Service Profit Chain

"It's People, Service, Profit, not Profit, Service, People." Fred Smith, Founder, Federal Express

If we agree with an article published by HBR back in 1994 titled Putting the Service-Profit Chain to Work, then it's employees first.

It's common sense that happy employees make happy customers. Or is it not common sense?

Daryl Choy, the founder of Touchpoint eXperience Management, helps firms make a difference at every touchpoint. Choy can be reached at wisdomboom.blogspot.com.

The Service Profit Chain Failed at Sears

Daryl

Thanks for your timely comment. And for bringing up Heskett's Service-Profit Chain (SPC).

I explicitly mentioned Sears because of SPC. HBR also published an article, The Employee-Customer-Profit Chain at Sears setting out how Sears had adopted the SPC to set the agenda for their business in 1998. It all sounds fine on paper, but reality can be very different. Once Sears started to get into difficulties just after the turn of the century, the balanced emphasis on employees, customers and profits changed. First, the emphasis on employees was dropped, to focus on customers and profits. Then, when things didn't improve, the emphasis on customers was dropped, to focus purely on profits. Sears' deepest point was in 2005. And they are still doing poorly today.

I hear your vote for putting emloyees first. Thanks for that.

I think you are right, it is common sense that happy employees tend to result in happy customers. But happy employees are not the only, or even the main driver of happy customers. It is also common sense that happy customers tend to result in more profits. And it is profits that we are really interested in. Why not simply concentrate on creating happy customers, rather than on creating happy employees in the hope that that will result in happy customers?

Graham Hill
Independent CRM Consultant
Interim CRM Manager

Who Makes the Customer Happy? ...it's the Employee!

There is a chapter in my upcoming book, Pain Killer Marketing, about the "Big Equation of Business" - basically a chapter that details how management decisions, business metrics, employees, customers and profits are linked, each depending upon the other. The premise is that employees drive the business metrics that are predictive of success with the customer. For example, if the customer wants "fresh popcorn" at the movies, the metric might be "how old is the popcorn?" The employee then pops fresh popcorn every 10 minutes to make sure the customer's need is satisfied. Customers coming into the theater can smell, hear and see that the popcorn is fresh. Their reaction is reinforcing to the employee for doing his job: making fresh popcorn.

It amazes me at times how few managers get this relationship: that customer satisfaction and profits are linked (data supporting this goes back dozens of years; e.g., The PIMS Principles by Brad Gale and others) and dependent upon employee behaviors.

In this chain of logic, if you have good internal predictive metrics (which many companies do not have), then management sets the direction and targets, the employees deliver (if they are motivated) and the customer is happy. I don't see this as an either/or problem. The employees satisfaction and customer satisfaction/loyalty are linked. The former is predictive of the latter.

Who Makes the Customer Unhappy? ...it's the Employee Too

Chris

Every story has two sides. And that applies to the employee-customer-satisfaction story too.

Most studies of customer service dissatisfaction identify employees as one of the biggest causes. Poor employee behaviours do drive customer dissatisfaction, just as much as good employee behaviours often drive customer satisfaction.

Faced with dissatisfied customers as a result of poor employee behaviours, what should you do? Should you focus primarily on making employees satisfied, and hope that results in better behaviours and eventually in customer satisfaction? Or should you focus primarily on making customers satisfied directly by changing the bad behaviours?

I believe that a certain amount of employee satisfaction is required to provide even adequate services for customers. But I wonder at what point the incremental cost of making employees more satisfied results in lower incremental revenue from more satisfied customers. And what should you do when you reach this point? Should you continue spending money on employees to keep them happy? Or should you stop spending (as you are destroying value from this point onwards)?

Tough questions. What do you think the right answers are?

PS. As to your popcorn question. I would automate the popcorn machine, thereby leaving the employee to concentrate on real value-adding activities for customers. Ones that are economically valuable for the company too.

Graham Hill
Independent CRM Consultant
Interim CRM Manager

Who Comes First? Customers or Employees - it depends

Graham -

This is similar to the old chicken & egg question? Let me start by saying, I think that they both need to come first - that employee satisfaction and customer satisfaction are intertwined.

That being said, the answer is not always black & white, and is dependent upon the industry you are in and where you stand competitively.
For example, Sears, a actual textbook case example of a company that proved employee satisfaction = customer satisfaction, suffered, largely, as a result of the lack of competitiveness of its merchandising - being squeezed, as many retailers have, at the low end by stronger discounters(Walmart, Kohl's, etc) and at the other by higher end and category killer retailers. It was its core business, the products and services it sold, that suffered, and regardless of its efforts in focusing on employee satisfaction and customer satisfaction, it couldn't stop the bleeding.

Keeping it simple, I think, where the products/services you sell/offer, lie on the spectrum of commodity to unique, to some extent, dictates how important employee satisfaction and customer satisfaction are to your success. As humans, we are (unfortunately) willing to put up with more to get something unique (where value lies solely with the product). However, the world is not static, and if you are successful selling/offering something unique, someone will copy it, and employee satisfaction and customer satisfaction will become more important to you.
The more ubiquitous or undifferentiated the product, the more the experience is part of the value equation of the customer, and the more employee satisfaction is related to customer satisfaction.

I agree that there is a point where incremental gains in employee satisfaction can lead to either lower profits (which can hurt employees in their wallet and decrease satisfaction) or higher prices, which could turn customers away (which in turn can lead to bored and unhappy employees).

All in all, its a delicate balance. The extremes are clear - the happiest employees can't help you if nobody wants to buy your widget, and the unhappiest customer will still buy if they have no other choice. It's in-between that it get muddled.

Which arm would you like to keep -- right or left?

Without customers and employees, you can't have a business.

Successful businesses deliver value to all the stakeholders (employees, customers, partners, and investors), they don't pick one over the other. I think asking whether employees or customers comes first is about as pointless as arguing about chickens and eggs.

Loyalty studies have shown that employee loyalty is related to customer loyalty, and that customer loyalty may lead to profitable growth. Does that mean that solely focusing on employee loyalty will guarantee profits? Of course not. But I'd challenge people to show examples of profitable growing businesses with employees that can't wait to leave for greener pastures.

Bob Thompson, CustomerThink Corp.
Blog: Unconventional Wisdom

Do Employees Influence Market Valuation?

All

We all know that customers drive profitability in a number of ways. There is plenty of robust evidence to support this proposition. I suspect that most of us would like to believe that employees are equally important. Here the evidence is rather more circumstantial.

In one way, our views are not all that important, as we are neither in a position to decide how corporate resources are allocated (the role of senior management), nor to advise senior management on how their allocation of resources will be received by financial markets (the role of financial analysts). We all know how persuasive financial analysts can be in influencing senior management bahaviour.

I thought it would be interesting to see what criteria financial analysts use in setting their expectations for corporate prospects (and thus corporate valuation). Like them or not, they are the best informed (and the smartest) people around when it comes to understanding corporates at the market level.

Brand Finance regularly reviews financial analysts to identify the factors they find useful in setting their expectations. In their 2001 Brand Finance Report (the latest I could find), they asked 250 financial analysts how usefull different information was in making investment decisions. Their answers were quite eye opening:

It is pretty obvious that financial analysts value information about market behaviour slightly above information about customer behaviour. But don't really value information about employee behaviour at all.

Are they right? Is customer behaviour much more important than employee behaviour? Is employee behaviour really not a very good indicator of future corporate value? Or are they missing a trick? You decide.

Graham Hill
Independent CRM Consultant
Interim CRM Manager

Employees...Evangelists

One of the most important publics for any organization is their employees. Satisfied employees that feel that they truly play a part in their organization or company can serve as the best brand evangelists of all. Consequently, disgruntled and unhappy employees can do a great deal to tarnish the reputation of your business. It is important to not only understand the power that employees have within the community to either build or tarnish your brand's reputation, but to also take action that will lead to employee satisfaction and involvement.

Ginny Wiedower
Public Relations
Writing and Editing
ginwied@hotmail.com