Chickens and Eggs: Business Performance and Delight

We all know the classic chicken-and-egg conundrum. Modifying this classic riddle to apply it to corporate performance, we could ask, "Which came first: business performance or high satisfaction levels?" While certainly an oversimplification, at the heart of our riddle lies a debate about the roots of corporate performance: what role does satisfaction play in driving bottom-line business performance?

Now, stepping back a bit, what are we talking about when we say `satisfaction'? Most will likely say, "Well, certainly you're talking about customer satisfaction." Indeed, having written extensively about the role of satisfaction, and more specifically, on delight and pain (see, for example, Keiningham and Vavra, The Customer Delight Principle, McGraw-Hill, 2001), we are major proponents of the central role delighting customers can have on business performance. But certainly employees--a progenitor of customer satisfaction and delight--also play alternately mitigating and driving roles on business performance. Or do they?

Employee satisfaction has been one of the most popular research areas in industrial psychology and organizational behavior during the last 30 years because of the assumed impact on performance. Counter to conventional wisdom, however, researchers have been unable to confirm a relationship between employee satisfaction and business performance. Through a review of theory, anecdotal qualitative experience, and rigorous quantitative analyses, we hope to shed some light on the alternately certain and uncertain relationship between business performance and employee satisfaction. We begin with an enlightening--if extreme--example.

Unexpected Consequences: The Safeway Experience

To the customer, the face of the company is not the CEO but the frontline personnel who make that all-important contact with the customer. It matters little if the company's policies and procedures are designed to delight customers if the people charged with carrying them out fail to deliver. Safeway, the second largest grocery store chain in the U.S., was well known for treating its customers with personalized attention and friendly service. Its reputation for friendly service was no accident--it was mandated. Safeway's management was determined to make the chain number one in its industry for customer service; so management required all 150,000 employees to be friendly.

In 1993, Safeway began phasing in an even more aggressive friendliness campaign under its Superior Service program. In this expanded program, employees were expected to display certain behaviors. They were told they should anticipate customers' needs, make selling suggestions, thank customers by name, and offer to carry out their groceries. They were also told they were expected to smile and make eye contact with Safeway customers.

In 1998, Safeway escalated its enforcement of the Superior Service program, using undercover shoppers ("mystery shoppers") to assess compliance with the program by individual employees in each of its stores. Based on mystery shopper observations, less than satisfactory service performance led employees to remedial training, disciplinary letters, and, ultimately, termination. Safeway expected their new service program to lead to higher customer satisfaction, increased loyalty and improved business performance. And for a time it appeared to work: the Superior Service program was a boon for Safeway's business. The company achieved some of the most spectacular financial returns in its industry throughout most of the 1990s.

However, Safeway failed to anticipate (or appreciate) the negative repercussions of this seemingly innocuous policy on its most precious resource--its employees. For many Safeway employees, requiring them to smile at every customer was no laughing matter. Some customers mistakenly interpreted the displayed friendliness as flirting. Employees were quick to report that the smile-and-make-eye-contact rule was leading to a higher number of sexual harassment incidents committed by customers. Employees began filing grievances with their union; they also filed charges of discrimination with the Equal Employment Opportunity Commission (EEOC) and the California Department of Fair Employment and Housing. In turn, the employees' union filed charges with the National Labor Relations Board. Ironically, employees charged that the company had fostered a "hostile work environment" by forcing smiles.

Although Safeway's Superior Service program made customers happier and enriched the company's bottom line, it was far from a success among employees. As one reporter noted, "Safeway Inc. either is in denial about a serious employee morale problem, or its... stores are staffed by a handful of misanthropes and slackers who can't stand the notion of grinning widely as they go the extra yard to please the supermarket chain's customers." Either way, employee satisfaction and customer satisfaction, and employee satisfaction and financial performance, were moving in opposite directions. Safeway discovered the downside of low employee morale during a long-lasting strike that was financially devastating to the firm and resulted in net losses for 2002 and 2003 fiscal years.

The Satisfaction Mirror

Consistently delivering delight requires effectively managing relationships with customers. And close, long-term relationships are only possible with long-term employees. Notwithstanding Safeway's experience, companies embarking on a service strategy often make a concerted effort to improve their employees' satisfaction as well. The management logic is simple: customer satisfaction mirrors employee satisfaction. And yet despite a seemingly simple logic, after three decades of looking into this satisfaction mirror, at times inconclusive, at times contradictory evidence has been reported on this relationship.

Despite the mixed findings regarding the relationship between customer satisfaction and employee satisfactions, theory progressed to not only incorporate but also extend the satisfaction mirror. Notably, the Service Profit Chain (SPC) has been of particular interest among managers, as it proposes a virtuous chain of effects from employee satisfaction to customer satisfaction to business results. Its application to retailing has been of particular interest to help retailers monitor customer satisfaction and thereby justify their investments in service improvement.

CESAR(TM) (Customer, Employee Service Climate And Revenue) Model Ipsos Loyalty's Model of the complex paths by which employee satisfaction can lead to profits.

As noted by Kamakura et al., however, "systematic empirical evidence of the SPC have emerged only recently... [and] most studies have been done within the last 2 to 3 years." Of those studies that have been conducted, findings regarding a link between employee satisfaction and customer satisfaction (the satisfaction mirror) and a link between employee satisfaction and business outcomes are mixed.

Testing the Service Profit Chain

In a recent (and soon to be published) paper, we took a closer look at the Service Profit Chain to see whether our data could lend support to the theory. Our study applied quantitative analytics (including correlation and regression analyses) on data gathered from over 38,000 employee surveys across over 100 grocery superstore locations to explore the link between employee satisfaction and business performance.

The data for our research was aggregated from a large, multinational retail grocery superstore in Western Europe. Hard and soft measures were collected in 2002 for each of the grocery superstores. Hard measures consisted of operational measures, such as staff turnover, tenure, store revenue, store profitability, percentage change in revenue, etc. Soft measures consisted of employee attitudes, collected via self-administered paper questionnaires distributed and completed at each of the superstore locations. The questions were part of a battery of employee attitude questions developed by Ipsos, consisting of proprietary questions based upon Ipsos' experience and expertise, and firm-specific questions based upon internal interviews with employees and managers.

Where others have found evidence that employee satisfaction was strongly and negatively correlated to performance (as measured by store-level profitability), our findings were different. When looking at the relationship between employee satisfaction and store profitability, we found that there was virtually no relationship (the correlation was effectively zero). However--and this is the interesting part--when controlling for certain store characteristics (for example, the size of store), we found that there was actually a positive relationship between employee satisfaction and store-level profitability.

These findings support the proposition that employee satisfaction is related to performance. When controlling for store size, our analyses found that employee satisfaction is significantly and positively associated with store profitability. Our research puts into question the generalizations of other research findings that found no relationship between employee satisfaction and store profitability . In particular, differences in store size may mask the true relationship between employee satisfaction and profitability. Our research suggests the need to measure and control for store size in studies aimed at assessing the impact of employee satisfaction on store performance. As we found, without the ability to control for store size, the relationship between employee satisfaction and performance can be hidden and overlooked.

As for the broader Service Profit Chain itself, why isn't there conclusive evidence of a relationship between employee satisfaction, customer satisfaction and business performance? It seems apparent that there must be a more complex set of factors governing the relationship between these three areas. Service management research has, in fact, identified four factors relevant to employees that affect the strength of the relationship: capability, satisfaction, loyalty, and productivity.

• Capable employees deliver high value service to customers. This requires that employees have the training, tools, procedures, and rules necessary to deliver good service.
• Satisfied employees are more likely to treat customers better than their dissatisfied counterparts.
• Loyal employees are more willing to suppress short-term interests for long-term benefit of the organization. They provide superior service to customers and stay with the organization longer, reducing the cost of turnover and its negative impact on service quality.
• Productive employees have the potential to raise the value of a firm's offerings to its customers. Greater productivity can lower costs of operations, resulting in lower prices.

Employee Capability and Productivity

Without question, no matter how satisfied or loyal a firm's employees, if they cannot serve the needs of customers, the customers will not be delighted, much less satisfied. It is vital to hire the right people. Hire on the basis of not only technical skills and experience but also personal characteristics. Screen employees for social abilities that promote long-term interpersonal relationships. Firms should also recognize the importance of personal relationships between employees and customers, and design jobs that encourage employees to stay.

Capability requires that employees be equipped with the right tools. Managers too often focus exclusively on the "friendly" and "knowledgeable" components of employee skills needed while giving short shrift to fundamental process improvements, such as computer upgrades, which make it easier for employees to actually perform their jobs.

Productivity-based improvements in service often require a tradeoff in quality. Seldom can service firms do both well. Research shows that service companies that pursue both a high service quality and high productivity strategy were less profitable than those that chose either one or the other. If productivity improvements are the primary means of driving delight, managers need to realize that doing this successfully requires walking a tightrope. As we saw in the Safeway example, the potential for unhappy employees might make any gains short-lived, as personnel seek employment elsewhere.

Customers drive revenue, and without question customer delight is paramount. Once you determine what delights customers, you can decide how to delight them. The first step is to align processes around customer needs and then align people and resources to support these processes. As processes are aligned, it is essential to inform employees why changes are being made. Employees should value customer-centered initiatives, as their jobs will be made easier with happier customers. This transformation does not necessarily require delighted employees, but it does require satisfied employees committed to delighting customers and having the right employees in place.