PRODUCT DEVELOPMENT FOR SERVICES

Marc H. Meyer, Walsh Research Professor
212 Hayden Hall, Northeastern University,
360 Huntington Avenue, Boston, MA 02115
mmeyer@cba.neu.edu <http://www.cba.neu.edu/~mmeyer>

Arthur DeTore, M.D.
Vice President, Director of Strategic Planning and Knowledge Management
Lincoln Re
1700 Magnavox Way
Fort Wayne, Indiana 46801

Published in Academy of Management Executive, Fall 1999

Title: PRODUCT DEVELOPMENT FOR SERVICES
Date: May 10, 1999
Executive Summary

This article applies management concepts for the development of products and systems to the development and growth of services businesses. It tests product platform concepts against the experiences of a success service enterprise and sets the stage for future research by positing approaches for market segmentation, service platform definition, and competency measurement.

We begin by proposing new management research in the field of product development as a foundation for studying services development. The central themes of that research are frameworks guiding the efficient development of new products based on robust product and process platforms targeting an array of related markets. Enabling these product and process platforms is the development or licensing of technical, production, marketing, and organizational competencies.

We then adapt these concepts to the development and growth of services businesses, applying them to a worker’s compensation insurer based on several years of collaborative research with management of that firm. We find the integration of target markets, services platforms, and competencies a powerful approach for characterizing the development and success of the business. Breaking the business down into major elements or "subsystems" of core services has allowed management to design specific service strategies and deliverables in a manner that is both highly systematic and measurable.

Product Development Research as a Foundation for Designing Services

Services are a dynamic and growing part of our economy. For example, the Bureau of Labor Statistics reports that the service-producing sector continues to lead projected employment growth in the U.S. economy, and that the ten leading industries accounting for 60 percent of all projected job growth over the coming decade are all service producers (such as data processing, health care, transportation, and financial services.) From the perspective of what we each purchase as consumers, we buy more services than physical products. One study showed that about 55 percent of consumer expenditures are for services (such as health care, travel, entertainment, and financial services), versus about 30 percent for nondurables (food and clothing), and about 15 percent for durables (consumer electronics, automobiles and household furnishings).

If services are such a major factor in the evolving economy, how are they best developed, delivered, and otherwise deployed? What are the keys to success for growing services entities? How can existing service offerings be revitalized and refreshed with new processes and technologies? How might existing capabilities be most effectively leveraged into new market opportunities identified by management?

To help begin to answer these questions, we turn first to research performed in the management of new product development. Clearly, high volume services businesses have achieved a certain degree of "productization" in the design and delivery of their services, be it a large tax preparation firm such as H&R Block, a fast food enterprise such as McDonald's, or a large accountancy such as Ernst & Young. What does productization mean? For physical products, we believe that it embodies a highly systematic approach to the design, manufacture, and integration of the various pieces and parts of the product, striving for advantage in function as well as cost. It also means leveraging these pieces and parts within a common architecture and common production process so that economies can be enjoyed across products for different customers. If each product were entirely unique, it would difficult to achieve scale, build brand, and capture market share.

We believe that these simple concepts apply well to services. Henry Ford wrote a very detailed description of a systematic approach to new product development (in this case, for the Model T automobile) that we now find emulated in discussions of "product platforms" today. Rather than view the automobile as a monolithic entity, Ford focused on the major subsystems that comprised the automobile and on his approaches to innovate and measure performance for these subsystems. Then, he described the integration of these subsystems into the final product -- the car -- and how its performance and cost might be measured as a "total system."

There is a substantial body of research into managing the development of products. That research has identified success factors for effective technological innovation and new product development, generally finding the need for strong market understanding as well as technical competency. Other works have investigated how to better coordinate and integrate new product development activities in marketing, engineering, and manufacturing disciplines through specific processes and organizational forms . However, the vast majority of field research on new product development has concentrated on manufacturers of physical products, be it automobiles , videocassette recorders , portable cassette players , power tools , computers and various types of production equipment . That focus has been broadened by studies of process innovation in non-assembled products such as ice and glass .

Over the past decade, momentum has emerged behind a perspective on new product development that emphasizes product families and product platforms. Product platforms are comprised of individual subsystems and subsystem interfaces, which themselves can be the focus of innovation and investment. The subsystems themselves are based on specific capabilities and component technologies both within and external to the firm. From the user's perspective, the net result is a continuous stream of value-rich, competitively priced products from the same firm over extended periods of time. Effective product family management and platform renewal systematically generates successive generations of market driven product platforms that are the basis for a firm's specific commercial offerings.

Integration of markets, products, and embodied technologies is arguably the most difficult yet important challenge facing firms seeking continued growth. Figure 1 (A Framework for Integrating Markets, Platforms, and Competencies) shows an integrative model that we initially proposed to help manufacturers consider this problem.

On the top part of Figure 1 are the firm's chosen markets, expressed as a market segmentation grid. Market segmentation analysis generally refers to examining the structure of a market as perceived by customers or users, and then applying research methods to understand the nature of demand for the regions of that segmented market space. The purpose of segmentation is to help management focus on specific markets. Armed with that focus, management can target its activities with respect to understanding user needs, performing competitive intelligence, defining and building products, building brands, and creating channels.

In the middle part of the figure are the firm's product platforms. Research has shown that successful corporations can plan the development of product families in advance so that a number of derivative products can be efficiently created from a foundation of common core technology. That foundation of core technology is the product platform, which we define as both common design rules and implemented subsystems and subsystem interfaces that form a common structure from which a stream of derivative products can be efficiently developed and produced. A platform approach to product development can dramatically reduce manufacturing costs and provide significant economies in the procurement of common components and materials. It can also lead to more rapid and cost efficient development of derivative products based on common platform technology. Equally important is that the building blocks of product platforms can be integrated with new components to rapidly address new market opportunities. This can reduce the time cycle for new product introductions.

At the bottom part of the figure are the firm's core competencies. We define a competence as a cohesive set of skills and techniques used to design, develop, distribute, and support a firm's products or services. In the Figure, we identify four general types of competencies that we have observed in manufacturers: market insights, product technologies, manufacturing processes, and, distribution and support capabilities. For service providers, these categories may indeed be quite different. The banking enterprise, for example, may consider its competencies in risk management and financial product packaging equivalent to what a manufacturer considers "product technology." Or, that it's computer and telecommunications systems are its manufacturing processes. Clearly, these competencies will vary from industry to industry, and vary for firms within the same industry.

For the purposes of effective new product development, external competencies among suppliers and partners are just as important as internal competencies developed within the corporation. Rarely can any one organization afford to build all aspects of a product itself. Quinn among others have observed that successful firms are focused, both in the market applications they target and in the particular internal competencies developed for product offerings. Such firms then rely on partners and suppliers for other necessary competencies. Those capabilities that the firm controls and that provide competitive differentiation Prahalad and Hamel label core competencies.

We can summarize the management implications of these arguments. First, a corporation must focus its product development activities on growth markets (which may not necessarily be the firm’s traditional markets). Second, it must develop product platforms that are robust and flexible and that can serve as the foundation for the rapid and cost effective development of specific products. Third, to build platforms, it must develop and nurture specific competencies, some of which are internal to the firm and others, licensed or acquired from outside the firm.

Each of these three elements is dynamic. Markets evolve or are newly born. Either the evolving market or the new market will demand new generations of platforms and component technologies that provide new features, higher levels of performance, or better value. To create these improvements typically requires the creation or acquisition of new competencies, particularly over the long term. Sadly, both Utterback and Christensen have observed that most industrial concerns fail to renew themselves, either due to obsolete market views or dated technology.

Extension of Product Development Concepts to Services

Services businesses can also prosper by the strategic integration of targeting markets, the development and renewal of robust service platforms, and focused competency development.

There have been several studies of services business whose findings are complementary to the frameworks presented in this paper. Service design and measurement are important elements of what we shall describe in the pages to follow. Accordingly, there is the collective work of Shostack and Kingman-Brundage, both of whom looked at the design of services from a workflow perspective. The lens they apply to examining workflow is one of processes, process integration, and process outputs as perceived by the users of the service. Deming also described systems-based approaches for measuring quality and cost for the process subsystems of social service organizations.

In addition to workflow design, the selection of specific services to provide among a potentially broad array of services required by a group of customers can easily be of strategic consequence. Value chain structure, firm positioning on the value chain, and migration on it over time are useful concepts for service strategy definition. Quinn examined service strategy in this light in The Intelligent Enterprise and also described organizational methods and processes by which to effectively implement strategic decisions. He favored the multi-disciplined, cross-organization task force as well as customer-centric measurements of service quality. These ideas are key building blocks for investigating services development.

The demand side of innovation is as important for services as it is for physical products. In The Service Profit Chain, Heskett, Sasser and Schlesinger sought to integrate the respective demand and supply sides of services innovation. Their argument was that business success in services derives primarily from loyal customers, for loyal customers will be repeat buyers of existing services, receptive targets for cross-selling new services, and the source of referrals for new customers. Customer loyalty is derived from customer satisfaction, and that in turn is most often provided by loyal employees of the services firm, and they in turn are loyal if their needs for autonomy, reward, learning are satisfied. Perhaps most important for own thinking about the design of services platforms, Heskett et. al. observed that the most success services companies develop a set of standardized service components that can be mixed and matched at the point or time of delivery by loyal, satisfied employees. Meyer and Zack observed a similar mixing and matching of standardized components in the on-line information services platforms of electronic publishers. In both cases, customization for the user occurs at the time of delivery. That customization is often achieved through people, but as the case of on-line services, it can also be attained through flexible technology.

Distinctive Positioning

To understand how these ideas integrate with platform concepts for services, we will now examine the evolution of a highly successful workers compensation insurer. One might initially consider workers compensation an uninteresting target for services innovation. The common (and correct) perception is that this industry has seen little innovation and changed little over the years. However, we suggest that such dormancy in any industry makes that industry a potentially fertile ground for innovative management approaches.

Workers compensation has been notorious in the United States for the lack of attentiveness on the part of employers to prevent occupational hazards. Fraud by "injured" workers is also not uncommon, as is waste and inefficiency in both accident reporting and claims processing. Industry data supports the need for improvement: insurance rates in this arena almost doubled between 1988 and 1993, and claims from occupational injury doubled in terms of actual dollars paid. Despite recent reforms, the average claim amount for workplace injuries in the United States remains about $4000, and injured workers still take almost twice as long to recover as people having comparable injuries outside the workplace. Studies within the industry have also shown that 85 percent of workplace injuries are caused by behavior that can be rectified, avoided altogether if the employer had only acted ahead of time. While only 25 percent of workplace injury results in lost time from work, that subset results in about 90 percent of all claims dollars paid. These data translate into large economic amounts: approximately 2000 American insurers divide about $60 billion annually in premium revenue.

ManagedComp, a Boston-based managed care workers' compensation company, has focused its energies on achieving a combination of service quality and lower cost. Management’s first premise is that the prevention of workplace injuries leads to lower insurance costs. Based on the market research performed prior to startup, management estimated that 25 cents of every dollar spent on occupational injury claims and related processing was waste - waste that could be addressed through systematic product and process development. The sources of that waste were numerous: injuries that should not have occurred in the first place, less than optimal medical care, poor return to work planning, and inefficient internal operations found in traditional insurance companies. If that waste could be reduced, the benefit could be shared with potential customers in the form of lower prices and thereby build market share.

This initiative must be considered in the context of conventional innovation within the insurance industry. The conventional wisdom has been to reduce costs through "reengineering" activities to reduce administrative costs. ManagedComp also seeks to reduce costs through highly efficient internal operations. Over the course of the past decade, companies have replaced paper with computers, and physical mail with electronic mail. Other more innovative firms have actually tried to eliminate certain forms of human decision making with computers. However, ManagedComp realized that other competitors could also hire the best consultants to help reengineer their internal operations, or license decision-making or office automation systems from vendors. To excel, management knew that it had to redefine what a workers compensation insurer was, how it worked, and the types of value-added services it could provide to customers.

Management redefined its business as one that reached directly into its customers’ premises to achieve better outcomes for employees and savings for employers. The company’s primary mission became to prevent injuries from occurring in the first place. It introduced a Total Injury Prevention Process at each worksite to achieve this goal. This behaviorally based program brings the employer's top management, supervisors, and employees together in a way that substantially reduces the number of worksite injuries.

If, however, injuries did occur, the company developed and deployed other worksite programs to get injured persons healthy and back to work as quickly as possible. Today, in a ManagedComp client, each injured employee is directed to the most appropriate medical provider for care. In most instances, care is delivered by occupational physicians who are responsible for delivering care and managing the employee's recuperation and return to work. These physicians are focused on treating occupational injuries and are familiar with return-to-work issues. ManagedComp also provides rapid access to specialized medical care, physical therapy, and case management. Collectively, these services result in better care for injured workers. In addition, the company uses computer technology to facilitate rapid reporting, problem resolution, and most importantly, performance measurement.

The company also carefully defined its sales approach. Employers only shopping for the least expensive insurance are not the best customers for this managed care approach. On the other hand, those that are interested in both the financial and human benefits of reduced injuries and rapidly recuperated employees are ideal customers. With such employers, ManagedComp forms a partnership that reaches far beyond the confines of commodity insurance.

Management’s hypothesis and business design has worked (so far) as evidenced by strong sales growth year after year. Started in 1988, today the company manages $175 million in annual premiums. Savings from a reduction of injuries due to the ManagedComp's programs and processes have been shared back with customers in terms of price reductions. There are many positive results. The company now has more than 2500 employers as customers in 44 American states. Its measurements have shown that the average client reduces its workers compensation costs by over 25 percent, and 95 percent of all its clients are experiencing cost savings compared to prior insurance programs. Employers are also finding 60 percent fewer claims going to litigation. Even more important, the average client claim amount is about one third less than the industry average and it’s loss ratio (claims dollars paid divided by premium dollars received) is 25 percent below the industry average. In sum, this company has brought some excitement into an industry formerly known for a lack of innovation and little appreciation for quality.

An Integrated Approach to Services Development

Now, let us turn our focus back to how the product development frameworks described earlier apply to services businesses. Figure 2 (The Integration of Markets, Platforms, and Competencies for a Services Business) shows the strategic framework presented earlier applied to ManagedComp. In the pages to follow, we will examine the strategies and processes used by this company to define and develop its markets, platforms, and competencies.

Defining Markets and Market Focus

At the top of Figure 2 is ManagedComp’s market segmentation, comprised of the various states in the United States as its segments, and size of employer (shown in terms of the number of employees) as vertical tiers. Management decided to focus on the middle tier. On one hand, large corporations used their employee volumes to force deep discounts by insurers. On the other, although small firms offered healthy margins, the cost of servicing and support them with ManagedComp's service intensive model proved prohibitive on a per employee insurance basis. Thus, medium sized employers offered the most attractive volume/margin opportunity. Also, the medium size employer might be more receptive to standardized approaches for injury prevention and medical management. Many large employers often try to implement their internal knowledge and capabilities in these areas. A large company might have an on-site nurse or an internal hazard prevention person, and therefore, whether valid or not, might not be as amenable to an services providers' own "best practice" approaches.

The market segmentation we observed at ManagedComp -- a traditional geographic and customer size delineation of groups -- does not tell the whole story, however. The CEO has always believed that a distinctive competency of the company is that it has tacit knowledge about the best types of customers within its target market segments. The price advantage it shares with customers is based on a partnership. Employers must understand and implement hazard prevention guidelines. Those that are shopping just on price, and do not fully embrace the effort required by both the insurer and the employer to achieve that price, would damage ManagedComp's financial position and therefore jeopardize its partnerships with knowledgeable customers.

Thus, there are customers that appreciate knowledge and value it, while there are others who view services as commodities and whose primary buying criteria is price. This distinction between knowledge and price differentiates the strategies of successful firms in similar industries. For example, H&R Block, the tax preparation service, thrives on convenience, price, and accuracy for standard tax returns. In contrast, a premium accountancy such as Ernst & Young provides accountancy knowledge for the most complex business and personal situations, helping clients to define and execute customized strategies. We suggest that the knowledge-convenience dichotomy may serve as an important third dimension to traditional two-dimension market segmentation schemes that we see used in many services businesses.

The differentiation between convenience and knowledge also has a predictive element. To take another example, Internet electronic commerce in its current form is primarily a convenience driven service. As Ecommerce matures, one might predict that new capabilities will emerge. Web sites might attract consumers through new forms of content on broadcast and cable media; interactive product presentation and branding will be designed for the Internet; financial transactions management will be conducted from points around the globe; and information systems will measure real-time buyer behavior and identify category leaders. On-line sellers and buyers will become increasingly knowledge-driven, selling and buying goods and services ever more effectively on the Web.

Developing and selling knowledge intensive services to customers who crave only convenience and low price is unsound; selling on price to customers whose primary expectation is value and knowledge is also self-defeating. We posit that understanding the knowledge and/or convenience drivers among customers will prove one of the more powerful techniques for focusing service development and marketing.

Services Platform Design and Governance

Returning to ManagedComp, management took an equally systematic approach to defining its services platform. The startup team was multi-disciplined. It comprised a managed care (from a health care background) business executive, a former nurse that was a case management expert, a claims management expert, and an information system manager. A multi-disciplined team is also one of the important principles of new product development from the world of designing physical products.

In the middle section of the Figure 2 is the "service platform" that the startup team defined. Just as with a physical product, that platform comprises the major groups of functionality that must interact to deliver a complete solution to the customer. For ManagedComp's business, the service subsystems are:

Management believed that the more it could do to systematize the development and delivery of these service components, the greater would be its ability to deploy them in service teams rapidly and in volume.

The founders then proceeded to identify specific customer needs and frustrations for each subsystem - or service component - in the platform. They first looked at the conventional approaches taken by existing insurers for each subsystem. Then, they designed programs and processes would either bring each subsystem to parity with competitors or more importantly, surpass them with something quite new and better. Lastly, the design team considered the staff and work activities required developing the competencies that would be the building blocks for each particular subsystem. This process bears striking similarity to a process called "composite design" that we have seen used in manufacturers of both physical products and software At ManagedComp, it was largely a proactive -- as opposed to reactive -- process undertaken by management to build a successful company.

Figure 3 (ManagedComp's Service Subsystem Strategies) contains the details of these analyses for each of the subsystems of the services platform and highlights the subsystem innovations. Note the columns, including the specific problem statement for each subsystem (learned by talking to target customers), the traditional approach taken by the industry to solve that problem (learned by talking to customers and competitors), and then ManagedComp's own approach.

For example, let us consider the accident reporting subsystem. At first glance, this might seem as simple as having the employer's human resources personnel report an accident to an insurer. However, it is not that simple, and most employers fail to report injuries in a timely manner and secure the correct medical provider. ManagedComp found that only 30 percent of its initial customers were doing this correctly, even after a three-hour training session! To address the problem, it built robust reporting and tracking information systems, and actually placed procedures for using these systems into its insurance agreements. Having done these things, management created a service subsystem that achieves results well beyond parity with the vast majority of insurance competitors.

As we seek to generalize the ManagedComp experience for managers of other services businesses, there are several important points to note. First, it is clear the services platform we have depicted as a block diagram in Figure 2 could just as easily have been presented as a value chain. Seen in this light, ManagedComp stepped beyond the traditional insurer's position on the value chain (e.g. just claims management) and moved increasingly forward up the value chain to participate on employers' premises to enhance hazard prevention.

Such efforts to decommoditize the traditional services of a business can differentiate the enterprise and is the basis of creating of renewing brands. TIE Logistics, a traditional freight forwarding company, has decided to become a software developer providing intelligent routing systems to all users of freight services. Or, Information Resources has traditionally sold point of sale data from supermarket checkout lines to food product manufacturers and distributors. Now, it provides analyses of those data and sells these analysis as value added information products. Or, consider State Street Boston Corporation, which has been a traditional leader in custodial services and fund accounting for the mutual fund and pension fund industries. In recent years, it has moved forward into "trade" and "pre-trade" activities with new businesses in securities lending and portfolio management. These are all compelling examples of actively pursuing value chain migration to grow the services business.

The second major point to be made about ManagedComp's services platform design concerns governance. Heide's rich taxonomy of the various methods and approaches for sustaining interfirm relationships (role definition, activity planning, adjustment mechanisms, monitoring, and incentives for desirable behaviors), can now be linked to new services development. We observe that many business to business providers seem to concern themselves with designing the service first, and then build mechanisms for governance later. ManagedComp appears to have made governance one of the design drivers for its platform design, knowing that a long-term partnership with its customers was the foundation of making its managed care model work. For example, in the Accident Reporting subsystem, the measurements of timely reporting and financial outcomes are proactively shared with employers. This helps sustain their "buy-in" to the general philosophy and specific practice of injury prevention. Thus, what we learn from ManagedComp is that subsystems and governance methods should be designed in parallel and integrally.

Nurturing the Required Competencies

ManagedComp's service platform required the development of particular competencies. Management’s view of the major competencies of the business is shown in the bottom section of Figure 2. Those competencies printed in italics are considered by management to be distinctive competencies relative to other domestic competitors. At the point of firm startup, these distinctive competencies were needs identified by the founding team the target of focused investment and human resource development.

For example, let us consider two of ManagedComp's distinctive competencies: understanding workplace hazards, and the prevention of injury. Obviously, both are interrelated and are highly industry specific. When management made the strategic decision to focus on mid-sized manufacturers, hospitals, distributors, and hotels, it then built into the business plan the hiring of occupational safety experts with knowledge of these particular industries. These experts then applied their expertise to create taxonomies of hazard types and procedures for reducing or eliminating hazards. Writers were then hired to translate this applied knowledge into manuals, lawyers into insurance contracts, and programmers into measurement systems. As these events transpired, the occupational experts remained working in the field to find new types of hazards and methods to prevent injuries.

Most other competencies within this company were developed with a similar approach. As we consider generalizing from the ManagedComp case, that approach may be generalized to five basic questions for services managers:

Creation of Specific Services

Platform focused companies must also set the bar at which standardized services and processes end and customization begins. For ManagedComp, it was clear that management tried to provide each new customer with specific service, as if each new account was a "new product." On the other hand, management was equally committed that customization should only occur on a base of highly standardized processes and systems. In other words, existing programs and processes for various subsystems would be mixed and matched to meet the needs of specific customers.

For example, the injury prevention process is generic to all industries served by ManagedComp, but has instantiations for hotels versus manufacturers versus retailers. This is as simple, yet as complex and detailed, as developing the data sheets covering the types of causes of injuries common to these various industry segments and providing these to the insurer's services teams. Creating, updating, distributing, and acting upon these data lies at the heart of this company's knowledge management activities.

Additional variation for customers is provided in the form of financial packaging. There are three types of financial packages offered: insurance plans for individual companies; group insurance plans (for groups of firms in a common industry), and excess coverage plans for companies that choose to self-insure.

The net effect of these efforts is that each customer feels uniquely served. At the same time, ManagedComp's sales growth suggests that an elegant services platform design actually makes the buying decision easier for the customer. From the buyer's perspective, a significant degree of standardization reduces uncertainty, and therefore, quickens the buying decision. From the supplier's perspective, commonality of programs and processes across different customers can provide operational benefits on a par with physical product manufacturers who develop common product platforms.

Deployment

The deployment of ManagedComp's services platform, and its generation of specific insurance policies for clients, is based on three key elements: multidisciplined teams, very specific processes (described in the Figure above), and technology in the form of computer systems for measurement and communication.

Each team has an account manager (who handles customer relations), a case manager (who directs medical care and recovery), a health and safety consultant (who recommend practices to prevent injuries), and a claims manager. Teams are assigned specific employer accounts within a given territory and are located in common facilities. It is these teams that customize ManagedComp's standardized services to particular employers.

Scaling up the business has meant scaling up teams in sheer number to cover more geographic territories. ManagedComp had two identically composed teams in 1991; today, it is approaching forty teams serving 44 states. Integrity of the firm's value proposition means consistency in the delivery of all the various subsystems described above. To achieve that consistency, the company has invested heavily in both internal and external educational programs for its employees. The programs, processes, and controls for each subsystem are taught to new team members in a corporate "university." Turnover among employees is itself unusually low. Senior management believes that the "injury prevention" creed has become infectious among its staff, helping individuals to take satisfaction in work that might otherwise be perceived as boring, highly administrative, and non-creative.

Performance Measurement

Physical product-makers, such as electronics manufacturers, perform both subsystem and total system measurements on dimensions of performance, cost, and quality for their products (such as period to period changes in capacity, field failures, and materials yields). Services providers should be equally committed to systematic performance measurement.

There are three major points about ManagedComp's approach to performance measurement that may be generalized more broadly to other service providers:

These various measures are summarized in Figure 4 (A Sampling of ManagedComp's Measurements). In that Figure, we present time series for two total system measures -- average cost per claim and lost time as a percentage of all claims. In worker's compensation, the two last measures are closely related because lost time from work tends to lead to higher claims. Measuring both provides a degree of reliability. Note that the fluctuations (or variances around the mean) of the observed measures have decreased significantly over the time shown -- a clear sign of a system stabilizing.

ManagedComp is now implementing measurements for a) cost/efficiency and b) quality/effectiveness for each of the major subsystems described above. Management is finding that tracking less obvious indicators of performance is also highly useful. For example, for its medical delivery subsystem, ManagedComp now measures medical costs, indemnity (insurance) costs, and medical outcomes (as benchmarked against healthcare norms). It also administers patient and employer surveys, and tracks "negative spins" (when injured workers returns to work only to report continued medical problems), among other subsystem performance factors.

In addition to the both total system and subsystem measures described here, ManagedComp also sorts and reports these data on a team by team basis. Upon demand, management receives a rank ordered report on the performance of all its teams along multiple dimensions of performance. These data are the basis for team-based performance rewards, and are part of the education process in the organizational internal employee education programs. As one might expect, a number of the subsystem and total system performance measures (average claims amounts, lost time from work, medical effectiveness, etc.) are then employed by the salespersons in the teams to both retain existing business and sell new accounts.

Generalization of performance measurement for services platforms leads us to the framework shown in Figure 5 (A Measurement Approach for Services Businesses). First, there are specific measurements for service subsystems. These subsystem measures will include activity measures (accounts visited for a salesperson) as well as outcomes (patient recovery rates for an aspect of medical care). Second, there are specific measurements of the effectiveness and efficiency of the entire system. These measures will tend to be outcome based. Measures of effectiveness for services are analogous to those of performance for components of a physical product (the loss ratio of an insurance company versus the horsepower and fuel economy of an engine). Measures of efficiency for elements of a service platform are analogous measures of cycle times, costs, and yields used by manufacturers of physical products.

Perhaps most important is that both sets of measures are best understood and utilized over time. From trend data, improvements can be made to specific subsystems, resulting in improved outcomes for the entire system. A basic goal of quality management is to reduce the variance of outcomes around the desired mean. Large volume services businesses can apply systematic measurement of subsystems and total system outcomes to that end.

ManagedComp has invested heavily in this measurement system. It considers these measurements concrete, objective assessments of the firm's competencies and the value its provides to customers. Further, the continuous improvement of its services platform and the measurement of its various subsystems has helped management link the competencies its seeks to develop or acquire directly into the company's service offerings. In other words, its platform measurement approach has allowed management to operationalize the concept of core competencies.

The Business Case for Service Platforms

The company we have described in this paper shows how management has applied the concepts of market focus, platform development, and competency creation to starting and growing a services business. It also shows how these product development concepts integrate nicely with the aforementioned literature in services process design and measurement, value chain migration, and building customer loyalty through employee loyalty. Each of its customers perceives the delivery of a tailored, customized service (in the form of occupational safety rules, local physicians and case managers, and financial packaging). Yet, these services are deployed from a common repository of industry knowledge, a national network of qualified physicians, and common financing programs. The company has developed a brand for doing business in this manner, and in turn, this reduces new customers' uncertainty and facilitates the buying process. Its percentage of repeat business is unusually high for the workers compensation industry.

For business to business service providers, ManagedComp's tight partnership with customers is significant in the context of the issues and problems involved in maintaining harmonious interfirm relations. Closer relationships between suppliers and vendors have been noted as a general trend by many authors, including Dwyer, Schurr, and Oh. Many business services providers find that the traditional set of services has become subject to price competition and is viewed increasingly as a commodity. To recapture a value position and enhance profitability -- in other words, to decommoditize the commodity service -- the service enterprise may redefine its services to "reach into" the customer's own business to solve more fundamental problems. In this way, greater value is added, and a new basis for pricing is possible.

ManagedComp's success centers on its customers agreeing to follow injury prevention practices, the benefit of which is in turn shared back with these customers in the form of lower prices. A close "partnership" between distinct entities requires the "strong form trust" posited by Barney and Hansen that is not typical in industry. Such trust is based on shared principals and beliefs that precede and lay the foundation for any contractual agreements and business arrangements between the firms. Sustaining that trust in dynamically changing markets subject to new customer requirements, new processing technologies, and new competitors, is difficult at best.

Building and sustaining the partnership with customers is but one of the many challenges facing managers of services enterprises seeking growth. To define market segments and market focus, we suggested in this paper that managers also consider the knowledge-intensity versus convenience-intensity of prospective customers to augment traditional geographical and size criteria. The application of perceptual mapping techniques to appropriate segment markets in this way is by no means trivial. Similarly, value chain perspectives were brought to bear throughout our discussion on services strategies. As many executives will state, understand the shape of today's value chain and a firm's positioning on that value chain is the easy part. Looking towards the future is far more difficult and requires both vision and fortitude.

Most useful for the practitioner may be our earlier presentation of a method to define services platforms as a set of interrelated subsystems. For each subsystem, management can systematically examine customer needs, traditional solutions, and distinctive service approaches that can lead to a better service offering. This was the essence of Figure 3. If the practitioner adds two additional columns to that table, and labels them "Measures of Quality" and "Measures of Cost" respectively, then indeed, the entire services design may be presented in summary form on a single page. We believe there is power in such conciseness.

We conclude with a word of caution. If one looks at a McDonalds, a Staples, or an H&R Block, the evidence exists for highly standardized service platforms replicated again and again, and aggressively branded to capture share. However, we believe viewing platforms within services businesses as monolithic entities can be self-limiting. As argued by Leonard from a competencies perspective, the inherent "change all or nothing" characteristic of monolithic product and service platforms will over time induce organizational rigidity and make the firm prone to better services from more nimble competitors.

Services platforms, even for large organizations, do not have to be monolithic in design. ManagedComp, which at first glance might appear as an all-or-nothing monolithic platform, has now decoupled its nationwide network of occupational physicians and is subcontracting this network to large employers who manage their own workers' compensation plans. If that decoupling were not possible, this new market opportunity could not have been developed. Therefore, while a monolithically constructed services platform might help a firm to achieve a certain level of size and scope, eventually, the behemoth will become a constraint to growth. With appropriately designed subsystems, the firm can pursue a differentiation strategy and, at the same time, potentially bring a better cost dimension to the new market that catches existing services providers unawares. It is the subsystems themselves that are the platforms.