Organising for co-creation: The service employee-customer interface as a source of competitive advantage

(pages 29-33 of printed journal)

By Simon Bell

Co-creation

The idea that customers can be a valuable source of innovation for firms is catching on in the business community. Many firms, which had previously kept customers at arm's length, are sensing possibilities from closer collaboration with customers around the processes of idea generation and product development. In effect, these firms are embracing co-creation as a potential source of advantage.

The poster child for successful co-creation is Lego, a business that, despite a proud heritage built since the company was founded in 1932, was until recently progressing rapidly toward bankruptcy. In 2004, Lego made losses of over US$300 million on little over $2 billion in revenue. The future was looking grim for Lego. So it was perhaps out of necessity that Lego pursued quite a radical shift in the way it developed products for its customers. The first step was opening up to its community of more than two million adult users - which had been labeled until then the 'shadow market'. Next, it formalised relationships with advanced users of its products who became ambassadors for the company, interacting with customers and Lego employees. It encouraged networking amongst its customer base and sought feedback - both positive and negative - from its customers. And perhaps most significantly, it turned to its customers for product designs, sometimes running competitions where the winning designs would be launched onto the market and the customer-designer would earn a royalty for every unit sold. In effect, the firm relinquished a degree of control over its business to customers. It transformed from a business that marketed to customers into a business that co-developed products with customers.

The changes for the business were significant. In the space of a few years, the company went from manufacturing a little over 600 products to close to 15,000 products. It was able to significantly reduce the number of in-house designers it had on staff. Manufacturing had to become more nimble and the company needed to build effective platforms for communicating and collaborating with customers - for example, web-based software platforms and aggressive launching of concept stores. However the payoff appears to have been worth it. In the midst of a five per cent drop in total US toy sales last year, Lego's sales surged 18.7 per cent. It earned $355 million before taxes in 2008, and $178 million in the first half of 2009.

If you love something, set it free

At the heart of Lego's success was the company's willingness to explore and leverage the advantages that flow from collaborative relationships. Providing customers with the opportunity to immerse themselves in the product development process leads to a product that more closely meets consumers' needs. The act of co-creation, by default, leads to greater engagement with the brand. Customers perceive an increase in control and the opportunity to make choices, both of which are intrinsically valued. Intriguingly, customers are also more tolerant of product failures - as co-developers of the product, they must shoulder some of the burden when things go wrong. All of these factors lead to stronger, more patient relationships between the firm and its customers and increased innovation. The only catch is that firms have to learn to give up control.

Giving up control is more difficult that it appears. Many businesses claim to be engaging in co-creation when the reality is that the customer involvement is staged, similar to Disneyland's theatrical service offering to its customers - or 'guests', as they are known. Further, co-creation is not a simple customisation of what the firm already provides nor is it a straight transfer or outsourcing of responsibility to clients - a model perfected by IKEA. Co-creation requires the genuine involvement and collaboration with customers where the outputs are, to a large degree, unknown and the processes by which these are achieved are continually evolving.

A spotlight on the services context

I was intrigued by the possibility of organising professional services firms around a co-creation model. The services context seemed to be perfect for co-creation. First, services are delivered face-to-face where there is plenty of scope for customer involvement. Second, the variability of services allows for real-time adaptation and customisation. Third, the face-to-face context often provides the consumer with a higher degree of visibility into the production process than is possible in manufacturing industries. Yet professional service firms have been very slow to embrace this idea. They tend to be reluctant to involve the customer anymore than is absolutely necessary. Indeed, the prevailing view tends to be that customer involvement is something that should be 'managed away' rather than actively encouraged. There is, above all, an ideology of 'expertness' in most service firms with practitioners who are generally sceptical of the customer's ability to make a meaningful contribution to the service.

With this in mind I approached a large stock broking firm in Melbourne to test the idea that co-creation could lead to better business performance. I was also intrigued to discover how the firm could help customers become more effective collaborators in the process. Finally, I wanted to understand how frontline service employees felt about a shift toward more collaborative relationships with customers.

After a number of interviews and a survey of over 1,200 high-value clients, I discovered that clients who took a more active part in the creation and delivery of the service were, in fact, significantly more loyal and spent more in brokerage with the firm in the year following the study. Along the way, I also found that the customers who were most effective in co-creating value with the firm were clear on what was expected of them, more motivated to get involved, and more expert investors. I found the notion of customer expertise particularly fascinating as it had enormous implications for the firm in equipping its clients with the necessary skills to become effective co-creators of value.

Educating customers

Lord Turner, the Chairman of the Financial Services Authority in the UK, as recently as June 2009 argued that, 'It is common sense that people armed with skills . as well as up-to-date information about new products, will be better able to cope with what life throws at them.' Clearly improving customer expertise is on the agenda of the peak regulator of the financial services industry in the UK. My research showed that expertise was a key determinant of customers' competence in dealing with financial services firms, which lends support to Lord Turner's view. Again, however, we observe relatively few proactive attempts by financial services firms to educate their customers, which I suspect is due to what Theodore Levitt called the 'paradox of customer education'. Customer education, while at first drawing customers closer to the organisation, may paradoxically equip them to leave as their level of skill enables them to switch freely between competitors. At the extreme, expert customers may drop out of the market entirely, choosing to produce the service themselves, for example, use e-Trade or Commsec instead of a full service broker.

My goal in a second study was to establish whether the customer-keeping benefits of educating clients were outweighed by the risks of losing more expert clients as Levitt had speculated. Working closely with the same stock broking firm, I discovered that the effect of educating customers was, on balance, positive. I found that clients developed both firm-specific and market-related knowledge; the former leading to an increase in loyalty while the latter - as Levitt predicted - led to a decrease in loyalty. But I also found that educating customers was seen as a valuable augmentation to the service, which had customer-keeping benefits. Educating customers, at least for this particular firm, was good for business performance.

Frontline service employees: the meat in the sandwich

To this point, I had found that co-creation led to greater customer loyalty and that customers with more expertise were better co-creators of value, underscoring the need for client education. Further, I found that educating customers carried little risk of driving customers away. The final piece in the puzzle was to understand what kind of support those responsible for customer education - namely, frontline service employees - needed to be able to achieve their objectives. Customer perceptions of value in a services context are determined at the employee-customer interface. A recent study in the retail sector showed that while 73 per cent of consumers attribute their best retail experience to store employees, some 81 per cent of consumers attribute their worst retail experience to store employees. Frontline service employees bear a great deal of responsibility when it comes to creating satisfied customers, and the same can be said for educating customers and involving them in co-creation.

In a study of over 400 service employees across 120 stores within a large Australian retailer, I sought to understand where employees looked for support when dealing with difficult customers. I found that role conflict arises when individuals are sandwiched between the expectations of two important stakeholders - the organisation, represented by store management, and the customer. Employees turned to their co-workers for support when the organisational promise - that customer oriented behaviours will lead to customer satisfaction - was not met; namely, when customers complained despite employees' best efforts. In other words, there are unintended consequences of internal marketing. Organisations' continual emphasis on customer sovereignty actually sets employees up for a greater fall when customers, on occasions, disappoint the employee.

What does all this mean for the firm?

It appears that for effective co-creation to occur, the organisation needs to be willing to give up an element of control. This can be uncomfortable for many firms and for the employees charged with delivering on the co-creation promise. An important question, therefore, is how do we help employees deliver on the education and co-creation promise?

There are three key things firms can influence. First, managers must focus on improving the skills of frontline service employees. The norm in recent years has been for service organisations to pursue standardisation of service which allows them to hire less skilled employees at lower wages - the McDonalds model. Co-creation, however, cannot work with low skilled service employees. Recruitment of capable individuals and ongoing training is therefore paramount. Second, employees should be provided with greater behavioral latitude in the workplace. The inevitable unpredictability that results from co-creation requires that service employees have sufficient flexibility and discretion to be able to respond to changing circumstances. Third, firms must revisit the way employees are rewarded. It is not unusual for call centre service staff to be rewarded on the basis of the number of calls answered per hour. Retail employees are often given incentives based on the dollar value of sales. There are no incentives in these reward structures requiring the employee to sit with a customer and work through their concerns, generate new ideas, and build a solution that better meets their needs. All this takes time and considerable effort. The importance of appropriately aligned rewards is essential for co-creation. I am often reminded of Upton Sinclair's well-known saying, 'It is difficult to get a man to understand something when his salary depends on his not understanding it.'

For the firm itself, co-creation means working toward a more porous organisational boundary. We need to pull back the curtain and let the customer see inside the organisation. Only then will both the employee and the customer understand what is actually possible on the co-creation front. Firms also need to provide the tools and platforms for helping and collaborating with customers. Dell provides an easy-to-use, engaging and flexible web interface that allows the customer to not only build a computer to their own specifications, but also reach other customers through blogs and chat-rooms - which can lead to further innovation. Finally, firms must invest in their operations and supply chain to achieve the kind of operational flexibility that allows them to make small quantities of different products without additional cost.

Where to from here?

While I have found preliminary evidence for the value of a co-creation business model to professional services firms, clearly more work needs to be done to prove the concept across a broader range of industries and customer types. Naturally, there will be some boundary conditions that I hope future studies will help to clarify. A co-creation model, and the lack of control that it entails, has potential legal implications, for example, intellectual property or potential for misrepresentation, which should not be underestimated. Further, the notion of giving up control is antithetical to the logic of brand management. These are tensions that further research will need to resolve.

Nonetheless, I believe there has been a fundamental shift in the way firms innovate and relate to customers. Those firms still maintaining arms-length relationships with customers will, in my opinion, be ill-equipped to compete in the market place in coming years.

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