(FORTUNE Magazine) – WHEN David Robinson, a New York art dealer, failed to pay his American Express bill for September, American Express called to find out why. ''Well,'' Robinson began, ''I just sent you $800. The other $5,372 is for rugs I bought during the summer in Marmaris, on the coast of Turkey. But now I've had them appraised, and they're worth less than half what I paid. The appraisers are afraid of lawsuits and don't want to certify their estimates. What do I do?'' The voice at the other end of the line was calm and kind. ''I'll note the dispute in your file. Just write us a letter and summarize the appraisers' estimates.'' No suspicious questions, no pressure for immediate payment, just an offer to help Robinson solve a problem on the other side of the world. Until the conflict is resolved, American Express isn't demanding the disputed amount. To a lot of executives that sounds like a crazy way to run a business. But far from costing money, such extraordinary customer service helps American Express earn the fattest gross profit margins in the credit card business. That lesson is sinking in on a growing number of managers. As global competition intensifies and companies around the world invade each other's markets, cost and quality differences among all sorts of goods and services are shrinking. The company that coddles customers best has a competitive edge. Last summer the Gallup Organization polled senior executives at 615 companies on the importance of eight different factors over the next three years. The winner by a mile: service quality, picked by 48%, well ahead of productivity and government regulation. Remarkably, even executives who turn out goods, not services, said that offering their customers better service will be nearly as important as making higher-quality products. This new concern with service comes none too soon for most consumers. They're fed up. The Yankelovich Monitor, an annual survey of 2,500 consumers that focuses on social trends, reports that among seven service industries, only supermarkets rose in perceived quality in recent years. Restaurants, hotels, and department stores stagnated, while airlines, banks, and cable TV operators dropped. Technical Assistance Research Programs Institute of Washington, D.C., which has studied complainers for nearly a decade, finds that the service operations of many companies are fielding over twice as many complaints today as they did in the 1970s. Buyers, whether consumers or corporations, are demanding more of sellers and too often aren't getting it. Yet the rewards of giving superlative service have never been clearer. In a gargantuan historical study, the Strategic Planning Institute of Cambridge, Massachusetts, has analyzed the performance of some 2,600 businesses over the past 15 years. Awkwardly named the Profit Impact of Market Strategy, or PIMS, this research shows that financial performance is tied directly to the perceived quality of a company's goods and services. By almost any measure -- market share, return on investment, asset turnover -- businesses that offer higher quality come out on top. Among the most powerful tools for shaping perceptions of overall quality, the PIMS study finds, is customer service. Unfortunately, rendering superior service is often a frustrating task. Service experts are fond of pointing out that unlike products, services can't be made in a factory and stored in inventory; they are consumed at the moment of production, and whoever delivers the service, from telephone operators to washing machine repairmen, will do more than any management system can to determine quality. In short, customer service seems depressingly uncontrollable, especially in decentralized, ''high contact'' industries like the hotel business, where dozens of employees deal with customers. Even companies that shine at service can't offer simple formulas. ''A lot of people have fancy things to say about customer service, including me,'' says Leon Gorman, president of L.L. Bean, the Freeport, Maine, mail-order house that leads its industry in quality of service. ''But it's just a day-in, day-out, ongoing, never-ending, unremitting, persevering, compassionate type of activity.'' Nonetheless, the masters of customer service -- many of them listed in the table overleaf -- didn't attain that status by accident, and a close look at them reveals strong similarities. They make outlandish efforts to hire only the right people, to train and motivate them, and to give them the authority necessary to serve customers well. They invest earlier and much more heavily than their competitors in technology to support customer service. They keep an especially sharp eye on the competition. And they constantly ask customers to rate the quality of service they have received. Few organizations combine the elements as well as American Express's charge card operation. The basic card service is similar to that offered by any number of others. Yet American Express customers, both cardholders and businesses that accept the card, are willing to pay a hefty premium over the rates levied by, say, the banks that issue Visa cards. The reason is clear, says Spencer Nilson, who writes a credit card industry newsletter and often lambastes American Express: ''There's no getting around the fact that American Express's service is far and away the best in the industry.'' THAT IS THE RESULT of what may be the world's most elaborate system for tracking service quality. Despite a strong tradition of excellent service, American Express slipped in the early 1970s. Complaints surged as the card operation expanded too quickly overseas, with too little investment. So James D. Robinson III, chairman of American Express, asked the 12 departments responsible for card operations to develop standards for their own performance and to measure their achievement. Ray Larkin, then a senior vice president charged with putting the measurement system into practice, soon discovered the system was no good. ''Each department was doing great according to its own standards,'' he says, ''but service wasn't improving.'' American Express called in McKinsey & Co. Instead of controlling quality department by department, the consultants suggested measuring the impact of all the departments' actions on customers. Today that system, called the service tracking report, measures the card operation's success in processing new applications for cards within 15 days, replacing lost or stolen cards in one day, sending out bills that are completely accurate, and performing over 100 other tasks. Every month Robinson and other executives scrutinize how well operations in all parts of the world have lived up to the standards, and every year the company publishes an annual summary for employees. Osvald Bjelland, a partner at the Service Management Group, an international consulting firm, calls the service tracking report ''the best feedback on service quality I have ever come across.'' American Express uses an awesome collection of other tools to produce top- notch service, including over 100 programs for recognizing and rewarding people who take unusual care of customers. A six-person team from headquarters makes the rounds of operating departments to check quality, and this year American Express will start following up on over 20,000 transactions with customers to see how they rate the treatment they've received. If the company's reputation starts to falter, Robinson aims to be the first to know. Incompetent people can't render good service, so the best companies tend to recruit meticulously. Singapore Airlines and Delta Air Lines are good examples. Both have outstanding reputations for service; Delta's seems to have declined a bit but is still strong even after a horrendous string of mishaps last summer that included a near collision in the air and a near landing in the ocean. Singapore hires less than 2% of the thousands of women who want to become ''Singapore girls'' -- yes, that's what the airline, based in a male- dominated land, calls its female flight attendants. Delta takes on even fewer, accepting merely 40 to 48 of the more than 20,000 applicants for flight attendant jobs who write in each month. Both companies insist on months of rigorous training. Singapore's future stewardesses, many of them from humble backgrounds, learn how to use makeup and serve luxurious meals that feature items with which they are unfamiliar, like fish forks and caviar. They are cautioned not to drink alcohol or eat onions for ten hours before coming to work. They cannot even start their jobs until they have done time at behind-the-scenes tasks, like cleaning airplane cabins and accompanying the airline's salesmen on visits to travel agents. ''All this is geared toward developing a well-rounded Singapore girl, one who knows all about the airline,'' says Michael Tan, a Singapore director. Delta does much the same, insisting that aspiring stewards and stewardesses move up through the back-office ranks before they get their wings. FEW TRAINING PROGRAMS are as intense as the one Merck uses to turn new hires into the kind of salespeople who will uphold the drug company's No. 1 rating for service to pharmacists and doctors. Aspirants first study basic medical subjects for ten weeks -- anatomy, physiology, disease -- and must score 90% or better on a weekly test to stay in the program. In phase two they spend three weeks learning how to discuss and present Merck's products, then go on trial for six months, making presentations in the field along with their district managers. Phase three is another three weeks at headquarters, brushing up presentation skills. Even after more than 11 months of training, salesmen must regularly attend ''primary didactics,'' medical classes conducted at Harvard, Johns Hopkins, and other universities. ''Training is our obsession,'' says Jerry Keller, a vice president at Merck Sharp & Dohme, Merck's U.S. drug division. ''People who come to us from other companies can't believe we have this kind of program.'' Motivation, Keller notes, is just as important as training. ''Salesmen motivate themselves because we show that we care about and respect them. A lot of places treat their salesmen like children.'' At Merck no salesman will be chastised for taking off at 4 P.M. to see a ball game with his family; in return, salesmen give their home numbers to physicians and stand ready 24 hours a day to answer questions or fill emergency orders. ''We let them decide how to spend their time,'' says Keller, ''and they pay us back in abundance. I don't think the money motivates them at all.'' Keller's loose-reined approach is typical among companies that serve their ^ customers well. Managers in lesser companies, driven by the desire to make service and sales people more productive, usually turn up the pressure, clocking how long it takes a telephone operator to handle a customer's complaint, insisting on elaborate reports from field salesmen. Striving to control the uncontrollable, they mechanize customer service as much as possible. That's exactly the wrong way to do it, says Richard Whiteley, a principal at Forum Corp., which specializes in sales and service training. He explains: ''Successful service organizations empower individuals to offer the best possible service they can, within reasonable limits.'' At Marriott and other companies known for good service, the people who render it are called associates and colleagues rather than customer service reps. They are remarkably free to call on every part of the company in helping customers, and they earn lush bonuses for extraordinary work. American Express thrives on heroic stories of how its people rescue customers from civil war and natural disasters, even when that means convulsing the company and spending thousands of dollars. Cash awards of up to $1,000 go to certified Great Performers such as Barbara Weber, 37, who last year cut through miles of State Department and Treasury Department red tape to refund $980 of stolen traveler's checks to a customer stranded in Cuba. Training and motivating is especially tough in industries that pay the minimum wage, like supermarkets and hotels. They generally can't afford to be picky about hiring and so end up with the rawest of recruits, nearly all eager to leave for better jobs. The dilemma doesn't bother Danny Wegman, president of Wegmans Food Markets, a 38-store chain based in Rochester, New York. An effective solution, he finds, is liberal college scholarships. After working at Wegmans for a year, any employee who performs well, can write a convincing application, and seems likely to do well in college or graduate school can get a scholarship for half his tuition. So far almost 1,000 of Wegmans' 11,000 full- and part-time employees have made the grade, staying in school -- and at Wegmans. Those motivated workers give the best service in the industry, according to the Consumer Network of Philadelphia, a nationwide group of 3,500 shoppers. One of them says: ''I've lived in Japan, and service at Wegmans is just like service in Japan. It's what a supermarket ought to be.'' Now Danny Wegman has extended the work-study program to high school students who seem likely to drop out. Last May he invited borderline cases from the Rochester public schools to join Wegmans Work-Scholarship Connection, which offers $5,000 college scholarships to students who keep working at Wegmans and attending high school. ''Five months later,'' Wegman says, ''the 30 we hired are all still here. We've never had that kind of retention rate.'' The prize for managing low-paid service workers may belong to Embassy Suites Hotels, a subsidiary of Holiday Corp. that specializes in hotels made up solely of suites. ''Historically hotel managers have believed that minimum- wage workers aren't smart or ambitious,'' says Hervey Feldman, president of Embassy Suites. ''That's just not true. With training and experience, they all have the curiosity and intelligence to go beyond making beds.'' To ensure that he hires and promotes general managers who share his views, Feldman looks most closely at candidates' interpersonal skills, especially their inclination to treat all people as if they are competent. To help motivate workers, managers post in the employee lounge a daily report on the hotel's occupancy rate, average room rate, and estimated profits, along with comments from at least five customers interviewed at random the day before. If the hotel is achieving its goals, even the lowest-paid worker can receive a monthly bonus of over $100. ''Minimum-wage workers are going to get out of that pit as fast as they possibly can,'' Feldman says. To keep them moving up in the fast-growing chain, and not out, he has cooked up a pay system based on skills. A housekeeper who wants to run, say, the front desk can take company-sponsored classes in that skill. Passing grades don't mean an immediate promotion, but they're worth an extra 25 cents an hour or so in housekeeping wages, as well as the chance to fill in at the front desk when demand peaks. ''I don't know of any other hotel that builds in switch-hitters like we do,'' Feldman boasts. About a quarter of Embassy's 4,500 hourly workers are usually in the training program, which has produced two dozen managers and assistant managers so far. Customers all want effective service that solves problems quickly, but surveys show that the emotional tone of the person serving them makes just as strong an impression. So companies desperate to improve service often try to get by with a quick tuneup of front-line employees' attitudes. Those tactics usually don't work. In a survey of 212 companies, the Zenger-Miller consulting firm of Cupertino, California, found that programs to improve service frequently boil down to teaching employees the soft sell, pumping them up with motivational seminars, and training them in telephone and courtesy skills -- ''smile-and-dial,'' as they say in the training game. ''Front-line workers don't create service quality,'' says Roland Dumas, a research manager at the firm. ''They just deliver it. Expecting training alone to improve service quality is like making a loading-dock worker responsible for the quality of products.'' FOR A COMPANY to shine in customer service, every manager and employee has to get the service religion. One practical way to shape their behavior: Get back- office departments to treat front-line operations as customers. When product designers have to sell their ideas to salesmen, for example, the whole organization tends to become more sensitive and responsive to the ultimate, outside customer. That's what has happened at Campbell Soup, whose frozen-food operation gets top marks for service to retailers. Carl Stinnett, a vice president, left Nestle for Campbell two years ago. ''I'm impressed with the breadth of concern for customer service here,'' he says. ''You obviously hear it in sales, but you also hear it in marketing, in the plants, and even in finance.'' To keep plant managers from dismissing customer requests as annoying interruptions, Campbell assigns a salesman full-time to each of its ten plants that make direct shipments. His job is to ensure that grocers get the products they want when they want them, even if that means disrupting production to load, ship, and bill an emergency order in one day. ''Most companies have a transportation or warehousing type to handle this function,'' observes Michael Newland, another Campbell vice president. ''But we find that keeping a salesman at the plant makes everybody there respond better to customers.'' The company doesn't consider even that safeguard sufficient. Fearing that its in-plant salesmen might be overlooking something, Campbell is sending experienced manufacturing people into the field to act as ombudsmen for customers. These roving inspectors visit customers to discover new ways of improving service, such as changing the way cases of Swanson frozen dinners are loaded in order to cut down on damage. Many companies will never provide outstanding service because they are afraid to spend the bundle it costs. Maintaining lavish inventories or excess production capacity is virtually mandatory. Example: Service Supply Corp. of Indianapolis, which styles itself the ''House of a Million Screws.'' It stocks over 74,000 fasteners, from nearly invisible screws for eyeglasses to yard- long structural bolts for bridges to the patented Mac Lean-Fogg Whiz-Lock, a self-locking screw that is nearly impossible to remove. Mel Seitz Jr., Service Supply's president, claims he can immediately ship 95 of any 100 items a customer is likely to order, compared with an average of 55 items for other nuts-and-bolts distributors. Carrying all that inventory makes Service Supply slightly less profitable than its competitors, Seitz says, but faster growing: ''The return on our inventory investment is seen in our reputation, which increases business and will eventually increase profit margins.'' Scrimping on capacity is a terrific way to infuriate customers, as investors who tried to call their brokers on Black Monday can confirm. Fidelity Investor Centers claims to get an edge on other discount brokers by employing more telephone operators per customer. During Black Monday, Fidelity more than tripled its staff of operators from 250 to about 800. Some customers couldn't get through for an hour, and 3% of Fidelity's 580,000 callers gave up, but the company answered its phones within 48 seconds on average. Some lesser firms reportedly dealt with the massacre by leaving their phones off the hook. New technology is an important part of the high cost of great service. Wegmans started installing optical scanners to speed up supermarket checkouts back in 1974, years before scanners swept the industry; it began installing automated teller machines tied into local banks back in 1983. Campbell was among the first food producers to equip salesmen with powerful hand-held computers. This year American Express's Travel Related Services Co., which deals in charge cards and traveler's checks, plans to spend some $300 million on technology, including exotic artificial intelligence programs that most companies think are too advanced to be useful. A powerful motive for this technomania is efficiency. Providing customer service, after all, means hiring lots of people, and technology is the best hope for improving their productivity. But companies that understand service don't use technology mainly to get more work out of their employees, as a factory might. They say the biggest benefits come from improving the quality of service and offering new services. The Authorizer's Assistant, for instance, one of American Express's artificial intelligence programs, helps credit authorizers decide whether to approve a cardholder's purchase (FORTUNE, October 12). American Express doesn't measure the benefits in approvals per hour. Instead it measures the payoff from making better judgments. The company estimates it will save seven times more than it would from productivity improvements alone because fewer bad credit risks will get by and fewer good ones will be turned down. WITH ALL THIS spending, how do the leaders in service achieve better financial results than their competitors, as the PIMS study says they do? Answer: Customers will pay more for superior service. The key is finding a service strategy -- knowing exactly which group of customers you want to serve and figuring out what kind of service will loosen their purse strings. ''Because the investment is so substantial, most companies can't invest in customer service across the board,'' observes Booz Allen & Hamilton consultant Randy Myer. ''More and more we're helping them work out what their customer service strategy ought to be.'' The strategy must be tightly focused. Jan Carlzon, Sweden's answer to Lee Iacocca, swung Scandinavian Airlines System from steady losses to steady profits in only two years by concentrating narrowly on business travelers. He laid on frequent early morning and early evening flights, installed movable partitions in aircraft cabins so SAS could expand business-class sections at will, and coached his staff to handle business travelers like royalty. None of those moves appealed to tourists looking for bargains, but the customers Carlzon really wanted often made SAS their first choice in his part of the world. People Express, by contrast, foundered when it tried to capture two widely differing market segments with essentially the same service. The airline's famous No Frills strategy was just the ticket for budget travelers, and operating revenues soared from $139 million in 1982 to $978 million in 1985. But when People Express later tried to fill its ever-growing fleet with business travelers, they said no to No Frills. Losing focus drove People into the clutches of Texas Air late last year. The best way to develop a service strategy is to listen to customers. They're quite willing to say what kind of service they want and to rate the service they're getting. But most companies have cotton in their ears. They rely heavily on complaints that come in over toll-free telephone lines and on comment cards, those ubiquitous service questionnaires that hotels and airlines hand out. ''The problem with such methods is that they measure only the extremes,'' says Christopher Hart, an assistant professor at Harvard Business School who studies service industries. ''You hear from Mr. Grumpy and Mr. Smiley, but not from Mr. Average.'' Outstanding service companies use toll-free lines and comment cards only to supplement their incessant customer surveys. Embassy Suites recently augmented the roughly 350 free-form customer interviews it conducts every day with a survey of 6,000 guests. ''It's probably the most extensive survey ever in the hotel industry,'' claims Feldman, the chain's president. (The biggest complaint: 18% said the chain should improve its free breakfasts.) Every week Fidelity Investor Centers asks 3,000 customers who have recently executed trades to rate the service they received and suggest improvements. The reason, according to David Cariseo, the brokerage's president: ''We're a luxury item. People could spend their whole lives without investing with us. So we have to provide luxury service.'' Cadillac gathers focus groups of owners and monitors very repair order and complaint registered by its 25 ''listening post'' dealers. The company has discovered that customers are most upset with the dealers' inability to repair cars right the first time. ''That's not easy to fix,'' says John Grettenberger, Cadillac's general manager, ''because luxury cars have so much complex equipment.'' Grettenberger set up a system that links every dealer with a corps of ten engineers who use computerized caches of engineering drawings and service bulletins to walk dealers through repairs that stump them. While over 40% of repairs by all automobile dealers have to be redone, says Cadillac, its own dealers have lowered their proportion to 35% and are still pushing. This year Cadillac jumped from 14th to seventh place in the rankings of service compiled by J.D. Power & Associates, an automobile industry research company. IMPROVING SERVICE is about as difficult a job as a company can undertake, because it means reforming attitudes and practices in nearly every department. Strong cultures and close ties to their customers seem to make the job easier for smaller, family-owned firms, but bigger, more bureaucratic companies can have a terrible time. ''They haven't worked out the methods for ensuring - service quality,'' says Roland Dumas of Zenger-Miller. ''In most service organizations, I can be applauded as a genius simply by walking in and applying the statistical process controls that manufacturers have used for years.'' Providing superior service need not be a touchy-feely mystery. It requires hardheaded analysis, talented management of people, intense concentration and commitment, and serious spending, but not black magic. American managers have learned to improve the quality of their products enormously in recent years. The champions of customer pampering show that organizations can improve service with similar common-sense management tools.

CHART: NOT AVAILABLE CREDIT: SOURCES OF INDUSTRY GROWTH RATES: INTERNATIONAL DATA CORP. (COMPUTER MAKERS); NILSON REPORT (CREDIT CARD ISSUERS); SECURITIES INDUSTRY ASSOCIATION (DISCOUNT BROKERS); PHARMACEUTICAL MANUFACTURERS ASSOCIATION (DRUG MAKERS); LAVENTHOL & HORWATH (HOTEL CHAINS); MAXWELL SROG PUBLISHERS (MAIL ORDER MERCHANTS): PROGRESSIVE GROCER (SUPERMARKET CHAINS). CAPTION: WHO SERVES CUSTOMERS BEST, INDUSTRY BY INDUSTRY DESCRIPTION: Color.