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The focus of this paper is to examine service quality and customer retention for an SME within an IT industry in Ireland. While there are numerous studies on Service Quality and Customer Retention available, there have not been many studies specifically relating to the IT industry. This literature review will examine the recognised papers that have examined Service Quality and Customer Retention as general concepts, and then examine papers relating specifically to the IT industry to determine if the broad concepts apply to this specific industry.
Any study of Service Quality has to start with some of the major researchers in this field. Gronroos (1984), Lehtinen and Lehtinen (1982) and Parasuraman, Zeithaml and Berry (1985) have all published papers on this topic, with a view to understanding the factors that determine service quality. Gronroos (1984), and Lehtinen and Lehtinen (1982) focused on the two dimensions that make up service quality, and Parasuraman, Zeithaml and Berry (1985) produced SERVQUAL as a survey tool designed to measure service quality. This paper will examine these studies in general, and then determine if they are suitable for use in a service company within the IT sector. Other similar papers written from an IT Industry perspective will also be examined.
The first of the dimensions of Service Quality as mentioned above is concerned with what the service delivers, and is referred to by Parasuraman, Zeithaml and Berry (1985) as "outcome quality" and by Grönroos (1984) as "technical quality". The second dimension is concerned with how the service is delivered, i.e. the process that the customer went through to get to the outcome of the service. Parasuraman, Zeithaml and Berry (1985) refer to this as "process quality" while Grönroos (1984) calls it "functional quality". These dimensions can lead to the difference between customer service perceptions and expectations from the service. Thus if the perception is higher than expectation, then the service is said to be of high quality. Likewise, when expectation is higher than perception, the service is said to be of low quality.
The SERVQUAL model was developed by Parasuraman, Zeithaml and Berry (1988) and is based on a generic 22 -item questionnaire, which is designed to cover five broad dimensions of service quality. The five dimensions are as follow:
Assurance - Knowledge and courtesy of employees and their ability to inspire trust and confidence
Empathy - Caring, individualized attention the firm provides its customers.
Reliability - Ability to perform the promised service dependably and accurately.
Responsiveness - Willingness to help customers and provide prompt service.
Tangibles - Appearance of physical facilities, equipment, personnel, and communication materials.
Parasuraman et al (1988) went to suggest that these five dimensions are generic and consistent across different types of services by stating that there was "consistent factor structure...across five independent samples." However, basing this conclusion on a small sample raises doubts on its validity. Buttle (1996) raised serious concerns with the number of dimensions, as well as their consistency in different contexts. Other scholars (Bolton and Drew, 1991; Cronin and Taylor, 1994) also questioned the effectiveness of the SERVQUAL Model, suggesting that there is greater validity in measuring service quality on the basis of simple performance based measures.
Therefore, at its best, the five dimensions should only be considered as a starting point rather than a tool that can be immediately used in the field.
The Gaps Model of Service Quality
The SERVQUAL model identifies five gaps where there may be a shortfall between expectations and perceptions of actual service delivery. These gaps were described as follows:
Gap 1 - the gap between consumer expectations and management perceptions. This gap is said to occur when customers expectations are not the same as what management thinks the customers expect.
Gap 2 - the gap between management perception and service quality specification. This gap exists when customer service standards are not aligned with management's findings of the customer's expectations.
Gap 3 - the gap between service quality specifications and service delivery. This gap is a result of actual service performance not meeting the set performance standards.
Gap 4 - the gap between service delivery and external communications. This gap occurs when the organisation's external communication about its service quality does not match the actual service performance.
Gap 5 - the gap between perceived service and expected service. This gap occurs as a result of one or more of the previous four gaps. The way in which customers perceive actual service delivery does not match up with their initial expectations.
The SERVQUAL survey tool is divided into five major categories and labelled according to the five dimensions of service quality identified by Parasuraman, Zeithaml and Berry (1985). Within each of these categories, four or five items are listed, totalling twenty-two items. Each item must be answered by the customer two or three times, depending on the format being used. The two-column format asks for the customer's expected performance and his or her perception of the company's performance under each item. Under this format, the customer has to answer a total of forty-four questions. The three-column format adds a third question that asks for the customer's expected minimum service performance, thus increasing the number of questions to a total of sixty-six. A disadvantage of asking this many questions is that it can potentially lead to respondent fatigue, which can negatively affect the quality of the data presented.
One observation of the SERVQUAL tool is that there is a possibility of divergent results being achieved due to factors such as the mood and past experience of the individual being interviewed. For example, a person who is used to five-star hotels may find a four-star hotel of lower quality, while a person who has never been to a five-star hotel may find a four-star hotel to be of high quality. Attempts to counter this problem by spreading the sample across a larger base may add substantially to the cost of the survey. Also, Carman (1990) recognised the possibility that the customer's familiarity with the service can also play a role in setting his or her expectations. Carman's suggestion to resolve this issue involves measuring the customer's level of familiarity with the services and to differentiate in that dimension among customers. While this seems like sound advice, it still does not make up for the scenario where a user, having experienced a service of low quality, has lowered his expectations of future service encounters. The result might be that management will mistakenly interpret the SERVQUAL scores in the next testing period as a signal that their service quality has increased when, in fact, it is only the customer's expectation that decreased. This shortcoming has been identified by other critics, such as Buttle (1996).
There have been many critics of the general effectiveness of SERVQUAL model and the subsequent GAPs model (Bolton and Drew, 1991; Cronin and Taylor, 1994). Buttle (1996) points out how "SERVQUAL fails to draw on established economic, statistical and psychological theory". These scholars argue that the failure to treat perceived service quality as an attitude is one of the key reasons why the theory is difficult to put into operation. For example, if a customer, who is indifferent towards Starbucks, were to have coffee there and found it a very satisfying experience, the probability of him or her coming back would be high.
Based on these findings, Cronin and Taylor (1992) proposed a tool they call SERVPERF as a replacement for SERVQUAL. This model requires the customer to rate a providers performance, extending from 1 (strongly disagree) to 5 (strongly agree), and requires the customer to rate the performance only of a service encounter. They state that "the performance-based scale developed (SERVPERF) is efficient in comparison with the SERVQUAL scale." In reality though, SERVPERF is merely a subset of SERVQUAL. That is, it only measures the perceived service process performance and disregards expected service process level. The rationale for doing so is because
- measuring the customer's expected service level before the service is rendered is not always possible, leaving the firm to measure it instead at the end of the service
- measuring the expected service level after the service has been rendered is inaccurate as the customer's expectation, by then, has already been biased by the service rendered.
In addition, a customer's attitude towards a service may change in time. For example a customer may not be immediately happy with a trip to a hair salon immediately afterwards, but after a few complements from friends their attitude may change.
Apart from removing the distortions caused by measuring expectations, SERVPERF also shortens the questionnaire from a maximum of sixty-six down to just twenty-five, thus reducing the likelihood of respondent fatigue, thereby potentially yielding more accurate data. . However, customer satisfaction and perceived service quality are entirely different arguments, where the former is an evaluation based on a specific transaction while the latter is a general assessment developed over a period of time. Parasuraman, Zeithaml and Berry (1994). Since SERVPERF is designed to measure customer satisfaction, and SERVQUAL is designed to measure perceived service quality, is it correct to compare the two? Parasuraman, Zeithaml and Berry (1994) believe that it is not a valid comparison and point out that Cronin and Taylor's paper is questionable at best.
With increased competition on all fronts, the need to retain customers is becoming more and more important for SMEs as it is most cost effective method of maintaining profitability compared with acquiring new customers. This fact is acknowledged by (Pfeifer, 2005) wheb he states that "It costs five times more to acquire a new customer than to retain an existing one" While the exact cost ratio is debatable, with some scholars believing that a higher ration exists in the services industry, the common viewpoint is that it makes commercial sense to look after your current customers before acquiring new customers (Walsh et al., 2005).
Customer loyalty is essential if a company is to retain its current customers. However, many debates are centred round what customer loyalty actually is, as Majumdar (2005) states, "Customer loyalty is a complex, multidimensional concept". There have been numerous definitions proposed, ranging from consumer attitudes to their past purchase history. Gustafsson et al. (2005) note three drivers of customer loyalty; calculative commitment, affective commitment and overall customer satisfaction. Calculative commitment is the rational and economic decision making, reviewing costs and benefits. Affective commitment is a warmer and emotional factor, based on trust and commitment. Commitment dimensions are described as "forward looking" and capture the strength of the relationship and the resulting commitment for the future. Empirical data from Gustafsson et al. (2005) suggest that calculative commitment has a consistent reduction in the churn rate of customers, thereby increasing customer retention. Gustafsson et al. (2005) report that "when satisfaction is measured as an overall evaluation of performance, it indeed predicts churn". Furthermore, the results provide recommendations for customer relationship managers when reviewing customer retention. To maintain the competitive advantage the company holds, managers should consider both the overall satisfaction of its customers and the competitiveness of the company's products and services. Seth et al. (2005) suggest that many studies have found a "direct positive link between service quality and customer behavioural intentions". One assumption sometimes made is that strong service leads to satisfaction, which in turn leads to loyal behaviour. However, this may not always be true. In a review of customer defecting patterns, Reichheld et al. (2000) found "60-80% of customers who defect to a competitor said they were satisfied or very satisfied on the survey just prior to their defection". So, retaining customers is clearly not just a matter of keeping them satisfied. Berman (2005) suggests that organisations must do even more than delivering on expectations and recommends delighting customers rather than merely satisfying them. It is suggested that customer delight is a construct related to, but separate from, satisfaction. This is in the same way that dissatisfaction is related to, but distinct from, satisfaction. Satisfaction is generally based on meeting or exceeding one's expectations, customer delight requires that "customers receive a positive surprise that is beyond their expectations" (Berman, 2005). If customer delight can be achieved then maybe this can provide the more stable loyalty that companies wish to attain. Keiningham and Vavra (2001) provide support for this view. Their study reviewed the effect of customer satisfaction levels on customer loyalty to Mercedes-Benz USA. The results found that there was only a 10 per cent chance of a dis-satisfied customer bringing return business. If the customer was satisfied with the product and service, the likelihood of their being willing to re-purchase rose to 29 per cent. However, the likelihood of return business from those customers that were delighted was found to be 86 per cent. Berman (2005) employs the Kano (1984) model as an underpinning for explaining how customer delight may be achieved. Kano's model cites three levels of requirements.
- Must be requirements
- Satisfier requirements
- Attractive requirements
A must-be requirement is taken for granted by the consumer. If this requirement is not fulfilled by the product or service then customer dissatisfaction will result. A satisfier requirement, as suggested by the name, has the ability to induce customer satisfaction. It is proposed that the more satisfier requirements that are fulfilled, the higher the level of resulting satisfaction. An attractive requirement is one that is neither explicitly expressed or expected by the customer. If attractive requirements can be met, it is suggested that the result will be customer delight. To successfully compete, organisations must ensure they fulfil all must-be and satisfier requirements, while also offering some attractive requirements that are not available from their key competitors.. There is however, one final complexity with regard customer satisfaction. Mittal and Katrichis (2000) report that the attributes viewed as important for newly acquired customers are different compared to customers who are already loyal. As they comment, "Often the attributes that enable a firm to acquire a customer differ from those that help the firm retain the same customer". These findings would suggest that it is important for a firm to understand and explore those factors that elicit satisfaction and delight for different segments of its customer database.
The discussion in the section above provides an understanding of how delighting customers can increase customer loyalty. However, there will be times when customers defect to competitors, and this is can be a major cost to the compnay. Reichheld et al. (2000) note that "when desirable customers defect, it's a signal that something is amiss". The departure of such a customer should prompt a search for the root causes of the problem, to what needs to be fixed in the business to prevent this from reoccuring. Research by Reichheld et al. 2002 on customer loyalty has advocated that if customer loyalty is gained, profits will follow. This is based on the fact that
- Loyal customers costs less to serve
- Loyal customers will pay higher costs for a set of products
- Loyal customers will act as word-of-mouth marketing agents for the company
Reichheld et al. (2000) recognised six distinct categories regarding relationship ending based upon three triggers. Situational triggers are those that are driven by the customer, for example, an increase/decrease in income. A reactional trigger is a company driven response and can be due to factors such as poor service or reduced product quality. According to Gustafsson et al. (2005), reactional triggers cause the consumer to "evaluate present performance more closely, which may put customers on a switching path". Finally, influential triggers are competitor driven, aimed to induce a customer to defect from the current company. Triggers include price, perceived value for money or service quality, and can result in consumers reviewing the potential gains of switching to another company against the costs of leaving the current company. For example, consistently reviewing the quality of service or products may only have a limited effect if prices are too high. The influential triggers of competitors lower price could outweigh the potential benefits of the improved service.
Another area to be considered is customer complaints.. While companies can attempt to provide complete satisfaction there will unfortunately be times when a customer feels the need to complain. How a company handles these complaints can have a direct bearing on whether a customer will defect or not. A complaint handled well can lead to a more loyal customer. A complaint handled badly can lead to a dissatisfied customer who may defect to a competitor, and could persuade other customers to also leave by telling them of their experience. Therefore, it appears that while a company must continue to reduce the desire for customer defection in the first place, it must also focus on ensuring loyalty is also maintained from effective complaint handling procedures.
Relevance to the Service Industry
Having examined the various arguments for and against the Service Quality models and the importance of Customer Retention, it can be determined that the SERVQUAL and SERVPERF models can be used as a starting point, but are they suitable for use for an SME in the IT industry in Ireland? There have been more recent papers focused specifically on the Service and IT industries, and these will now be assessed.
In the United States service organisations are now taking dissatisfaction seriously. Recent applications of the Six Sigma philosophy to service organisations (Kim 2000; Pande, Neuman and Cavanagh 2000) point to the potential economic value of refining relevant business processes to deliver absolutely predictable, defect free, service products - i.e. the creation of perfect technical quality.
The Six Sigma concept was developed by Motorola in the late 1980's and focused primarily on best practice in the manufacture of semi-conductors to achieve zero defects in production. This approach was widely adopted by other manufacturing companies as a method of improving quality. In 1997 General Electric announced its ambition to reduce defects from 35,000 per million operations to fewer than 3.4 defects per million operations (Hendricks and Kelbaugh 1998) For GE, and for many other followers of the Six Sigma approach, numbers are paramount. However, more recently Six Sigma has undergone something of a conceptual transition, where pure numbers are no longer the critical factor used to determine success or failure of the system, but instead the measurement is customer satisfaction. This makes the approach more suitable to the Service industry. Yilmaz and Chatterjee (2000) discuss Six Sigma as a 'metaphor for excellence', a way of thinking about business rather than, necessarily, concentrating on the numerical absoluteness of "3.4 defects per million operations".
While the Six sigma approach has been used predominantly by manufacturing organisations, it has also been adopted by the Service industry in more recent years. For example Citibank has reduced its service failure rate by more than a factor of ten in three years (Rucker 2000). Whether the adoption of the Six Sigma ethos by service businesses is a response to increasing expectations from customers, or whether this is a strategy aimed at achieving competitive advantage by a small number of pioneering firms is, as yet, unclear. However, there are now clear indications that some substantial service-based see commercial possibilities from the Six Sigma approach.
Relevance to the IT industry
In more recent years, the issue of service quality and customer retention has been looked at very closely by the Mobile Telephone operators. Customer retention is of major importance to them as retaining an existing customer is much cheaper than acquiring a new customer. In most western countries the mobile telephony market has now reached its mature stage, and as Zeithaml, Berry and Parasuraman (1996) stated, the net return on investments in mature markets could be much higher for retention strategies than for strategies to attract new customers, particularly for companies with an established customer base. Various researchers (Reichheld and Sasser, 1990; Aaker, 1991), emphasised that a loyal customer base generates more predictable sales, steadier cash flow and an improved profit stream. Evangelia Blery et al 2008 looked at the Greek Mobile Telephony market and proposed the hypothesis that the "repurchase intention is influenced by perceived service quality". In this study, perceptions alone were used to measure service quality, and the SERVPERF model was used in preference to the SERVQUAL model, as the purpose was to measure service quality without measuring the expectations. The findings verified the research hypotheses, and proved that there are relationships between service quality and repurchase intention in the Greek mobile telephony sector. These findings are in accordance with the literature, as formal researchers such as Zeithaml, Berry and Parasuraman (1996) also found that service quality has an influence on purchase intention. The relationships between service quality and repurchase intention showed that service quality is an important decision-making criterion for service consumers, and any efforts to improve quality will be beneficial. Thus, the Greek mobile operators should pay attention to the quality of their services.
There is an abundance of research papers showing the link between Service Quality and Customer Retention. While there may be disagreements between some researchers on which methods are more suitable for measuring this - SERVQUAL or SERVPERF - there is little disagreement on the benefit of improving service quality to increase customer retention. While price sensitivity will also have to be considered, the research suggests service quality improvements remain the main driver in increasing this customer retention. Six Sigma, while recently being introduced into the services industry is still very much aimed at the manufacturing sector.
The intention now is to conduct a survey of former customers of Abacus Systems to detemine if there is a link between their decision to move to a different service provider and the quality of service that was being offered by Abacus Systems. Having examined the varoius models available, each has its merits and de-merits. When carrying out their research in Greece Evangelia Blery et al (2008) opted for the SERFVPERF model, and it would appear that the SERVPERF model is the model most suitable for research for a service compnay within the IT sector.
Industry review of ICT Sector in Ireland
The 2008 Information Society and Telecommunications report from the CSO is the most recent publication giving information on the ICT sector as a whole in Ireland. It summarises the ICT sector in Ireland as follows:
"The ICT sector in Ireland employed almost 87,200 people and represents 8% of total persons engaged in industry and services. While the ICT sector accounted for 6% of the total number of enterprises and 8% of total persons engaged in industry and services, it contributed 24% of total turnover in the sectors. Between 2003 and 2006 the number of persons engaged in the sector rose from 80,100 to 87,200, an increase of almost 9%. Turnover in the sector increased from €48.9m to €75.4m over the same period. The average ICT manufacturing enterprise had 173 persons engaged and had an average turnover of €230m. By contrast, ICT services sector enterprises tended to be smaller with an average persons engaged of 11 and an average turnover of €7m. "
The ICT sector in Ireland can be divided in Manufacturing and Services, and includes the Telecommunications section. The focus of this industry review will be on the Services section only, as this is the relevant section for this paper.
The extract from the CSO report from 2008 details a very positive picture of the ICT sector at this time. However, since 2008, the ICT services sector, along with all other sectors in Ireland, has seen a dramatic decrease in activity. The true picture of ICT activity in Ireland today is very different from that which pertained in 2008. Many IT services companies have folded, numerous jobs have been lost and activity in practically all ICT Services companies that have survived has decreased. However, CSO figures for 2009 are not yet available so the exact extent of the decrease cannot yet be quantified, so the 2008 figures will be used to describe the industry as it was then.
Most companies in Ireland use computers and technology in some form. The CSO figures tell us that 98% of enterprises of manufacturing organisations, 99% in construction and 98% in services use computers and technology. The majority of these organisations also use the Internet, and 65% of all enterprises state that they have a website or homepage.
In 2008, two thirds of enterprises indicated that they used a Local Area Network (LAN) while nearly half of enterprises stated that they had an Intranet (internal website for employee access only). Nearly a quarter (23%) of enterprises had an Extranet (access by external users to some part of their Intranet) in 2008.
In 2008, 54% of all enterprises received assistance or advice from suppliers of IT products while 43% of enterprises received similar services from IT consultancy firms. Abacus Systems Ltd falls into this category as a service provider of IT products and Consultancy.
There has been rapid growth in the uptake of broadband since 2005. There were just over 176,000 broadband subscribers in the second quarter of 2005, but this increased to 1,055,000 subscribers by the same period of 2008. In the second quarter of 2008, 78% of all subscribers connecting to the Internet used a broadband connection. The number of narrowband connections continued to decrease, down to 289,000 connections by the second quarter of 2008. Much of this increase can be explained by the de-regulation of the telecoms market in Ireland. There are now a number of providers of broadband services, and many of these offer terrestrial wireless solutions rather than the tradition DSL service via the telephone line that Eircom provides. In 2008, 83% of enterprises had a broadband connection, compared to 68% in 2007. The old style modem dialup connections are being phased out, and broadband services are not only extending in coverage but also offering better speeds and performance at reduced prices. For many years Ireland lagged behind Europe in terms of broadband coverage, but by 2008 this picture had changed. The percentage of Irish enterprises with a broadband connection has steadily increased from 48% in 2005 to 83% in 2008. The EU27 average for 2008 was 81%.
There are many players in the IT services market in Ireland. Abacus Systems offers services to organisations ranging from SME to Corporate to Government. Typically, an SME will be provided with a full range of IT services, where the service provider essentially becomes their IT department. However, Corporate and Government organisations, with their own IT departments, generally avail of specialised services only. There are therefore many competitors vying for business in each of the different levels. These will range from Fujitsu Siemens, which specialises in offering outsourced IT services to LAN Communications and DSS, which would specialise in providing LAN and WAN solutions. Abacus Systems offers all of these services, but on a smaller scale, as well as some specialised services such as Digital Dictation. The leading IT Services companies in the Dublin region are LAN Communications, DSS, Morse, Calyx and Hibernian, but there are numerous other companies, such as Abacus Systems, that operate at a level below these.
PEST analysis of IT Services sector in Ireland
Political / Legal:
As Ireland is a member of the EU, Ireland is a stable Political country. While the government has been under pressure in recent months due to the dramatic downturn in the economy, and this may have concerned some overseas investors, these concerns have eased in recent weeks due to the favourable response to the budget. Ireland is still seen as a good country to invest in from a political perspective. In addition, as Ireland is the only native English speaking country in the Euro zone, this makes Ireland an attractive option for US investors. Within Ireland itself, there are no major political issues for Irish businesses to be concerned with. From a legal perspective many of the laws in relation to ICT apply to the whole of the EU, such as Internet usage policies for businesses. Many of the laws can seem over bureaucratic, but in the main are accepted as being for the general good.
The economic climate in Ireland has changed dramatically in the last 18 months. For the previous 15 years Ireland had been experiencing continuous growth, but in 2008 and 2009 Ireland's economy experienced a dramatic downturn as the growth was replaced with recession, high levels of unemployment and a massive deficit on our balance of payments. A massive increase in the supply of bank credit over the previous 5 to 7 years encouraged a boom in construction activity. This resulted in huge increases in property prices, which encouraged domestic spending more widely. The position today is that house pricing has dropped by approximately 33% from the height of the boom period. The banking sector, which contributed greatly to the credit expansion, is now in severe difficulty due to the downturn both domestically and internationally, and is facing years of massive losses. The recent annual reports from Anglo Irish Bank, AIB and Bank of Ireland make for depressing reading at the moment.. As a result, credit conditions have tightened greatly, and this has had a particular impact on SMEs in Ireland. Credit is the lifeblood for most SMEs, and with credit no longer available many SMEs have been forced to scale down, or close completely. This is reflected in the unemployment figures, which are approaching 14%, a figure that has not been seen for nearly 20 years.
While the very unpopular NAMA is now being ramped up, Ireland needs a lot more that this to get a properly function banking system rolling again to provide much needed credit to Irish businesses.. Latest forecasts suggest that an economic recovery is likely to begin in late 2010, but there will be a long time before economic activity returns to normal.
Competitiveness deteriorated during the boom years, and this is now hindering growth as we try to come out of recession. Restoring competitiveness inside the Euro Zone is more difficult as Ireland does not have the option of changing interest rates or exchange rates. The change in competitiveness can therefore only occur through the downward adjustment of wages and prices, which is already underway with the harsh budget of December 2009. Public Sector pay has been hit hard, and there will be further cuts in Public Services. The Government has promised another three tough budgets over the next three years.
The net effect of the downturn has been a decrease in business generally across all sectors. While sectors such as the construction sector have experienced massive job losses and an equally massive decrease in activity, the IT sector has also been affected. With less money in the economy, these is less money for companies to spend on outsourced IT services, and IT services companies have also felt the effect of the downturn.
The economists forecast a recover later this year, and this will start to bring some activity into the market, but it will probably be 2011 before any real growth appears for IT services companies.
Socio / Cultural
The largest socio / cultural issue facing Ireland in 2010 is unemployment. The Irish labour market is currently experiencing a sharp downturn as a result of the massive decreases in output across a number of sectors. This is particularly true of the construction sector, where the job losses have been staggering. Output in this sector has practically stopped completely, and has resulted in a number of high profile company closures. This has led to a large reduction in employment and high levels of unemployment. The labour market in Ireland is flexible, and there is widespread evidence of significant reductions in wage rates, as well as jobs, throughout the private sector. There is a danger now that there this increase in unemployment in the short term will translate into a permanently higher level of unemployment, and a return to long-term unemployment, something that had been removed during the boom years. As many of those losing jobs today are low skilled, and unemployment benefit considered being relatively generous, Ireland faces serious challenges to getting people back to work again. In recent months we have some government attempts to reduce the numbers of unemployed, such as the reduction in social welfare for those under 21, greater encouragement and support has to be provided to help encourage the unemployed get back into work.
Ireland has generally been quick to adopt technology advances, particularly in Education, producing highly educated technology aware graduates.. This is evidenced by the fact that 7 of the top 10 IT companies in the world had an Irish base. One of the main contributors to this success was the availability of a highly educated workforce, with IT skills. A recent International Telecommunication Union report advised that Ireland had risen from 26th position to 18th place in a new index that measures the advancement of ICT in more than 150 countries worldwide, but dropped a place on ICT skill levels. Ireland's biggest gain was in the technology usage category, climbing from 32nd to 19th. Though Ireland's roll-out of broadband has been widely criticised in recent years, the improvement in the availability of broadband services in recent years has evidently made an impact, giving more businesses access to the internet, and contributing to Ireland's climb up the index.
With the downturn in the economy in Ireland in recent years and the subsequent loss of jobs, there is now a general acceptance that technology offers a great opportunity to get people back working. Ireland needs to look to new and emerging technologies, and to also take the lead with research and development, as we are no longer competitive at the lower level IT jobs such as PC manufacture. Dell's move to Poland for PC manufacture is clear evidence of this fact.
One such emerging technology is in renewable energy. BVP Investments, an early stage investor in green businesses, such as Wavebob and Biomass Heating Solutions, has forecast a positive outlook for Ireland's green business sector, despite the gloomy outlook for other sectors of the economy. The positive outlook is based on its analysis of projected growth in the sector throughout 2010. The current performance of Ireland's green sector is generating optimism among investors that significant growth levels can be achieved in the next five years.
Where IT technology contributed greatly to our growth in the past, more highly skilled technology jobs such as R&D and green energy technology could be the technology opportunity for the future.
Five Forces Analysis:
In the main, buyer power is high for general IT services. As this service is generally speaking generic, there are a number of providers that can offer the service. However, when a services company can offer unique services, such as support for a product that most other service companies cannot support, then the buyer power weakens. With general support contracts, there is price sensitivity, and prices for annual support contracts have dropped in the past 12 months, demonstrating the buyer power in this area. On average Abacus Systems support contracts have reduced by between 105 and 20%, and this seems to be typical of the industry at the moment. However, for unique services, such as digital dictation and IP telephony, prices are remained steady, showing a weaker level of buyer power for these more specialised products.
Supplier Power would also be considered to be low. As with buyer power, many of the products sold in this market are generic, and therefore there are multiple sources to choose from. IT service companies like Abacus Systems will purchase their products from distributors. There are a number of distributors in the Dublin area vying for this business. In addition, with Ireland being a member of the Eurozone, there are also a number of European distributors trying to get a foothold in Ireland. As well as pressure from competitors, switching costs in the main are quite low too in general, but with some exceptions with the more specialized products. The result of this is a reduction in prices and stiff competition between the distributors.
In recent years one of the primary barriers to entry for a new company wishing to enter the market was the lack of qualified and experienced field engineers. A company wishing to enter the market would have had to poach engineers from an existing company, which would result in high wage demands. The recent downturn has changed that, and there is now glut of suitable engineers available, as many IT companies have had to reduce their employee numbers to survive. Therefore, should a company wish to enter the market today, acquiring a suitably qualified engineering resource is no longer such a difficult task. This makes entering the market for new entrants an easier task. Whether they would wish to enter the market at this time is another matter however, as the market place is very competitive, and prices margin are dropping. This makes profitability an issue, and may dissuade new entrants.
In the past many companies choose to have an on-site engineering presence if they did not have an internal resource themselves. With the improvement in broadband rollout in recent years, this on site presence has been replaced with a remote access service. However, their service is pretty much the same, so it is not really a substitute service.
One area where substitution might be possible is with SaaS (Software as a Service). Rather than purchasing software a solution, such as MS Office or MS Exchange, from companies like Abacus Systems, these applications can be rented by way of an Application Service Provider or from the manufacturer directly. This service bypasses the traditional IT services companies such as Abacus Systems.
Rivalry in the IT services sector is intense. There are a large number of competitors and margins are dropping. Profitability is an issue for most IT services companies in the past 18 months. Some IT services companies have closed, others have merged, and there has been a general drop in employee numbers across the board. The number of experienced field engineers seeking employment proves this.
One of the main areas where competition has been stiffest has been in the pricing of annual support contracts. With decreasing margins competitors are dropping support contract prices to buy new business. As the service provided is generic, there is little differentiation, and competition is intense.
Abacus Systems SWOT Analysis
In January 2010 the board of directors conducted a SWOT analysis for internal use and to assist in the development of the strategic plan to 2012.
- Loyal Customer Base. Many customers have been with Abacus systems since it was founded in 1993.
- Proven Technical and Sales skills. The four principles in the organisation have all over 15 years involvement with Abacus Systems, and pride themselves on their integrity.
- Track Record. With 17 years success, Abacus Systems has a proven track record.
- Responsiveness. With a small, dedicated team, Abacus Systems can respond quickly to engineering and sales requests. Our SLA with support customers stipulates a 4-hour response for critical issues, and this response time is consistently achieved.
- Low cost base. With the MBO in April 2009, the cost base has been lowered dramatically. This has made Abacus systems a much leaner organisation, and has reduced substantially the profitability concerns that existed prior to the MBO.
- Accreditation. Abacus Systems has achieved Industry Accreditation from a number of vendors. These include 3Com, Cisco, Mitel, Microsoft, VMWare, WinScribe, Nuance, Fortinet, Sonicwall and many others. This level of accreditation gives Abacus Systems credibility in the market place, and gives confidence to customers regarding the skill set of the engineers.
- Stronger Management Team. The management team undertook a FAS One-Step-Up programme in 2009, which gave the management team skills in Strategic Planning, HR and Financing that was lacking somewhat prior to taking the course. This course has strengthen the skills matrix of the management team and has resulted in an improved performance by the team.
- Inability to target fresh new accounts. Acquiring new accounts has always been a challenge for Abacus Systems, and this remains a weakness today.
- Quality measurement / performance. There is a need for better monitoring and reporting of quality within the organisation, and in particular regarding the support desk.
- No spare capacity. A result of the MBO was a major cutback across the board, including employee numbers. Abacus Systems is not working at close to full capacity, and there is little room for expansion with the current head count.
- Cumbersome internal systems. The internal systems are poor, and this was one of the first weaknesses identified by the MBO team. A new accounts package was introduced in January 2010, and other process within the organisation with be integrated with this new package in the coming months. These include order processing, invoicing, proof of delivery notes and CRM in general
- Day-to-Day issues - no long term planning. This was another weakness indentified by the MBO team and the Fas programme was undertaken to remedy this issue. Too much of management time is taken up with managing day to day issues, and not enough time being spent on long tem planning. This weakness has been improving in recent months since the completion of the Fas programme, but needs to be monitored to ensure the management team does not fall back into old habits.
A number of opportunities have been identified, and have been listed in order of priority. These opportunities form the basis of the expansion element of the business plan for the coming years for Abacus Systems
- Nursing Home Package. All Nursing Homes now must meet HIQA standards. This means implementing a HIQA approved software package. Abacus Systems has partnered with the leading software providers in Ireland to supply the network infrastructure for the Nursing Homes. 450 Nursing Homes have been identified and a marketing campaign is under way
- WinScribe Digital Dictation and Solution. This solution has been available for a number of years, but there has not been much update in the market. The Legal and Medical professionals are the main users of dictation devises. With the recent downturn there has been in increase in interest in this product as it can lead to greater productivity. Recent successes in both the legal and medical fields have been on the basis of the cost benefits offered by the solution. A marketing campaign will be launched in Q2 of 2010
- Lost maintenance customers. There is a database of former annual support customers on file in Abacus Systems. A marketing campaign will be undertaken in Q2 of 2010 aimed at these former customers with a view to brining some of them back to Abacus Systems.
- Virtualisation. Server virtualisation is an growing technology and Abacus Systems, as a VMWare partner, can offer full virtualised solutions. One of the benefits of Virtualisation is a reduction of Server hardware, and therefore a decrease in administration and running costs. Again, in the current climate, this is an attractive proposition.
- Speech Recognition. This technology has been available for many years, but it is only now considered to be a viable technology. Nuance Dragon Naturally Speaking is the leading product in the space, and Abacus Systems have had some successes in recent months. A marketing campaign will be undertaken later in 2010 to increase sales of this product.
- Acquisition. Abacus Systems will be monitoring the market for any small IT services companies that may be willing to sell their customer database. This would offer Abacus systems a good opportunity to extend its own customer database.
- Software as a Service (SaaS). SaaS is a service being offered by Application Service Providers (e.g. Eircom) and Software manufacturers (e.g. Microsoft). Traditionally companies would purchase software from IT Services companies like Abacus Systems. Today, they also have the option of renting the software directly from an ASP or Manufacturer by way of broadband. The products are not installed locally, but are rented from a website (cloud computing), and the contract expires at the end of the rent period. This service is a threat to all IT Services companies and strategies to counteract this threat are required. Abacus Systems is looking to embrace the technology by adding it to our portfolio of products, and thereby changing this from a threat to an opportunity.
- Economy Local / World. The current economic climate, both locally and globally, continues to be a threat. While there are green shoots appearing in some countries, there are no signs yet in Ireland.
- Competition. Many IT companies in Ireland are struggling at the moment, and this has made competition intense. The result has been a drop in service charges and therefore a drop in margins and profitability. This trend continues in early 2010 nd needs to be monitored
- Software as a Service (SaaS). Please see opportunities no 7 above, as this is both an opportunity and a threat.
- Emerging technologies. How we conduct business today is very different to how it was just a few short years ago. Emerging technologies such as the Internet, Mobile Phones, Green Technologies have had major impacts on the world and have resulted in many companies emerging and others closing. A watchful eye has to be kept on all emerging technologies for their potential to change business models and therefore the viability of IT Services companies.
Abacus Systems holds a database of former Support Contract customers that have moved to a different provider. The questionnaire will be directed at this database to gather their thoughts on the level of service provided to them by Abacus Systems. The database was initially cleaned to make sure all former customers were still in business, and there was still a person there that had a memory of dealing with Abacus Systems.
The research proposes to determine if there was a link between the service quality Abacus systems provided to Support Contract customers, and there decision to move to a different vendor. The Hypothesis therefore is that there is a link between Service Quality and Customer Retention for an SME in the Irish IT Industry.
The role of service quality has become critical to the success of organizations. Therefore, it is important to use a reliable instrument to measure information service quality. Of the models assessed in the literature review, SERVQUAL and SERVPERF would appear to be the most suitable to a Service Industry. SERVQUAL is a popular instrument for doing this, but, though widely used, it has been criticised for its reliability and validity. Use of the performance measures from the SERVQUAL model to form the SERVPERF model have addressed many of these issues, and therefore the SERVPERF model will be used in this study.
The research will be carried out by way of Questionnaire, and will be administered to the Database using on on-line survey tool - SurveyMonkey. SurveyMonkey is an online survey tool that enables people to create their own surveys quickly and easily (www.surveymonkey.com). The main benefits of SurveyMonkey are
- Powerful, yet simple survey creation
- Fast and flexible response gathering
- Intelligent results analysis
Population and Sample
The survey was administered to the database of former Abacus Systems customers, having first ensured that all entries in the database were suitable to be surveyed. Given the current economic climate some businesses were no longer in operation, or had downsized, and so there was no contact available in the organisation that was in a position to answer the questions. The initial number of 105 former customers was reduced 55 potential targets when the database had been updated. The full remaining population of the database was surveyed, so that the results would be an accurate reflection of their reasons for moving to a new vendor. All 55 companies were contacted by phone to make sure they premit me to send them the questionnaire by e-mail, in, and all 55 agreed, although some reluctantly. The surveys were sent out in early March, and follow up e-mails were sent the following week. A total of 22 replies were received.
Data Collection, Editing and coding
The 22 items used to measure the five SERVQUAL dimensions were adapted from the study by Parasuraman et al. (1991) and some modifications were made to suit an IT Service company. These modifications resulted in changes to the wording of some items found in a SERVPERF questionnaire. For example, an original assurance item "Customers feel safe in their transactions with employees" was replaced by "Our customers can trust us". In addition, 2 items from the Tangibles section were removed, as they are not relevant in this study as our services are carried out on customer sites. This gives a total of 20 items in the SERVPERF format. However, to ensure that these questions address the hypothesis - there is a link between Service Quality and Customer Retention for an SME in the Irish IT Industry - two additional questions were added directly asking views on the effect of Service Quality and Price on their decision to move to a different vendor.
When designing a questionnaire some researchers have used the seven-point Likert scales while others used the five-point format. In this study, respondents were asked to rate their expectations and perceptions of each of the 22 items on a five-point Likert scale ranging from "1 - Strongly disagree" to "5 - Strongly agree" as suggested by Babakus and Mangold (1992) and Johns et al. (2004), as this would appear to be the format most readily used for service organisations.
The questionnaire was pilot tested initially among 6 fellow workers in Abacus Systems, and then among 5 trusted current customers. Having determined that the questionnaire would address the question posed in the research question, it was issued to the 55 targets during the second week of March 2010. Of the total 55 surveys that were sent out, 22 customers responded fully so that the information they provided was deemed to be usable for data analysis for this study.
Survey Monkey provided the data in a format that could be used by SPSS. SPSS for Windows wasused to analyse the data. SPSS for Windows provides predictive analytics software and solutions. SPSS provides software tools that enable marketers to access and prepare data for analysis; develop and deploy predictive models; and generate reports and graphs to present the results.
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