"The customer comes first." We've all heard this mantra from the marketing materials of countless businesses. In my book Under New Management, I highlight a growing number of corporate leaders who are throwing this once immutable law on its ear in light of research showing that customer satisfaction is more effectively built by first focusing on employee happiness.
The idea of putting employees before customers is not entirely new. Over 20 years ago, a group of business professors from Harvard University were 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 percent to 85 percent increase in profitability.
This finding laid the foundation for the 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, loyalty is driven by employee satisfaction, and satisfaction is driven by putting employees first.
Employee satisfaction is achieved when companies focus on creating "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.
The belief shared by many corporate leaders that hierarchies ought to be flipped and customers put second is simple in theory but difficult to put into practice. Turning the organization around requires turning loyalties around. Leaders must demonstrate that their loyalty is to employees first, trusting that their employees will then be more loyal and caring to their customers. It's a big gamble, but the results speak for themselves.