S PRING 2006 VOL.47 NO.

Ivor Morgan and Jay Rao

Growing Negative
Services

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Growing Negative
Services

W hen people hear the word services, they often think about offerings
that are “neutral” or “routine.” They conjure up familiar experi-
ences that they navigate regularly — for example, dry cleaning, haircut-
ting or lawn care. Such services are distinct from the types of services
people aspire to use, such as those associated with travel and entertain-
ment; for classification purposes, these might be labeled “positive” serv-
ices. However, there is a third type of service, which is not often
considered or particularly well understood. We refer to these as “negative”
services because they deal with events most people hope they will never have
to deal with — things such as toothaches, leaky roofs or collision repairs.1
Whereas much of the writing about services has looked at the nature of the activ-
ity (for example, whether it is tangible or intangible) or has examined the activity
from the provider perspective (for example, in medicine, whether the need is
acute or chronic), we take a customer viewpoint. (See “About the Research,” p. 70.)
Most people feel confident in describing common problems and the routine
services they require. They have no trouble identifying qualified service Negative services —
providers in these areas. But negative services are different: Customers are not
able to evaluate the content of the service — only the process (and then only those that are needed in
after the service has been completed). Because the precipitating events that trig-
ger the need for negative services are not everyday occurrences, many people are
emergencies, when
not equipped to diagnose their needs or make informed judgments about the problems arise or to
solutions required. They may know that they have a toothache or a flooded
basement, for example, but they don’t know the right response. Furthermore, ensure against unwanted
even after the service has been provided, they usually are in a poor position to
judge its quality or the price paid for it. This has led many professional groups outcomes — are part of
to develop codes of ethics. Nevertheless, there are many cases of unnecessary
most businesses and
medical procedures and of consumers wondering if the repair parts they pur-
chased were truly necessary. central to many.
Negative services are offered by many kinds of companies. They are fre-
quently associated with warranties, which companies have traditionally pro- Their very nature
vided as a means of staying competitive. However, in recent years, they have
become more visible in other industry environments. For example, Sears, Roe-
presents unique
buck and Co., one of the world’s largest retailers of appliances, tools and machin- growth challenges.
ery, has made negative services a profitable part of its business. A substantial part

Ivor Morgan is an associate professor at Babson College, in Wellesley, Massachu- Ivor Morgan and Jay Rao
setts, and a visiting professor at IESE Business School in Barcelona, Spain. Jay Rao
is an associate professor at Babson. They can be reached at [email protected]
and [email protected].

Illustration: © Campbell Laird/Veer SPRING 2006 MIT SLOAN MANAGEMENT REVIEW 69

 vided and may have a poor idea of its cost, and (2) how to organ-
About the Research ize and deploy their services to meet customer needs when
demand is unpredictable.
In a prior article for MIT Sloan Management Review (“Mak-
ing Routine Customer Experiences Fun”) we introduced a The Nature of Negative Services
classification for services industries — routine services, neg- Prospect theory in psychology offers a fresh perspective on how
ative services and positive services — based on customer individuals view risks and losses in decision making.2 It suggests
perceptions. That article focused on industries in the “rou- that people are not “rational” about decisions when they are fear-
tine” category. We started our research on “negative” serv-
ful. They do not study the facts, select strategies or weigh the
ices by looking for industries involved in correcting failures
probable outcomes. People in need of negative services approach
or repairing people and things. We examined the 1992,
decisions in a similar fashion. Our investigation suggests that peo-
1997 and 2002 U.S. Economic Census C4 data to investigate
the extent of this fragmentation.
ple go through at least three phases when receiving negative serv-
We used the latest C4 numbers to rank-order of poten- ices: awareness and selection, connection and provision.
tially negative service industries. As expected, many cate-
gories — hospitals, home and garden equipment repair, Awareness and Selection Though people are conscious of negative
physician offices, dentist offices, automotive repair and services, they often deny that the services are intended for them.
auto body repair — showed less than a 10% C4 concentra- Consequently, the services can be divided into two broad forms:
tion. Oil change, funeral services, pest control and glass pre-event, in which the service recipient acknowledges a probable
replacement showed levels of concentration between 20 service need (risk) or has some institutional inducement to antici-
and 30%; tax preparation and household appliance repair pate the need, and post-event, in which the recipient reacts with
had very high levels of concentration — above 60%. How-
some urgency to problem signs or symptoms, although the spe-
ever, a detailed examination of the health care category
cific nature of the problem may not be known.
revealed a broad range: 72% for kidney dialysis centers,
When choosing a pre-event contract, few service recipients
39% for medical laboratories, 27% for ambulance services
take the time to understand the quality differences between
and 10% for diagnostic imaging centers.
In determining whether to categorize services as routine potential service providers, or they may find evaluation difficult.
or negative, we looked at the extent to which the customer Pre-event contracts, often selected on the basis of cost or ease of
diagnoses the situation and evaluates and chooses the serv- access, frequently lock service recipients into specific provider
ice provider. Some industries, such as kidney dialysis, were relationships. Even with an element of choice, provider selection
considered borderline; funeral services were seen to be in may be heavily influenced by referrals or existing relationships
the domain of the person paying for the service. To identify with the provider network. An auto insurance company, for exam-
specific companies, we looked at at least two segments in ple, may not mandate a specific body shop, but it may suggest one.
each of the high-, medium- and low-concentration cat- In situations where no pre-event contracts exist and services
egories. In addition to secondary research such as examina- needs arise (that is, post-event), service recipients often assess
tions of 10K filings, we interviewed executives, talked to
their service options based on the magnitude of the problem (in
industry experts and prepared case studies. We specifically
terms of cost or personal requirement) and on the time they have
looked at how companies pursued growth through new
available. If the need is urgent, as in the case of an auto accident
services, products, mergers and acquisitions. In our inter-
views we investigated the reasoning behind strategic moves
or a broken furnace during winter, people may take “any port in a
and the problems encountered. storm.” They know they need help, and, unfortunately, they are
not in the best position to sift through all the possible solutions to
determine how much each will cost.
of the U.S. health care industry — concerned with diagnosing and
treating illnesses and responding to accidents — falls into negative Connection Once the need for negative services is evident, people
services. So do the tens of thousands of businesses that specialize in often tap into a large network of service providers, whether they are
repairing cars and unclogging drains. Services shift from being neg- aware of it or not. A single car accident, for example, typically trig-
ative to becoming routine when the problems are largely under gers the involvement of a towing company, at least one insurance
control and can be managed by the recipients themselves, as in the company, an appraiser, a body shop and a car rental agency. If
case of people with diabetes. someone is injured, other services are required: an ambulance, an
Companies hoping to build positions in negative services face emergency room and health insurance. Some services act as con-
two major challenges: (1) how to access inexperienced customers, nectors, even if the end users don’t actively choose them. For exam-
who are not in a strong position to evaluate the service being pro- ple, ambulance services play a big role in hospital selection.

70 MIT SLOAN MANAGEMENT REVIEW SPRING 2006

Similarly, when a U.S. motorist calls AAA to request road service, he concentration suggests that there may be significant opportunities
or she has no idea which towing company will appear on the scene. (see “Market Concentration in Selected Industries.”)
In Europe, Multiasistencia Group, a large home assistance and
repair company, has grown by leveraging relationships with a Four Strategies for Growth
number of financial institutions; it has no direct relationship with A number of companies have tried — with varying degrees of
the end users of its services. The Madrid-based company (which success — to make negative services a central part of their overall
operates in Spain, France, the United Kingdom and Portugal) corporate strategies. In the course of analyzing the changing mar-
offers its services through insurance companies, banks and other ket dynamics within service industries, we have identified four
affiliates, all of which are trying to cultivate the loyalty of their core strategies for negative services growth: market-centric,
own customers. For example, one of Spain’s largest banks recently provider-centric, network management and network enhance-
contracted with Multiasistencia to provide a new perk to its credit ment. Below, we will explore how the different strategies operate
card holders: 24-hour plumbing and locksmith service. Bank cus- and identify some ways that companies pursuing them can
tomers pay no charge for service calls, and labor costs are dis- attempt to make them work better.
counted substantially below local rates.
Market-centric Since most people have only an infrequent need for
Provision Many service recipients tend to think in terms of a spe- negative services, it is difficult for specialized service providers to
cific service provider — a surgeon, mechanic or repair- establish and maintain links with customers. This hinders some of
person — as opposed to a service network. But the work of an the most obvious avenues for growth. In medicine, for example, it
individual service provider is often difficult to isolate from all the takes a wide network of primary care physicians to keep a narrow
related services that contribute to the overall experience. Follow- specialist busy. Although the likelihood that any one patient will
ing an accident, for example, the service recipient (in this case, the face a specific negative condition is small, many primary care
patient) may perceive that the principal service provider is the physicians referring their cases to a small group of specialists can
attending physician, but the ambulance’s emergency medical tech- make for a growth opportunity.
nician may be the one who actually saved the patient’s life. Insurance companies have strong market connections and play
Nonetheless, the principal service provider (in this case, the physi- an organizing role; they provide a pre-event link between service
cian) is usually in the strongest position to use the goodwill to recipients and specific providers. While they influence customer
support his or her growth strategy. choice, they do not provide the actual service. Other companies,

Concentration of Negative Services

Market Concentration in Selected Industries
Most negative service specialties are highly fragmented. Indeed,
it’s hard to name a chain of boiler repair specialists, body shops or
dental offices. An examination of the most recent U.S. Economic Examining the degree of concentration in an industry can pro-
vide an indication of what kind of opportunities may exist for
Census C43 data shows that in all but a few industries the four
growth. Industries where current concentration is low (such as
biggest companies control less than 10% of the market. The major
body, paint and interior repair) may offer more potential than
exceptions are appliance repair and maintenance (where, in 2002, industries where concentration is high (such as kidney dialysis).
four companies controlled 60.5% of the market), tax preparation
(60.2%), auto glass replacement (28%), pest extermination Market Concentration
(27.5%) and funeral services (19.4%). 80%
Kidney dialysis
There has been increasing market concentration in several centers
areas of health care, including kidney dialysis centers (an increas-
60% Household
ingly routine service, where four companies control 72.4%), appliance repair
ambulance services (27%) and medical and diagnostic labs
(23.7%). Each of these industries has several factors favoring scale
40%
economies, so the increased level of concentration is not surpris- Ambulance
ing. But markets continue to be extremely fragmented in most services
other health care areas. For negative service providers, significant Exterminating
20% and pest control
market fragmentation raises important questions about how to
Hospitals
approach the market and how to manage the business to achieve
Auto body, paint
the best possible results. High concentration suggests that some 0% and interior repair
service providers have already found strategies for growth; low 1992 1997 2002

SPRING 2006 MIT SLOAN MANAGEMENT REVIEW 71

particularly those with broad market visibility, such as Sears, have Provider-centric Gaining a reputation for being the best at what it
been drawn to the idea of service business expansion, even if it is does or providing good value at low cost helps a negative service
difficult to orchestrate. provider build its market position. However, many service recipi-
Sears already had a $3 billion home services business when it ents still want reliable information so they can evaluate service
established Sears HomeCentral in 1996. Management’s goal was to providers for themselves. Most recipients have little information, are
capture an even bigger share of the fragmented home services mar- under time pressure and have virtually no familiarity with the serv-
ket, which Sears estimated at nearly $160 billion (including $60 bil- ice they are buying. Providers looking to grow need to find ways to
lion for interior home improvement, $50 billion for exterior home create the conditions for easy evaluation by prospective customers.
improvement, $30 billion for residential maintenance and $20 bil- To understand this approach, consider the example of the
lion for product repair).4 Shouldice Hospital in Thornhill, Ontario, Canada, which special-
Claiming relationships with more than 70 million households izes in hernia operations. Patients are treated for hernias in hospi-
and more than 15 million in-home visits per year, Sears targeted tals all over North America. They are a common problem
revenues of $10 billion in 2000 through a mixture of negative and (especially in men) and generally are not considered urgent, but
routine services: roofing, siding, service contracts, heating and treatment methods and recovery times vary. Based on its reputa-
cooling, pest control and windows and doors. Its strength was in tion for postoperative success, the Shouldice draws patients from
time-sensitive household repairs, but it anticipated that much across Canada and the United States, despite the fact that its sur-
future growth would be in areas in which customers had time to geons tend to follow procedures that are more invasive than other
research and compare alternatives, such as heating and air-condi- treatments. Whereas most medical treatments are coordinated
tioning systems. through a patient’s primary care physician, the Shouldice takes it
In creating the Sears HomeCentral brand, the company launched upon itself to educate patients on the services it offers, advising
a major ad campaign to draw attention to its service focus. It offered potential patients on how to self-diagnose a hernia. Because it spe-
to repair any appliance, not just those purchased at Sears. It invested cializes, the Shouldice operates more efficiently than hospitals
heavily in training a force of 15,000 technicians (both employees and offering a broader range of treatments, with less capital and fewer
independent contractors) and armed them with the latest technol- support staff and supplies.
ogy.5 To underline its new service focus, it acquired a large remodel- In a sense, the Shouldice has found a way to move its service of
ing contractor and a termite and pest control company.6 hernia surgery from the negative to the routine. Similar shifts are
Unfortunately, the market didn’t respond as quickly as man- occurring in other areas of health care. Fresenius Medical Care AG,
agement had hoped. Although services were much more prof- headquartered in Bad Homburg, Germany, operates more than
itable than the company’s mainstream business,7 using the Sears 1,000 kidney dialysis centers in the United States. The placement of
brand to expand into other businesses was a struggle. The com- their centers around the country allows users to travel from their
pany has closed some of its stores and has chosen to eliminate home base and still maintain their treatments. Similar multisite
some of its home services lines (such as pest control). Among chains are developing in the area of diabetes treatment as well.
other things, management learned that the infrastructure for a Clearly, some types of problems are easier to diagnose and man-
rapid response to appliance repairs is very different from what’s age than others. When a car muffler drags under a car, it is fairly
needed to manage services such as deck and siding installation, obvious that the exhaust system needs some kind of repair. Electri-
which have longer time frames. cal problems are less obvious: It could be a faulty battery or several
Other companies attempting to pursue the market-centric other things. Service providers looking to distinguish themselves as
model have had more success in attracting new customers. The specialists need to figure out how to provide customers with cred-
Terminix International Company, a leader in residential pest con- ible and accessible information to evaluate their services.
trol, based in Memphis, Tennessee, is a rare example of a company
that offers a focused negative service. Acquired in 1986 by The Network Management Many service companies have achieved
ServiceMaster Company, a provider of industrial services in growth by becoming network managers. In contrast to players
Downers Grove, Illinois, it spends heavily on advertising to estab- such as Sears and Terminix, which strive to reap the benefits of
lish itself as the homeowner’s first choice for pest control. In their own brands, network managers often begin with neither
essence, Terminix has two segments of customers: those who strong market connections nor particular strength in service pro-
think they have a pest problem that needs attention (because of, vision. Instead, they manage all the network elements to provide a
say, a rotting deck) and those who want or need pest inspections recognizable bundle of services, delivering advantages to both
when homes are being sold. Serving the two market segments service recipients and providers.
gives Terminix some operational flexibility, since some of its serv- A fairly common network management strategy is to piggy-
ices are more time-sensitive than others. back on the business of other companies in order to gain access to

72 MIT SLOAN MANAGEMENT REVIEW SPRING 2006

customers. This is what Multiasistencia does in the area of home systems. Enterprise Rent-A-Car Co., which has the largest car rental
assistance and repair, and what credit card loss-protection com- fleet in the United States, has been successful in using this approach.
panies have done by using mailing lists of bank customers. A relative latecomer to the car rental business, it differentiated itself
Another company that has pursued this strategy successfully is from the start by placing most of its offices in neighborhood mar-
American Home Shield Corp. of Carroll, Iowa, which, like Ter- kets, rather than focusing on airports and other transportation cen-
minix, is a subsidiary of ServiceMaster. ters.8 To appeal to customers, one of Enterprise’s best-known
AHS is the leading home services warranty specialist in the features is providing free transportation to the rental office.
United States, selling warranties to cover repairs throughout homes: Enterprise specializes in renting to customers who need a car
major appliances, heating and cooling systems, plumbing and elec- because of an accident, mechanical repair or theft.9 Drivers who are
trical systems, even swimming pools. Founded more than 30 years insured by participating insurance companies can reserve Enter-
ago, it grew by insuring home buyers against property faults. Rather prise cars when they report their accidents. Enterprise also tries to
than marketing warranties directly to customers, AHS co-markets make things easy for the insurance companies and auto repair shops
pre-event service contracts through banks and mortgage com- by streamlining the reports and using information technology to the
panies that are much better known, including Bank of America, fullest extent.10 From a customer’s view, the service is seamless.
Chase, GE Capital and Wells Fargo Home Mortgage. As the network Enterprise follows a classic network enhancer strategy. It links
manager, AHS sets the quality standards for the contractors and auto body shops to insurance companies — providing service to both
develops control systems. When problems occur, homeowners — and to the owner of the damaged vehicle. In doing so, it attempts
place calls to AHS, which dispatches the appropriate contractor. to create enough goodwill to generate customer loyalty. Intuit Inc.,
the Mountain View, California-based financial software company,
Network Enhancement Network enhancers study negative service net- follows a similar approach. Even though tax preparation services are
works to see how they can improve the overall service delivery mostly routine, Intuit’s TurboTax product likewise simplified the
process. They do not manage the whole process or provide the process of tax preparation by linking the taxpayer’s employer, broker-
major service content to the end user. Rather, they look for oppor- age service, bank and payroll management company. Enhancers
tunities that other network partners will value for managing their leverage their own routine services with information systems to con-
customers and integrating the supply network through information nect them to the overall negative service networks.

Leverage Points for Negative Services

Unlike other kinds of services, customers edge. Having access to information they Sears services all brands of home appli-
don’t really want to buy negative serv- trust may cause potential service recipients ances, including products it doesn’t sell.
ices: They buy them because they have to choose particular providers rather than But broadening the scope can also create
to. However, there are several things rely on intermediaries. The current push for new challenges in managing the organiza-
service providers can do to expand their objective rankings in health care has paral- tion efficiently.
market positions and build competitive lels in other negative service sectors.
Match supply and demand. Negative serv-
advantage.
Cultivate customers. Establishing a cus- ices require rapid response and satisfactory
Build a brand. A strong brand helps miti- tomer base is fundamentally difficult for outcomes. Low cost is not always the top
gate uncertainties for post-event service many negative service providers. Most cus- priority. Service providers need to recog-
recipients. It brings the familiar into the tomers hope to avoid needing the service nize the importance of customer referrals
unknown. When time is a factor, people in the first place — and not many aspire to and do all that they can to meet customer
often turn to a service provider they become regular customers. Using a cus- expectations.
know. For example, one pest extermina- tomer base that has already been estab-
Understand the needs of different seg-
tion company was able to build its brand lished by another company may be a
ments. People who plan negative service
by offering to compensate its hotel and logical start for some companies. For
purchases in advance (pre-event recipients)
restaurant customers if performance example, credit card loss-protection com-
make decisions based on their assessment
goals were not met. panies tend to rely on bank mailing lists to
of risk and price. Those who react (post-
find new customers.
Provide information. Typically, customers event recipients) use different criteria:
have difficulty evaluating the quality of Broaden the scope. It can be hard to build brand recognition, performance rankings
negative services. Service providers that a viable business around a narrow spe- and ease of access. Service providers need
are able to train customers in how to evalu- cialty. Broadening the scope of the services to recognize these differences and tailor
ate what they’re getting gain a potential provided can increase the overall volume; their messages accordingly.

SPRING 2006 MIT SLOAN MANAGEMENT REVIEW 73

Mixing Routine and Negative Services it also requires a steady stream of customers. To be successful,
In some industries, such as auto repair, there is significant over- service providers need to look at both supply and demand and
lap between negative and routine services. Standard services — devise flexible relationships on the supply side to meet the fluc-
say, oil changes at set mileage intervals — require little discussion tuating needs of the market. (See “Leverage Points for Negative
and are fairly simple. However, dealing with breakdowns and Services,” p. 73.)
malfunctions falls into the negative category, even when the car is Most of the successful companies we studied achieved suffi-
under warranty. In these circumstances, service recipients must cient volume and built customer loyalty by broadening the scope
communicate directly with service providers regarding the diag- of their services. But those who excel in negative services seem to
nosis of the problem and do their best to understand which have difficulty broadening beyond them, perhaps because meet-
repairs are absolutely essential and which can wait. ing negative service needs requires a highly responsive system in
Many companies, including Sears, ServiceMaster and Laidlaw which low cost is not the primary concern. Obviously, such a sys-
International, have tried to mix negative services with routine tem may be less suited for more routine services.
services. Laidlaw, for example, a diversified company based in Most negative service providers tend to focus on service deliv-
Naperville, Illinois, concentrated on routine services (school and ery outcomes — for example, successful tooth implants or a per-
intercity buses) but then diversified into new areas, including fect auto body paint job. Service recipients, on the other hand,
chemical waste management and ambulance services. It later tend to view things more from a process perspective — how it felt
moved into emergency health care and outsourcing services for to be the customer or patient and how smoothly the service was
hospitals. Laidlaw management soon realized that combining dif- delivered. Service providers need to recognize these differences in
ferent kinds of activities was more difficult than it appeared, perspective and develop better ways to educate customers in eval-
requiring vastly different marketing and management skills. uating their services and the customer service experience. To be
Many companies run into difficulties by failing to recognize successful, they must have a deep understanding of the needs of
the essential differences between routine and negative services. customers and how best to address them.
They often attempt to sell both routine and negative services to
the same customers. But negative service providers are selected REFERENCES
based on the magnitude of the problem and the time available for
1. We first introduced this classification for service industries in our arti-
response, whereas customers select routine service providers cle “Making Routine Customer Experiences Fun,” MIT Sloan Manage-
based on their specific needs and the provider’s perceived ability ment Review 45, no. 1 (fall 2003): 93-95.
to meet them. Mixing different kinds of services together ignores 2. D. Kahneman and A. Tversky, “Prospect Theory: An Analysis of
the differences in the service recipient profiles and the service Decision Under Risk,” Econometrica 47 (1979): 263-291; A. Tversky
and D. Kahneman, “Advances in Prospect Theory: Cumulative Repre-
delivery systems. Some customers have contractual or preexisting
sentation of Uncertainty,” Journal of Risk and Uncertainty 5 (1992):
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vided. Contrary to how it may seem, there is usually very little on 3. C4 is the percentage of market share held by the four largest com-
the demand side to justify one-stop shopping. panies in an industry.
4. “Sears Targets Growing Home Services Market,” Do-It-Yourself Retail-
ing 173, no. 5 (November 1997): 21.
IT’S EASY TO SEEwhy managers have such difficulty understanding
negative services. Until individuals actually need the particular 5. “Watch Out for the ‘Service Side of Sears,’ ” Air Conditioning, Heating
& Refrigeration News, April 5, 1999.
services, they are frequently in denial. In the course of receiving
6. M. Troy, “Building Out-of-the-Box Revenue Streams,” DSN Retailing
the service, they often feel anxious. And there is no getting
Today, May 11, 1998, p. 56.
around the reality that many negative services are difficult to
7. In 1997, for example, services made up 8.4% of sales but 16.5% of
evaluate before, during and after the fact. operating income (Troy, “Out-of-the-Box”).
Although customers tend to be loyal to service providers once
8. The firm’s first airport rental office was opened at Denver International
they have established relationships, the nature of negative serv- Airport in 1995.
ices makes for peculiar challenges. Ironically, making products 9. See “Enterprise Rent-A-Car Fact Sheet,” n.d., http://aboutus.enter-
more reliable can lead to new challenges: If there are fewer prod- prise.com/press_room/fact_sheets.html
uct failures in a given location, logistics support on a per unit 10. H. Harreld, “Pick-Up Artists,” CIO, Nov. 1, 2000, 148-154.
basis may become more costly to provide. As many manufactur-
ers known for their service can attest, being an excellent service Reprint 47313. For ordering information, see page 1.
provider is not sufficient to build a sustainable service business; Copyright © Massachusetts Institute of Technology, 2006. All rights reserved.

74 MIT SLOAN MANAGEMENT REVIEW SPRING 2006

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