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Employee Satisfaction and Customer Loyalty
The management perspective is simple: Happy employees help create happy customers. Employees who service happy customers are more likely to emerge from the interaction happy . . . And so on and on the interaction spirals, virtually feeding on itself. This effect has been popularized in the concept of the "satisfaction mirror" (i.e., employee satisfaction leads to customer satisfaction and business results), first described in an article in the Harvard Business Review. The article, written by a number of highly respected Harvard professors, established a theory of linkage between the level of service provided by businesses and their profitability. It served as an impetus for a reexamination of how employees were treated within their workplaces. The argument was largely intuitive, stimulating others to explore it more scientifically.

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Virtually all of the studies that tested the satisfaction mirror concept have identified some linkage between employee satisfaction and customer satisfaction, between employee satisfaction and customer loyalty, or both. The discovered linkages, however, have ranged from negative to positive, and a few studies yielded no correlation at all. The necessary conclusion? Employee satisfaction does not universally nor unambiguously create customer loyalty.

The lack of a consistent, positive linkage supporting this myth should not be taken as an invitation to abuse employees or treat them with indifference. Although there may not be a direct relationship between employee satisfaction and customer loyalty, pervasive and continuing low employee morale will exact an ultimate toll. Unhappy employees can hurt operations in a myriad of ways: absenteeism, low productivity, uncooperative spirit, filing complaints, supporting strikes, and so forth. And as former Customer Satisfaction Director of AT&T, Ray Kordupleski, noted, "I have found that no one [employee] in any organization can totally satisfy a customer. But any one [employee] can totally dissatisfy a customer."

While employee satisfaction isn't the boon promised to businesses, employee dissatisfaction has led to disastrous results for many firms, as Safeway discovered.

LOYALTY MYTH 2 :Employee Satisfaction Leads to Business Results
The belief that employee satisfaction is important to business out¬comes has been around for ages, as far back as the seventeenth century, when an Italian named Bernardino Ramazzini reported on the feelings of workers who dug and maintained cesspools. There are probably a subsequent 7,000 or more identifiable investigations on the subject. Unfortunately, culling through the findings of these studies looking for relationships between employee morale and standard measures of productivity finds a mixed bag: positive correlations, negative correlations, and, in some situations, no correlations whatsoever.

Similarly studies specifically testing the association between employee satisfaction and business results typically discover some link¬age. Just as was the case with examinations of employee satisfaction and customer satisfaction, they have failed to reveal consistent indications. Some correlate negatively, some positively, and a few fail to show any correlation.

Most investigations into the linkage between employee satisfaction and customer satisfaction and, ultimately, corporate profits have tended to study absolute levels of employee measures (e.g., a rating of 7.3 on a 10-point scale). The authors were fortunate to have access to data sets from several firms (both U.S. and European). In exploring the nature of the linkage between employee measures and business outcomes within these data sets we made a surprising discovery: The consistency of employee feelings was more important than the ab¬solute level in building a cause-effect model!

Employees, like customers, appear to establish thresholds of expected performance. That is, they will accustom themselves to less than ideal circumstances so long as those conditions don't worsen. Employees similarly acclimate to thresholds of environment, even though they may be less than perfect. If, however, these thresholds are breached by deteriorating conditions (breaking through a minimally acceptable level), then there are repercussions in employees' performance, and customer feelings and profits are likely to suffer. But if employee attitudes remain constant or advance slowly, without receding, then customer attitudes and profits are more likely to improve. Again, in our data, the linkage to business outcomes was not universal. Unfortunately, firms with satisfied employees can still find themselves losing out to competitors and ultimately going out of business.

LOYALTY MYTH 3 : Loyal Employees Create Loyal Customers
Employee satisfaction has not always been shown to link directly to customer loyalty, so a new myth has evolved with a slightly different target. The amended myth holds that it is not employee satisfaction but employee loyalty that results in customer loyalty. Clearly, this statement also seems intuitively correct. Belief in this myth is further fueled by occasional examples in the business and popular press that offer support for this argument.

For example, in a survey of more than 7,500 workers, more than half considered themselves committed to their employers. Shareholders investing in the companies with committed employees received, on average, a 112 percent return on their investment over three years. Investment in companies where employees considered themselves average or below average in commitment to the firm returned an aver¬age of only 76 percent.

Because of its assumed impact on corporate performance, for the past 30 years, employee commitment has been one of the most popular research areas in the fields of industrial psychology and organizational behavior. However, paradoxical as it might seem, researchers in these disciplines have been unable to confirm a relationship between employee commitment and business performance.13 Just as with employee satisfaction research, some studies have been able to show a relationship, while other studies have been unable to establish any. One team of researchers noted, "Although higher levels of commitment may relate to improved job performance in some situations . . . the present findings suggest that commitment has very little direct influence on performance in most instances."

The Service Management faculty at the Harvard Business School suggests that the strength of the relationship may be contingent upon four elements describing employee performance: capability, satisfaction, loyalty, and productivity. These four elements are thought to directly influence customer satisfaction (and ultimately loyalty) in the following manner:

1. Capability: Capable employees can deliver high-value service to customers. This implies that employees have the training, tools, procedures, and rules to deliver good service.

2. Satisfaction: Satisfied employees are more likely to treat customers better than are their dissatisfied counterparts.

3. Loyalty: Loyal employees are more willing to suppress short-term demands for the long-term benefit of the organization. As such, they may themselves place a priority on good customer service. Loyal employees also stay with their organizations longer, reducing the cost of turnover and its negative effect on service quality.

4. Productivity: Productive employees have the potential to raise the value of a firm's offerings to its customers. Greater productivity can lower costs of operations, which can mean lower prices for customers.

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The combination of these four factors makes intuitive sense. In addition to the traditionally emphasized elements of employee satisfaction and loyalty, this perspective adds the dimensions of capability and productivity. The theory, yet to be proven, emphasizes that employee loyalty is not a singular, direct link to customer loyalty.

Source :
Timothy L. Keiningham, Terry G. Vavra, Lerzan Aksoy and Henri Wallard, Loyalty Myths: Hyped Strategies That Will Put You Out of Businessand Proven Tactics That Really Work. You can find this excellent book here