Engagement —> Quality —> Profit

I recently had a remarkably frustrating phone call to a financial services company that helps to illustrate the vital importance of the service-profit chain, the notion that empowering frontline employees results in greater customer loyalty and higher long term profits. The firm, a credit card company, needed to verify my identity in order to proceed with the transaction. I dutifully provided my social security number, account number, birth day, and zip code, but the verification system had one more question: “How many accounts do you hold with the bank?”

In order to answer this question, I needed to know what they meant: The bank is a large global institution that provides banking products, credit cards, personal loans, mortgages, etc. The employee administering the verification could not tell me what he meant by the “number of accounts” – whether these were accounts currently open or ever opened; whether these were credit card accounts only or inclusive of banking products; did this include co-branded cards – the poor fellow had no idea, he only knew to check whether the stated number matched the profile on his screen, and had no way of over-riding the system.

He was audibly frustrated and apologetic, but could only offer that I redial to begin the process again, which invariably would culminate in the same unanswerable riddle. Needless to say, I will not be doing business with them in the future.

Question: Was this a failure of customer service quality? In an abstract sense, yes, but it was no fault of the representative but rather of inflexible customer-facing systems. Leaders who are sensitive to the inner workings of the service-profit chain insist on a service culture that is responsive to the needs of both associates and customers. And there is a marked difference between those organization that pay lip service to being “customer-centric” and those with highly attuned listening skills.

The Service Profit Chain

It is a truism that one should listen most closely to those people who speak to the most people. They are those with the broadest frame of reference, encompassing the views of customers, suppliers, sales associates, service representatives, etc., which is the best protection against market myopia. Fortunately, there are systematic methods for identifying broken processes, frustrating dead ends, and the like through the implementation of integrated feedback loops for both customers and frontline employees, and, just as importantly, having clear, consistent channels for ensuring that this feedback creates real-world positive change. The Service-Profit Chain is an extensively researched and validated conceptual and measurement model developed by Harvard Business School professors James Heskett, Earl Sasser, and Leonard Schlesinger that specifies causal pathways between upstream employee factors (such as capabilities, loyalty, satisfaction, productivity, and service quality) and downstream customer responses (such as satisfaction, loyalty, and willingness to recommend), that together culminate in revenue growth and profitability. The key point of intersection occurs where all of the training, motivation, policies and support systems provided to employees comes into direct contact with customers in key moments of truth, leaving customers with a sense of the value of the service received (External Service Value). Because value perceptions are determined foremost by employee factors, the attitude of associates turns out to be perhaps the most critical causal factor in driving sales and profit; accordingly, feedback systems that tap into associates’ sentiment, beyond superficial questioning, become essential for effective strategic management.

Building a Service Profit Chain for the New Decade

Where to start? Most companies have existing systems in place for gathering feedback from their front line associates, typically managed by the HR department, and separately, systems for collecting customer feedback, typically managed by the Marketing and/or Insights department. Metrics around revenue growth and profitability are generally reported separately by the Finance department, and the systems that support associates are typically designed, monitored, and modified by the Operations department. The abundance of different players in the mix reveals the need for active C-level orchestration of the various pieces into a coordinated system. Assuming that your company already has these pieces in place, here is a very high level roadmap for building a manageable Service Profit Chain:

1. Critically evaluate your Human Capital feedback systems. Many HR feedback systems are sadly generic, focusing on broad satisfaction with one’s job, management, compensation, etc. For the purposes of informing an effective SPC, these kinds of job satisfaction and 360 performance metrics are necessary but insufficient because they begin with an internal company frame of reference wherein all players are subject to the same history, training, policies, and support systems. Some will perform better and some worse under the same constraints and be more or less satisfied. This relative ranking is less important for the SPC than identification and measurement of those critical factors that create fluidity or friction when servicing clients. Knowing the percentage of managers who garner a top box “availability” score is far less useful than knowing that the most stressful moment for front line employees is the absence of workarounds when systems are down, or that a certain replacement part can’t be properly identified by branch employees, or that one key question in the verification protocol is a consistent roadblock. The key component in this process is to conduct careful interviewing to identify the frictions that consistently detract from productivity, service value, and customer satisfaction. As usual, the devil is in the details. According to Yoshida (1989), only 4% of an organization’s frontline problems are known by top management, 9% are known by middle management, 74% by frontline supervisors and 100% by frontline associates. He called this systemic problem the “Iceberg of Ignorance.” In order to identify this kind of specific information, disciplined in-depth qualitative interviewing of frontline associates is required.

2. Institute a continuous customer feedback system. Many companies struggle with low response rates to post-service customer surveys and have resorted to pop-up screens at Point of Sale to ask for overall satisfaction with the transaction (despite asking for this feedback in full view of the associate who provided that service), or by placing kiosks near exits with smiley face to sad face buttons (which are ignored by 99.9% of passersby). Call centers routinely ask customers if they are willing to remain on the line to complete surveys; retailers, including the US Postal Service, tend to draw attention to survey links printed on the bottom of paper receipts with incentives of coupons or drawings; both these approaches are extremely ineffective due to close to 0% compliance. How then to capture meaningful, representative feedback at the moment of truth? The most effective way to consistently capture customer feedback is to incorporate it as part of the transaction itself. Customers have been conditioned to provide loyalty card numbers, telephone numbers, clicking “I agree,” etc. at point of sale. Work with Operations to build in feedback systems that are part of the sales process. For top box scores, no follow up information is generally necessary. For less than top box scores, frontline employees can be trained to rapidly enter very actionable feedback regarding what went wrong (by using meaningful categories derived from “Iceberg of Ignorance” interviewing), which gets automatically linked to customer data, date/time, amount, item/quantity, associate, etc. to make it even more actionable.

3. Implement, Implement, Implement. Identifying points of friction to the C-suite is actually the easier part of the solution. In many cases, middle managers and supervisors already know what the problem is but don’t have the backing of senior management to prioritize implementation of solutions. Again, the most effective process change is to make understanding, prioritizing, and addressing these issues a requirement for senior management, e.g., as a permanent agenda item at senior level meetings. Oftentimes, the first step will be to estimate the magnitude of the problem and its consequences, both short term and long term. A widespread problem that has severe consequences would naturally get the highest priority, whereas limited problems with minor consequences would get lowest, and high consequence/narrow population affected and low consequence/broad population would take the middle priority levels, respectively. The importance of maintaining open lines of communication between the frontline and the boardroom cannot be overstated; in most companies, the failure to melt the “Iceberg of Ignorance” the essential missing piece. With engaged leadership continuously informed by the people who talk to the most customers and prospects, leaders can direct resources to reducing the most significant sources of friction and find their way to profitable growth.