Principal-Agent Alignment and Relational Incentive

This thesis focuses on the creation of a high-performance service operations organization. As organizations increasingly compete on service quality, increased attention has been given to measuring, tracking, and improving customer satisfaction. This thesis 1) provides a novel framework for service quality improvement and 2) explores concepts in game theory, relational contracts, and incentive mechanism design that impact service quality in the modern organization. The framework introduced in this thesis is comprised of four distinct steps. In the first step, service quality is quantitatively measured and drivers of service quality are determined both through qualitative methods and through statistical analysis on a customerby-customer basis. In the second step, key drivers of service quality are addressed through process redesign and operational improvement. In the third step, the alignment of service operations incentive mechanisms with employee behavior consistent with high service quality is analyzed and considered in the context of building a high-performance service organization. Finally, the role of organizational learning and the relational contracts that may help to sustain a culture of experimentation, learning, and improvement are considered. These concepts are applied to a host organization, Atlantic Energy, by way of case study throughout this thesis; this acts to provide a concrete example of the application of these concepts and shows an example of the effectiveness of the framework when compared to traditional methods in service operations improvement. Thesis Supervisor: Deborah Nightingale Title: Professor of the Practice, Aeronautics and Astronautics and Engineering Systems Division Thesis Supervisor: Georgia Perakis Title: William F. Pounds Professor of Management Science, MIT Sloan School of Management