Revisiting the Service-Profit Chain

Read the article below or at Financial Services Technology - Europe.

By John Purvis

A 5% increase in customer loyalty can increase profit from 25% to 85%. This conclusion, from Reichheld’s and Sasser’s 1990 HBR article “Zero Defections: Quality Comes to Services,” became a rallying cry for service organizations attempting to assume their proper place in traditionally product-centric cultures. For a few service visionaries, it also coincided with a radical break from the clinical profit and market share goal setting which had been management orthodoxy for over twenty years, and signaled a shift in emphasis to customers and customer-facing employees.

The Service-Profit Chain

In a subsequent HBR article, “Putting the Service-Profit Chain to Work,” (1994) Sasser et. al. carefully defined the radical transformation which occurs when companies put employees and customers first. At the heart of the thinking is the service-profit chain which can be summarized as follows:

• Internal quality drives employee satisfaction
• Employee satisfaction drives employee loyalty
• Employee loyalty drives employee productivity
• Employee productivity drives value
• Value drives customer satisfaction
• Customer satisfaction drives customer loyalty
• Customer loyalty drives growth and profitability

The beauty and strength of this elegant model resonated with emerging thought among services thought leaders. According to Paul Stewart, a services sales and marketing pioneer who built SGI’s services marketing operation before joining Cisco as a services sales principal, “The service-profit chain was at the heart of the Cisco Customer Advocacy revolution.”

The service-profit chain model is so rich that there are many deep insights which can be drawn from it. Let’s look at just four of them here.

Lesson One: The Interconnectedness of the Enterprise

In the words of Randy Baker, former EVP of Oracle’s multibillion dollar services business, “A company’s shareholders, customers and employees ultimately share a common fate. Too often, companies miss the simple fact that the interconnections among these constituents will define that fate.” Under Baker, Oracle’s service organization drove to spectacular levels of financial performance, customer loyalty and employee satisfaction. “A company must maintain a balanced triangle among shareholder, customer and employee interests,” says Baker. “This can only be done if there is not only a recognition, but also a daily management of the linkages from culture and infrastructure to productive, loyal employees, to real value delivered to customers, to customer satisfaction and loyalty, and finally to sustained growth and profits.”

Lesson Two: The Role of Services Sales and Marketing

Services sales and marketing must not only be aware of this interconnectedness, but also play a pivotal role in tying employees to customers and ultimately to profits.

Services marketing works closely with services delivery, product sales, product management, finance, corporate marketing etc. to bring a robust set of services to market. As a result, of course, customers should be able to secure a service offering which more likely optimizes their satisfaction (and, in turn customer loyalty, growth and profits!). Furthermore, intelligent and effective services marketing efforts often force clarity and resonance of thought around the foundation of the service-profit chain: from internal systems to employees to the fundamental value offered to customers. Remember, services does just-in-time manufacturing one better. We do real-time manufacturing, i.e. the service doesn’t exist until, say, that technical assistance call is answered. There is no better crucible to forge the effective links of the service-profit chain.

Services sales is in the business of selling customer satisfaction – putting the right service offering in place within the right customer at the right price. (Again, see customer satisfaction, read customer loyalty, growth and profits.) Indeed, the very act of selling services into an account, year after year, becomes a material contributor to customer satisfaction. The point of renewal becomes a precious customer touch, the renewal sales motion becomes a renewable act of managing customer expectations – and, after all, customer satisfaction is ultimately less about absolute service levels than it is about the precise management of customer expectations. Moreover, services sales can become, over time, the dominant factor in the customer’s perception of the ease of doing business with a vendor – this fact follows from the reality that services sales becomes the place in a company with the most business knowledge of a loyal customer’s compounding inventory of products and services. Finally, it is more often services sales rather than product sales which must deal with the process discipline required to do business with multinational companies. As a result, services sales can serve as a sort of global glue which can be used to assemble the full weight of the enterprise behind the service-profit chain.

Lesson Three: PDIF and the Management Operating System

Nate Rhodes, former VP of Support and Maintenance at Openwave often plays off of the famous quote in Jurassic Park, “Life will find a way,” and says “PDIF will find a way.” By PDIF he means the successive refinement loop of Plan-Do-Inspect-Fix. In other words, if the inspection process is in place and the company’s management operating system mandates that the results of this inspection will result in corrections being built into new planning, new planning into new execution and new execution into new inspection, the service-profit chain will become optimized over time. “Everybody measures,” says Rhodes, “and it can become a fool’s errand. It’s not about measuring. It’s about measuring in the context of a successive refinement loop, and running the successive refinement loop in the context of a fully instrumented management operating system.”

Lesson Four: It’s All About the Employees

This is perhaps the most important lesson of all. Look again at the foundation of the service-profit chain. Internal quality drives employee satisfaction. All goodness derives therefrom.

Attention to internal quality means a commitment to employee selection and development, world-class training, employee rewards and recognition, tools for serving customers, intelligent job design based on a real understanding of the work to be performed, creative workplace design, internal communication, an information democracy and on and on. It is fundamentally about building a corporate culture which celebrates the employee as the privileged access path to customer loyalty. It proves time and time again to be about a leadership style which places the welfare and empowerment of employees above the neurosis of micromanagement and the delusion of self-aggrandizement.

Want to boost profits by 25% to 85%? Bottom line, it’s all about the employees.

John Purvis has over 25 years of general management, R&D, sales and services experience. He is President and CEO of Corda Technologies, a pioneer in data visualization and Business Performance Management. He has served as the EVP of worldwide field operations for the services sales and marketing specialist Encover, Inc., and as SVP of global sales and marketing for Oracle Corporation where he developed a $3 billion dollar support services business. Prior to Oracle, John built and dramatically grew the Silicon Graphics North American Customer Service operation. Before Silicon Graphics, he first founded Acknowledge Systems, a computer-based training software company later acquired by Convergent Technologies, and then Unisys Open in Singapore where he was responsible for open systems marketing, sales, support and professional services for open systems solutions across Asia Pacific. John is also passionate about education and has taught extensively in mathematics and computer science at both the graduate and undergraduate levels.

© John Purvis, 2005, 2008

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