Service Profit Chain: How It Works & Why You Should Care

The service profit chain dissects the levers that translate good service into profitability. The outcome of quantifying and understanding these levers for the companies that have done it is an increased focus on empowering employees.

Leaders who understand 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.

I believe that organizations can accomplish this by connecting front line workers more effectively with leadership through vertical collaboration. 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; and having a good process for making sure input, feedback and ideas get actioned.

What is the Service Profit Chain?

The Service-Profit Chain is a theory and business model evolved by a group of researchers from Harvard University in the nineties. It establishes relationships between profitability, customer loyalty, employee satisfaction, loyalty, and productivity. Profit and growth are stimulated primarily by customer loyalty. Loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, in turn, results primarily from high-quality support services and policies that enable employees to deliver results to customers.

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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) I 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…”

If this is even half true at your organization, you can see why it’s critical to have a better way to collect, structure, and action the significant number of problems you don’t have knowledge of.

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.

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Service Profit Chain: How It Works & Why You Should Care