Service-Profit Chain Theory: Driving Profitability Through Employee Engagement

Posted on: 22nd May 2014

by Richard White, Director, incentivesmart

At incentivesmart we have recently been working with a blue-chip manufacturing company to launch a customer loyalty initiative to drive sales and engagement in a tough, competitive industry. When we first met the company in question they were adamant that they needed to grow their revenue by throwing reward at their key customers. You would forgive them for jumping to that conclusion, reward programmes are all around us and they seem pretty straightforward; dangle a carrot and the wheels will start to move? Unfortunately, however, it’s not that simple, particularly in this specific industry where competitors were also dangling carrots, big fat juicy carrots.

At around the same time, I was building a partnership with a leading UK specialist in People Engagement and Brand Alignment, who is working with us to develop a Motivation and Leadership Masterclass. The core content of the Masterclass is based around Service-Profit Chain, a theory developed by Harvard Business School, that establishes relationships between profitability, customer loyalty and employee satisfaction, loyalty and productivity.

Our recommendation to the company, based on these principles, was to develop a holistic strategy that would target attitudes throughout the entire organisation and in turn create a great experience for customers. You see, there is a strong, proven correlation between employee satisfaction, engagement, productivity and profitability, so creating a positive culture and rewarding great behaviour is not just a "fluffy" nice-to-have; it's a vital stimulant for your sustainable growth and profitability.

Here are just a few of the key internal areas in the business we concentrated on in order to maximise customer revenue. 

Attracting the best talent and keeping it

77% of companies have difficulty in attracting the right candidate for their business, particularly in more senior roles, so differentiating your proposition is increasingly important. Candidates are 8 times more likely to be attracted to companies with structured engagement and motivation strategies. So you’ve attracted some superstars, now you have to keep them and replacing talent is an expensive business; the CIPD estimate that the cost of employing every new member of staff is now almost £10,000, when taking into account the cost of recruitment, agencies, advertising, internal processes, training up to the correct standard and more. The CIPD also conclude that engaged employees deliver 4 times more value to an organisation than non-engaged employees and increased engagement can not only result in up to 57% increase in discretionary effort, but also an 87% reduction in desire to leave. 

Improving employee attendance rates

It is estimated that over 25 million bogus sick days are taken each year in the UK, accounting for around 12% of all sick days taken! The cost to businesses is more than a staggering £1.25 billion per year. However, their findings also show that engaged employees take, on average, less than 3 days sick leave per year whereas as disengaged staff take more than double that.

Encouraging peer-to-peer recognition

Recognition amongst colleagues can have a massive impact on positive attitudes in the work place, and there is little better than receiving a thank you for a job well done. Thank you has a meaningful impact on people’s performance; it costs nothing and it is always appreciated. A simple thank you when done with sincerity and accompanied by an appropriate reward can substantially increase employee engagement.

Improving internal communication

The two most important drivers of employee engagement identified by CIPD research into engagement levels are; having opportunities to give feedback and; feeling well-informed about what is happening in the organisation. These, in turn, promote better performance, employee retention and positive emotions towards work. Encouraging ideas and suggestions from your employees can be an invaluable resource for your business. Two-way communications and feedback mechanisms within your business allow all employees to feel listened to and valued, but also unlock some genuinely great ideas that otherwise go untold. Towers Watson research shows that employee involvement, sharing information and getting feedback directly relates to a 2.2% increase in shareholder value. A well-executed internal communication plan will provide your employees with knowledge, give them empowerment within their position and offer a much better service to your customer.

Driving customer revenue

Loyal customers are critical to sustainable business growth as they are usually much less price-sensitive, are less susceptible to competitive approaches and can become a powerful marketing ally, going out of their way to promote your company. Generating incremental profit was always the goal of this project so we put the final pieces of the jigsaw in place with a, well-communicated, points based reward programme for customers.  The programme combined with the much-improved internal communication and the outward enthusiasm that creates means that the programme has far surpassed all of the original targets set. 

In summary, engaged employees go the extra mile to deliver, they provide better experiences for customers, approach their jobs with energy, creativity and deliver better service. They remain with their employers for longer, and ultimately they deliver an enormous payoff to the business by creating passionate customers who buy more, stay longer and tell their friends.

Read more about Service-profit Chain Theory in the Harvard Business Review
http://hbr.org/web/extras/2008/12/service-profit-chain-today


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