A question of loyalty

loyalty of both customers and staff is key to business success, according to
author Fred Reichheld. He talks to Keith Rodgers about his latest CRM theory
and how HR fits into the framework  

first sight, the New York Times, Enterprise Rent-A-Car, Dell Computer and the
US Marine Corps don’t appear to have a great deal in common. But along with
companies from sectors as diverse as the airline industry and the fast-food
business, these organisations have been singled out by management guru Fred
Reichheld for their expertise in attaining loyalty. At a time when customer
retention is top of corporate priorities, Reichheld believes that loyalty ñ
both among customers and employees – is the key to business success.

the last decade, the concept of loyalty has taken something of a battering
among management thinkers. Many argue that freedom of choice, particularly in
high-volume consumer sectors, makes it all too easy for customers to switch
suppliers, often at the click of a mouse. At the height of the Internet boom,
meanwhile, the concept of employee loyalty was severely tested as start-ups
used the lure of stock options and novel working practices to entice
professionals out of traditional industries. As economic cycles have
fluctuated, the concept of loyalty has swung in and out of fashion.

however, has other thoughts. A director of management consultancy Bain &
Co, he has spent more than a decade studying business practices in a wide range
of industries to "prove" both that loyalty exists and that it
increases shareholder value. His first major work, The Loyalty Effect published
in 1996, mapped out his theory that long-term customer retention can lead to
big leaps in profitability – partly because the cost of doing business with a
client drops over time, and partly because long-term customers are less fixated
on finding the lowest price. This year, in Loyalty Rules, he takes the argument
further, constructing an "Acid Test" model to help organisations measure

theories underpin much of today’s focus on customer relationship management
(CRM), a business concept supported by a fast-growing IT sector. The failure
rate of CRM projects has been high, and Reichheld believes that poor attention
to employee loyalty is a significant cause. He talks to Keith Rodgers

How strong is the link between employee loyalty and good customer management?

have yet to discover a company with superior customer loyalty that does not
have superior employee loyalty. At Bain, we have surveyed thousands of
employees across North America, and found that 50 per cent of frontline
employees do not agree that their company deserves their loyalty. Those
attitudes get transmitted almost instantly to the customer – and no amount of
investment in technology can overcome that. Most people using CRM tools don’t
feel their company is out to build relationships, or even values and rewards
customer loyalty. But for companies with the highest levels of retention in
their industry – like Enterprise Rent-A-Car and Harley-Davidson – 70 to 80 per
cent of customers and employees agree that they deserve loyalty. I think that
top level of loyalty will get even higher.

How can companies build long-term loyalty when their primary focus is on
short-term measures, particularly quarterly financial filings?

nothing wrong with quarterly filings – accounting and cash flow are obviously
important, but alone they’re inadequate. If you just look at quarterly profits,
you make some foolish trade-offs. Enterprise has always had a culture of
treating customers right, but they paid compensation based on profits – so
employees would sometimes oversell. Seven years ago, they started measuring
whether customers were completely satisfied with their service and if they
intended to rent again. They rank their 4,800 branches every month on those
criteria – and in those branches that fall in to the bottom half of the
ranking, no one’s allowed to be promoted. It’s had an enormous impact on the
firm. Enterprise has raced past Hertz and Avis to become the largest car rental
firm in North America.

Computer, the market share leader in personal computers, pays on profit, but
it’s scaled on how well you meet its three customer experience metrics – the
percentage of computers that get there as promised (for example, the right
machine in the right timescale); the percentage that work first time; and if
they don’t work first time, the percentage that get fixed on the first try.
That can scale to either double or halve the profit-based compensation.

Several of the companies you hold up as examples of "Loyalty Leaders"
have experienced problems recently – Dell and Cisco have cut back during the
high-tech recession, and Southwest Airlines is operating in a business that’s
suffered huge job cuts following the 11 September 11 terrorist attacks. How
badly has that affected employee loyalty?

are unavoidable when your business collapses, but it turns out the Loyalty
Leaders have more robust businesses. The trick is to minimise layoffs – make it
clear that you’re trying to avoid them by careful planning and prudent
financial management, and that when you do get forced into it you’ll treat
employees fairly. It’s not a coincidence that Dell and Cisco are weathering the
downturn better than their competitors. The percentage of layoffs at Cisco is
around 17 per cent – its four largest competitors range from 30 to 60 per cent.

Airlines is the only consistently profitable major airline in the US for every
year since 1973. It has employee turnover rates of 4 to 5 per cent, in an
industry with rates typically double that. Several recent articles show that
it’s weathering the problems better than the competition, and it thinks it has
a good chance of getting through this downturn without any layoffs. Part of
that comes from its focused strategy – it never got hooked on the narcotic on
auctions on the Internet, filling planes with butterfly customers who flit from
deal to deal.

What’s the role of the HR department in a Loyalty Leader?

most of these companies, the HR function is not a huge, powerful bureaucratic
organisation. Much of it has usually been absorbed into the line of business.

HR departments have gone down the track of trying to keep employees satisfied –
it sends the wrong signal. Employee satisfaction is a deeply flawed concept.
The leader’s job is to put the welfare of the employees first, which means
putting them in a position to give customers what they want so that they come
back for more.

also has an enormously valuable role in getting team sizes correct. Whenever an
Enterprise branch grows to a specified size (usually between 100 and 200 cars)
it’s split in two and a new branch manager is appointed to the new location.
Over half the teams in US companies are too big to support real loyalty – they
are destructively bloated and it’s impossible to achieve high levels of

HR should also focus on the frontline – that’s where the customer experience is

Measuring loyalty is notoriously hard. What should organisations do beyond
customer and employee satisfaction surveys?

and loyalty are only distant cousins. The best way to measure loyalty is to ask
the Acid Test questions – the bottom line is, does the organisation deserve
your loyalty? The shortened version has 10 statements*, which you need to
consider true or false:

My company really cares about building a relationship with me

My company values people and relationships ahead of today’s profits

My company attracts and retains outstanding personnel

My company sets the standard for excellence in its industry

My company communicates openly and honestly

My company’s personnel listen well and respond quickly to feedback

My company makes it simple for customers to do business

Customer loyalty is appropriately valued and rewarded at this company

I trust my company’s personnel to behave with fairness and integrity

I believe this company deserves my loyalty

The shorter version of the Acid Test first appeared in Harvard Business
School’s October Management Update. The full version appears in Loyalty Rules!

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