The Service Profit Chain is a theory and business model evolved by a group of researchers from Harvard University in the nineties. The main conclusion is that loyal customers are the result of loyal, engaged employees. Furthermore, leading service organizations are using the model to quantify the impact that loyal, engaged employees have on the bottom line. They’re accomplishing this by looking closely at each step of how their organization creates value for customers. 

The Links in the Service Profit Chain

If you read the diagram below from right to left, it’s easy to understand each of the steps involved in having a profitable, growing business based on loyal customers. More specifically, each of the boxes represent a step in the process that can be measured. You can measure retention, repeat business, referrals, customer satisfaction, employee satisfaction etc.

The not so easy part is then working out the relationships between each of these. What’s the relationship between employee satisfaction and productivity for example?

But many leading organizations have attempted to do just that. And what they’ve learned is that when they make employees and customers paramount, a radical shift occurs in the way they manage and measure success. Frontline workers and customers need to be the centre of management concern and the focus shifts to investment in people, technology that supports frontline workers, revamped recruiting and training practices, and compensation linked to performance for employees at every level.

The leaders in those organizations that have invested in understanding the service-profit chain develop and maintain a corporate culture centered on service to customers and fellow employees. They display a willingness and ability to listen.

We believe that the ability to listen can be accomplished by more effectively connecting front line workers with leadership.

More specifically, the following key processes and organizational muscles should be focused on:

• Having a good customer feedback loop
• Having a good employee feedback loop
• Having a good process for making sure input, feedback and ideas get actioned

Improving Service Profit Chain Levers

1. Create a Customer Feedback Loop

With the service profit chain, the ultimate measure is customer loyalty. To get there, organizations should focus on creating satisfied customers by providing great value. This is easy to understand, but of course not easy to do.

Understanding what customers value is difficult for two reasons. First, unless you’re a small startup, it’s difficult for leaders to stay in close, direct contact with customers. The larger the organization, the more complicated this becomes. The second reason is that customers aren’t actually very good at explaining what they want and why. If we just listened to our customers verbatim, we’d likely miss many important opportunities to provide more value.

To deal with these challenges (and in addition to other measures such as NPS) we believe it’s best to use frontline employees to create a customer feedback loop. Frontline employees can be trained to understand how to translate customer feedback into useful input and the right tools and processes can provide structure that’s more actionable at scale.

2. Create an Employee Feedback Loop

Frontline employees are critical to a great customer experience. In the service profit chain, this translates to empowering employees to do their jobs well and increasing their motivation to provide great service. Similar to customer feedback loops, creating a feedback loop for frontline employees is key to unearthing the problems that hurt productivity, satisfaction and ultimately loyalty. In his acclaimed study “The Iceberg of Ignorance”, consultant Sidney Yoshida concluded:

“Only 4% of an organization’s frontline problems are known by top management, 9% are known by middle management, 74% by supervisors and 100% by employees…”

This is one of the reasons that employee feedback is so important. Without it, leadership will remain largely ignorant of the challenges employees face and the things within the organization that lead to disengagement.

The other reason that employee feedback is so important is that just giving employees a voice has been shown to increase motivation and engagement in their work.

3. Create Processes to Action Input

Armed with great input and feedback, it’s important to have a good process in place that biases action over analysis. Multiple studies show that a focus on implementing known solutions has a bigger impact on customer satisfaction than analysis and focusing on bigger issues. Coming up with ideas on how to improve customer satisfaction is not typically the issue, the knowledge already exists within your organization. The bigger issue is that often these ideas don’t progress because:

• The individual with the solution doesn’t have the resources needed to implement it
• The origin of the problem and solution exists elsewhere in the organization
• Many of small, good ideas slip through the cracks and never get actioned

This is where a better connection between frontline employees and leadership can become key. With leadership support and the right tools and processes, leaders can ensure that solutions get the needed resources, the right cross-functional collaboration happens, and they appropriately prioritize input by shining a stronger light on all the solutions and assigning accountability. In another HBR report that looked specifically at patient care improvements, the researcher found that a direct connection between front line feedback and leadership was important for success. When leaders became involved, action was less likely to slip through the cracks.

*The Service Profit Chain was originally published in 1994, but is still relevant and useful today. For a more in-depth overview, go to the HBR post on “Putting the Service Profit Chain to Work”: https://hbr.org/2008/07/putting-the-service-profit-chain-to-work

What you should do next

Now that you've read this article, here are some things you should do:

1. Look into how Spinach can help you run effective one-on-ones.
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