It's astonishing what happens when senior executives pay attention to how work actually gets done.

MANAGING OUR WAY TO HIGHER SERVICE-SECTOR PRODUCTIVITY

by Michael van Biema and Bruce Greenwald
What electricity, railroads, and gasoline power did for the U.S. economy between roughly 1850 and 1970, computer power is widely expected to do for today's information-hased service economy. But there is increasing concern hecause improvements in productivity growth are continuing at low levels despite the expenditure of trillions of dollars on information technology. Whereas productivity grew at an annual rate of 3% in the two decades following World War II, it has grown at an annual rate of only about 1% since the beginning of the 1970s. Had the earlier level of productivity growth been sustained, the gross domestic product would now be approximately $11 trillion instead of about $6.5 trillion. That extra $4.5 trillion per year in economic output-which amounts to roughly an additional $18,000 for every man, woman, and childwould be having a profound impact on a wide range of social and economic problems. WljatJ^preventmg a productiyity revival iii_the^ UjS. economy? Clearly, the manufacturing sector cannot be blamed. Since 1980, improvements in productivity in the manufacturing sector have moved the United States from a position of near terminal decline to renewed world dominance. Handwringing over the fate of the Rust Belt cities is a thing of the past. From 1970 to 1980, the United States lagged behind several other major industrial powers in manufacturing productivity growth. (See the table "The Turnaround in U.S. Manufacturing Productivity.") In the early 1980s, U.S. manufacturing began to rebound, and between 1985 and 1991 the United States surpassed Germany and Canada in manufacturing productivity growth, was neck and neck with Italy, and lagged behind only Japan and the United Kingdom. Manufacturing, however, constitutes an increasingly small proportion of the U.S. economy. GoodsHARVARD BUSINESS REVIEW July-August 1997

producing activities (such as manufacturing and construction) employed only 19.1% of the labor force in 1992-down from 26.1% in 1979. (See the table "The Growth of the Service Sector in the U.S. Workforce.") Service-producing activities, on the other hand, employed 70% of all U.S. workers in 1992-up from 62.2% in 1979. By 1994, 71.5% of U.S. workers performed service jobs - whether in manufacturing or service organizations - as managers and professionals, salespeople, or technical support staff. Although the service sector's size has grown in the past 20 years, its productivity growth has declined. Compare its productivity growth with that of the manufacturing sector, for example. From 1946 to 1970, productivity grew by 3% per year in the manufacturing sector and by 2.5% per year in the service sector. From 1970 to 1980, those annual rates fell to 1.4% for manufacturing and 0.7% ^for services. Then, from 1980 to 1990, the rate recovered to 3.3% for manufacturing but stagnated at 0.8% for services. The productivity revival had failed to penetrate the service sector. Why hasn't productivity grown as fast in the service sector as in the manufacturing sector? Several incomplete explanations have been offered and have resulted, in our view, in some serious misconceptions. We hope to show their limitations here and present a new explanation that lays the blame
Michael van Biema is an assistant professor of economics and finance, and director of the Sloan Studies in Technology and Service Sector Productivity, at the Columbia Business School in New York City. Bruce Greenwald is the Heilbrunn Professor of Economics and Finance at the Columbia Business School Their research on service sector productivity is supported by the Alfred P. Sloan Foundation. 87

SERVICE SECTOR PRODUCTIVITY

1970 -1980 Country Canada Germany Italy Japan United Kingdom

1985-1991

Productivity Growth Rate Indexed to U.S. Growth Rate 0.2%

-2.6% -1.1 0.0 2.3 1.1

2.0 2.4 5.2 0.2

in two places: the ineffectiveness of many U.S. business managers at improving productivity and the inherent complexity of the service sector itself. A management-based approach to improving the service sector's productivity offers hope for a rapid and significant turnaround of the sector's productivity growth rate.

Understanding the Service Sector's Productivity Slump

There are a number of current explanations for why productivity growth has stalled in the service sector. A common one is that the issue is simply a matter of measurement. Productivity, it is claimed, has been growing. But traditional productivity measures fail to capture that growth because it has been concentrated in improved quality of services. The data, however, argue strongly against this possibility. First, undermeasurement of quality has been cited as an explanation since the 1950s, but there is little evidence that it has increased. Second, the quality argument would apply equally to services and manufactured goods, yet manufacturing productivity has enjoyed a revival despite the undermeasurement of quality, whereas service productivity has continued to stagnate. A second common explanation for the lag in the service sector's productivity growth is that since the 1970s, manufacturing workers, faced with the threat of losing their jobs to low-wage employees overseas, have learned to work harder and smarter, but service workers, who typically have much less exposure to global competitive pressure, have not. This explanation also falls short. First, the pressure on manufacturing workers in the United States has generally been overstated, often for political purposes. Second, although it is true that many manu88

facturing jobs have been lost to foreign workers, a far greater number have been lost simply because growth in demand for manufactured goods has been relatively slow in the past ten years, and that has affected output. A third and mind-numbingly familiar explanation is that output in the service sector is far below its potential because of a number of macroeconomic factors. According to this line of reasoning, the proposed solutions are to increase national savings and investment in the service sector by lowering the federal deficit and thereby reducing interest rates; to improve the quality of the workforce by repairing the woeful educational system, which produces workers unable to cope effectively with the increasingly technical nature of jobs; and to accelerate the development of new technologies by increasing support for research and development, which has been dwindling. In other words, save more, improve education, conduct more R&JD, and the service sector's problems will be solved. A radically different view will be presented here. We will contend that the problem is not a lack of resources; rather, it is that service sector companies operate below their potential and increasingly fail to take advantage of the widely available skills, machines, and technologies. The main reason the service sector has not reached its total potential output is management. If managers were focused energetically and intelligently on putting the existing technologies, labor force, and capital stock to work, rapid productivity growth would follow. To be sure, the management challenges are more severe in the service sector than in the manufacturing sector. However, the high productivity levels attained by leading-edge service companies indicate that attention from management can result in vastly improved performance throughout the service economy.

Employment Category Goods-producing (for example, manufacturing, construction, and mining) Service-producing Other (includes agriculture and household services) Total

1979 26.1%

1992 19.1%

62.2 11.7

70.0 10.9 100.0

100.0

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what is required to fulfill this potential is a better understanding of services and a set of tools, techniques, and policies to help keep management's focus on productivity improvement. The rigorous application to the service sector of those management techniques that have heen so effective in the manufacturing sector is a start. Despite their many failings, techniques such as total quality management, hest-practice analysis, process reengineering, justin-time management, team-based management, and time-based competition helped to focus manufacturing managers' attention on productivity and, in the process, helped them bring their companies back to life. Although applying those techniques to the service sector is more complex, doing so would help managers provide high-quality services efficiently to customers. The key here is that such techniques have refocused manufacturing managers' attention on the central issue: the efficiency of basic operations. Applied with equal rigor to service organizations, they should yield similar results. The villains, according to our view, are not the deficit or the educational system or lagging gov-

cial events, such as management buyouts, that demonstrate the high levels of unexploited potential; and (5) our detailed case studies of individual companies' productivity performance. The first compelling piece of evidence for the view that productivity is management driven is the improved performance of U.S. manufacturing. The decisive element in this turnaround clearly was not the economic factors that are the primary focus of the current debate. The early 1980s were a period of huge public deficits, low private-saving rates, and high real interest rates. Schools were just as bad as - if not worse than - they are today, judging by the slight improvement in most measures of educational performance since the late 1970s and early 1980s. Nor can the revival be explained by the arrival of new productivity-enhancing information technologies. Foreign competitors have had equal access to such technologies but have not been able to replicate the improvements attained in the United States. The critical factor seems to have been the performance of managers, whose attitudes changed sig-

The primary reason why the productivity growth rate has stagnated in the service sector is management.
ernment support for R&D; rather, they are all the forces - takeovers, financial manipulations, government regulation, and the general fixation on high growth - that distract managers from the fundamentals of tbeir businesses. nificantly under the pressure of foreign competition. If marketing was the primary focus of the 1960s, and if management and finance dominated the 1970s and early 1980s, the most recent period has been characterized by renewed attention to managing basic production and operations. Many of the important managerial techniques that have been developed in recent years are production oriented, and if they were indeed the decisive development in the turnaround of manufacturing, then it seems unlikely that service productivity would be able to improve without a similar refocusing of managers' attention. The second major piece of evidence in support of a management-based understanding of service sector productivity is tbe existence of wide and persistent disparities in performance between the best service companies and their competitors. Northwestern Mutual, for example, has long been acknowledged as the low-cost provider of life insurance. (See the table "How Productivity Varies in the Insurance Industry.") Each dollar that Northwestern collected in 1991 from customers' premiums
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A Management-Based Approach to Service Sector Productivity

The evidence overwhelmingly supports the management-oriented view of the service productivity problem. Robert H. Hayes and William J. Abernathy, the authors of "Managing Our Way to Economic Decline" (HBR July-August 1980), are as relevant today as they were in the 1980s, when they argued that productivity performance lies predominantly in the hands of managers. Five broad categories of evidence point in this direction: (1) the productivity turnaround in manufacturing; (2) tbe large and persistent gaps between the performance of average service companies and the best-run companies; (3) the fluctuating patterns of productivity growth at many service companies; (4) certain speHARVARD BUSINESS REVIEW July-August 1997

SERVICE SECTOR PRODUCTIVITY

How Productivity Varies in the Insurance Industry

General Expenses -r Premiums (in cents per dollar) Connecticut Mutual Phoenix Mutual Northwestern Mutual

Year

1988 1989 1990 1991

20.9 19.8 20.2 20.9

16.7 15.7 14.9 15.6

6.8 6.9 7.4 6.3

Note: Data bave been adjusted far differences in accaunting for sales force structure, type af policy written (base or new], and product mix (term or wfwie life}.

involved a processing cost of 6.3 cents, as opposed to 20.9 cents for Connecticut Mutual and 15.6 cents for Phoenix Mutual. The differences in productivity cannot he attrihuted solely to differences in the product mix. If anything, those would have worked against Northwestern hecause it sells relatively more lowpremium term policies than high-premium wholelife policies. Nor can the differences he attrihuted to the organization of the sales force, since the numhers measure only administrative costs; to the productivity measure chosen, since other measures, such as insurance in force (the total amount of insurance a company has underwritten) or total assets, yield similar results; or to wage costs, since they differ only slightly among the companies. Nor can the U.S. hudget deficit, overall R&D spending, or the eduHow' Productivity Varies at Regiona cational system he invoked to Telephone Companies explain the differences, since technology, highly skilled lahor, and capital are equally availahle Costs per Access Line Customer Service Costs per ($1 Access Line ($) to practically all similar companies. The differences, therefore, Company 1988 1991 % change 1988 1991 % change must he attrihuted to how these factors are put to use, and that is Bell of $36.2 $368 $388 $29.6 5.4 22.3 a question of management. Pennsylvania Such large disparities hetween Illinois Bell 384 384 36.0 39.7 0.0 10.3 the most productive companies in an industry and the others can New EnglancJ 482 436 41.7 46.1 -9.6 10.6 he found even among the regional Telephone Bell operating companies. The New York 564 47.6 531 49.3 6.2 3.6 telephone companies, hecause of Telephone their common Bell System inheritance, use the same hasic techSouth Central Bell 482 430 -10.8 38.1 40.4 6.0 nologies, pay the same hasic U S West 489 401 -18.0 38.8 32.4 -16.5 wages, and operate under the same hasic lahor agreements.
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Their employees share common hackgrounds and training. Their technology is developed in common either hy equipment suppliers or hy their shared R6LD facility. Bell Communications Research. Yet cost differences of ahout 50% characterize regional company operations in the aggregate, from a low in 1991 of $384 per telephone access line at Illinois Bell to a high of $564 per access line at New York Telephone. (See the tahle "How Productivity Varies at Regional Telephone Companies.") Similar differences also show up in other areas, such as customer service. Customer service costs per access line in 1991 ran from a low of $32.40 at U S West to a high of $49.30 at New York Telephone. Because there are few proprietary technologies, productivity is theoretically the same for all companies, and differences in performance must therefore reflect differences in managers' effectiveness. Similar large differences in productivity also have heen found in such industries as hanking, hrokerage, and retail. If a high percentage of companies in those industries apply hest practices, they can have a considerahle cumulative effect. Consider the following scenario: Assume that there is a productivity gap of three to one hetween the hest performers in an industry and the laggards. If, over a 20-year period, all the laggards could close that gap, then the industry would he ahle to enjoy 3% annual productivity growth over that period. A third piece of evidence for the view that managers drive productivity is the fact that productivity growth at many companies fluctuates widely in hoth duration and magnitude. The usual cycle

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goes something like this: Management becomes concerned about costs and margins. It announces cost-cutting programs and large-scale layoffs. Then quiet returns and, for an extended period, little more is heard until the next management intervention. A telling example of this cycle is the experience of Citicorp's credit-card division during the recession of the early 1990s. Citicorp was widely regarded in 1990 as having the most efficient operations of any credit-card issuer, with lower costs than all its major rivals. Administrative expenses grew by about 6% in 1991, then declined by 3% under companywide cost-cutting pressure, and then jumped by 27% in the next two years. (See the table "The Cost of Taking One's Eye off the Ball: Citicorp.") The increase in costs over those two years was an across-the-board phenomenon affecting all aspects of the operation. A deterioration of such magnitude in so short a period defies traditional economic logic and demonstrates how important it is for managers to continue paying attention to costs. In this instance, the source of the distraction was an unprecedented increase in bad loans owing to the recession - a problem that consumed much of management's time. The emphasis on managing credit losses was understandable, as a further run-up in net credit expense would have had a disastrous effect on the company's finances. But the rapid increase in operating costs when management's attention was diverted from basic operations underscores the central role of management in maintaining productivity growth. This commonly observed pattern of fluctuating productivity- periods of rapid advance followed by periods of little improvement, if not outright decline - cannot be explained by the oft-cited factors of capital, labor, and technology. That is because changes in investment, labor, and technology have, on an annual basis, only marginal effects on a company's overall productivity. Investment and depreciation alter a company's capital stock by only a small percentage in any given year. Employee turnover accounts for only small changes in a company's labor force. Even technology changes at a relatively steady and predictable rate. So in order to understand how productivity fluctuates at companies, one needs to look first and foremost at the actions of management. There are a number of special circumstances that, taken togetber, provide the fourth piece of evidence that management can attain improvements in productivity. The success of most leveragedbuyout firms, for example, stems almost entirely from their ability to concentrate management's attention on the efficiency of basic business operaHARVARD BUSINESS REVIEW July-August 1997

Year 1990 1991 1992 1993 1994

Adminiilrative

Administrative Expenses (in millions of dollors)

Net Credit Losses (in millions of dollars)

100 106 103 123 131

100 150 156 127 101

again.

expenses rose wilh net credit losses at Citicorp in the eariy 1990s but

were not brought back in line as net credit losses declined

tions. Such opportunities would not be as widely available if those firms were operating at - or even near - their potential productivity levels. The LBO firms have made fortunes not because of the generally low level of stock prices (successful buyouts have continued to occur since the mid-1980s despite high stock prices) and not because they can acquire companies at bargain prices, but because they have hired tough managers who are able to increase efficiency.

The Importance of Sustained Management Attention

One of the factors complicating the achievement of productivity gains in the service sector is that, unlike many manufacturing companies, in which product engineers are asked to work on long-term projects, service companies tend to assign their staffs to temporary projects. Consider the following series of events at Cormecticut Mutual Insurance Company, which decided in 1990 to improve productivity in several departments. The company brought in an outside operating executive who, in her previous joh at another insurance company, had achieved a 35% cost reduction. A task force from the targeted departments convened in December and developed a plan to reduce the number of employees by 25% in 1991 and by another 10% in 1992. Information technology staff members would be used to carry out the project, although a handful of outsiders were hired for critical positions. The work consisted primarily of creating a common graphical interface for the multiple databases that characterized the original operation and then streamlining processes such as underwriting, posting premiums, setting up new policies, and writing loans. The technology involved was standard and
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SERVICE SECTOR PRODUCTIVITY

well tried. Capital was invested largely in personal computer workstations and programming services. Existing employees needed little training to perform the new jobs. Some processes were revisited more than once over the two years of the project. Surprisingly, when processes were revisited a second time, productivity gains were greater than they had been on the first pass. In other words, the first go-around had not exhausted all the possible improvements. The results of this persistence were impressive. Over the course of 1991 and 1992, Connecticut Mutual managed to reduce the number of positions in its back-office support operations by 128-just over 25% of the original 500-person force. Its total investment was estimated to he about $7 million: about $4 million for new investments in computers and about $3 million for additional operating expenses. Annual savings were estimated to be $4.5 million per year - a return in excess of 60% - and quality measures, such as response times by the back office, improved enormously as a result of the new processes.

top priorities, then productivity performance will lag. If the improvement of basic operations ranks high, then productivity growth will follow.

Exploiting Existing Capabilities

In all the successful projects we studied, returns on capital more than justified any investment and in some cases were astronomical. Furthermore, more highly skilled workers were rarely essential for success: the existing workforce was fully capable, with at most modest retraining, of meeting the demands of the new work processes (although lower-skilled workers were often let go). Finally, to the extent that the projects we studied used truly leading-edge technologies, they tended to contribute to failure rather than success. The successful projects overwhelmingly used proven technologies that were at least three years old. In all those respects, managers were largely using existing resources to achieve improvements. Consider the experience of NYNEX Corporation. In 1991, the company wanted to install a limited

By putting the existing technologies, labor force, and capital stock to work, managers can raise productivity growth rates considerably.
In the middle of 1992, the company's CEO, who had been a major promoter of the project, announced that he would be stepping down in 18 months. Successful work on the project came to a halt as senior managers, including the outside operating executive in charge of the productivity plan, began jockeying for the top position. Focus and cooperation among departments was rapidly lost. Effort was diverted from carrying out improvements to identifying and promoting what had been achieved. Although the project was extended through 1993, there were few reductions in the workforce after mid-1992. The attention of management was now focused elsewhere. Clearly, once managers' attention was no longer sustained, productivity improvement dropped off. Given the seriousness of this problem, it might be helpful to understand why projects stall. Competitive pressures obviously play a role, as do pressures to meet profit targets or eliminate losses. But an underlying, and more plausible, explanation is that management is a scarce resource. If acquisitions, stock-price manipulations, and public relations are
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automated-voice-response system to handle a small percentage of service calls for residential and smallbusiness customers. The installation period was less than two years, the technology had been available for a few years, and the existing customer-service labor force was largely unaffected and unchanged (except for some minor training). The capital expenditure was $3.25 million. In addition, about $2.18 million in onetime expenses were incurred - mostly labor costs associated with bringing the new system online. When the voice response system was up and running, NYNEX realized annual savings of about $3.9 million-an annual return far in excess of 50%. By using the same technology in other areas of the company, NYNEX discovered, it could potentially save more than $50 million per year. Just as NYNEX could use existing technology to achieve productivity gains, Salomon Brothers was able to leverage an existing workforce. When the company wanted to relocate its back-office staff from New York City to Tampa, Florida, in order to lower labor costs, a careful reevaluation of functions led to a reduction from an average of 644
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workers between 1991 and 1993 to 458 workers in 1994, and ultimately to 425 in 1995. At the same time, both the volume and complexity of transactions increased with no significant upgrading of the labor force. In fact, there was a significant reduction in the number of skilled workers as many highly experienced employees decided not to move from New York to Tampa. The overall reduction in the labor force of 34% represents an average annual productivity gain of more than 15% over two years. We have seen this pattern at company after company, and the data unambiguously show that by using existing inputs, management can raise productivity growth rates considerably.

The Management Challenge: Understanding Service Businesses

Although management's effectiveness may be what drives the service sector's productivity, we are still a long way from seeing improvements in the sector at the level of the macroeconomy. That is not only because of the sector's size but also, and more important, because it can be notoriously difficult to manage. One way to appreciate this complexity is to compare the management challenges in the service sector with those in the manufacturing sector. The first important difference between the two sectors is that services encompass a much wider range of activities than traditional manufacturing does. Economists and many managers have tried to treat service as an undifferentiated amalgam. However, although medical care, investment management, retail distribution, private education, telecommunications, dry cleaning, and check processing may all be service activities, they present very different productivity challenges. A necessary first step for managers is to identify the distinct activities performed in their companies and deal with each in an appropriately tailored way. An approach that has been fruitful in our research is to distinguish among transaction-processing activities like data processing, which, with appropriate technology, can be effectively organized into large, highly automated work environments; distribution activities (wholesale and retail) that involve local, intercormected operations with significant economies of scale; small-scale, dispersed manufacturing-like activities (such as dry cleaning and hamburger making); and higher-level activities that involve direct human interaction and superior analytical capabilities (such as medical care, investment banking, and law). Because the productivityimprovement strategies appropriate to each type of
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activity are quite different, it is essential to identify these separate functions - which often are embedded in the same company-if progress is to be made in improving productivity. The second difference between the sectors is that service jobs are inherently multifunctional in ways that manufacturing jobs often are not. The role of fast-food workers is an obvious case in point. Their responsibilities often include production (making the fast food), retail service (delivery to customers), customer service (making sure that customers have an enjoyable experience), and transaction processing (accepting payment and making change). Under some circumstances, it also may involve stock management and simple building maintenance. Measuring, monitoring, and improving an individual's performance are therefore complex tasks. As a result, efforts at improving organizational performance require careful attention to what employees actually do and how their activities could be streamlined. This complexity can thwart efforts to improve efficiency because employees resistant to change often claim that changes will impair their ability to do their work. To address this level of complexity, managers need to consider a full range of management practices. Best-practice analysis within an organization with many similar units (as is often the case in services) can be a good start for managers because efficient units provide useful information about management techniques and performance targets. At the same time, comparisons across organizations can help companies avoid repeating past mistakes. Process analysis, too, is often a useful tool because it can uncover ways in which service workers can interact with customers. The continual analysis and feedback of quality-management techniques ensure that the full range of critical functions continue to be improved. Our studies indicate that the proper application of this set of tools can yield enormous performance gains in services just as they have in manufacturing. Third, whereas manufacturing capacity can be spread out across time through physical inventory, service capacity is relatively fixed and carmot rely on inventory to store capacity. Compared with manufacturing, service operations are more rigid, involving a basic level of capacity that must be set in anticipation of demand (for example, the number of phone lines, switches, or stores). Furthermore, it is difficult to tell at times whether a service business has the appropriate amount of capacity, since there are no "stockouts" or inventory accumulations to use as gauges. Therefore, service sector managers who want to improve productivity not
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SERVICE SECTOR PRODUCTIVITY

only must maximize capacity utilization but also must struggle to determine just what that capacity needs to be. Consider the differences in workforce planning in the two sectors. In manufacturing, excess capacity leads to an accumulation of inventory, which in turn leads to temporary or, if necessary, permanent layoffs. In the longer run, new hiring often stops automatically, as laid-off workers wait to fill their old jobs. In services, because operations are spread out, signs of excess capacity are more subtle, and staffing adjustments are more convulsive and uneven. During slowdowns in business, service companies react in one of two ways: They eliminate work without laying off the corresponding workers and hence are left with excess staff. Or, in frustration at not having achieved projected workforce reductions, they eliminate both jobs and employees without ensuring that the people who go correspond closely to the work that is being eliminated. As a result, many of the workers continue on as

This situation is in marked contrast to that in the service industries, where competition is predominantly local. Services are usually not transportable - think of hospitals, restaurants, and stores-and some larger service organizations (such as Wal-Mart Stores and Target in discount retailing) have achieved economies of scale that ensure protected local market positions. The local nature of many service businesses diminishes the invigorating force of competition and may cause efficiency gains at the company level to dissipate at industrywide and economywide levels. For example, improved retail efficiency will not always translate into lower prices or higher quality at the local level. Instead, such improvements may simply spur entry by new competitors with access to the operating efficiencies involved. Their entry, in turn, may not drive down prices or drive up the quality of service; instead, it may divide the existing sales in the market more finely among local competitors. Fixed costs are then spread out over a smaller sales base at

The government's most important contribution may be to minimize the demands it makes on the attention of business leaders.
consultants or contract employees, defeating the original objectives. Careful workforce planning is much more important for productivity improvement in services than it is in manufacturing. Such planning must be a part of any reengineering, quality-management, or other technique-driven approach to performance improvement. It also should be noted that this type of plarming can reduce or eliminate the likelihood of the kinds of careless layoffs that have received so much negative press of late. Fourth, the nature of competition differs in the two sectors. Manufacturing output is transportable, and economies of scale are either global or nonexistent. Competition among manufacturers is correspondingly global, and that has important consequences. Manufacturing companies do not enjoy local niches sheltered from the full force of foreign competition. In the 1970s, the weaknesses in U.S. manufacturing were ruthlessly exposed, and weak companies were threatened with extinction. That was perhaps the greatest single factor in the U.S. manufacturing revival. Efficiency gains at individual companies were rapidly translated into gains in the industry and the overall economy.
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each company, which largely offsets the original efficiency gains. Thus, at the industry level, there may be little consequent productivity gain.

The Government's Role in Productivity Growth

Traditionally, economists have argued that the government can improve productivity in the service sector by lowering the deficit and interest rates, improving education, and supporting research and development. Although all those measures may be helpful, they are unlikely by themselves to make a big improvement in the rate of productivity growth. The most important contribution that government is likely to make in this effort is to minimize its demands on the attention of business leaders. The first way it can do that is to maintain a stable macroeconomic environment and avoid letting the economy slip into recession. Historical evidence suggests that, on balance, recessions have a negative impact on productivity levels. Moreover, the loss in productivity growth seems to be permanent. There is no significant evidence that recessions
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are followed by higher than average productivity growth. In coping with the balance sheet, workforce level, cash flow management, and other concerns that typically confront companies during recessions, management's attention seems to be diverted from the everyday task of continuous performance improvement, and the resulting declines in efficiency are long lasting. In our case studies, we saw several instances in which large productivityenhancing projects were delayed or scrapped during such periods. The second way the government can help the service sector improve productivity is not to overregulate it. The point here is not, however, that regulatory interventions are unjustified. When carefully conceived, they can be quite beneficial to the country's economic and social well-being. The point is that regulation should be carried out in both spirit and practice to minimize the demands made on businesses' attention and resources. This means that if the government is serious about enhancing productivity performance, it should formulate stable, cooperative long-term regulatory policies, rather than aggressive responses to the latest crisis.

Employment Cotogory Managerial, professional Technical, sales, administrative support Other service occupations Total

1983 23.4% 31.0 13.7 68.1

1994 27.5% 30.3 13.7 71.5

Securing Jobs Through Higher Service-Sector Output

It has been claimed that recent improvements in productivity - gained by reducing employment rather than increasing output - are less desirable than productivity gains achieved during a period of expanding employment. But that is not always the case. One example is the spectacular long-term growth in agricultural productivity: the farm labor force has been reduced to almost nothing, and yet the sector is a foundation of U.S. prosperity. Similarly, although accelerating growth in manufacturing productivity in the 1980s led to reduced manufacturing employment, the change was beneficial to the U.S. economy as a whole. Overall employment has continued to grow and has grown especially rapidly for managerial and professional workers. (See the table "The Growing Ranks of Management in the Service Sector.") The present problem is not the creation of new jobs but rather the productivity of workers in those new, predominantly service positions. Keeping highly skilled workers in jobs in which they are not needed is no solution to the nation's

productivity difficulties. The available evidence indicates that the great majority would succeed in finding new jobs. The U.S. economy has generated an unending stream of new employment opportunities, not just for laid-off workers but also for new immigrants, the expanding native-born population, and the growing number of women entering the workforce. The challenge is to ensure that their talents lead to ever higher levels of productivity in their new jobs, and that is ultimately a challenge for management. Managers must ensure that productivity levels in the newly created service jobs that employ an. ever increasing proportion of the U.S. labor force are sufficiently high to provide for the country's collective well-being. Many factors complicate the task of achieving a management-driven revival in service productivity comparable to that in manufacturing, hut they do not put it entirely out of reach. Service sector managers may indeed have to be more focused and careful in their approach to managing productivity improvements. Due attention must be paid to identifying and defining the roles and activities performed in the workplace; bringing to bear appropriate productivity-enhancing strategies to ensure that important elements of job responsibilities are not lost; implementing carefully conceived, parallel human-resources and workforce-management strategies; and maintaining the focus on performance improvement in the ahsence of global competitive forces and in the presence of many other distractions. However, there is undeniable evidence that leading-edge service companies do attain performance levels far in excess of those of their average competitors, and particular companies achieve spectacular improvements. The management challenge is clear. 5
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