The presentation will be in room 2-233 at the Carlson School.

As service becomes an ever larger part of every developed economy, service productivity is increasingly the focus of attention. To increase service productivity, many companies utilize automation more extensively, to reduce the use of labor. The variability of service, however, means that decisions about service productivity must take not just efficiency but also effectiveness into account. Greater labor intensiveness all other things being equal, usually results in higher service quality. This implies, and research confirms, a tradeoff between service productivity (efficiency) and service quality effectiveness).

Based on this tradeoff, we propose service productivity as a strategic decision variable--that is, the company manages the service productivity level to maximize profits. We develop a theory of the optimal service productivity level that explains when higher or lower service productivity will be profitable, and distinguishes between short-term effects of service productivity, due to labor-automation tradeoffs, and long-term effects, due to the advance of technology. The theory results in testable empirical propositions, which are confirmed using data from more than 700 service companies in two time periods.

The research shows that service productivity should be higher when 1) profit margin is lower, 2) price is lower, 3) the market is more concentrated, 4) wages are higher, and 5) factors other than service quality have a larger impact on sales. Our empirical results also provide preliminary evidence that large service companies may tend to be too productive, relative to the optimal level, and if so, should place less emphasis (in the short run) on cost reduction through automation and more emphasis on service quality.