This original post was inspired by concepts from chapter two of Under New Management. The idea of the customer-focused business is so deeply ingrained in most people’s minds that anything else would seem like madness. However a growing number of corporate leaders (as well as extensive research), is showing that the best way to serve customers is to focus on employees first.
Putting Employees First
By David Burkus
“The customer always comes first.” We’ve all heard this mantra, either as part of our jobs or as customers ourselves in the marketing materials of countless businesses. However a growing number of corporate leaders are throwing this once immutable law on its ear in light of extensive research showing that customer satisfaction is more effectively built by first focusing on employee happiness.
The idea of putting employees before customers seems counterintuitive, but it’s not entirely new. Over twenty years ago, a group of business professors from Harvard University had been working on a model that validated this concept. James Heskett, Thomas Jones, Gary Loveman, W. Earl Sasser, and Leonard Schlesinger were comparing results from their own studies and synthesizing other research to construct a model to explain the outstanding success of the most profitable service-based companies.
It began with Sasser’s research, conducted with his former student Fred Reichheld. The duo took aim at a long-standing assumption of business — that market share is the primary driver of profitability. If a company can increase market share, the thinking went, it will increase sales while taking advantage of economies of scale to lower costs and thus increase profits. When the pair examined a variety of companies and the existing research however, they found that while market share is one factor in profitability, another factor better explains the most profitable companies: customer loyalty. Based on their research, Sasser and Reichheld estimated that a mere 5 percent increase in customer loyalty can yield a 25 to 85 percent increase in profitability. This finding laid the foundation for the five Harvard professors’ search for the causes of customer loyalty. After studying dozens of companies and troves of research, they created a model that tracked the origins of customer loyalty. They called it the ‘service-profit chain.’
The service-profit chain links together several elements of the business model in a linear relationship: Profit and growth are driven by customer loyalty. Loyalty is influenced by customer satisfaction. Customer satisfaction is stimulated by a high perception of value of the service. Value is the result of productive employees. Productivity stems from employee satisfaction.
Put another way, profits are driven by customer loyalty, customer loyalty is driven by employee satisfaction, and employee satisfaction is driven by putting employees first.
Employee satisfaction is achieved when companies focus on creating high ‘internal service quality’ — a term the Harvard professors used to explain the process that some call “putting employees first.” At the core of their service-profit chain was the concept of value. In a service business model, value is as much about perception of the service received as the quality of the product. Therefore, the professors theorized, satisfied and productive employees are better able to ensure that interactions with customers are high-quality and lead to a higher perception of value. The service-profit chain predicts that by putting employees first, customers will be better served and become more loyal and the company will become more profitable.
When their research was first published, the concept of the service-profit chain generated a lot of discussion. It was a theoretical model built on a variety of research, and it led to a wave of even more research seeking to strengthen the link between satisfied employees and satisfied, profitable customers. In a recent study, Steven Brown and Son Lam of the University of Houston synthesized decades of research to firmly establish that link.
Brown and Lam gathered twenty-eight studies on employee satisfaction and customers’ perceptions of quality. In total, these studies examined over 6,600 employees and customers. Brown and Lam’s results showed that, across all of the studies, high levels of customer satisfaction and perceived service quality were related to high levels of employee satisfaction. Frontline employees provide better service to customers when they’re supported and satisfied in their work.
Most interestingly, since Brown and Lam were synthesizing a variety of studies from many different industries, they were able to analyze the employee-customer relationship in two different types of businesses: those in which customers and employees have an ongoing relationship (such as doctor’s offices or IT consulting firms) and those in which the interaction takes place in a onetime transaction, such as in a fast-food restaurant or a retail shop. They assumed that, since ongoing relationships include more frequent customer-employee interactions, the effect of employee satisfaction on customers’ perceptions of quality and satisfaction would be stronger in that type of business. However, they found that this effect did not change significantly with the type of business or the level of interaction with the customer. Employee satisfaction appears to have just as strong an effect on customers whether the employees interact with customers only once or their interactions are frequent and ongoing. These results echo what HCLT experienced when it put employees first and trusted them to take care of HCLT’s customers.
New research also supports the idea of flipping the organization chart. A recent study demonstrated that managers play a significant role in employees’ satisfaction and the service-profit chain. A trio of researchers led by Richard Netemeyer of the University of Virginia collected data from a single retail chain that included 306 store managers, 1,615 customer-employee interactions, and 57,656 customers. The researchers were testing the effect of managers’ performance and satisfaction on employees, and hence its effect on customers’ satisfaction and the overall performance of the managers’ stores.
They found that managers’ actions, customer satisfaction, and store financial performance were indeed linked. These results support the argument that management’s support of employees significantly contributes to what Heskett and his colleagues at Harvard internal service quality, the first link in the service-profit chain. The findings from the research of Netemeyer and his team also suggest that flipping the organizational chart really works. It’s essential that managers understand that their role is to support employee satisfaction and hence customer satisfaction, in no small part because their success in this role clearly has a major impact on the financial performance of their company.