How may I help you? Revolutionizing service in China

Service is the next frontier in the Chinese economy. As China's biggest cities begin their transformation from manufacturing to service centers, Chinese corporations must relax and adapt their management style if they are to compete in the global service sector, according to panelists at the recent Third Annual Executive Forum in Shanghai hosted by the W. P. Carey School of Business and the Shanghai National Accounting Institute. The requirements of a successful service sector include flexibility, the ability to move and invest ahead of the growth curve, and careful human resources management — all new concepts for Chinese managers accustomed to the mindset of a command economy.

"For China's economy, the next frontier is services, not goods," said Robert E. Mittelstaedt, dean of the W. P. Carey School of Business, during a panel discussion at the Third Annual Executive Forum in Shanghai hosted by the W. P. Carey School of Business and the Shanghai National Accounting Institute.

In China, service is indeed the frontier. In fact, the industry could be said to be in an embryonic state: Salespeople routinely insult customers and blame them for mistakes and delays that are clearly their own. Successful competition in the service sector will be essential to providing high-paying jobs to China's increasingly educated urban work force and attracting foreign direct investment.

Already, service industries like retail and tourism are moving to a central location in China's evolving urban economies. In Shanghai in 1991, the service sector accounted for 31 percent of the city's total GDP; last year, it accounted for half. As China's biggest cities begin their transformation from manufacturing to service centers, the panelists warned that Chinese corporations must relax and adapt their management style if they are to compete in the global service sector.

Panelists said that the requirements of a successful service sector include flexibility, the ability to move and invest ahead of the growth curve, and careful human resources management — all new concepts for Chinese managers accustomed to the mindset of a command economy.

Changing the rules

Chinese state-owned companies do not reward individual performance, conduct market research, or anticipate trends. Until recently, employment and benefits were guaranteed regardless of individual output or expertise — the so-called "iron rice bowl." But private players in today's increasingly market-driven economy are changing the rules, focusing on staff training, evaluation, and retention to compete with not only lumbering state-owned corporations but also international companies.

This new focus is vital to success in service, according to Jim Ritchie, president and CEO of global logistics firm Meridian IQ. Ritchie stressed that the way a service company treats its staff directly influences the company's growth and reputation. "You need to focus on your people — CEOs cannot personally meet the needs of the customers but they can set the tone," said Ritchie. "You focus on the individual employees first to make sure they have the training they need to be successful and you reward good service on a monthly basis."

According to Ritchie, implementing employee training programs, supporting in-house consultant teams, and establishing consistent reward systems helps to educate and motivate service workers to build better relationships with clients. Starbucks CEO Howard Schultz agrees. He believes that treating employees well is the reason why caffeine lovers receive consistently good customer service at all 11,000 Starbucks retail outlets worldwide.

In 1988, Starbucks became the first company in America to offer health-care benefits to its part-time workers. This "benevolent" strategy has allowed Starbucks to minimize turnover, promote a responsible corporate image, and guarantee a smile with your $3 latte. "If you ask me the most important discipline in building a company, it's not accounting. It's HR — the ability to attract and retain great people," Schultz told the panelists. "People are your greatest asset. Starbucks has spent almost zero on advertising." Starbucks instead spends money to create value for its people, who then build relationships with customers.

Reward the good, remove the bad

Roger Dow, president and CEO of the Travel Industry Association of America and a former executive at Marriott, echoed Schultz's statement. "At Marriott, our foundation was if you take care of your people, they will take care of your customers and your business will take care of itself," he said. "Whenever we got far away from that foundation, we got in trouble. When we came back to that foundation, business improved."

In order to respond to the increasing demand for better service, some Chinese corporations have begun adopting objective procedures to evaluate their workers' performance, reward good service, and provide relevant training. These changes, however, often still exist within traditional, inflexible Chinese hierarchical systems and do not necessarily help to motivate workers. In its attempt to improve its dismal customer service, Haier, one of China's largest home appliance manufacturers, adopted an evaluation system similar to the system employed in Chinese classrooms.

Haier employees are graded daily based on their performance, and their scores are displayed publicly in the office as large colorful arrows. Such systems can help to reward good performers and weed out slackers, but they don't promote the single high standard of customer service a company like Starbucks achieves using less polarizing means. This is not to say that no Chinese company has developed operational blueprints that promote good customer service.

The burgeoning Internet sector has proved a testing ground for radically different corporate structures and new standards of service. By connecting customers to service providers around the world, the Internet effectively cut out the myriad middlemen that long characterized Chinese business.

Alibaba.com is a B2B website that connects international buyers and Chinese manufacturers. Since its inception in 1999, the site has amassed more than 20 million registered users from more than 200 countries. Alibaba's founder and CEO Jack Ma was forced to create a completely new service model to ensure that Chinese producers, many of whom never deal directly with customers, provide international buyers with the quality and service they expect.

Internet paves the way

A man who taught himself English by befriending tourists in his hometown of Hangzhou, Ma did not attend school overseas, work in an international company, or slave away for years at a state-owned enterprise. A former English teacher, Ma first used the Internet on a trip to the United States as a translator. Upon his return, he parlayed his fascination with the new technology into several pioneering online ventures that forged his progressive management style.

"In China's socialist society, employees should be at the top," Ma told the panel. Alibaba's headquarters in Hangzhou, a city a few hours east of Shanghai, are organized following this principle. "Usually in China, the boss is on the top," Ma said in a recent NPR interview. "I stand on the lowest floor, so my employees and colleagues are my bosses." Ma understands the challenges and rewards of global service.

It is his job, he says, to teach other Chinese new ways of doing business in China — on- and off-line. "I am trying to make this company be different, make it great. We are changing the way Chinese do business, we give them the opportunity to work on the Internet, show them how to do business, how to hire and how to fire. These small companies are the true engine of the Chinese economy," Ma said.

Ma's success proves that a working environment in which employees are encouraged to give feedback and hierarchies are deemphasized in favor of teamwork can work in China. According to Ma, only such a company can provide excellent service. As China transitions from a role as the workshop of the world to also being its largest market, companies like Alibaba — with its constructive focus on employee quality, performance, and retention — will effectively overhaul the outmoded managerial styles of the state-owned system and compete with international corporations.

As Ma explained to the panel, "You have to work hard. Salespeople in China face difficulties, suspicion. Sometimes people will avoid the salesperson as they walk into a store. But if you help the salesperson to have the right concept of service, everything changes."

Bottom line:

• Service industry leaders agree that effective human resource management is the key to success in the global service industry.
• Some Chinese corporations' attempts to adapt to the new market economy have not produced desired results because they adhere too closely to the outmoded managerial models of state-owned enterprises.
• The Internet has proven an incubator of management innovation in China, producing such homegrown success stories as Alibaba.com that demonstrate Chinese companies are capable of providing world-class service.
• In order to compete in the global economy, the Chinese service sector must adopt management and HR practices that emphasize employee performance, quality and retention.