To increase service productivity, many companies utilize automation extensively to reduce the use of labor. However, greater use of automation does not always result in higher service quality, and the effectiveness of automation in providing service hinges on how advanced the technology level is. Departing from the standard perspective in which productivity is simply treated as an output measure of firm performance, the authors propose service productivity as a strategic decision variable; that is, the firm manages the service productivity level to maximize profits. They develop a theory of optimal service productivity that explains when the optimal productivity level will be higher or lower and distinguishes between short-term effects of service productivity due to labor–automation trade-offs and long-term effects due to the advance of technology. The theory, together with the existing literature, inspires the development of three testable empirical hypotheses, which are confirmed using data from more than 700 service companies in two time periods. The research shows that service productivity should be lower when factors (e.g., higher profit margin, higher price) motivate the provision of better service quality and that service productivity should be higher when factors (e.g., higher market concentration, higher wages) discourage the provision of better service quality. The empirical results also provide preliminary evidence that large service companies may tend to be too productive relative to the optimal level and, if so, should place less emphasis (in the short run) on cost reduction through automation and more emphasis on service quality.
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