields Cookies store in Costa Mesa’s South Coast Plaza each morning, Janet Osinski, 21, flips on her computer even before she starts warming up the oven.

Paging to a daily planner, she plugs in a few crucial facts: Rain is expected. Daylight savings time has just begun. Schools are on holiday. There’s been an earthquake.

And then she sits back.

Combining historical data with the day’s anomalies, Osinski’s workstation shows how many customers dropped in each hour last year and predicts how many of which cookie today’s customers are likely to tote away.

The program tells her how much dough to mix--by what time--to minimize leftovers. And as the day unfolds, Osinski plugs in hourly sales updates, which the software massages to revise remaining forecasts and offer other suggestions. If sales are slow, for instance, the computer might nudge her to offer free samples.

Though the irresistible aroma of a semisweet-chocolate-chip-with-nuts cookie doesn’t immediately trigger associations with state-of-the-art management, Mrs. Fields is at the forefront of efforts to squeeze higher productivity out of America’s service businesses.

It is a crucial challenge, because the service industries--entertainment, hotels, health care, professional services, advertising, retailing, transportation, communications, insurance, banking and more--increasingly are at the heart of the U.S. economy.

During the 1980s, bricks-and-mortar industrial companies lopped off 2 million jobs in a wrenching effort to slim down, speed up and halt muscular international competitors. By 1990, that left service industries responsible for a commanding 4 of every 5 remaining jobs in private industry.

But over the past two years, service companies and their workers have stepped up to the chopping block. Deregulation and foreign competition--those dual dangers that set into effect the restructuring of the manufacturing sector--have hit them with a vengeance.

The aftershocks of this tectonic shift are the business headlines of today: The merger of Bank of America with Security Pacific. The marriage of Chemical Banking Corp. and Manufacturers Hanover. The deaths of Pan American World Airways and Eastern Airlines. Mergers and job cuts at top accounting firms such as KPMG Peat Marwick, Ernst & Young and Deloitte & Touche. Layoffs at big law firms and public relations companies.

Combined with an enduring recession, this pummeling of service companies created a new class of unemployed--professionals and managers who had thought their jobs inviolable.

How could this have happened to the businesses that futurists promised would carry the U.S. economy into a rosy, post-industrial information age?

The service industries “allowed their white-collar payrolls to become bloated, their investments in information technology to outstrip the pay-backs, and their productivity to stagnate,� answered Stephen S. Roach, senior economist at the investment banking firm Morgan Stanley, in an influential Harvard Business Review article last fall. The resulting retrenchment, he predicted, will endure until at least the middle of the decade.

In certain industries--notably transportation, telecommunications, cable television, banking and financial services--deregulation kicked off life-or-death struggles. Stronger players cut prices and introduced innovations that weaker bretheren could not match, forcing many to merge or go out of business.

In Atlanta, for example, two hometown airlines, Eastern and Delta, clashed in a vicious dogfight to rule the Southeast when the industry was cut free from government regulation in the 1980s.

Today, Delta’s campus-like headquarters at Hartsfield Atlanta International Airport bustles with activity as Delta joins American and United in a troika that dominates U.S. air travel. Just down the road, empty terminals that housed once-proud Eastern serve as a metaphor for a shrunken industry--dark, silent, unoccupied.

In other sectors, direct foreign investment has provided a decisive advantage by ensuring access to capital in prolonged battles over market share. That was the story, for example, with Investcorp’s recent $300-million equity infusion into Saks Fifth Avenue, the tony department store chain. The fresh funds from the Bahraini company are allowing Saks to launch an ambitious program of expansion and renovation at a time when many chains are shrinking or dying.

Similarly, a Hawaiian education trust invested $250 million in the Wall Street firm Goldman, Sachs last month, teaming up with Japan’s Sumitomo Bank, which had purchased a $500-million stake six years ago. The international capital helps keep Goldman a leader in a brutally competitive industry, and allows the firm to remain a private partnership--the last among the big investment banks.

But many U.S. service companies, lacking foreign patrons, have foundered.

Riding a wave of enormous growth in the ‘80s, service firms added 20 million jobs with scant regard to cost. At the same time, said Morgan Stanley’s Roach, the industry invested $800 billion on computer hardware and probably an equal amount on software and support.

What they got in return, however, is pitiable--productivity increases at the barely perceptible annual rate of 0.7%. For the U.S. economy as a whole, that performance canceled out the handsome 3.8% average annual gains churned out by a newly revitalized manufacturing sector in the last decade.

So far, service companies have aped the manufacturing sector’s response to new competitive pressures: They’ve lopped off employees.

Yet this strategy is far trickier in service companies, which thrive largely on the wits and energies of their workers. Roach called the approach “slash-and-burn� and warned that it risks alienating customers and losing competitive muscle.

To business guru Peter F. Drucker, a professor at the Claremont Graduate Center, the solution is for people to work “smarter�--to clearly define tasks, then eliminate everything that does not need to be done. Get rid of long meetings with too many participants, he urged. Get rid of computers in retailing. Salespeople, Drucker said, “spend so much time serving computers that they have little time for serving customers.�

Indeed, for all the fancy equipment, many service companies haven’t yet figured out how to work smarter.

Not only did they buy more high-tech equipment than they needed, they also applied it to functions that didn’t add value, such as word processing and spread sheets. The result: Computers greatly boosted fixed costs without providing offsetting income.

There have been some exceptions--exceptions that the experts say need to become the rule.

American Airlines’ Sabre reservation system, for example--by walking travel agents through complicated itineraries--encourages travel planners to direct a lot of extra business American’s way. Other airlines fought American’s system--and then copied it.

“Technology has been part of the problem,� Roach said, “but it can also be part of the solution. It has to deliver in this decade, or the whole Information Age is a sham.�

Enter Randall K. Fields.

A former computer programmer, he is chairman of Fields Software Group, an affiliate of Mrs. Fields Cookies, the Park City, Utah, cookie company founded and run by his 35-year-old wife, Debbi.

The super-efficient software custom-built by the 45-year-old Randall Fields and a team of computer technicians allows Mrs. Fields store managers such as Janet Osinski--and Debbi Fields herself--to do what they do best: concentrate on customers and employees.

“We couldn’t run the company one week without it,� he said.

Mrs. Fields Cookies has grown from one store in Palo Alto in 1977 to more than 600 stores in 35 states and six foreign countries, employing 5,000 people. But rather than become bureaucratic, the firm has stayed lean.

Four years ago, Mrs. Fields acquired La Petite Boulangerie from Pepsico. The soft-drink company employed 53 people at headquarters to run the 119 bakery outlets; within four weeks, Fields’ software cut that number to three.

Baked goods are hardly the only context in which the squeezing of back-room functions provides the critical savings that make mergers work.

For example, when Fleet Financial acquired the Bank of New England last year, the Providence, R.I., bank-holding company consolidated the two banks’ data processing centers into one. The move is expected to slice 50% off the merged banks’ combined data processing and back-office budget of $180 million by the end of this year.

Still struggling with costly bad-loan portfolios, commercial banks remain the most traumatized service segment. As Congress removes barriers to interstate banking, more and more weak banks will be eliminated; observers expect the industry to contract from today’s 12,000 institutions to about 5,000.

Amid the banking gloom, however, one ray of light--an exemplar of Drucker’s “working smarter� thesis--is Banc One Corp. The Columbus, Ohio, bank tallies the highest return on assets in the industry, and its market value exceeds that of Citicorp, the No. 1 bank in terms of assets.

Banc One, with $46.3 billion in assets, has achieved such dominance in part by pursuing a strategy that proved successful in the restructuring of manufacturing companies: It has decentralized operations, but constantly circulates throughout its 51 affiliates the ideas initiated by the various units.

A recent study by the Boston Consulting Group, for example, applauds the fact that Banc One’s affiliates are so powerful they can override headquarters’ marketing judgments. Yet headquarters lets field offices know about each others’ best practices--even publishing “league tables� that disclose operating performances, with the worst listed first. The Boston consultants believe that the practice encourages a healthy collaboration to improve the weakest units, rather than competition to be the best.

In the insurance industry, employees of once-paternalistic Aetna Life and Casualty have been shaken forcibly out of their torpor by a new chief executive, Ronald E. Compton.

In the past year, Compton has pulled Hartford, Conn.-based Aetna out of selling auto insurance in 28 states, sold its individual health insurance unit to Mutual of Omaha and laid off 2,600 employees.

Three corporate divisions have been dissected into 15 profit centers so that lackluster businesses can no longer hide their poor performance. Compton also organized a new auto insurance claims department to deal directly with customers, cutting out independent agents who sell Aetna policies.

So far, it’s unclear whether the pruning and reshaping will encourage new growth. Many employees are made nervous by their sudden insecurity; some claim to be overworked from the cutbacks. The proof will be in Aetna’s profit, which slowly has been spiraling downward for five years.

But it is clear that the insurance business--one of the engines of the computer revolution, with its massive data sorting and storage demands--has ample room to make efficiency gains.

At one big West Coast health insurer (which refused to be identified for this story because its inefficiency reflects so poorly on management), getting a routine claim through a highly automated system used to take 10 days--providing everything went smoothly. A question could easily double the time, and more than half of all claims raised questions.

The system, discovered the Cambridge, Mass., consulting firm CSC/Index, was clogged with hand-offs, sorting tasks and complex data entry, followed by two rounds of rigorous rework and review. Out of the entire 10-day process, a meager 5.2 minutes actually was spent on evaluating the policyholder’s claim.

Shocked by the findings, the company now delegates authority to customer-service representatives to resolve questions on the spot.

Banc One, Aetna and the anonymous insurer confirm one enduring truth: No technological substitute exists for clever managers and strategies.

Added to unimaginative business plans, high-tech yields zero, wrote Esther Dyson, publisher of the computer industry newsletter Release 1.0: “Pointless processes are automated but not redesigned or streamlined as companies try to adopt technology without disruption . . . A little disruption--rethinking of business processes and policies--is key to making new technology useful.�

So service companies confront the same imperative as manufacturers: Do it better, or someone will steal your customers.

Beneficial Corp., a consumer-finance company headquartered in Wilmington, Del., restructured in the late 1980s, selling off all operations not related to its core business of lending money to middle-class Archie and Edith Bunkers.

The $10-billion firm targets people who earn $30,000 to $50,000 a year, making home-equity loans, vacation loans and second mortgages. From brightly painted offices decorated with large, cheerful photos of families at play, Beneficial also delivers credit card and installment financing for retailers. Even in the dreary 1991 economy, Beneficial chalked up net income of $148.8 million, a 13.3% return on equity.

About 70 miles northwest of New York City, in Middletown, N.Y., 35-year-old Robin Owens manages a Beneficial branch using techniques acquired in her 15 years with the company.

“We are working so much smarter today,� she said. “We are expected to do so much more. Fifteen years ago we had two or three products. Now the list is so long I can’t guess how many products are on it.�

Echoing Janet Osinski’s experience behind the counter of her Mrs. Fields’ outlet a continent away, Owens said Beneficial’s newly installed computer system frees her to spend more time training employees and explaining new products to increasingly sophisticated customers.

“I’m totally immersed in my job,� she said, exuding energy. “It’s challenging. It’s satisfying, trying to be responsive and stay ahead of the wave.�

She paused. “My company is not just sitting. They expect us to change.�

Service Jobs Dominate the U.S. Economy. . .

The proportion of Americans who work in the service industries--from banking to burger flipping, insurance sales to copier repair--has increased over the last three decades, whilemanufacturing employment has shrunk.

. . .But the Productivity of Service Workers is Stagnant

By deploying new technology and slashing employment, U.S. manufacturing has boosted its productivity, defined as output per worker. But service industries have been unable to consolidate similar gains in efficiency