The Service-Profit Chain

June 9, 2009 6 Comments

When I get a chance to do corporate training, I will often ask the group of managers to write their answers to these two questions:

  • What is the one thing that should probably be the top priority of most businesses? Put another way, what matters the most to a business – to your business?
  • How do you get or accomplish what matters most? Put another way, if you are the owner or manager of a business, what is the most important thing you should be doing on a daily basis to accomplish your top priority?

Do you think all managers in the room write the same thing? No way. One of the obvious implications is that they are not on the same page at work.

I get a variety of answers to the question “what matters most?” The first thing most groups mention is profit. Some of the other common responses are customer service, quality products, and employee morale. But I rarely hear the answer I am looking for- growth. (By growth I mean growth through excellence and not growth through acquisition.)

If money does not hit the top line, it will NEVER hit the bottom line.

You can take that to the bank. Too many managers are managers of costs, the line items, and they forget the one line that matters the most – the TOP line.

I saw the service-profit chain (click to enlarge the diagram) years ago and immediately bought into its logic. Please understand this is not a “universal law” that applies in all industries all the time (e.g. airlines, WalMart), but for many businesses, especially small business, it does apply very well. Here is how the logic flows:

  • The priority of a business should be growth through excellence.
  • The key to growth is loyal customers. If we don’t have customers, we don’t have revenue. It’s MUCH less expensive to keep an existing customer than to get a new one.
  • The key to customer loyalty is customer satisfaction. Satisfied customers are those whose expectations have been met. But a strategy of customer satisfaction is competitive mediocrity because a simply satisfied customer is indifferent – they are open to being retrained by our competition about what to expect. Instead we want to strive to exceed our customers’ expectations – impress their socks off and delight them. That is competitive excellence, and it does not happen by chance but by purposeful design.
  • It is our employees that impress or disgust our customers – not us as managers. We can’t get employees to impress your customers by policy alone.
  • If we are constantly turning over employees, we are barely in a position to satisfy our customers, let alone impress them.
  • Satisfied and committed employees are more likely to stay with us. These employees are in the best position to impress our customers.
  • Internal service quality – meeting and exceeding the expectations of our employees – is the key to ensuring they are satisfied and committed. It is sheer folly to think that employees that are disgusted with us will then go out and impress our customers. Only delighted employees produce delighted customers.
  • The key to internal service quality is not policy but system design. As managers, we experiment with the systems we control – hiring, training, rewards, job design, etc – for the purpose of improving employee attitudes.

So, what is the number one thing we need to do on a daily basis if we want to grow our business?

Take care of and impress our employees.

And we expect this to work its way through better employee attitudes, retained employees, delighted customers, loyal customers, higher revenues, and healthier profits.

Because I believe so strongly in the logic of the service-profit chain, it suggests that I should practice a very specific style of leadership. Stay tuned, I’ll talk more about that in future posts.

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  1. Bret,

    This section: But a strategy of customer satisfaction is competitive mediocrity because a simply satisfied customer is indifferent – they are open to being retrained by our competition about what to expect. Instead we want to strive to exceed our customers’ expectations – impress their socks off and delight them. That is competitive excellence, and it does not happen by chance but by purposeful design.

    Is fantastic, because satisfaction means indifferent. I desire our company to “knock their socks off”. This is confirmation to me that a complete system is needed to maximize profits for employees, clients, and the companies delivering the product or service.

    Great stuff, keep up the excellent work!

    [Reply]

    Bret L. Simmons Reply:

    You have the right approach, IMHO, Jeremy. Satisfaction is just not good enough. Thanks! Bret

    [Reply]

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