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Failures represent an important source of variability in service operations and a major performance challenge. As a consequence, the effective management of failures is a prerequisite to achieve lean services. The purpose of this paper is to focus on the operational perspective of failures; that is attempt to quantify the impact of critical failure parameters on key system performance measures, such as cycle time and work‐in‐process. The authors also analyze various operational concepts, or management practices, that service organizations use to address the effects of failures.

Discrete event simulation was used to model the behavior of a typical two‐stage service system (front‐office, back‐office), and design of experiments to estimate the impact of significant parameters that characterize service failures, on key system performance measures. In a final experiment, three of the most common practices used by management to address failures, and the impact of these practices on system performance under different conditions were analyzed. The findings are validated through a case study in the financial services.

The results of this study suggest that failures and rework degrade the performance of service systems. This adverse impact is reinforced, if specific inputs of the system deteriorate, such as the ability of the service organization to deliver appropriate quality, to detect failures early and to be capable enough to recover timely and efficiently from failures. In addition, the results show that typical management practices used to address the impact of failures have strengths and weaknesses depending on the characteristics of both the service system and the failures. If this is not taken into consideration, the above managerial practices may lead only to short‐term improvements, while the main causes of failures will remain unsolved.

Analyzing the impact of failures in a service environment is a challenging task. This paper complements the existing literature on service failures by focusing on the related effects on operations. With the use of simulation, the authors quantify the impact of failures on key aspects of operations of the service system and also provide useful insight into the parameters that determine the effectiveness of various management practices used in practice to address failures. Finally, the authors use a case study in financial services to validate the results.