SBP 2d: Labor Intensity

This principle occurs because customer inputs can very widely, making it difficult for automation to adapt to the input variation. Also, customer-self inputs are resistant to automation and often prefer a personal touch. (This will be discussed later in SBPs: Technological Depersonalization and Capricious Labor)

This Service Business Principle simply observes that service businesses tend to be labor-intensive. In other Service Business Principles, namely Technological Depersonalization and Capricious Labor, the causes and implications of labor intensity will be discussed in more detail.

One way to consider labor intensity is to use Schmenner's “Service Process Matrix” (which is described in the supporting reading). Schmenner graphs service businesses along two dimensions: labor intensity and degree of interaction and customization. A two-by-two graph might be depicted as follows:

The line marked “Diag” represents the diagonal. There is a propensity for service businesses to move to the diagonal or up the diagonal. This implies that there is a relationship between interaction and customization, and labor intensity. This relationship is alluded to in this Service Business Principle: customer inputs (particularly those involving interaction and customization) limit the potential for automation, which therefore increases the labor intensity of the process.

In the Service Process Matrix, labor intensity is defined as the ratio between labor costs and capital costs, which is a cost-based view. That definition of labor intensity skews labor intensity measures based on capital intensity. An alternate way to view labor intensity is from a production process intensity perspective–defining “labor intensity” as percent of process effort which is accomplished by labor (as apposed to machine effort). I consider this latter definition of labor intensity more appropriate, but not as easy to estimate.

We must not neglect labor development, since labor may ultimately be the limiting factor for our production capabilities.

The “move up the diagonal” idea of the Service Process Matrix implies that labor intensity can be reduced when interaction and customization are reduced.

In some cases it is possible to control the customer interaction, such as by standard procedures and customer involvement in the process. For example, when a new patient visits a doctor's office for the first time, they are given a myriad of forms for medical history and insurance information. Having those standardized forms is less labor-intensive than interviewing each patient personally.

Customization can be reduced by providing a standard “menu” of service options. Automatic teller machines only allow a fixed set of bank transactions, but those that are most commonly needed. More customized transactions, such as mortgage planning, are less automated and thus more labor-intensive.

With most services there are clear limits to the ability to reduce labor intensity. Much of the value of many services is in the interaction and customization. Rather than attempting to reduce labor intensity, such service providers must consider effective ways of developing labor into a serviceable and productive resource. Effective ways to manage labor include training and job design, which will be discussed in Unit 8: Human Resource Management.

Many companies, such as Marriott Hotels and Resorts, esteem labor as the key to providing excellent customer service. Despite the introduction of technologies (such as in-room check-out), the overall process continues to be very labor-intensive. Therefore, the company expends great effort in employee selection and training.

A company that has a well-thought-out system for labor management is Disney World. Their operations are extremely labor-intensive, and much of the Disney experience is defined by the quality of labor. Disney has a system for hiring college students on “internships” that involve a semester or two at a Disney park operation–doing anything from operating an attraction to sweeping the streets. In addition to their work responsibilities, the interns are required to attend extensive training courses about the company's culture and operations. (Including their legendary “traditions” course where the students learn, among other things, the names of the Seven Dwarfs.) Students who do well during that internship can apply for an “advanced internship” in more meaningful functional areas. Thus, through these programs Disney maintains high-quality, low-cost labor, and accomplishes much in the way of career employee selection.

Despite the large investment in capital equipment and technology, much of the airline production process still tends to be labor-intensive. The fortunes of airlines tend to be highly correlated with the relationships between labor and management. Airlines that have had labor problems, such as USAir, have also had profitability problems. Airlines known for good labor practices, such as Southwest Airlines, tend to be quite profitable.

With manufacturing, production is often standardized, and inputs do not care who or what is working on them, therefore technology can often easily replace labor.

1. What percent of operating costs is labor?
2. Has labor content changed over time?
3. How might customers respond if production labor was replaces with automation?

For a Service Process Matrix, estimate the degree labor intensity of your business process. Does the process tend to be a labor-intensive? Identify the location of your business on the Service Process Matrix below. (Students submitting over the Internet should see instructions at the bottom of the Application Exercise Submission form.) Mark the area where other companies in that industry tend to be on the matrix. Identify a few companies in the industry that are positioned elsewhere. (Put letters on the matrix and tell what company each letter represents.) How do these other companies differ in terms of labor intensity? Why do they differ? What advantages or disadvantages are there to the alternate positioning?

For this exercise, you might estimate “labor intensity” as the portion of production costs attributed to labor, and “degree of interaction and customization” as the extent employees interact with individual customers so that the service can be customized.