7. If a constraint has been broken, go back to Step 3. Warning: Do not let inertia become the system's constraint.

In the first step, the goal of the organization is defined. The goal of profit organizations is to increase shareholders' value. Shareholders' value is the discounted cash flow of the organization. The value-centered definition of the goal is important in service organizations because it focuses everybody on the organization's value. In nonprofit organizations, focusing the whole organization on the goal is even more important because the definition of the goal is usually more complicated and requires incorporation of the resources limitations typical to many nonprofit organizations.

In the second step, a set of performance measures is defined for the organization and its units. Performance measurement is not widespread in service organization but its importance is high-it serves as a compass for management to monitor and control how the organization is functioning and, eventually, the achievement of its goal.

Bottleneck Management

Similar to most organizations, the overall constraint of service organizations is the market constraint. Namely, many of them have excess capacity for selling more of their services and the ability of earning more money is governed by the demands of the market. In other words, service organizations are able to cope with a substantial increase in the number of customers and serve them properly. This becomes even more important because most of the costs of a typical service organization are fixed costs.

As noted by Pass and Ronen (2003), most service organizations have two bottlenecks: one in their Sales and Marketing departments and the other in their IT department. These internal bottlenecks will remain bottlenecks even if more resources are added to the respective departments and therefore are referred to as permanent bottlenecks. The IT department is the heart of service organizations such as banks, insurance companies, cellular providers, telecommunication firms, and credit cards companies.

No matter how many more salespersons or marketing employees we add to the Sales and Marketing departments, there will always be more potential customers and sales and more marketing initiatives and activities than resources for dealing with them. Similarly, no matter how many development people we add to the IT department, there will always be more demand by other departments for development projects and enhancements to existing information systems. This demand for development in the IT department is typically in excess of 300 to 500 percent compared to their development capacity.

The operations, logistics, and customer service departments should not be bottlenecks and these departments should be planned and run with a proper amount of protective capacity (Ronen and Pass, 2008a, Chapter 14). Protective capacity is a controlled excess capacity aimed at protecting the undisturbed flow of service transactions through the organization.

A diagram that is useful for illustrating this permanent bottleneck reality is called Cost-Utilization (CUT) diagram (Ronen and Spector, 1992). The CUT diagram is a histogram that schematically compares the utilization (load) of each resource of the organization with its cost. Each bar in the histogram represents a single resource or department; the height of the bar corresponds to its load (0 to 100 percent), while its width is proportional to its cost.

Focusing management on the permanent bottlenecks has an immense potential of substantially enhancing the performance and value of the organization. Improved performance of Sales and Marketing will bring more customers, whereas improved performance of the IT development department will allow offering better service to customers.

Exploiting Permanent Bottlenecks

Since the service organization always has permanent bottlenecks at the Marketing and Sales department as well as at the IT department, these bottlenecks should be properly managed in order to secure their best exploitation.

Exploitation of the bottleneck has two dimensions: 1. Efficiency-reducing nonproductive times of the bottleneck 2. Effectiveness-directing the bottleneck to process the most valuable services, tasks, and customers.

Increasing Bottleneck Efficiency

Although the value of the service organization is highly dependent on the outcome of its bottlenecks, the percentage of the time that bottlenecks are productive is much lower than 100 percent-usually in the range of 40 to 80 percent (Ronen and Pass, 2008a, Chapter 17). The nonproductive time is called garbage time. Garbage time of a bottleneck is the time devoted to activities that either nobody should be doing or surely should be done by another (non-bottleneck) resource. The garbage time is caused by activities such as rework due to an incomplete kit of requirements or instructions, and participation in unnecessary meetings.

Reduction of the garbage time is achieved by a simple procedure: monitoring the wasted times, classifying them according to their causes, using the Pareto analysis to identify the main causes, and implementing remedies that eliminate or greatly reduce the main causes of wasted time (Ronen and Pass, 2008a, Chapter 5).

The typical result of such a procedure is a 20 to 40 percent increase in the bottleneck's Throughput. Namely, by conducting an easy-to-implement procedure one can get potentially 20 to 40 percent more salespersons or more software developers without any investment in expensive salaries or training.

Increasing Bottleneck Effectiveness

By definition, bottlenecks are resources that are not able to perform all tasks arriving at their desk. Instead of letting chance dictate which tasks will be carried out and which will be abandoned, it is much wiser to choose to accomplish those tasks that will bring most value to the service organization and abandon the least valuable tasks. The systematic process of picking the most valuable tasks for execution is called strategic gating (Pass and Ronen, 2003). Strategic gating is a process of prioritization that defines the value of the different tasks, products, services, projects, or customers for the organization and decides by priority which ones will be carried out and which will be dropped (Ronen and Pass, 2008a, Chapter 5).

Priority of a task/product/service/project/customer is affected by two parameters-on one hand, its value to the organization and on the other hand, the time (effort) spent at the bottleneck processing it. The resulting priority can be decided by calculating the specific Throughput of the task/product/service/project/customer or graphically by drawing the focusing matrix for the bottleneck. The specific Throughput of a task is the ratio between the value of the task for the organization and the time this task requires to be processed at the bottleneck. Namely, the specific contribution of a task represents the value that the organization gains per constraint time (Ronen and Pass, 2008a, Chapter 5). The focusing matrix is a chart that maps the tasks/products/services/projects/customers in two dimensions according to their relative importance to the value of the organization on one hand and the ease of achievement on the other hand (Ronen and Pass, 2008a, Chapter 5).

In a large financial institute, the total amount of development tasks requested from the IT department was typically 400 percent higher than the actual development capacity. Traditionally, the decision of which tasks to deliver in a given year was influenced mainly by the organizational power of the requesting unit ("he who shouts louder, wins"). In order to decide rationally on the best portfolio of tasks to be developed during the next year, management adapted and implemented the strategic gating mechanism. A major element of strategic gating is the notion that those tasks that did not have high enough priority should not be put on a "contingency list" but will be put aside in a firm freeze status waiting for a subsequent annual strategic gating session.

This strategic gating process obviously ensured that maximum value to the organization was delivered. Moreover, this process increased the effective capacity of the IT department of this firm by 15 percent, enabled it to develop 15 percent more software products, and at the same time enabled it to reduce the damages associated with version content changes.

Subordinating Everybody Else to the Permanent Bottlenecks

The organization as a whole has to be subordinated to its main constraint-the market. This means that in order to achieve high profits one has to offer customers services that deliver as much value as possible.

In order to achieve this subordination to the market, the organization has to undergo a paradigm shift-to accept the approach that everybody in the organization has to be subordinated internally to the market through Marketing and Sales.

In service organizations, one has to instill double subordination: to the market and to IT development. Subordination to IT development means practically to request only necessary IT applications, to eliminate any "nice to have" features, and to submit the requirements in a complete kit. A complete kit is the set of items needed to complete a given task (e.g., information, drawings, materials, components, documents, tools) (Ronen and Pass, 2008a, Chapter 12).

Elevating the Permanent Bottlenecks

Permanent bottlenecks obviously can be elevated by hiring more resources. A more challenging mechanism for elevation is the offload mechanism. Offloading bottlenecks is achieved by directing part of the tasks of the bottleneck to other non-bottleneck resources. Candidates for offload are repetitive tasks or those that do not require the highest professional skills.

Salespersons can be offloaded very effectively by a good back-office. Administrative tasks, meetings coordination, customer retention, etc. can be performed by the back-office, freeing the salesperson to increase Throughput by performing more sales meetings per week. For example, in a medium-sized insurance company, Pareto analysis of a typical day of a salesperson revealed that only 13 percent of the day was used for face-to-face sales meetings with a customers. As a result, they were carrying out only one meeting per day on average. By offloading customer retention activities to the customer support center of the company, salespersons were able to spend twice as much time at sales meetings and conduct two sales meetings a day. In no time, this trivial change led to a meaningful increase of 20 percent in sales.

Response Time Reduction

Lead time reduction is complementary to the Throughput enhancement by constraint management according to TOC. In order to reduce lead time, it is recommended to implement the tactical gating mechanism (Ronen and Pass, 2008a, Chapter 5). Tactical gating is the controlled release mechanism for service tasks. The tactical gating mechanism is based on a "gate keeper" who releases tasks for processing using the following principles: DBR scheduling Introduction of tasks in complete kit (Ronen and Pass, 2008a, Chapter 12). For example, in a technical call center in order to serve a customer the service provider needs a complete kit that includes customer name; address; home, office, and mobile phone numbers; name of liaison; details of all equipment on site; nature of failure/complaint; etc.

Introduction of tasks in small batches (Ronen and Pass, 2008a, Chapter 11) Preventing task introduction in an unplanned manner In order to achieve significant lead time reduction, TOC should be integrated with the tactical gating mechanism. For example, DBR and the complete kit would bring about better results than DBR alone. Addition of the small batch concept (originally suggested by JIT/Lean) and performance measurement would bring about further improvement in performance.

Performance Measures

Goldratt and Cox (1992) suggested three measures of performance for improved management of organizations: Throughput (T) Operating Expenses (OE) Inventory (I) For service organizations, we suggest to add to this set another three performance measures (Ronen and Pass, 2008a, Chapter 13): Lead time (LT) Quality (Q) Due-Date Performance (DDP) Throughput and Operating Expense share the same definition in all types of organizations. In service organizations, inventory is mainly a metric for the amount of WIP in the service process or in a certain department.

Lead time in service organizations should be measured from the customers' standpoint-from the time of the service request by the customer to the moment of service delivery.

Quality is a multifaceted metric. On one hand, the quality perception of the service by the customers is crucial and should be monitored closely by customer satisfaction surveys. On the other hand, the quality of service processes is equally important. The quality of the service process can be monitored by measuring "right first time service," the amount of "garbage time," and other industry-specific measures.

Due-date performance measures the adherence of the organization to the Service Level Agreement (SLA) for the service or the process.

Costing, Pricing, and Decision-Making

Similar to all organizations, service organizations have an improvement potential related to costing, pricing, and decision-making.

The "evils" of traditional cost accounting can be partially resolved by TA. The Focused Management concepts and tools for pricing, costing, and decision-making have succeeded in creating more value in service organizations. For example, the Global Decision-Making (GDM) methodology can relieve pricing conflicts, transfer price determination, and make-or-buy decisions as well as investment decisions as shown in Ronen and Pass (2008, Chapter 16).

Quality Enhancement

Quality is a complicated topic because quality is multifaceted. Service processes are unique in the mere fact that the customer is highly involved in the process.

Some people consider quality to be a cultural issue. In fact, quality is a major business concern having a direct effect on the value of the organization: The quality of service processes and the quality of the provided service strongly influence the value perception of customers.

The quality of service processes has a major effect on the costs of the organization and hence on profits and value. In service organizations, the "garbage time" should be measured by its real economic value, that is, by economic value of the wasted time. The authors' experience, backed by the relevant literature, shows the garbage time of IT software developments, for example, is 40 to 70 percent of the labor cost. Methods like "quality costs" usually show a much lower amount of waste and should be scrutinized.

The business approach to quality encourages the prevention of both poor service quality as well as over-quality for which the customer is neither paying nor valuing (Coman and Ronen, 2009; 2010).

TOC has never developed a coherent methodology for quality improvement in an organization. TOC's contribution to quality is limited to the issues of where to focus the efforts for quality improvement and the recommendation to eliminate bad multitasking (BMT) as a way to improve the quality of execution in project management.

How to Implement the Change?

Value enhancement projects are more complex in service organizations than in manufacturing organizations for reasons mentioned previously. Hence, it is of great importance to have a structured approach to value creation in service organizations. The preferred methodology in this case is the Value Focused Management (VFM) approach.

VFM is a practical five-step methodology for implementing shareholders' value enhancement projects (Ronen and Pass, 2008a, Chapter 19). VFM provides a common language across all functional areas; thus, it enables aligning all the organizational decision-making with the goal and creates a clear link between management actions and shareholders' value. The stages of VFM are: 1. Define the goal.

2. Determine the performance measures.

3. Identify the value drivers and evaluate their potential impact.

4. Decide how to improve the value drivers.

5. Implement and control.

The buy-in for TOC in service organizations is much more difficult than in manufacturing organizations. Thus, it is important that the management team should be aligned with the goals and methods of the implementation project. Once top management decides to launch the value creation project, thorough education and training seminars should be conducted for top- and mid-management. Value creation teams will then focus on the main value drivers and conduct projects for their improvement (Ronen and Pass, 2008a, Chapter 23).