(Business 2.0) – A few months ago, my wife and I planned to fly Virgin Atlantic to London, but the airline messed up our reservation. When I called to get it fixed, I waited, and waited, and waited some more for someone to answer. I finally got a disgruntled employee who put me on hold for a while and then disconnected me. We flew British Airways.

My experience shouldn't surprise anyone. A Pew Charitable Trusts survey last spring found that 46 percent of consumers had simply walked out of a store during the preceding year after encountering bad service; 81 percent believed that stores were cutting corners on hiring. Corner-carving, in fact, turned out to be the problem with Virgin, which reduced its reservations staff after 9/11 and therefore didn't have enough qualified people when business came back.

Does anyone besides me find it odd that customer service is deteriorating even as companies are investing heavily in customer-relationship management software, the technology that tracks customer activity and tailors marketing efforts accordingly? AMR Research reports that some 34 percent of technology managers plan to invest in CRM software this year. ARC Advisory Group estimates that companies will spend nearly $38 billion on the stuff between 2001 and 2005.

Maybe companies are spending on the wrong thing. Before you can manage a relationship, you first need to build it. And relationships are built less by fancy data mining than by what happens to customers when they actually make contact with the organization. Call Southwest Airlines, and instead of getting a "menu of options," you talk to a real person who actually seems happy to sell you a ticket. Southwest didn't lay off people last fall, so they can really serve their customers. (What a novel idea.) Years ago Jan Carlzon led a remarkable turnaround of SAS, the Scandinavian airline, based on the elementary observation that customers' feelings about a company come from the myriad small interactions they have with it--checking in, boarding the plane, getting served a drink and meal, and so forth. If a company doesn't get these experiences right, nothing else matters.

These interactions are still, even in the Internet age, conducted by--drumroll, please--people. That's why successful organizations in industries like airlines, hospitality, retailing, and financial services take care to hire people who fit into a service-oriented culture. They train them and treat them well so they'll stay. The best companies build cultures in which front-line people are empowered to do what's needed to take care of the customer.

If companies feel the urge to buy customer service software, perhaps they ought to spend on the kind that tells them about their prospective employees. Humetrics, Kenexa, and Unicru offer programs that have helped companies such as Blockbuster, Target, and Brinkers identify applicants best suited for service jobs. Hiring right reduces the cost of turnover, even as it enhances the customer's experience.

Retailers talk about "the final 3 feet"--the distance between the customer and the associate--as the most crucial piece of real estate in customer relations. I agree. It's in this space that the battle for survival and growth will be won.

Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business.