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Service-Profit Chain Audit

Service-Profit Chain Audit

A service-profit chain audit helps companies determine what drives their profit and suggests actions that can lead to long-term profitability. As they review the audit, managers should ask themselves what efforts are under way to obtain answers to the following questions and what those answers reveal about their companies.

Profit and Growth

1. How do we define loyal customers?

Customers often become more profitable over time. And loyal customers account for an unusually high proportion of the sales and profit growth of successful service providers. In some organizations, loyalty is measured in terms of whether or not a customer is on the company rolls. But several companies have found that their most loyal customers—the top 20% of total customers—not only provide all the profit but also cover losses incurred in dealing with less loyal customers.

Because of the link between loyal customers and profit, Banc One measures depth of relationship—the number of available related financial services, such as checking, lending, and safe deposit, actually used by customers. Recognizing the same relationship, Taco Bell measures “share of stomach” to assess the company’s sales against all other food purchases a customer can potentially make. As a result, the fast-food chain is trying to reach consumers through kiosks, carts, trucks, and the shelves of supermarkets.

2. Do measurements of customer profitability include profits from referrals?

Companies that measure the stream of revenue and profits from loyal customers (retention) and repeat sales often overlook what can be the most important of the three Rs of loyalty: referrals. For example, Intuit provides high-quality, free lifetime service for a personal finance software package that sells for as little as $30. The strategy makes sense when the value of a loyal customer is considered—a revenue stream of several thousands of dollars from software updates, supplies, and new customer referrals. With this strategy in place, Intuit increased its sales to more than $30 million with just two U.S. field sales representatives.

3. What proportion of business development expenditures and incentives are directed to the retention of existing customers?

Too many companies concentrate nearly all their efforts on attracting new customers. But in businesses like life insurance, a new policyholder doesn’t become profitable for at least three years. In the credit-card finance business, the breakeven point for a new customer is often six or more years because of high marketing and bad-debt costs in the first year of a relationship with cardholders. These costs must be defrayed by profits from loyal customers, suggesting the need for a careful division of organizational effort between customer retention and development.

4. Why do our customers defect?

It’s important to find out not only where defectors go but also why they defect. Was it because of poor service, price, or value? Answers to these questions provide information about whether or not existing strategies are working. In addition, exit interviews of customers can have real sales impact. For example, at one credit-card service organization, a phone call to question cardholders who had stopped using their cards led to the immediate reinstatement of one-third of the defectors.

Customer Satisfaction

5. Are customer satisfaction data gathered in an objective, consistent, and periodic fashion?

Currently, the weakest measurements being used by the companies we have studied concern customer satisfaction. At some companies, high levels of reported customer satisfaction are contradicted by continuing declines in sales and profits. Upon closer observation, we discovered that the service providers were “gaming” the data, using manipulative methods for collecting customer satisfaction data. In one extreme case, an automobile dealer sent a questionnaire to recent buyers with the highest marks already filled in, requiring owners to alter the marks only if they disagreed. Companies can, however, obtain more objective results using “third party” interviews; “mystery shopping” by unidentified, paid observers; or technologies like touchscreen television.

Consistency is at least as important as the actual questions asked of customers. Some of Banc One’s operating units formerly conducted their own customer satisfaction surveys. Today the surveys have been centralized, made mandatory, and are administered by mail on a quarterly basis to around 125,000 customers. When combined with periodic measurement, the surveys provide highly relevant trend information that informs the managerial decision making process. Similarly, Xerox’s measures of satisfaction obtained from 10,000 customers per month—a product of an unchanging set of survey questions and very large samples—make possible period-to-period comparisons that are important in measuring and rewarding performance.

6. Where are the listening posts for obtaining customer feedback in your organization?

Listening posts are tools for collecting data from customers and systematically translating those data into information in order to improve service and products. Common examples are letters of complaint. Still more important listening posts are reports from field sales and service personnel or the logs of telephone service representatives. Intuit’s content analysis of customer service inquiries fielded by service representatives produced over 50 software improvements and 100 software documentation improvements in a single year. USAA has gone one step further by automating the feedback process to enter data online, enabling its analysis and plans departments to develop corrective actions.

7. How is information concerning customer satisfaction used to solve customer problems?

In order to handle customer problems, service providers must have the latitude to resolve any situation promptly. In addition, information regarding a customer concern must be transmitted to the service provider quickly. Customers and employees must be encouraged to report rather than suppress concerns. For example, one Boston-area Lexus dealer notified its customers, “If you are experiencing a problem with your car or our service department and you can’t answer ‘100% satisfied’ when you receive your survey directly from Lexus, please give us the opportunity to correct the problem before you fill out the survey. Lexus takes its customer surveys very seriously.”

External Service Value

8. How do you measure service value?

Value is a function not only of costs to the customer but also of the results achieved for the customer. Value is always relative because it is based both on perceptions of the way a service is delivered and on initial customer expectations. Typically, a company measures value using the reasons expressed by customers for high or low satisfaction. Because value varies with individual expectations, efforts to improve value inevitably require service organizations to move all levels of management closer to the customer and give frontline service employees the latitude to customize a standard service to individual needs.

9. How is information concerning customers’ perceptions of value shared with those responsible for designing a product or service?

Relaying information concerning customer expectations to those responsible for design often requires the formation of teams of people responsible for sales, operations, and service or product design, as well as the frequent assignment of service designers to tasks requiring field contact with customers. Intuit has created this kind of capability in product development teams. And all Intuit employees, including the CEO, must periodically work on the customer service phones. Similarly, at Southwest, those responsible for flight scheduling periodically work shifts in the company’s terminals to get a feel for the impact of schedules on customer and employee satisfaction.

10. To what extent are measures taken of differences between customers’ perceptions of quality delivered and their expectations before delivery?

Ultimately, service quality is a function of the gap between perceptions of the actual service experienced and what a customer expected before receiving that service. Actual service includes both final results and the process through which those results were obtained. Differences between experiences and expectations can be measured in generic dimensions such as the reliability and timeliness of service, the empathy and authority with which the service was delivered, and the extent to which the customer is left with tangible evidence (like a calling card) that the service has been performed.

11. Do our organization’s efforts to improve external service quality emphasize effective recovery from service errors in addition to providing a service right the first time?

A popular concept of quality in manufacturing is the importance of “doing things right the first time.” But customers of service organizations often allow one mistake. Some organizations are very good at delivering service as long as nothing goes wrong. Others organize for and thrive on service emergencies. Outstanding service organizations do both by giving frontline employees the latitude to effect recovery. Southwest Airlines maintains a policy of allowing frontline employees to do whatever they feel comfortable doing in order to satisfy customers. Xerox authorizes frontline service employees to replace up to $250,000 worth of equipment if customers are not getting results.

Employee Productivity

12. How do you measure employee productivity?

13. To what extent do measures of productivity identify changes in the quality as well as the quantity of service produced per unit of input?

In many services, the ultimate measure of quality may be customer satisfaction. That measure should be combined with measures of quantity to determine the total output of the service organization. At ServiceMaster, for example, measures of output in the schools and hospitals cleaned under the company’s supervision include both numbers of work orders performed per employee hour and the quality of the work done, as determined by periodic inspections performed by ServiceMaster and client personnel. Similarly, Southwest Airlines delivers relatively high levels of productivity in terms of both quality and quantity. In fact, outstanding service competitors are replacing the typical “either/or” trade-off between quality and quantity with an “and/also” imperative.

Employee Loyalty

14. How do you create employee loyalty?

Employee loyalty goes hand in hand with productivity, contradicting the conventional wisdom that successful service providers should be promoted to larger supervisory responsibilities or moved to a similar job in a larger business unit. ServiceMaster and Taco Bell have expanded jobs without promoting good service workers away from their customers. At ServiceMaster, effective single-unit managers are given supervisory responsibilities for custodial, maintenance, or other workers at more than one hospital or school. Taco Bell gives restaurant general managers a “hunting license” to develop new sales sites in the neighborhoods served by their restaurants and rewards them for doing it.

15. Have we made an effort to determine the right level of employee retention?

Rarely is the right level of retention 100%. Dynamic service organizations require a certain level of turnover. However, in calibrating desired turnover levels, it is important to take into account the full cost of the loss of key service providers, including those of lost sales and productivity and added recruiting, selection, and training.

Employee Satisfaction

16. Is employee satisfaction measured in ways that can be linked to similar measures of customer satisfaction with sufficient frequency and consistency to establish trends for management use?

Taco Bell studies employee satisfaction through surveys, frequent interviews, and roundtable meetings. Customer satisfaction is measured by interviews with customers conducted biannually and includes questions about satisfaction with employee friendliness and hustle. Both the employee and customer satisfaction rankings are comprehensive, store-specific, and conducted frequently. With these data, the company can better understand overall trends and the links between employee and customer satisfaction.

17. Are employee selection criteria and methods geared to what customers, as well as managers, believe are important?

At Southwest Airlines, for example, frequent fliers are regularly invited to participate in the auditioning and selection of cabin attendants. And many take time off from work to join Southwest’s employee selection team as it carries out its work. As one customer commented, “Why not do it? It’s my airline.”

18. To what extent are measures of customer satisfaction, customer loyalty, or the quality and quantity of service output used in recognizing and rewarding employees?

Employee recognition may often involve little more than informing individual employees or employees as a group about service improvements and individual successes. Banc One goes one step further, including customer satisfaction measures for each banking unit in its periodic report of other performance measures, mostly financial, to all units.

Internal Service Quality

19. Do employees know who their customers are?

It is particularly difficult for employees to identify their customers when those customers are internal to the company. These employees often do not know what impact their work has on other departments. Identifying internal customers requires mapping and communicating characteristics of work flow, organizing periodic cross-departmental meetings between “customers” and “servers,” and recognizing good internal service performance.

In 1990, USAA organized a PRIDE (Professionalism Results in Dedication to Excellence) team of 100 employees and managers to examine and improve on a function-by-function basis all processes associated with property-and-casualty insurance administration, which included analyzing customer needs and expectations. The PRIDE effort was so successful that it led to a cross-functional review of USAA’s service processing. Service processing time has been reduced, as have handoffs of customers from one server to another.

20. Are employees satisfied with the technological and personal support they receive on the job?

The cornerstone of success at Taco Bell is the provision of the latest in information technology, food service equipment, simple work-scheduling techniques, and effective team training. This practice led to the establishment of self-managing teams of service providers. Also, the quality of work life involves selecting the right workers. Winners like to be associated with winners. Better employees tend to refer people they like and people like themselves. Internal service quality can also be thought of as the quality of work life. It is a visible expression of an organization’s culture, one influenced in important ways by leadership.


21. To what extent is the company’s leadership:

  1. energetic, creative vs. stately, conservative?
  2. participatory, caring vs. removed, elitist?
  3. listening, coaching, and teaching vs. supervising and managing?
  4. motivating by mission vs. motivating by fear?
  5. leading by means of personally demonstrated values vs. institutionalized policies?

22. How much time is spent by the organization’s leadership personally developing and maintaining a corporate culture centered around service to customers and fellow employees?

Leaders naturally have individual traits and styles. But the CEOs of companies that are successfully using the service-profit chain possess all or most of a set of traits that separate them from their merely good competitors. Of course, different styles of leadership are appropriate for various stages in an organization’s development. But the messages sent by the successful leaders we have observed stress the importance of careful attention to the needs of customers and employees. These leaders create a culture capable of adapting to the needs of both.

Relating the Measures

23. What are the most important relationships in your company’s service-profit chain?

24. To what extent does each measure correlate with profit and growth at the frontline level?

25. Is the importance of these relationships reflected in rewards and incentives offered to employees?

Measures drive action when they are related in ways that provide managers with direction. To enjoy the kind of success that service organizations like Southwest Airlines, ServiceMaster, and Taco Bell have enjoyed, looking at individual measures is not enough. Only if the individual measures are tied together into a comprehensive picture will the service-profit chain provide a foundation for unprecedented profit and growth.


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