• Strategy
  • McKinsey & Co.

Measuring Performance in Services

Services are more difficult to measure and monitor than manufacturing processes, but executives can rein in variance and boost productivity if they implement rigorous metrics.

• Principles of service measurement. Many executives don’t understand how to measure and manage what appear to be unique activities, and they confuse correctable performance variance with irreducible environmental variance. Embracing three principles that identify variance and allow for meaningful comparisons can help executives overcome these difficulties.

Use internal benchmarks. While a company must know what its peers are achieving, it’s a mistake to measure its performance against the competition: these benchmarks are typically just samples of data with little explanation behind them. Companies that use external benchmarks are often frustrated to find themselves off by a factor of five to ten, positively or negatively.

Using external benchmarks compounds the internal difficulties that service companies face in normalizing activities and the data that define them. Consider a measure such as costs per unit of information processed: some companies include allocated costs, such as corporate overhead and salaries; others don’t.

Internal benchmarks deliver more detailed metrics, allowing a company to find its own best practices and to see where and how they are achieved. It can then have access to all relevant information to assess differences among business units and accounts. In defining internal benchmarks, for example, a company can determine which costs are included or how asset costs are allocated—details that get lost in external benchmarking. A company can see what’s really possible within the organization by using its own benchmarks.

A cost tree with detailed metrics is an important tool to help companies define internal benchmarks (see chart). External metrics might deliver numbers on the top level of the tree, but only by developing internal trees for each service line can a company begin to understand its true cost drivers. A tree allows a manager to compare the performance of different accounts against similar metrics and also to calculate which improvements will have the most impact on the top-level figure. Once a team has gathered cost data throughout the tree, for example, it could target opportunities to cut costs and calculate which efforts would have the most impact on the bottom line. Creating cost trees can also help companies write better service agreements that exclude unprofitable activities or generate more revenue where service costs warrant it.

Measure cost drivers. Even after service companies begin to define and capture the detail that lies beneath the top level of the cost tree, they still need to discover the underlying cause of each expense. Measuring only the cost of repair calls, for instance, probably wouldn’t reveal whether they all stem from a single poorly built product, which could be improved or sourced differently for less than the cost of the repairs, or from factors such as variability in the performance of repair teams. Better measurements look at cost drivers, such as cost per employee (a resource metric), incidents per employee per day (a productivity metric), or — in a product-based service business — the number of incidents per product (a volume metric).

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