Three Levels of Service Recovery Management (SRM) T H U N D E R B I R D. Service Recovery Management. and Case Study.

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1 T H U N D E R B I R D Three Levels of (SRM) Third level LEARNING FROM RECOVERIES : Framework and Case Study Second level Service provider Assistant Professor of Marketing Thunderbird, The Garvin School of International Management Glendale, AZ, USA MichelS@t- bird.edu Robert Johnston Professor of Operations Management Warwick Business School University of Warwick, Coventry, UK bob.johnston@warwick.ac.uk DEVELOPING A RECOVERY CULTURE Service Recovery 1st level: Re-Establishing Satisfaction Service recovery refers to the actions a service provider takes in response to service failure. (Grönroos 1988) Service recovery is a thought-out, planned process of returning aggrieved/dissatisfied customers to a state of satisfaction with a company/service. (Lewis 1996) Justice Distributive Procedural Interactional Other constructs 2nd level: Developing a Recovery Culture 2.1 Managing Frontline s Johnston and Clark (2001) claim that some organisations just let their staff soak up the pressure Second resulting level from their inadequate Service service systems leading provider not only to dissatisfied and disillusioned customers but also stressed and negatively disposed staff who feel powerless to help or sort out the problems DEVELOPING A RECOVERY CULTURE Boundary-spanning role (BSR) (Bowen and Schneider 1985) is very demanding. selection Training Empowerment Rewarding

2 2.2. Internal Communication 2.3 Developing a Positive Attitude Landon (1979) stresses the dual function of information, which is addressed both to the outside of the organisation (customer) as well as to the inside (Gilly and Grønhaug 1991). Fornell and Westbrook (1984) have described a vicious circle of consumer complaints. High portions of consumer complaints contribute to isolation of the consumer affairs function and to a limitation of its activities to individual case-by -case complaint handling, which precludes marketing actions to reduce future complaints. People with the right attitude truly believe that a customer who complains is your friend (Zemke 1995). Other work refers to the positive aspects of complaints - e.g. a complaint is a gift (Barlow and Møller 1996). However, in many companies, this is often not the case as (Andreasen and Best 1977) point out: Unfortunately, complaining customers are often looked on by business as being the enemy. 2.4 Measurement System 2.5 Encouraging Complaints Lifetime Value Service Guarantees: While these costs may accumulate quite quickly, Firnstahl (1989) declares: Yet, paradoxically, spending money is the goal. He argues that these costs reveal the losses caused by service failures, which, in turn, force management to act. When do customers complain? Singh (1990) found that both (1) episode-specific variables as well as (2) personality variables are necessary to explain complaining behaviour. Providing service guarantees is another way to encourage dissatisfied customers to raise their voice (Hart et al. 1990). 2.6 Marketing recovery efforts 3rd level: Learning from Recoveries Service guarantees are formal promises made to customer about aspects of the service they will receive (Zeithaml and Bitner 1999). Promising a full guarantee to customers inevitably requires a service recovery program which is able to return the customer to a state of satisfaction after a service failure. Third level Second level LEARNING FROM RECOVERIES Service provider DEVELOPING A RECOVERY CULTURE

3 3rd level: Learning from Recoveries Acid Test of SRM Most important yet least applied level of service recovery management. Johnston (2001) found that the use of information about problems raised by customers which led to process improvements was one of the most significant means of creating bottom line impact of recovery. What seems to make customers annoyed, even angry, after a failed service recovery, is not so much that they were not satisfied but they feel that the system has not been changed so that the problem will not arise again (Johnston and Clark 2001). We believe one acid test, failed by many organisations, is their ability to take problem data, from customers or even staff, and turn it into real improvements. Study 2,520 critical incidents were analyzed and categorized customers of a Swiss bank Stratified random sampling (6 core processes, 30 regions) Process within the last 8 weeks Blueprint approach (>450 items) Average duration of telephone interviews was 15 minutes Whenever a service failure or problem reported, a service recovery questionnaire was used (n=2 872) The three items were measured on a 5-point scale ranging from Very satisfied to very dissatisfied Very likely to recommend to very unlikely to recommend Scales are treated ordinal rather than intervall-scaled or metric I wanted to extend an existing mortgage. They insisted on doing all the paperwork again. This was too much, and I changed my bank (#B ) I wanted to withdraw 2,000 Swiss francs at an ATM. Although the receipt was printed and the card was processed, no money was issued. However, the amount was deducted twice on my account statement (#A ) I was promised a free credit card for the first year. I got a bill for 85 Swiss francs. The consultant apologized and promised to correct the account balance. He never did (#A ) Model of the service recovery process studied and Management Study Antecedents Demographics Relationship duration and strength Service Failure Type of failure Failure category (justice) Failure criticality Service Recovery Recovery category (justice) SF with speed and outcome Service recovery evaluation Dependent variables Satisfaction Word- of-mouth Included in this study Interviews with 11 branch managers 60 to 90 minutes Fully transcribed and analyzed with CAQDAS software Not included in this paper Interviews with 20 employees 2 categorical 2 ordinal 2 categorical 1 ordinal 40 categorical 3 ordinal 2 ordinal

4 A complaint is an opportunity. And it is important for word-of -mouth Another manager stressed the point that recovery is important because we can show the customer how important he is The customer feels that we do care for him, not only when we want to sell. You have to put it in perspective, I am responsible for a customer base of 36,000 customers, there are a lot of problems I am responsible for, and this takes time. I get about 100 complaints a year, including about 30 that are frontline relevant. This is not alarming; I cannot build a large organization to take care of that. Formal procedure for complaint handling Part of this process is a mandatory entry into the customers database file. We learned from the interviews that this procedure is followed very differently. Two respondents follow the procedure very strictly, some decide case by case what to enter, others have no idea that this procedure even exists. One respondent explicitly refuses to comply: I know that there is a formal procedure in the handbook, but I have not read it and probably never will. I solve complaints immediately, preferable by phone or person-to-person, I don t like to write things down Complaints always call for problems; I want to avoid this as much as I can. However, I always try to show to the customer that I am concerned about solving his problem properly. We confronted our interview partners with the finding from the study that a majority of problems take three or more weeks to be solved. The respondents insisted that in their branch, a response time of three weeks is much too long and that they try to get back to the customer within 24 hours. However, if there is some troubleshooting necessary to reconcile payments, this may take three weeks. One manager suggests that if troubleshooting takes longer than expected, it is important to keep the customer informed. The interviewees internally blame other departments or other banks for such a delay. In front of the customer, this should be the exception. One single respondent mentions that there is a tendency to blame [back office] if it s their fault. [However,] we are working on appearing as one bank. Three managers claim that they are responsible for handling the complaint, even if it s not their fault. As one puts it, I have to take the blame, even if it happens in the loan department. Managing frontline employees The single most often mention problem regarding effective service recovery is shortage of staff, or, by the same token, high administrative workload that does not leave enough time to deal with real customer issues. Frontline employees are still loaded with administration duties. Ideally, the customer representative should concentrate on the customer only. It s a question of the objectives, if you want to achieve 100%, you don t have time for selling. It s questionable whether you can score 100% on service quality and 100% on [sales] objectives.

5 Internal Communication Internal communication about service recovery management is not systematically structured. The larger the bank, the more systematic the process, the personal network becomes more important to solve problems. Otherwise, you lose too much time for recovering. Developing a positive attitude Based on the interviews, there appears to be a conflict in the way complaints are perceived. One the one hand, the bank made an official commitment to a customer-oriented complaint handling procedure. Don t be frustrated receiving a complaint, rather be grateful. As we all know, it s only the tip of the iceberg who gives us feedback, hence we should be grateful for learning that something went wrong. On the other hand, however, complaints are often perceived as a nuisance. Measurement System The formal process defined for addressing customer complaints demands that any incident is recorded in the customer s database file. As expected and described by (Fornell and Westbrook 1984) vicious circle of consumer complaints, we learned during the interviews that many employees and managers are reluctant to share their problems with others. One reason for the reluctance is disbelief that management will take appropriate action: Why should I enter data, if nothing is going to happen? We explicitly let the respondents estimate how many customers we surveyed reported dissatisfactory incidents. While the true value is about 25%, the estimations ranged from just a few to 10-15%, 15% on the one extreme up to more than half of the customer base, probably 70% on the other extreme with most of the guesses around 30%. 3rd Level SRM 3rd Level SRM While we argue that the 3rd level of recovery management may be the most important one in the long run, we learned that even in this company the loop is not systematically closed. Respondents suggest that in order to improve service quality they need more resources more training better and less complex products and superior IT applications to streamline processes. Bottom up improvement program One respondent would like to see such an improvement program because the present (complaint) system measures the negative, and this improvement program would highlight the positive. s would be asked to work in a positive, solution oriented manner. There was also some reluctance. One manager mentioned that most problems (and solutions) are already known but not (yet) implemented. A second one feared that such a formal program would pile up the workload of his employees. And for a third one, such a program would not increase satisfaction.

6 Questions (instead of conclusions) 1. Does the framework with the three levels of SRM make sense? 2. Is the misalignment of objectives, incentives, and resources in this case a general problem? 3. Based on the economic idea of diminishing returns, companies have to decide what level of service recovery management is justified on a cost-benefit analysis. How should this problem be addressed? 4. Do you have any suggestions for further developing the paper?