How to Decide If AI Is Right for Your Service Business

Artificial intelligence (AI) is all the rage these days. From finance to healthcare to retail, everyone seems to be jumping on the AI bandwagon. But as business professors, we believe that not every company should rush into adopting AI without careful consideration. Our research suggests that service businesses, in particular, should think carefully about whether AI is the right choice for them.

Here are four rules to help you decide if AI is a good fit for your service business.

Why Service Providers Face a Different Calculation

If you’re a manufacturer, AI can be a no-brainer. It can reduce costs without compromising quality and deliver a good return on investment. But service businesses, which provide services rather than physical products, face a different set of challenges. Unlike products, services are co-produced with the customer. This means customers can complicate even simple processes.

For example, think about a restaurant. A customer orders what they want, combine dishes as they see fit, and eats the food when it’s served. The restaurant has to deal with whatever choices the customer makes. If customers interact directly with the server or the cook, they might ask for substitutions, question ingredients, or request special dishes. This is less likely to happen if they order from a fixed menu on a tablet. Similarly, a restaurant can offer a few standard dishes or many customizable ones.

If you run a service business, you’ve already made many choices based on your customer interaction strategy. For instance, if you own a financial services firm, are your offices designed to be comfortable for long meetings with clients? Or do you prefer short interactions over the phone or through an app? Do you offer a limited range of services, or do you tailor your services to each client’s needs?

Dealing with Uncertainty

A key consideration for service businesses is how much uncertainty you allow customers to introduce into your process. This uncertainty comes from the extent of customer interaction and the variety of services offered.

According to information processing theory, organizations handle uncertainty by using knowledge to reduce risk. For service firms, the challenge is using knowledge effectively in service production. Human knowledge, or human capital, reduces uncertainty as workers solve problems and meet customer needs. However, human capital has its downsides: it belongs to the employee, not the firm, and it isn’t scalable. On the plus side, customers value human interaction.

Organizational knowledge, or organizational capital, is codified knowledge that belongs to the firm and can be scaled. AI, as a form of organizational capital, has these advantages.

Information processing theory offers three techniques for organizing knowledge to handle uncertainty:

1. Rules and Programs: These are forms of organizational capital.
2. Hierarchical Structures: Front-line workers escalate complex issues to more knowledgeable managers.
3. Goal-Oriented Coordination: Empowering lower-tier employees with decision-making autonomy, guided by organizational goals, relies on knowledgeable, experienced workers—human capital.

Service firms with limited customer interaction and fewer service options often rely on organizational capital, like tech solutions and rules. Firms offering many customizable services and high customer interaction use front-line knowledge workers coordinated by goals. Tech can augment these strategies, but the cost of offering more services or customer choices means relying more on human knowledge workers.

The Strategic Use of AI

AI can reduce customer interaction uncertainty because the firm owns it and can scale it. However, AI is still bound by its rules and datasets. In areas of uncertainty, human capital has advantages in finding creative solutions, linking concepts, and understanding human interactions.

Here are four rules to strategically integrate AI into your service business:

1. Strike a Strategic Balance: Use AI for predictable tasks like payments, where it enhances efficiency without much loss. For complex and varied customer needs, rely on human expertise and interaction. The best approach often combines both, with AI handling routine tasks and humans managing the nuances that AI can’t.
2. Leverage Strengths: Use AI for tasks requiring objectivity and comprehensiveness, such as data analysis and decision-making. This ensures precision in areas like finance and healthcare. In services where trust and personal rapport are crucial, prioritize human interaction to build strong client relationships.
3. Seek Opportunities for Synergy: Encourage interaction between human capabilities and AI, allowing both to learn from each other. This not only improves current operations but also helps both humans and AI evolve, leading to a sustainable competitive advantage by continuously expanding knowledge and adaptability.
4. Consider the Context: Assess your customers’ specific needs and values to determine the right mix of human and technological resources. Recognize that this balance may shift over time as technologies advance and client expectations change.

By following these guidelines, service firms can effectively integrate AI into their operations, leveraging the strengths of both human and artificial intelligence to meet their clients’ needs in a balanced and sustainable way.