Expectations… and the Productivity of the Service Economy

Recently I needed to go to the post office in downtown Chicago for a certified letter. Yes, it would seem, the post almost writes itself… the lines were long and, in the middle of it, one of the two employees wandered off to take a break or something. The guy next to me, an older guy, was about to lose his mind with rage. He said “this must be how it is under communism” and seethed with rage. My response was that the selection of employees was essentially designed to “employ the unemployable” in the name of limiting social unrest as a thinly disguised government work program. At one point, an actual competent employee came in and took all the people in line to self-service machines and helped me personally, for which I was thankful. The entire process, which should have been simple, took over an hour.

I was in a local sandwich shop called “Corner Bakery” (which I usually call “Corner Confusion”) where you order in one place and they give you a tag to put on your table, and then you wait for your sandwich to come to you. This sort of process always scares me, because the shop is big and there is a patio outside, so they don’t know where you are sitting and it just seems like they could miss you. Well, this time they found me… a waiter who didn’t speak English very well came over and set my sandwich in front of an older guy and gave him my sandwich (one was flat bread so it should have been obvious which was which). The other guy was about to go apoplectic with rage but I had been watching the whole thing, just assuming that it would be screwed up, and I calmly got up and switched sandwiches with the guy (I was watching him, too, to make sure he didn’t take a bite out of it). He was in mid rant but I didn’t care, I just wanted lunch.

Often I go by McDonalds for coffee (I don’t like Starbucks very much, although I usually go there just because it is preferred by others and I don’t care very much overall) and it is part of the rest of my order. There are two dimensions for my coffee – “black” and “large”. I have learned through hard experience to wait until the clerk is ready to receive this complex and easily forgotten information; you’ll just have to repeat it five more times. It is beyond expectations that you could ask for your order (like a number “9” or something and AT THE SAME TIME say “large coffee, black”) without having to repeat it later. But you need to stay on it, or you never know what you’ll get.

Through myriad travels and eating out continually for years I have three expectations for the US service sector, so that I am never disappointed:

1) they know nothing
2) they do nothing
3) they annoy me

With this, you won’t find your blood pressure rising at the post office, at the check out line, waiting for your check at a restaurant, receiving the wrong order, or just generally being ignored.


What we are really talking about is the productivity. In the manufacturing sector, productivity is all-important. When you talk about factories, you see parts arriving just-in-time, defects measured in parts-per-million, and productivity measures like the time to produce a car or the percentage utilization of a factory. By almost any measure productivity in the manufacturing sector has soared.

In the distribution chain, productivity has also increased. Note those huge distribution centers located on the outskirts of suburbia (or exurbia?). Along with obtaining real-time information from retailers to stock that gear at various locations in advance of when it is needed, the distribution sector is continually improving in productivity. Recent rises in the price of gas have only sharpened this focus.

And yet in the service sector, productivity is abysmal. I often use the phrase “one sigma” as a joke – in the manufacturing sector they talk about “six sigmas” or errors in the range of parts per million, yet a “one sigma” service sector would get the answer right 2/3 of the time. That would probably be a good case.

You can also see the attempts to improve productivity that often don’t involve better training or skills; they involve simplification. Ever wonder why you order by number at McDonalds? Ever think why those cash registers just have pictures on them? And that everything is the same everywhere in terms of restaurant setting for the franchises – to guarantee a minimalist level of service. And for that, given that my expectations are low, I am thankful.


As we move into a more service-orientated economy, where fewer and fewer people work in manufacturing, we need to ask ourselves – “are we good at this”? A short answer is, probably better than most of the world, but still not very good. On the one hand we are more productive per unit because we don’t pay a lot of our service sector workers much of anything, in many industries (retail and food services). We have a lot of part time workers in this sector, and they don’t have benefits, much less pensions. But as even the shortest venture out into the service sector will show you, the quality of service is often low.

Some service companies that are good are vilified for it. An acquaintance worked for a long time at a big manufacturing company where, frankly, his life was pretty sweet. He took a union buyout after bitching for years about his old company, and took a job at Wal-Mart.

Wal-Mart, even though they paid a fraction of his old wage and he never received enough seniority for full-time benefits, worked his rear end off. At Wal-Mart, he stocked the whole time and they rode him hard to ensure that it was all done. The second the work slacked they made him clock out, even ahead of his shift. They don’t mess around at that company, the managers rise through the ranks and do have measures of productivity and take their jobs seriously.

I know that there are small companies where service is taken seriously, and the managers know their customers and in fact they ANTICIPATE their customers’ needs. These companies often have their owners hovering nearby or in the front lines, and this also makes all the difference, because the owners have a big stake in the outcome and know that service allows them to compete against bigger retailers where they can’t always win on price (they might be able to be competitive, though).

As far as government, health care or education productivity, we all know that this is hardly measured at all. Even though the web and new technologies have revolutionized work, you won’t know it out there in government in terms of cost reductions, although they do implement the internet as a way to increase their revenues and get in the cash faster (so they can kick it out the other side even faster). Schools see budgets increase and don’t tie it to outcomes, and they don’t take responsibility for making things better.

When you look at our economy from a “million mile” view, you can see:

1) a highly efficient manufacturing sector
2) an increasingly efficient distribution sector
3) a poor quality but relatively low cost service sector
4) an abysmal government, health care, and education sector
5) a thin-crust of relatively high productivity service areas in terms of consulting, high tech, and legal areas… but these are a tiny percentage of the total

Think of “one sigma” as the sad challenge to today’s service sector…

Cross posted at LITGM

15 thoughts on “Expectations… and the Productivity of the Service Economy”

  1. There are several things going on. One of them is a tremendous increase in technology-boosted productivity, and consequently of high-paying opportunity for people with high levels of skill or aptitude in the most productive economic sectors. These people are no longer available to work in lower-productivity economic sectors. The smart teacher of old is now a lawyer; the smart coal miner is now a computer programmer, and the mines are more productive after having substituted machinery for workers. The people who are left to work in lower-productivity jobs tend not to be, on average, as able, as hard-working or as courteous as was the case in the past. Employers have compensated, to some degree, for this new reality by making the work more automated and simpler (e.g., the numbered cash register buttons at McDonald’s). On balance everyone is better off even though mass-market service is often poor.

    I would add:

    -To some extent, places like Romania represent our past. Retail customers may be treated better there than they are here, but the tradeoff is that there are fewer opportunities for workers.

    -Service in our economy is also handicapped in many cases by poor management, overregulation and fear of lawsuits.

    -Service in entry-level positions would probably be better if our primary and secondary schools were better. Employers have to compensate for the illiteracy and innumeracy of many high-school graduates.

    -IMO the level of mass-market service is a good indicator of the overall health of our economy. Service improves when workers are afraid of losing their jobs. My impression is that the economy is doing OK.

  2. A big part of the problem is the almost complete disenpowerment of store/branch managers by HQ personnel who think everything must be top-down directed in detail, in an almost Soviet fashion.

    BizWeek recently had an item about new management at the Gap chain, who have adopted the radical idea of consulting their store managers about new product ideas. Previously, the Gap apparently ran consumer focus groups, but didn’t bother to ask the people actually selling their products what they thought.

    I’ve generally found Borders to be a reliable source of mindless behavior: example here.

  3. That’s what you guys get for living in a big city. Go to the red states. You’ll be amazed at the difference.

  4. I think poor service is largely a function of, “you get what you pay for.” Honestly, how often to you make service the top priority when selecting a store or a restaurant. People do, of course, but they don’t do so as consistently as they do for price.

    I saw this happen in the computer industry. Up until the early 90’s computers where sold overwhelmingly in small shops dedicated to computers and electronics. Knowledgeable geeks with a near evangelical zeal staffed the stores. Soon however, general retailer began carrying computers. People would go to the computer store and ask the questions they needed answered to choose a system and then they would go to the box store to buy the unit cheaper.

    The computer industry also learned people would not pay for technical support. You could have gold standard tech support but if it made your unit $20 more expensive then no one would buy it. Few people factor tech support into their purchasing decision, they just assume that a cheaper unit has a good support as a more expensive unit.

  5. By far, the best tech support comes along with the more expensive machines to be found at Apple (Consumer Reports), so that people are willing to pay for a machine they believe to be better and are also willing to pay more because Apple provides decent support. I factored in overall cost and reliability and support when I bought my Mac.

  6. I don’t disagree with the sentiment that this is a function of living in the city. I often marvel as I travel that even the lowliest worker at a small town McDonalds would instantly be the king of our local varieties.

    I remember when computers were a mom-and-pop era, as well. It as a lot of fun to go in there and tinker around, and talk about what was going on. All gone, sadly enough.

    I think Wal-Mart doesn’t have the same variety of problems because they take their store managers very seriously and although a lot of stuff comes from HQ (distribution, ordering, etc…) their managers are expected to be on top of things and are motivated.

  7. Service in America is appalling. That is why McDonald’s has so much trouble establishing itself overseas. Service at McDonalds is appalling. That is why the foreigners avoid it.

    My only wish is that TSA weren’t hiring the MickyD rejects instead of the other way around.

    I’ve generally found that service is proportional to gross margin. So what do you want? Price or service? They’re both available, if you’re willing to pay the going price.

  8. US airlines provide a counterfactual to my argument. Most US airlines have poor service and lose money. Southwest has OK service and makes money.

  9. OTOH the problems with US airlines are probably more a combination of poor management and overregulation (blocking of competition from foreign airlines).

  10. And yet in the service sector, productivity is abysmal. I often use the phrase “one sigma” as a joke – in the manufacturing sector they talk about “six sigmas” or errors in the range of parts per million, yet a “one sigma” service sector would get the answer right 2/3 of the time. That would probably be a good case.

    I don’t want to brag, but I can deliver 0.1 sigma without breaking a sweat.

  11. You need to enlarge your sample. The service sector also includes doctors, mimes, lawyers, masseuses, accountants, eBay, stand-up comedians, IT security professionals, strippers, rappers, clergy, FedEx, programmers, and the Boston Symphony Orchestra. One size does not fit all, and this is the hardest part of the economy to describe and measure. It’s sometimes called the tertiary sector, as it comes after the primary (extraction of resources, like mining and forestry, plus agriculture) and secondary (manufacturing, which turns extracted materials into finished goods). “Miscellaneous” would probably have worked about as well, and been more accurate.

    Isn’t it interesting that Marx considered this part of the economy unimportant? So much for historical inevitability.

  12. As to Southwest Airlines, and I have flown them recently and they are my first choice, they made the smart decision by hedging their fuel cost. Damned speculators!

    Bad times are cleansing times. You can’t sustain bubbles. They have to be popped. Sorry, Pollyannas, that’s the way the mop crumbles.

  13. I don’t want to brag, but I can deliver 0.1 sigma without breaking a sweat.

    Ralf, I don’t doubt that a bit. After all, one sigma is roughly 68% and two sigma is about 95%.. So 0.1 sigma is ..

  14. Mrs. Davis, I live in a foreign country and the McDonalds’ are so packed you’re lucky if you can get in the door, much less squeeze up to the counter. Service is as good as possible considering the crushing crowds. It may not be the service that brings them in, though; the rest of the beef served in this country is water buffalo, or wildebeest, or something.

    Doesn’t mean service in (urban) America is good, it just means there’s a kink in your thesis. In my US small-town post office the service is terrific, and the clerks keep the customers laughing. But then it’s a lower-income town, so that’s one of the best jobs in town. Nowadays, if there’s a surviving mom-and-pop shop, it tends to be a tourist attraction.

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