Jim Manzi’s Uncontrolled

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Tampering or Experiments?
National Review Online
Statistical quality control guru W. Edwards Deming used the term “tampering” to describe this process of introducing changes without rigorously evaluating ...

Tampering or Experiments?

By Reihan Salam

May 29, 2012 12:04 P.M.

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In a review of Jim Manzi’s excellent new book Uncontrolled, Arnold Kling offers the following aside:

I was once seated at a dinner table next to an official of the Department of Education involved in education research. I made an impassioned plea for more controlled experiments in education. The official responded by asking, “Would you want your child to be the subject of an experiment?” At this, my jaw dropped, and I sputtered, “They do it to my children all the time! They constantly introduce curriculum changes, scheduling changes, and changes in teacher methods. They just don’t bother to evaluate whether or not it works.”
Statistical quality control guru W. Edwards Deming used the term “tampering” to describe this process of introducing changes without rigorously evaluating results. Tampering and experiments are two ways of disturbing the status quo. But only experiments are designed with the intent of producing reliable measurements of success or failure.
Like my dinner companion, most policymakers view experiments as at best costly and at worst immoral. Even though tampering is just as bad, if not worse, it somehow escapes such criticisms.

I often encounter arguments against decentralized trial-and-error. The alternative to trial-and-error, however, is centralized trial-and-error, in which errors are far more costly and far more difficult to reverse. But it is very easy to mask these costs: all you need to do is fail to engage in the rigorous evaluation of results, as Kling suggests.
On a separate note, an education professor recently made the case that choice-based reform in New York city has exacerbated the advantages of savvy, affluent parents. She makes a number of entirely legitimate points. Yet it is important to reckon with the counterfactual, e.g., had New York city not embraced (decidedly imperfect) choice-based reform, would we have a more egalitarian, high-performing educational system? Or would we have somewhat more middle-class flight? And if we had the latter, would this have materially improved outcomes for students in New York city public schools — or would it have eroded the tax base, undermined the political investment of middle-class voters in the school system, and contributed to a general deterioration of the quality of life in New York city? This seems like a question worth asking.

surprising findings about randomized government inspections

Research & Ideas

OSHA Inspections: Protecting Employees or Killing Jobs?

Published:	May 21, 2012
Author:	Michael Blanding

Executive Summary:

As the federal agency responsible for enforcing workplace safety, the Occupational Safety and Health Administration is often at the center of controversy. Associate Professor Michael W. Toffel and colleague David I. Levine report surprising findings about randomized government inspections. Key concepts include:

• In a natural field experiment, researchers found that companies subject to random OSHA inspections showed a 9.4 percent decrease in injury rates compared with uninspected firms.
• The researchers found no evidence of any cost to inspected companies complying with regulations. Rather, the decrease in injuries led to a 26 percent reduction in costs from medical expenses and lost wages—translating to an average of $350,000 per company.
• The findings strongly indicate that OSHA regulations actually save businesses money.

About Faculty in this Article:

Michael Toffel is an associate professor in the Technology and Operations Management unit at Harvard Business School.

• More Working Knowledge from Michael W. Toffel
• Michael W. Toffel - Faculty
  Research
• E-mail Michael W. Toffel: mtoffel@hbs.edu

With an election looming and the economy continuing to struggle, the effectiveness of government regulation has become a political football. While advocates hold regulations up as necessary to protect public health and safety, critics see them as arbitrary and costly to business, reducing wages and killing jobs at a time when the United States can ill afford to lose them. Few regulatory agencies have a more direct effect on businesses than the Occupational Safety and Health Administration (OSHA), the federal agency responsible for enforcing regulations to keep workplaces healthy and accident-free.

"If people are skeptical of OSHA, it's likely based on anecdotes. The difference in our study is we are looking at hundreds of companies over a long period of time, and we find that those anecdotes are not typical."
—Michael Toffel

"Needless rules and onerous regulations are often roadblocks to economic growth and job creation," groused one congressman during a House subcommittee hearing on OSHA last year, sharing the private frustrations of many employers. The debate over the agency has gone on for years, in part because there has been little evidence to prove the case for either side. In order to get the biggest bang for taxpayers' bucks, OSHA typically inspects companies most likely to have problems, often following accidents and complaints, stacking the deck with companies that are worse than average.
"Where there is smoke, there is usually fire, so the fact that government inspectors find safety problems is not surprising," says Michael W. Toffel, an associate professor and the Marvin Bower Fellow at Harvard Business School.
At the same time, when problems are resolved, there's no way of telling whether the inspections themselves helped fix them, because the law of averages implies that a company with a bad year would usually improve the following year even without an inspection. "When they do find a problem, it's not entirely obvious that it wouldn't resolve itself anyway," he says.
Toffel has long studied the effectiveness of regulations, focusing on voluntary measures. When he and colleague David I. Levine heard of a program at California OSHA to conduct randomized inspections of workplaces, they realized they had the perfect real-world experiment to settle the debate over workplace inspections.
"When I learned that Cal-OSHA was conducting some of its inspections at random, I felt almost an obligation to analyze that experiment," says Levine, a professor at UC Berkeley's Haas School of Business. "To let these debates on OSHA and other regulatory agencies continue for another generation when this experiment had already been done seemed inexcusable."
Little did the researchers know at the time how difficult it would be to extract the data for analysis. That task fell to Toffel, who was still completing his doctoral studies at Haas when the research began in 2005. "We received all this data from Cal-OSHA on cassettes, the likes of which I have never seen," Toffel laughs. "They were Memorex tapes about three-quarters of an inch tall and six inches square. We had to hire someone to make them machine-readable."
The team brought on Matthew Johnson, then an HBS research associate who is now an economics doctoral student at Boston University, to help with the data analysis.
Thus began the long saga of extracting statistics on inspections and sorting out which were randomly assigned, which followed accidents, and which followed complaints. In addition, Toffel and Levine essentially became deputized by another California regulatory agency to gain access to workers' compensation data. Because the data were collected at the company level, the researchers limited their analysis to firms with only one plant, where the effects of an inspection on injury rates and costs could be clearly identified. Finally, they matched companies by size, industry, and other characteristics to end up with some 800 companies. Half of the companies had been subject to random inspections; half of them were eligible for inspections but not chosen.

Surprising findings

The results of their analysis, published in Science last week, are definitive: inspections worked. Compared with uninspected firms, the companies subject to random inspections showed a 9.4 percent decrease in injury rates. What's more, the findings were consistent for both large and small accidents. "We thought our results might have been driven by fewer big problems, like preventing storage racks from collapsing and other major accidents; or perhaps by a particularly dramatic decline in smaller injuries prevented by workers more regularly wearing personal protective gear," says Toffel, who worked as an environment, health, and safety manager in the private sector before pursuing his doctorate. "But we found it to be an across-the-board effect."
Just as important are the findings about the costs to companies of complying with regulations. Testing every measure they could find—jobs, wages, sales, and credit ratings among them—the researchers found no evidence (within the margin of error) of any cost to businesses that had been inspected. In fact, quite the contrary: the decrease in injuries led to a 26 percent reduction in costs from medical expenses and lost wages, translating to an average of $350,000 per company. While those costs would be felt most immediately by the firms' workers' comp insurance companies, over time that would translate to lower insurance premiums for the employers.
In other words, those who charge that OSHA regulations cost business money have it completely wrong. In fact, the regulations save money. The magnitude of the results surprised even Toffel and Levine, who expected perhaps a small savings if any. But the strength of the findings, they say, should persuade even skeptical antiregulatory critics.
"If people are skeptical of OSHA, it's likely based on anecdotes," Toffel says. "The difference in our study is we are looking at hundreds of companies over a long period of time, and we find that those anecdotes are not typical. If they know of a company that has been shut down, that is not typical." In fact, the inspected firms were just as likely to be in business at the end of the study period as the control firms.
Of course, a single study cannot settle the debate over regulation, or even the debate over OSHA. This study is limited to one regulatory agency in one state; other states and other agencies could show different results. One thing the research does show, though, is the value of randomized inspections as a way to help gauge regulations' effectiveness. What's more, say Toffel and Levine, the potential benefits from randomizing isn't limited to government inspections, but can also extend to the private sector in the form of randomizing the deployment of new safety, environmental, and quality programs.
But randomizing, of necessity, involves a trade-off. Focusing on short-term cost-effectiveness often leads managers to implement new programs at sites or at times when they think they will do the most good. But such targeted interventions make it impossible to evaluate the program's overall effectiveness, as one could with randomized deployment.
"There is a perceived cost in doing a portion of the work in a randomized fashion," Toffel says. "But if you want to learn, it requires an investment and some patience. You have to be willing to delay or forgo deploying a new program at some of the neediest sites in order to evaluate whether the program is effective." Or as Levine puts it: "It's costly to learn, but it's more costly to be ignorant."

About the author

Boston-based writer Michael Blanding is a fellow at the Edmond J. Safra Center for Ethics at Harvard University and author of The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink.

 Kaiser Permanente CEO: Health IT Must Focus On Quality
InformationWeek
... out services and more incentive to save money--but Halvorson advised others to follow the advice of esteemed management consultant W. Edwards Deming.

 2010/8/5

Service and Quality

Designing the Soft Side of Customer Service

By Sriram Dasu and Richard B. Chase

August 2, 2010

In service environments, customers have complex needs. Even in the most mundane encounters, emotions are lurking under the surface. Your job is to make those feelings positive.

When people think about innovation in customer service, they usually think in terms of technological or process enhancements that make service delivery faster or more efficient. In recent years, restaurants have introduced hand-held devices that buzz patrons when their table is ready, and supermarkets offer customers self-service checkout lines. While such innovations may simplify matters for customers, service organizations rarely stop to consider the overall psychology that shapes service encounters. Indeed, despite the plethora of articles and books about managing the customer experience, many key psychological variables that influence customer perceptions — the subtle enhancements that help define a positive experience — have yet to be defined or articulated fully.
Organizations often measure the outcomes of service encounters in concrete terms such as on-time flight arrivals or the time to resolve a customer’s call. However, the subjective outcomes — the emotions and the feelings — are more difficult to describe: Did the passenger enjoy the flight? Did the customer who called the service center with a problem hang up feeling better about the provider? Much as having a deeper understanding of systems dynamics and process analysis has pushed companies to re-engineer their operations to achieve explicit outcomes, findings from behavioral decision- making research, cognitive psychology and social psychology can point service providers to ideas for redesigning the psychological or implicit aspects of service encounters.

The Leading Question

How can service organizations make their encounters with customers more positive?

Findings

• Service providers need to recognize how emotions, trust and feelings about control shape how customers perceive their service experience.
• The “ETCs” need to be managed as design variables.
• The “soft side” of customer service requires the same management intensity as, say, supply chain redesign.

In an earlier article we drew upon the seminal work by decision theorists such as Kahneman, Ariely and Lowenstein to propose several service design principles.1 We noted, for example, that good service design needs to pay attention to the sequence of events that comprise the service.2 All things being equal, it is also good practice to conclude an encounter on a high note — to “finish strong.” Further, it helps to get the unpleasant parts out of the way early so people have events to look forward to. We also noted that even though requiring customers or patients to wait is a negative, it’s better to consolidate the waiting into one block of time (to “segment the pleasure and combine the pain”) rather than requiring people to endure multiple waits. Some of these principles are counterintuitive and not accessible through conventional customer surveys and focus groups.
About the Research >>

About the Research

Ten years ago we became interested in what we believe to be the last frontier of service design: how customers subconsciously experience service interactions. While much attention was being paid to organizational culture and human resource management, there was very little research on how service operations and processes could be designed to deliver the implicit or psychological outcomes. Our initial research involved studying what the major researchers in cognitive psychology and behavioral decision making had found from experimentation and theory building. We also conducted numerous interviews and workshops with Harrah’s, MGM Resorts International, Dell, Farmers Insurance, the Seattle SuperSonics and McKinsey & Co. The goal was to develop a new way of engineering service encounters. We have conducted field experiments to test our concepts and are currently applying these ideas to health care, working with companies to reengineer processes and systems.

In this article we examine how three additional factors — emotions, trust and control — can influence customer assessments of service experiences and their overall view of service providers. These factors are key elements in most service encounters — in many cases they either drive or reinforce how customers perceive their experience. Organizations that take the time to understand how each of them works will have opportunities to shape new offerings that lead to more positive service results.

• Emotions influence what we remember, how we score encounters and the decisions we make. We all have explicit memories that we access about events, and implicit, or unconscious, emotional memories that characterize our feelings during those events.3 Emotionally charged episodes (both positive and negative) are often easily recalled.
• Trust is a primitive psychological variable that is essential to any robust and enduring relationship. Without trust there is often no engagement, only negative feelings such as anxiety and frustration. With trust comes a sense of comfort.
• Control over one’s environment and knowledge of how events are going to evolve are fundamental psychological needs.4 Research shows that feelings of control (or lack thereof) can affect one’s health. Negative events — for example, learning of a serious illness or a large decline in the value of one’s retirement fund — can inflict serious psychological harm by diminishing our sense of control. However, control is linked to trust, and greater trust can reduce a customer’s need for control.

Designing the “ETCs”

In recent years, manufacturing companies have achieved significant productivity and quality gains by embedding new production knowledge into production systems. Services providers can achieve similar levels of improvement by embedding psychological knowledge into their customer service encounters. They can accomplish that by actively addressing emotional, trust and control factors — what we refer to as “the ETCs” — as design variables.

Designing for Emotions

Companies work hard to select the emotions that make up their competitive positioning. We refer to this high-level positioning as the “emotional platform.” When The Allstate Corp. says, “You’re in good hands” with its insurance, it wants to reinforce the idea of security and loyalty. MGM Resorts International’s marketing tag line for the MGM Grand, “Maximum Vegas,” is intended to convey a sense of thrill and excitement.
An organization’s commitment to an emotional platform can facilitate decisions regarding its processes, people and physical assets. Consider Harrah’s Entertainment Inc., the casino operator. Given that it’s in the entertainment and hospitality business, it could have chosen fun and excitement as its emotional platform. But management discovered that, more than fun and excitement, its most valued customers identified more with luck. Since the probability of winning depends on the nature of the gamble and is regulated, management needed to understand how customers experienced their feelings of luck. Management learned that gamblers, in addition to being superstitious, believed in routines: They wanted to control everything from where they parked their cars to which machines they used to how long they had to wait in the dining room. They saw delays as unwelcome obstacles. In response, Harrah’s began offering customized services to top-tier customers. These customers have access to their favorite machines, parking spots and rooms; separate waiting lines at dining facilities; and dedicated shop-floor employees who understand their routines and idiosyncrasies. Today, if a regular Harrah’s customer wins a jackpot, she will have someone assisting her within 90 seconds.

The Ups and Downs of Automobile Repair

Using Emotionprints, service providers, such as auto repair shops, can map the activities and the emotional responses of staff against the anticipated emotions of customers.

View Exhibit

Tracking Emotions Once a company has selected its emotional platform, the next step is designing the interactions that consistently manage emotions in accordance with the platform. That requires management to understand the evolving relationships among process flows, transaction history and emotions.
In most complex service settings, different stages of the service cycle and different service offerings and products will lead to different emotions. For example, at a general hospital, the parents of a healthy new baby will be in a very different emotional place than the relatives of a patient who has just been admitted to the intensive care unit. Similarly, passengers bound for vacation in Hawaii are apt to be more excited than business travelers flying from Chicago to Dallas.
To develop a more nuanced approach to designing emotionally sensitive processes, one must understand the drivers of emotions. In general, people become emotional when they first discover a change in anticipated outcomes, be they potential or real. People likely experience fear if the truck in front of them on the highway dangerously swerves into their lane. An employee may feel joy when he learns that his bonus is higher than expected. The strength of our emotions generally corresponds to the relative importance we place on the outcome. According to appraisal theory, five factors cause us to experience an emotion or some combination of emotions:5

1. The change in outcome improves our situation or makes it worse.
2. The new outcome is associated with a penalty or a reward.
3. The new outcome is certain or just a possibility.
4. The causal event is significant or powerful, and its resultant change difficult to cope with; alternatively, the event is not very significant and the changes are easy to cope with.
5. You are responsible for the event and incumbent change; alternatively, an outside agency is responsible for the event and change.

Appraisal theory makes it possible systematically to analyze customer-facing processes and anticipate customer emotions. We refer to the service flowcharts that describe how customers feel as “Emotionprints.” Emotionprints are particularly useful when the emotional state of customers is directly tied to steps in the service cycle. For example, it is well known that expectant parents experience two emotional peaks: the first time they see the ultrasound image of the fetus, and when the newborn baby cries. Experiences in other realms have their own patterns. When automobile owners discover a problem with their car, there is a predictable pattern of events and emotions.
Responding to Emotions Once managers define customer emotions typical to specific stages of a service, they can design the appropriate service responses. A response includes the information managers share and the attitudes employees display. Hotels have long recognized that concierges and bellboys should display a welcoming attitude toward guests. Other service establishments can learn from their example by prescribing the attitudes employees should display at key moments of service delivery. The attitudes can be broken down into sets of behaviors or actions. For example, an attitude of invitation might include eye contact and smiling at the customer. An attitude of celebration could include cheering and applauding. An attitude of compassion might involve attentive listening and speaking softly.
Emotions are also influenced by a customer’s transaction history with the company. A customer calling to rectify a billing error for the fourth time is likely to have stronger emotions than a customer calling about a problem the first time. That underscores the importance of having information systems that provide service employees with a comprehensive picture of the company’s relationship with the customer.
The key to empathy is being aware of how the customer is feeling. Having an awareness of previous interactions can help servers prepare for their customers’ responses and understand that there may be a basis for a customer’s emotions. Armed with this information, companies have opportunities to design more thoughtful customer interactions. In call centers, for example, calls can be routed to service agents with special authority and advanced customer management skills. Similar forethought can be put into highly charged patient interactions, such as those involving expectant parents.
Among pregnant women, it is well known that genetic tests cause anxiety, and test results that indicate potential genetic abnormalities generate strong emotions. A well-designed system would alert service providers of the emotional state of patients who might be vulnerable so that special staff are on hand. The ability to anticipate patient needs cannot be overvalued. In one of our focus group studies, we learned of a patient who suffered a miscarriage; at a follow-up appointment, a physician’s assistant asked her if she planned to breast-feed. To avoid such service blunders, the clinic now inserts flags in patient files to alert caregivers about a patient’s emotional state.
Influencing Emotions Linking process flows and transaction history to emotions allows service organizations to limit negative emotions and accentuate positive ones. An extreme example can be found at professional sporting events, where team employees work to stimulate crowd involvement with timely messages (for example, “Defense!”) on the big screens. However, other service organizations are paying close attention to this opportunity area as well. White Memorial Medical Center, in East Los Angeles, for example, recently implemented a patient tracking system of patient waiting times and delays. When a patient’s wait exceeds a set threshold, staff members inform the patient about the expected waiting time and the causes of the delay. The system has enabled the hospital to reduce complaints and increase overall satisfaction.
Organizations in general have found success in identifying and focusing on points in the service cycle where emotions tend to be high. Rather than include everything, it helps to simplify by concentrating on the strong positives or negatives, and determining whether the emotions are caused by the company or by external agents.

Emotional Moments and Organizational Responses

Service providers should categorize events based on the type of emotion and the source. When negative events are caused by the company, quick recovery is vital. When they are caused by external agents, the company can generate good will by either being supportive when the emotions are negative or celebrating with the customer when the emotions are positive.

View Exhibit

In any service business, service breakdowns are to be expected. But how companies respond is critical. Service providers that are able to correct problems quickly have opportunities to generate strong customer good will. The benefits come largely from the improved emotional state of customers who have experienced failures.
At present, service design focuses heavily on service recovery.6 However, service companies have other, less obvious opportunities to deliver customer value. For example, in the wake of car accidents, drivers often experience negative emotions that are not connected to the insurance company but to the stress of the situation. There is an opportunity for the insurer to strengthen the relationship with the customer by showing support. At a minimum, the agent can show concern by sending a note or calling — or the company can go a step further. For an extra fee, Allstate offers customers a special rider that automatically “forgives an accident” and holds premium rates steady even if the accident turns out to be the policyholder’s fault. There are similar opportunities to piggyback on positive emotions.7 Businesses can align themselves with positive experiences, as when restaurants recognize a patron’s birthday.

Designing for Trust

Consistent performance goes a long way toward building trust, and the use of traditional operations management approaches, such as Six Sigma, can be important drivers. The need for trust is particularly important when the outcomes are not completely under the control of the service provider and when the customer is not in a position to assess the service provider’s knowledge or skills. That is often the case with professional services, where customers have legitimate questions about whether service providers have the skills, the motivation and the resources to serve them.
There are significant differences between how customers assess a service provider’s motivation and how they view competence. In most professional services, it is easier to judge motivation than competence. Motivation is seen as a reflection of attitude, while content-related errors are seen as inadvertent or the result of extraneous causes (and thus easier to forgive). A waitress who makes a mistake on an order but then compensates with diligent service is likely to get a bigger tip than a waitress who makes no errors but is viewed as being indifferent. That helps explain why good service recovery boosts loyalty.
Although credentials, testimonials and recommendations are frequently important factors in trust, many customers make their judgments based on other cues, including a person’s behavior, problem-solving skills, ability to communicate clearly and other surrogates such as the ability to perform ancillary tasks. For example, the core task of a consulting engagement might be reorganizing a client’s call center, but an essential aspect of the job might be managing the logistics of client meetings. If that is managed efficiently, the consultant may benefit from a halo effect, which may help the company sell the client on other consulting engagements. Indeed, there are other process variables, such as response time, that customers often use as indicators of overall competency and professionalism. Here are some others:
Professional Appearance Customers often look for physical cues. In one study, subjects judged a travel agent with a messy office to be less competent than one with a more organized office.8 Personal appearance can also be a factor. A recent study of doctors reported in the New York Times showed that patients were more trusting of doctors who dressed professionally than those who were overly casual; as a result, they were more likely to follow the professionally dressed doctors’ orders.9
Clear Communication Every profession contains terminology that facilitates rich communication among experts. When specialists use explanations that seem incomplete, customers question their qualifications. But when explanations are too complicated, customers complain about that. The key is to relate as clearly as possible to customers.10
Active Involvement Customers constantly monitor the motivation of service providers. When it is seen as lacking, it inevitably influences customer judgments about a service provider’s competence. Service providers must ensure that they are not showing indifference to customers by the way they organize service delivery or assign personnel. When companies are able to show that they are processing a customer’s order — as FedEx Corp. does with its well-known package tracking capability — they help themselves. We call this the “We’re on it! factor.” In health care, the importance of active involvement and listening is documented in studies. Farmers Insurance Group of Companies found that satisfaction scores for the claims process were highly correlated with whether clients believed in the commitment (an aspect of motivational trust) of the claims agent. Commitment was judged on the basis of level of engagement and whether the agent was viewed as proactive.
Smart Follow-up Little gestures speak volumes about a server’s motivation. These include following up with the customer after the contractual obligations have been completed.
Likability Often lost in the electronics of customer relationship management is the importance of interpersonal familiarity and likability in establishing customer confidence and trust. To be sure, likability is complex — it is made up of numerous variables, including friendliness, congruence of values, language and, especially in professional services, similarity of backgrounds.
Willingness to Take the High Road In most service situations, the service provider has the upper hand in terms of power and/or information and the customer or client is at a disadvantage. We contend that trust increases significantly when the dominant party signals that it will not exploit the other’s vulnerability. For example, a rental car company waiving a late fee or a salesman recommending that customers refrain from purchasing what’s known as a profitable option can yield important benefits such as loyalty and referrals that may far outweigh the additional dollars they would have otherwise generated. Many service providers are reluctant to operate that way for fear that there is too much to lose. But when a company such as Progressive Casualty Insurance Co. quotes rates from competitors or a medical specialist encourages his patients to seek a second opinion, they are wagering that the pluses will outweigh the minuses.

Designing for Control

Every service encounter that involves uncertainty either in outcome or process will cause customers to experience a loss of control. Service providers design for control in two ways: by allowing people to have behavioral control over parts of the service delivery process, and through cognitive control, where even though customers can’t influence the process, they can see enough of the system to know that it’s well managed. Behavioral control is at play when investors get to select from a menu of retirement investment options; when patients get to arrange their own hospital meal schedules; and when cable subscribers get to personalize their channel lineups and home entertainment choices. In general, if service is not going to be delivered right away, customers prefer having behavioral control and the ability to manage when the service is delivered; off-line waits are preferable to in-line waits. Cognitive control is created by conveying information about the process or the outcome to the customer. When airlines post information about flight delays, they are restoring cognitive control.

Allocating Decision Rights

Customer preferences on decision rights depend on the importance of the decision and their level of knowledge. On major decisions, customers frequently prefer to cede decision control to those with more expertise. Where decisions are relatively inconsequential, service providers can cede decision rights to customers, thereby giving them a greater sense of control.

View Exhibit

Outcome Information Making information available to customers is central to managing cognitive control. Although it might seem helpful for service providers to provide customers as much information as they can, there are situations where more information is not necessarily better and may even be worse. For example, some terminally ill patients don’t want to know their prognosis. Likewise, in the wake of the recent stock market declines, many investors prefer not to be reminded of the shrinking value of their retirement savings. Events that generate strongly positive or negative emotions need to be handled with care. In such situations, it’s often possible to allow people to choose how much information they will receive. Web technologies are well suited for this customization, allowing individuals to access as much or as little information as they want based on what they can handle emotionally.
Process Information Even people who don’t want a lot of detail about outcomes often like to know as much as possible about process. One way to provide process information is with service previews, which can reduce anxiety about the negative aspects of a service and prepare people for the positive parts. For example, Kaiser Permanente, an Oakland, California-based health care provider, offers seminars designed to give patients undergoing medical treatment an overview of the steps they will need to navigate. Bumrungrad International Hospital, a leading multispecialty medical center in Bangkok that serves patients from all over the world, connects prospective patients to recent patients with similar backgrounds. That allows people to get information specific to their needs.
Control and Decision Making Providing information about outcomes and process only addresses some of the main concerns. Another key issue of control is the allocation of decision rights between customers and service providers. What decisions should the company allow the customer to make? Increasingly, for instance, auto insurance companies have recognized the importance of this aspect of the service experience in defining their relationship with customers. Progressive Insurance, for example, offers customers the option to buy a concierge service. In the event of an accident, customers who purchased this service can have the insurance company deal with the repair process from start to finish. Under a traditional policy, the customer chooses the repair shop and handles the interactions; with the concierge service, the insurance company does everything. Our research found that customer preferences on decision rights are based on the significance of the decision and the level of knowledge customers have. On major decisions, customers frequently prefer to cede decision control to service providers with greater expertise. In instances where the decisions are relatively inconsequential, providers can allocate decision rights to customers, giving them an increased sense of control. In situations that fall in the middle, a segmented approach makes sense. Service providers need to balance the costs of choice against the benefits of perceived control. We find that businesses often fail to optimize this trade-off by either overestimating the cost of choice11 or by not sufficiently recognizing the customer’s need for control. For example, in health care, several studies have shown that patients’ decision control needs are rarely met because physicians don’t adequately recognize patients’ decision needs.
Organizations seeking to excel in customer service need to explore opportunities to revamp their service processes. They need to attack the “soft side” of customer management with the same type of focus they have previously used to re-engineer work flow and supply chains. It is not enough to assume that the organizational culture or heroic actions by a few front-line employees will produce the proper outcomes. Rather, managers must carefully rethink the psychological aspects of emotions, trust and control of service encounters much the way industrial engineers approach the physical side of work. Although some areas, such as mobile technologies that facilitate banking or access to medical records, may lend themselves to technological innovations, the first requirement for any service provider is having a clear understanding of the kind of service and personal attention customers are looking for as well as their emotional needs.

(Reprint # 52104)

Sriram Dasu is an associate professor of information and operations management at the University of Southern California Marshall School of Business. Richard B. Chase is the Justin Dart Professor of Operations Management at the Marshall School of Business.

REFERENCES

1. B.L. Fredrickson and D. Kahneman, “Duration Neglect in Retrospective Evaluation of Affective Episodes,” Journal of Personality and Social Psychology 60 (July 1993): 45-55; G.F. Lowenstein and D. Prelec, “Preference for Sequence of Outcomes,” Psychological Review 100 (1993): 91-108; and D. Ariely and Z. Carmon, “Gestalt Characteristics of Experiences: The Defining Features of Summarized Events,” Journal of Behavioral Decision Making 13 (2000): 191-200.

2. R.B. Chase and S. Dasu, “Want to Perfect Your Company’s Service? Use Behavioral Science,” Harvard Business Review 79 (June 2001): 78-84.

3. J.E. Ledoux, “Systems and Synapses of Emotional Memory,” chap. 8 in “Memory: Organization and Locus of Change” ed. L.R. Squire, N.M. Weinberger, G. Lynch and J.L. McGaugh (New York: Oxford University Press, 1991).

4. R.S. Lazarus and S. Folkman, “Stress, Appraisal, and Coping” (New York: Springer Publishing, 1984).

5. I.J. Roseman, M.S. Spindel and P.E. Jose, “Appraisals of Emotion-Eliciting Events: Testing a Theory of Discrete Emotions,” Journal of Personality and Social Psychology 59, no. 5 (November 1990): 899-115.

6. C.W.L. Hart, J.L. Heskett and W.E. Sasser, “The Profitable Art of Service Recovery,” Harvard Business Review 68 (July 1990): 148-156.

7. V.S. Folkes, “Recent Attribution Research in Consumer Behavior: A Review and New Directions,” Journal of Consumer Research 14, no. 4 (March 1988): 548-565.

8. M.J. Bitner, “Evaluating Service Encounters: The Effects of Physical Surroundings and Employee Responses,” Journal of Marketing 54, no. 2 (April 1990): 69-82.

9. E.N. Marcus, “When Young Doctors Strut Too Much of Their Stuff,” New York Times, Nov. 21, 2006.

10. D.L. Rotter and J.A. Hall, “Doctors Talking with Patients/ Patients Talking with Doctors: Improving Communications in Medical Visits” (Westport, Connecticut: Auburn House, 1992).

11. G.R. Bitran and J. Hoech, “Humanization of Service: Respect at the Moment of Truth,” Sloan Management Review 31, no. 2 (winter 1990): 89-96.

Former Ford CEO Red Poling 1925-2012

 

Former Ford CEO Red Poling is dead at 86

Former Ford CEO Red Poling

Harold A. “Red” Poling, former chairman and chief executive of Ford Motor, died over the weekend in California. He was 86.

Poling, who retired in 1994, was instrumental in turning around Ford’s North American operations in the early 1980s when Japanese competitors were clobbering domestic carmakers. Poling focused on cutting costs and restoring quality, and enlisted the help of renowned quality guru W. Edwards Deming to reestablish Ford’s reputation with the American public.

“Red Poling was an extraordinary leader who had a profound impact on Ford Motor Company and everyone who worked with him,” Ford executive chairman William C. Ford Jr. said in a statement. “With a list of accomplishments that span 43 years, including leading the company through a remarkable turnaround during the 1980s and 1990s, Red was respected by all for his leadership, his passion for being the low-cost producer and his genuine affinity for people. Our thoughts and prayers go out to his family.”

Harold A. Poling, 86, a Chairman of Ford, Dies

By BILL VLASIC

Published: May 15, 2012

Harold A. Poling, the son of an auto mechanic who helped guide the Ford Motor Company through the recession of the early 1990s as its chairman and chief executive, died on Saturday in Pacific Grove, Calif. He was 86. 

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Harold A. Poling in 1990, during his tenure as chief executive and chairman of the Ford Motor Company. He retired in 1994.

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His death was announced by Ford, where Mr. Poling worked for 43 years before his retirement in 1994. 

Known as Red because of his auburn hair, Mr. Poling rose through the company’s ranks on the strength of his financial acumen and a low-key leadership style that brought stability during tough times. 

He gained prominence in the 1980s as the head of Ford’s troubled North American operations, and later as the company’s president and chief operating officer, imposing financial discipline early in his tenure and presiding over plant closings and widespread job cuts. He was also credited with using Japanese production techniques to shave costs and improve quality. 

In the midst of huge losses, Mr. Poling joined other senior Ford executives in backing a $3 billion program that produced the wildly popular Ford Taurus. “We bet the company,” Mr. Poling said in a Ford news release. “It was a tremendous gamble, but it has paid off handsomely.”

He was promoted to president of Ford in 1985 and became a vice chairman two years later. The company’s fortunes improved as well, with Ford reporting what was then an industry record of $5.3 billion in profits in 1988. 

Mr. Poling was named Ford’s chairman and chief executive in 1990, succeeding Donald E. Peterson. He was 64 years old, but the company gave him an exemption to stay beyond its mandatory retirement age of 65. On his watch, the company introduced models that allowed it to emerge from the recession with a competitive lineup. 

Through all the ups and downs of the industry and Ford’s management infighting, Mr. Poling was considered a steady, unflappable executive. 

“He was not a table-pounding kind of guy, just very smart, very cordial and very professional,” said David Cole, chairman emeritus of the Center for Automotive Research in Ann Arbor, Mich.

Mr. Cole recalled a dinner in the early 1990s attended by Mr. Poling and Roger B. Smith, then the chairman and chief executive of General Motors, Ford’s hometown rival. Mr. Smith dominated the conversation at the table, Mr. Cole recalled, while Mr. Poling hardly said a word. “So my wife turned to him and said, ‘Red, what do you do?’ And Red just smiled and said, ‘I’m the C.E.O. of Ford.’ ” 

Harold Arthur Poling was born on Oct. 14, 1925, in Troy, Mich., the son of an auto mechanic and a nurse. He said that he learned the basics about cars from his father. “We’d grind valves, change piston rings and clutches, and do lots of other jobs,” he said. “It was serious work, but to me it was very interesting.” 

His family moved to Virginia, where Mr. Poling attended high school. He joined the Navy at 17. After being discharged two years later, he went on to earn a bachelor of arts degree from Monmouth College in Illinois 1949 and a master’s degree in business administration from Indiana University in 1951. 

He joined Ford in 1951 as a cost analyst in the company’s steel division, and had several financial posts before becoming a vice president of Ford of Europe in 1972. He became chairman of the European subsidiary, and in 1980 was named executive vice president of North American operations. 

In 1986, he received a distinguished service citation from the Automotive Hall of Fame.

Mr. Poling is survived by his wife, Marian, whom he married in 1957; two daughters, Kathryn Poling and Pam Cruden; a son, Doug; and five grandchildren.

well-tested academic theories can help them succeed not just in business, but in life.

Clayton Christensen's "How Will You Measure Your Life?"

Published:

May 9, 2012

Executive Summary:

World-renowned innovation expert Clayton M. Christensen explores the personal benefits of business research in the forthcoming book How Will You Measure Your Life? Co-authored with James Allworth and Karen Dillon, the book explains how well-tested academic theories can help us to find meaning and happiness not just at work, but in life. This excerpt describes how marginal thinking can lead to personal, professional, and moral failure.

About Faculty in this Article:

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School.

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Editor's note: Every year, HBS Professor Clayton Christensen teaches students that well-tested academic theories can help them succeed not just in business, but in life. He expounds upon those lessons in his forthcoming book, How Will You Measure Your Life? Co-authored with James Allworth (MBA 2010) and Karen Dillon, the book uses meaningful corporate and personal anecdotes to extoll the value of theory in finding and creating happiness.
"You'll see that without theory, we're at sea without a map or a sextant," Christensen writes. "If we can't see beyond what's close by, we're relying on chance—on the currents of life—to guide us."
Christensen also believes that certain common business principles are misguided and even dangerous. In the following excerpt, he explains why focusing on marginal costs and revenues can lead to personal, professional, and moral failure.

The Trap of Marginal Thinking

In the late 1990s, Blockbuster dominated the movie rental industry in the United States. It had stores all over the country, a significant size advantage, and what appeared to be a stranglehold on the market. Blockbuster had made huge investments in its inventory for all its stores. But, obviously, it didn't make money from movies sitting on the shelves; it was only when a customer rented a movie that Blockbuster made anything. It therefore needed to get the customer to watch the movie quickly, and then return it quickly, so that the clerk could rent the same DVD to different customers again and again. It wasn't long before Blockbuster realized that people didn't like returning movies quickly, so it increased late fees so much that analysts estimated that 70 percent of Blockbuster's profits were from these fees.
Set against this backdrop, a little upstart called Netflix emerged in the 1990s with a novel idea: rather than make people go to the video store, why don't we mail DVDs to them? Netflix's business model made profit in just the opposite way to Blockbuster's. Netflix customers paid a monthly fee-and the company made money when customers didn't watch the DVDs that they had ordered. As long as the DVDs sat unwatched at customers' homes, Netflix did not have to pay return postage-or send out the next batch of movies that the customer had already paid the monthly fee to get.

"As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not."

It was a bold move: Netflix was the quintessential David going up against the Goliath of the movie rental industry. Blockbuster had billions of dollars in assets, tens of thousands of employees, and 100 percent brand recognition. If Blockbuster decided it wanted to go after this nascent market, it would have the resources to make life very difficult for the little start-up.
But it didn't.
By 2002, the upstart was showing signs of potential. It had $150 million in revenues and a 36 percent profit margin. Blockbuster investors were starting to get nervous—there was clearly something to what Netflix was doing. Many pressured the incumbent to look more closely at the market. "Obviously, we pay attention to any way people are getting home entertainment. We always look at all those things," is how a Blockbuster's responded in a 2002 press release. "We have not seen a business model that is financially viable in the long term in this arena. Online rental services are 'serving a niche market.' "
Netflix, on the other hand, thought this market was fantastic. It didn't need to compare it to an existing and profitable business: its baseline was no profit and no business at all. This "niche" market seemed just fine.
So, who was right?
By 2011, Netflix had almost 24 million customers. And Blockbuster? It declared bankruptcy the year before.
Blockbuster's mistake? To follow a principle that is taught in every fundamental course in finance and economics. That is, in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and revenues that each alternative entails. But it's a dangerous way of thinking. Almost always, such analysis shows that the marginal costs are lower, and marginal profits are higher, than the full cost.
This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they'll need in the future. If we knew the future would be exactly the same as the past,that approach would be fine. But if the future's different—and it almost always is—then it's the wrong thing to do. As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.

You End Up Paying the Full Price Anyway

Case studies such as this one helped me resolve a paradox that has appeared repeatedly in my attempts to help established companies that are confronted by disruptive entrants—as was the case with Blockbuster. Once their executives understood the peril that the disruptive attackers posed, I would say, "Okay. Now the problem is that your sales force is not going to be able to sell these disruptive products. They need to be sold to different customers, for different purposes. You need to create a different sales force." Inevitably they would respond, "Clay, you have no idea how much it costs to create a new sales force. We need to leverage our existing sales team."
The language of the disruptive attackers was completely different: "It's time to create the sales force." Hence, the paradox: Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward?
The answer lies in their approach to marginal versus full costs. Every time an executive in an established company needs to make an investment decision, there are two alternatives on the menu. The first is the full cost of making something completely new. The second is to leverage what already exists.
Almost always, the marginal-cost argument overwhelms the full-cost. When there is competition, and this thinking causes established companies to continue to use what they already have in place, they pay far more than the full cost—because the company loses its competitiveness. As Henry Ford once put it, "If you need a machine and don't buy it, then you will ultimately find that you have paid for it and don't have it." Thinking on a marginal basis can be very, very dangerous.

An Unending Stream of Extenuating Circumstances

This marginal-cost argument applies the same way in choosing right and wrong: it addresses a question I discuss with my students: how to live a life of integrity—and stay out of jail. The marginal cost of doing something "just this once" always seems to be negligible, but the full cost will typically be much higher. Yet unconsciously, we will naturally employ the marginal-cost doctrine in our personal lives. A voice in our head says, "Look, I know that as a general rule, most people shouldn't do this. But in this particular extenuating circumstance, just this once, it's okay." And the voice in our head seems to be right; the price of doing something wrong "just this once" usually appears alluringly low. It suckers you in, and you don't see where that path is ultimately headed or the full cost that the choice entails.

"The marginal cost of doing something 'just this once' always seems to be negligible, but the full cost will typically be much higher."

Recent years have offered plenty of examples of people who were extremely well-respected by their colleagues and peers falling from grace because they made this mistake. Nick Leeson, the twenty-six-year-old trader who famously brought down British merchant bank Barings in 1995 after racking up $1.3 billion in trading losses before being detected, suffered exactly this fate and talks about how marginal thinking led him down an inconceivable path. In hindsight, it all started with one small step: a relatively small error. But he didn't want to admit to it. Instead, he covered it up by hiding the loss in a little-scrutinized trading account. It led him deeper and deeper down a path of deception.
He lied to cover lies; he forged documents, misled auditors, and made false statements to try to hide his mounting losses. Eventually, he arrived at his moment of reckoning. He was arrested at the airport in Germany, having fled his home in Singapore. As Barings realized the extent of Leeson's debt, it was forced to declare bankruptcy. The bank was sold to ING for just 1 pound. Twelve hundred employees lost their jobs, some of them his friends. And Leeson was sentenced to six and a half years in a Singaporean prison.
How could hiding one mistake from his bosses end up leading to the undoing of a 233-year-old merchant bank, a conviction and imprisonment for fraud, and ultimately the failure of his marriage? It's almost impossible to see where Leeson would end up from the vantage point of where he started—but that's the danger of marginal thinking.
As soon as he took that first step, there was no longer a boundary where it suddenly made sense to turn around. The next step is always a small one, and given what you've already done, why stop now? Leeson described the feeling of walking down this dark road in an interview with the BBC: "[I] wanted to shout from the rooftops … this is what the situation is, there are massive losses, I want it to stop. But for some reason you're unable to do it."

100 Percent of the Time Is Easier Than 98 Percent of the Time

Many of us have convinced ourselves that we are able to break our own personal rules "just this once." In our minds, we can justify these small choices. None of those things, when they first happen, feels like a life-changing decision. The marginal costs are almost always low. But each of those decisions can roll up into a much bigger picture, turning you into the kind of person you never wanted to be.
I came to understand the potential damage of "just this once" in my own life when I was in England, playing on my university's varsity basketball team. It was a fantastic experience; I became close friends with everyone on the team. We killed ourselves all season, and our hard work paid off-we made it all the way to the finals of the big tournament. But then I learned that the championship game was scheduled to be played on a Sunday. This was a problem. At age sixteen, I had made a personal commitment to God that I would never play ball on Sunday because it is our Sabbath.
So I went to the coach before the tournament finals and explained my situation. He was incredulous. "I don't know what you believe," he said to me, "but I believe that God will understand." Every one of the guys on the team came to me and said, "You've got to play. Can't you break the rule, just this one time?"
It was a difficult decision to make. The team would suffer without me. The guys on the team were my best friends. We'd been dreaming about this all year. I'm a deeply religious man, so I went away to pray about what I should do. As I knelt to pray, I got a very clear feeling that I needed to keep my commitment. So I told the coach that I wasn't able to play in the championship game.
In so many ways, that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, I realize that resisting the temptation of "in this one extenuating circumstance, just this once, it's okay" has proved to be one of the most important decisions of my life. Why? Because life is just one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over and over in the years that followed.
And it turned out that my teammates didn't need me. They won the game anyway.
If you give in to "just this once," based on a marginal-cost analysis, you'll regret where you end up. That's the lesson I learned: it's easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. The boundary—your personal moral line—is powerful because you don't cross it; if you have justified doing it once, there's nothing to stop you doing it again.
Decide what you stand for. And then stand for it all the time.