Service Organizations

An organization providing intangible services rather than tangible goods is termed as Service organization. In the standard industrial classification, service organizations include hotels, restaurants and other lodging and eating establishments, barber shops, beauty parlors and other personal services, repair services, motion picture, television and other amusement and recreational services, legal services and accounting, engineering, research/development, architecture and other professional organization. Service organizations also includes educational organizations, banks, insurance companies and other financial institutions. Also government agencies and most other non-profit organizations are service organizations.

Characteristics of Service Organizations

  • Quantity Measurement: It is easy to keep track of the quantity of tangible goods, both during the production process and when the goods are sold, but it is not easy to measure the quantity of many services. We can measure the number of patients that a physician treats in a day, for example, and even classify these visits by type of complaint, but this is by no means equivalent to measuring the amount of service that the physician provides to each of these patients. For many services the amount rendered can be measured only in a crude terms, if at all.
  • Absence of inventory: Goods can be held in inventory and this inventory is a buffer that dampens the impact on production activity of fluctuations in sales volume. Services cannot be stored. If the services available today are not sold, the revenue from these services is lost forever. Resources available for sale in many service organizations are essentially fixed. In the short run, a hotel can’t increase the number of rooms that it offers for rent and it does not reduce costs substantially by closing down some of its rooms. These facts cause a great stress to be placed on planning for an amount of available services that is not in excess of what can be sold currently and on marketing efforts to sell these resources each day. The loss from unsold services is such an important factor that it normally is a key variable in service organizations of all types
  • Quality Measurement: The quality of tangible goods can be inspected, and in most cases the inspection can be performed before goods are released to the customer. If the goods are defective there is physical evidence of the nature of the defect. The quality of a service can’t be inspected in advance at best it can be inspected during the time that the service is being rendered to the clients. Judgments as to the adequacy of the quality of the most services are subjective measuring instruments and objective quality standards do not exist. An accounting firm can measure the number of hours spent on an audit, but not the thoroughness of the work done during those hours. A consulting firm has no objective way of appraising the soundness of its recommendations.

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