Although not-for-profit, “service-profit chain” analysis can and should be utilized in credit unions for the same reasons many other industries have implemented the strategy.
The Service Profit Chain, written by Harvard Business School Professors James Heskett, W. Earl Sasser and Leonard Schlessinger in 1997, has quickly become a “how to” guide for leaders in all industries that are attempting to enhance performance by better understanding the relationship between employees, customers and profits. Credit union leaders too can benefit from this same analysis by examining the relationship between their employees, members, and contributions to net worth.
The elements that lead to employee satisfaction and customer retention are said to have fundamental implications for corporate profitability. Much of the mainstream literature generally focuses on the relationship between only two of these three subjects at one time (employee satisfaction, customer retention, and corporate profitability). However, analysis through the service profit chain lens requires a thorough understanding of the effects of these three elements on each other, and their subsequent effect on the business operation as a whole. Accurate service profit chain analysis serves to highlight the importance of the link, and subsequent success of each of the three main areas involved. In order to effectively maximize credit union assets, a complete understanding of the link between employee satisfaction and its relationship to member retention and contribution to net worth should be understood and practiced.
In order to sufficiently examine the service profit chain in any organization, each of the three elements needs to be comprehensively analyzed and defined before ascertaining the causal relationship between them. Many organizations analyze one or two of these areas of their business, and their relationship to one another, but very few ever take the time to correctly analyze the overall effect that the three elements together have on business operations.
Making Warranted Change
This “silo” analysis typically leads the leadership of an organization to make seemingly warranted changes or modifications to one of the elements of the service profit chain without a full understanding of the causal outcomes to all of the elements. For example, analysis at a credit union may lead its management to decide that employees should be empowered to exercise greater control over decision making when dealing with members. This decision will seemingly improve both employee morale and member satisfaction. However, the effects of this decision also need to be analyzed in terms of the effects on income. The important point is that each element should be examined in relation to the other two before a final business decision is made.
Most organizations begin service profit chain analysis by examining the elements of employee satisfaction, recognizing that employees are their most valuable asset. As most everyone in business is aware of, employees are important to any organization, as they are the foundation for any potential productivity. Employee satisfaction has been directly linked to employee loyalty. Because employees can be considered the heart of an organization, management should consider investments in employee satisfaction and subsequent loyalty, to be a necessity. Traditional measures of the losses incurred by employee turnover concentrate only on the cost of recruiting, hiring, and training replacements. But in most service jobs, an even greater cost of turnover is the loss of productivity and decreased customer satisfaction.
The Glue That Binds
Although there are three main elements to the service profit chain, customer retention/loyalty can be considered the primary conduit between them. This is also true in credit unions where members serve as the primary conduit between employees and net income. In other words, the glue that binds the elements together and produces positive results from the theory itself. The subject of customer retention/loyalty is more complex than it may seem on the outset. Tempting as it may be to relegate customer retention to marketing, what can marketing do to stem the outflow of employees and members? It is unrealistic to expect any single function to achieve fundamental improvement. According to Frederick Reichheld, a noted business consultant, retention is not simply one or more operating statistics, it is the central gauge that integrates all the dimensions of a business and measures how well the firm is creating value for its customers. It is widely accepted that it is far cheaper and more efficient to have loyal, repeat members, rather than to have to market and mine for new members.
The third main element of the service profit chain is profitability, which is a by-product of employee satisfaction and customer retention/loyalty. While most organizations typically emphasize generating new business and cutting costs, a rapidly growing body of evidence points to an indirect yet undeniable correlation between employee satisfaction, customer/member retention and financial performance.
Lessons From GE & Southwest
This theory has been embraced and implemented by many successful titans of business, including Jack Welch, former CEO of General Electric, and Herb Kelleher, founder of Southwest Airlines. It is not enough anymore for a company to focus only on improving profitability, or in the case of credit unions, contributions to net worth; it is necessary to examine the main components that lead to profitability and income generation.
It is now recognized that the best way to improve corporate profitability is to focus on the effective management of human capital as well as customer capital. The same is true for credit unions, where both employees and members should be counted as important and valuable assets of the organization. Today, top-level executives of outstanding service organizations spend little time setting profit goals or focusing on market share. Instead, they understand that the new economics of service, frontline workers and customers need to be the center of management concern.
Dr. Anthony L. Emerson is President and CEO of the Connecticut Credit Union League. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com