Does A Slow Growth Economy Affect Service Levels?

Peter Gurney

Several months ago a friend sent me an article with the headline, "Providing good service is the key to surviving the down economy."

I have seen similar headlines in articles, blog postings and on-line discussions repeatedly since the start of the recession, all claiming that a bad economy threatens service levels, and that we must remain focused on serving our customers, now more than ever.

Sounds like good advice, and it makes intuitive sense. But is there really a solid basis for this assumption? And now that the recession is receding, how should we view service quality in an up economy?

Business Case for Better Service in a Recession

There appears to be two main reasons for the claim that focusing on good service is important to surviving a recession. The first is that, with lower business volume, every customer counts. We must therefore treat them especially well and not give them any reason to defect. This point is hard to refute. In a growing economy you might be able to replace a lost customer, but in a slow economy there may not be a replacement waiting in the wings. Furthermore, with many companies dropping their prices to attract scarce customers, the temptation for customers to switch is high. Excellent service is one way to counteract that temptation.

The second reason for the claim is that layoffs and cutbacks threaten the ability of companies to provide their usual level of service quality. In other words, a bad economy leads to bad service, so we need to be vigilant and not let our service levels slip.

This point is a bit more suspect. Yes, layoffs mean there are often fewer employees available to serve customers, but the reason the employees were let go in the first place was that business is down. If the ratio of service workers to business volume remains the same, there is no reason to think that service will deteriorate. (An exception is government services, where staffing levels are determined by tax revenues rather than business volume. However, the customers in this case are captive, and not likely to defect.)

What’s Old Is New Again

When I started seeing the connection made between a bad economy and declining service quality, it rang a faint bell in my mind. I had heard similar claims before. Looking through my old records, I discovered that this had, indeed, been a hot topic in the past. With one twist: The last time around, the claim was that a good economy leads to bad service.

Back before the dot-com bust, in the late ‘90s through early 2001, company managers were despairing about the difficulty of keeping up service levels. Why? Because the unemployment rate kept dropping. With a shrinking labor pool there was more competition for front-line service workers, and companies could no longer be as selective about whom they hired. Furthermore, with so many companies undergoing aggressive expansion, they often had to shorten training programs in order to get employees onto the floor faster. To make matters worse, many of their best service workers were leaving because they were able to find higher paying jobs in other fields, which were also experiencing labor shortages.

It’s Always About the People

These problems were not just theoretical. A very real example appeared when one of my company’s clients, a regional chain of home improvement stores, saw their customer satisfaction scores plummet. They had been successfully competing with Home Depot and Lowe’s by virtue of their superior customer service. The company was highly selective about new hires, and its training program was considerably more rigorous than that of its competitors. Employees at their stores were known for their encyclopedic knowledge of the stock as well as for their eagerness to find and assist any customer who needed help.

When I asked one of their executives why customer satisfaction was falling, he said it was becoming more and more difficult to find the quality of worker they needed. "We’re reduced to hiring warm bodies," he sighed.

At about the same time, I attended a presentation by Howard Schultz of Starbucks and Pete Nordstrom of Nordstrom Stores. (They were showing off their newly purchased NBA team, the Seattle Sonics. Not a happy ending.) In the Q&A following the presentation, Schultz was asked if the low unemployment rate was affecting Starbucks’ ability to hire and grow. He admitted that it had become very challenging to keep up their hiring standards, and that they had, indeed, seen a deterioration in service quality that they were working hard to correct.

So which is it? Does service quality go down in a bad economy or a good economy? Or both? Or neither?

To get a little more insight, I compared U.S/ unemployment figures to average ratings from the American Customer Satisfaction Index (ACSI), which measures satisfaction across multiple industries. Lining up comparable time periodsin this case, second quarter ACSI averages and June unemployment ratesI came up with the following chart: (Click image to enlarge.)

If you squint hard, it looks like rising unemployment—a sign of economic weakness—may relate to rising satisfaction levels. In other words, a bad economy may not lead to bad service—or at least to low satisfaction—after all.

But looks can be deceiving, so I ran a linear regression of the two variables. Sure enough, there does appear to be a relationship. The R squared is .36, with a P value of .018. According to my software program, this means that "the slope is significantly non-zero, i.e. there is probably a relationship between the variables." (In case you were wondering, I also looked at unemployment as a leading indicator of satisfaction by comparing second quarter ACSI results to unemployment figures from the prior March. The results were similar, although the correlation was slightly weaker, with an R squared of .28).

Of course, this is a dangerous exercise. For one thing, there is more to customer satisfaction than service quality. For another, as all statistics professors sententiously drill into their students’ heads, "correlation doesn’t mean causation." There are undoubtedly other factors influencing these results.

Nevertheless, at face value the argument that a bad economy threatens service levels is not particularly strong, while the opposite argumentthat a growing economy is a threat to serviceis more compelling.

As the economy bounces back, this could be an important point to keep in mind. Companies haven’t started hiring in great numbers yet, but they will before long. When that happens, competition for labor may once again become fierce, and the ability to maintain service levels will be put to the test.