Ten minute tutorial – Service profit chain

Profit from a positive link between customer and employee satisfaction in the first in our weekly series of tutorials on the hot topics in HR and training

What is it?

A methodology that uses statistical modelling to demonstrate the link between the loyalty and satisfaction an organisation creates among customers, employees and other stakeholders to its profits and shareholder value.

The story so far

Since the 1970s, attempts to measure the link between customer satisfaction and profitability have been ongoing. The quest has been driven by the common-sense assumption that improvements in service would result in an increase in sales. Today, the concept of customer relationship marketing (CRM) is central to most companies’ marketing strategies. However, until recently the benefits of CRM were largely anecdotal. Also, the parts played by the loyalty and satisfaction of employees and other stakeholders were not acknowledged at the same level.

In 1997, a group of Harvard service company experts, James L Heskett, W Earl Sasser and Leonard A Schlesinger, published research establishing clear links between profitability and a quantifiable set of relationships involving both customers and employees. Their book The Service Profit Chain identified the most important types of relationships and offered numerous examples of companies where these were nurtured to help achieve profits and growth.

Meanwhile, the advance of economic statistical modelling has enabled firms to identify various relationships with greater accuracy and determine where improvements can most profitably be made. This work has largely been pioneered under the name Customer Asset Management (CAM) by the international consultancy CFI Group, founded by University of Michigan econometrician Claes Fornell.

In the UK, research identifying the importance of addressing multiple stakeholders has been undertaken by Cranfield School of Management’s Professor Adrian Payne and his colleagues. Having focused initially on customer relationships, they argue that companies need to take into account a total of six different market domains – customer markets, internal markets, referral markets, influence markets – such as government, media and environmentalists – supplier and alliance markets, and recruitment markets. All of these can impact strongly on business performance. The most critical of these are employees, customers and shareholders.

The promise

Advocates argue that companies which manage the service profit chain can dramatically boost profits. The retail sector is especially likely to benefit, but the methodology can also be applied to a range of other sectors which market directly to customers, from IT and telecommunications to leisure and travel.

The authors of the Harvard study singled out several companies, mainly American, which performed well in handling employee and customer relationships. Between 1986-1995 their share price grew by 147 per cent, nearly twice as fast as that of their nearest rivals.

Three types of relationship showed the strongest links: profit and customer loyalty, employee loyalty and customer loyalty, and employee satisfaction and customer satisfaction. The authors propose a series of steps to enable any service company to measure and improve its performance in these and other areas, leading to an overall increase in profits.

Pros and cons

No company can afford to ignore a methodology that offers the benefits claimed by its advocates, but in practice many are waiting to see how the evidence accumulates before taking action. This is particularly the case in the UK where the subject is still quite new. Some may also be put off by the considerable costs involved in statistical modelling. Under-performance of British Airways – cited as a role model in the Harvard study as well as many other academic works on customer service – demonstrates that the link between service and profit is by no means infallible.

Who’s on board

The classic case study is Sears, Roebuck & Co, which found that a 5 per cent rise in staff attitude created a 1.3 per cent increase in customer satisfaction – a boost of 0.5 per cent in sales growth and an identifiable increase in profitability. Nortel Networks has also been conducting statistical research to identify correlations between profits and employee- and customer-related variables. The Harvard study features high-profile organisations such as American Express, Intuit, British Airways, Taco Bell, Fairfield Inns, Ritz-Carlton Hotel, Southwest Airlines and WalMart. UK companies using the approach include Thistle Hotels.

Key players

In the US: James L Heskett, W Earl Sasser, Leonard A Schlesinger; and colleagues at the Harvard Business School, CFI Group. In the UK: Adrian Payne of Cranfield School of Management and Pennie Frow of CRM Associates.

HR contribution

When employee loyalty and satisfaction are factored into the equation, HR’s role should be pivotal. Experience suggests that attitudes to the job and the company are principal drivers to employee satisfaction and these need to be monitored on a continuous basis. As Payne and Frow put it: “HR has a major strategic role to play in helping their organisation manage the drivers of profitability”.

Even taking employee satisfaction out of the equation, HR should be vying for a central role in initiatives such as these. In the current climate of HR outsourcing, it is imperative that HR departments demonstrate they have an essential part to play in initiatives which contribute to the bottom line.

The focus on customer service gives the HRD department an excellent opportunity not only to demonstrate its ability to improve customer service levels through training and development initiatives, but in a context which offers the chance to have the bottom line rewards of those programmes evaluated and measured.

Essential reading

The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value (1997) by James L Heskett, Leonard A Schlesinger & Earl W Sasser, Harvard – describes research of successful, mostly American case studies. A thorough, process-oriented book that aims to educate rather than provide a quick read based on anecdotes.

Relationship Value Management: Exploring the Integration of Employee, Customer and Shareholder Value and Enterprise Performance Models by Adrian Payne, Sue Holt and Pennie Frow, Cranfield

The Service Profit Chain: Intellectual Roots, Current Realities, and Future Prospects by Roger Hallowell and Leonard A Schlesinger, in Handbook of Services Marketing and Management by Dawn Iacobucci and Terri Swarz, Thousand Oaks/Sage

The King is Back Personnel Today, 23 September 1999. Exploring the importance of data handling and interactive technologies in allowing firms to target their marketing at an individual level

Web sites

www.hbs.edu Harvard Business School

www.cfigroup.com CFI Group


By Rob McLuhan

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