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Michael Lowenstein, Ph.D., CMC Thought Leadership Principal, Beyond Philosophy

The Service-Profit Chain, an enterprise performance and financial results concept introduced by Gary Loveman, James Heskett, W. Earl Sasser, and Leonard Schlesinger in 1994 in Harvard Business Review, and in a 1997 book by the last three authors, can essentially be explained as follows: It is a theory of business management which links employee satisfaction to customer loyalty and profitability. For the past two decades, it has been the analytical foundation used by many organizations to assess the health of their company.

There is an ongoing, fundamental flaw with the Service-Profit Chain, not surfaced with much attention when the concept was first introduced, or given any examination frequency since that time. Its foundation of employee satisfaction is built on shifting sand. Namely, the connection between satisfaction and behavior, whether by customers or employees, has been challenged and largely refuted in study upon study.

Here’s a summary which encapsulates the difference between satisfaction and loyalty as metrics, expressed by Susan Wyse of Snap Surveys in a June, 2012 post: “Customer Satisfaction is a measurement of customer attitudes regarding products, services, and brands. Customer Loyalty on the other hand has two definitions. Customer Loyalty consists of loyalty behavior (also referred to as customer retention) which is the act of customers making repeat purchases of current brands, rather than choosing competitor brands. Secondly, Customer Loyalty encompasses loyalty attitudes which are opinions and feelings about products, services, brands, or businesses that are associated with repeat purchases.”

So the key takeaways from Ms Wyse’s summary is that satisfaction principally measures attitudes, which are passive, reactive, and tactical, and that this metric has little connection to value-related behavior. Adding to the shortcomings of this metric, it also tends to be what is known as a “lagging indicator”, which will often drop faster following a negative experience than it will improve following a positive one.

What’s true for customer attitudes relative to behavior can also be applied to employees. Industrial psychologists and organizational behaviorists have been studying employee satisfaction for over 30 years, assuming that the level of staff satisfaction correlates with impact on measurable results. However, as one major study concluded: “Researchers have been unable to confirm a relationship between employee satisfaction and business performance.”

This is almost identical to the oft-proven determination, of which Susan Wyse’s explanation is one example, that a high level of customer satisfaction has relatively little bearing on loyalty behavior. And, for purposes of this discussion, it is the influence of employee satisfaction attitudes on customer behavior which is at the core of the Service-Profit Chain’s claimed linkage. Going the next step, beyond employee satisfaction, does their engagement profitably drive customer behavior?

First, what does employee engagement, which has been around for over twenty years, actually mean? Kevin Kruse, a former VP of Kenexa (now part of IBM) and a leadership contributor to Forbes magazine, defined employee engagement as “the emotional commitment the employee has to the organization and its goals.” Coincidentally, this definition was also done in a June, 2012 article. Note that Kruse’s concept, like other ways that engagement is understood within HR circles, does not include any mention of customers, customer experience, or value delivery.

His perception of employee engagement, though it recognizes the power of emotional commitment, is simply another iteration of many seen over the past two decades. They are all about alignment and productivity, and all make assumptions about the influence of engagement on customers.

Since first entering active HR use, employee engagement has had many meanings and interpretations, but relatively little of it has to do, by conceptual definition, specifically with impact on customer behavior. Thorough analysis conducted by The Conference Board in 2006 showed that, among twelve leading engagement research companies, twenty-six key drivers of engagement could be identified, of which eight were common to all:

• Trust and integrity – How well do managers communicate and ‘walk the talk‘?
• Nature of the job – Is it mentally stimulating day-to-day?
• Line of sight between employee performance and company performance – Do employees understand how their work contributes to the company’s performance?
• Career growth opportunities – Are there opportunities for growth within the company?
• Pride about the company – How much self-esteem do the employees feel by being associated with their company?
• Coworkers/team members – How much influence do they exert on the employee’s level of engagement?
• Employee development – Is the company making an effort to develop the employee’s skills?
• Relationship with one’s manager – Does the employee value relationship(s) with manager(s), and is there trust and credibility between the levels?

Again, typically, there is little or no mention/inclusion of ‘customer‘, ‘customer focus’, or ‘customer value’ elements either in measurement or analysis of employee engagement. Though it is recognized that customer experience, and resultant behavior, can often be impacted by engagement, it is more tangential and inferential than purposeful in nature.

Kruse, whose definition of engagement comes close to the ‘line of sight’ driver identified above, has created his own version of the Service-Profit Chain, as applied to employees, i.e. the Engagement-Profit Chain. He believes that engaged employees care more, are more productive, and use discretionary effort on behalf of the company’s goals, which leads to:

– higher service, quality, and productivity, which leads to…

– higher customer satisfaction, which leads to…

– increased sales (repeat business and referrals), which leads to…

– higher levels of profit, which leads to…

– higher shareholder returns (i.e., stock price)

It’s all very linear and very assumptive. In the article, Kruse flatly states: “Engaged employees lead to better business outcomes.” Over 250,000 people have viewed his article, so it has had broad coverage. Like the Service-Profit Chain, the core flaw in the concept Kruse put forward in his thesis is that higher satisfaction, and even higher emotional commitment, by one stakeholder group, in this case employees, will drive the behavior of another stakeholder group, in this case customers. Unless the employee’s emotional commitment is focused on customers, customer experience optimization, and product or service value delivery, there is likely to be only marginal influence on customer behavior.