1. 1. Putting the Service ProfitPutting the Service Profit Chain to WorkChain to Work Ref: Heskett, Jones, Loveman,Ref: Heskett, Jones, Loveman, Sasser, SchlesingerSasser, Schlesinger HBS/ Service ManagementHBS/ Service Management
2. 2. 22 Key Learning PointsKey Learning Points Understand the linkages betweenUnderstand the linkages between Profitability, Customer Loyalty, Value andProfitability, Customer Loyalty, Value and Employee ProductivityEmployee Productivity Diagnose drivers of ProfitDiagnose drivers of Profit
3. 3. 33 Value Creation: What A Business Aims to AchieveValue Creation: What A Business Aims to Achieve Delighted Shareholders Delighted Shareholders Revenue Growth Incrsd Mkt Share Delighted Customers Deliver grtr Prcvd value Committed Mgmt Committed Employees > Margins > Com. Positn Lower Costs Waste dn Productivity up Cont. refine Processes Innovation
4. 4. 44 The Links in the Service Profit ChainThe Links in the Service Profit Chain Rev Grwth Profit ability Custmr Loyalty Custmr Satisfn Extrnl Service Value Employe Retn Employe Prodvty Employe Sat Intrnl Service Qlty Service concepts Results for customers Service designed & delivered to meet targeted customers needs workplace design job design employee seln & dev rewards/ recogn tools for serving customer Operating Strategy & Service Delivery System retention rpt biz referral
5. 5. 55 1. Customer loyalty drives profitability & growth1. Customer loyalty drives profitability & growth A 5% increase inA 5% increase in customer loyalty cancustomer loyalty can boost profits by 25%boost profits by 25% to 85%to 85% -------------------------------------------------------------- -------------------------------------------------------- The quality of marketThe quality of market share, measured inshare, measured in terms of customerterms of customer loyalty, deserves asloyalty, deserves as much attention asmuch attention as quantity of marketquantity of market share.share.
6. 6. 66 2. Customer satisfaction drives customer loyalty2. Customer satisfaction drives customer loyalty Xerox found that itsXerox found that its very satisfiedvery satisfied customers werecustomers were 6 times more likely to repurchase company6 times more likely to repurchase company equipment than were customers who wereequipment than were customers who were merelymerely satisfied.satisfied. A Satisfied Customer is Loyal 0 20 40 60 80 100 120 1.ExtremlyDissati sfied 2.somewhat dissatisfied 3.slightly dissatisfied 4.satisfied 5.verysatisfied Loyalty%(Retention)
7. 7. 77 3. Value drives customer satisfaction3. Value drives customer satisfaction An insurerAn insurers efforts tos efforts to deliver maximumdeliver maximum value include fundingvalue include funding a team that providesa team that provides special services at thespecial services at the sites of majorsites of major catastrophes.catastrophes. TheThe company has one ofcompany has one of the highest margins inthe highest margins in its industryits industry
8. 8. 88 4. Employee productivity drives value4. Employee productivity drives value Southwest airlinesSouthwest airlines deplanes & reloadsdeplanes & reloads two thirds of its flightstwo thirds of its flights in 15 minutes or less;in 15 minutes or less; pilots fly an avg. of 20pilots fly an avg. of 20 hrs more/month thanhrs more/month than competitors. Farescompetitors. Fares stay low while servicestay low while service remains high.remains high.
9. 9. 99 5. Employee loyalty drives productivity5. Employee loyalty drives productivity One auto dealerOne auto dealerss annual cost ofannual cost of replacing a sales repreplacing a sales rep who had 8 years ofwho had 8 years of experience with oneexperience with one who had less than awho had less than a year was $432000 inyear was $432000 in lost sales.lost sales.
10. 10. 1010 6. Employee satisfaction drives loyalty6. Employee satisfaction drives loyalty In one company study..In one company study.. Dissatisfied - 30%*Dissatisfied - 30%* Satisfied only 10%*Satisfied only 10%* * Wanted to leave* Wanted to leave
11. 11. 1111 7. Internal quality drives employee satisfaction7. Internal quality drives employee satisfaction Service workers areService workers are happiest when theyhappiest when they are empowered toare empowered to make things right formake things right for customers and whencustomers and when they havethey have responsibilities thatresponsibilities that add depth to theiradd depth to their work.work.
12. 12. 1212 Lifetime Value of a customer can be astronomical!
13. 13. 1313 Service Profit Chain Audit QuestionsService Profit Chain Audit Questions Do measurements of customer profitabilityDo measurements of customer profitability include profits from referrals?include profits from referrals? How are customersHow are customers perceptions of value perceptions of value shared with those responsible forshared with those responsible for designing a product or service?designing a product or service? What proportion of business developmentWhat proportion of business development expenditures and incentives are directedexpenditures and incentives are directed to the retention of existing customers?to the retention of existing customers?
14. 14. 1414 From the CustomerFrom the Customers Perspective.s Perspective. Customer Needs/Wants Business Process Capabilities Supporting Orgn structure Bus. Practices Measures/ rewards/ culture Technology Moments of Truth Service standards Performance capabilities I want I need I would change vendors to get Enablers Design
15. 15. 1515
16. 16. 1616 The Virtuous Cycle of LoyaltyThe Virtuous Cycle of Loyalty Loyalty Profitability Hi Pay Attracts Talent Hi Productivity Superior Service
17. 17. 1717 1. Customer loyalty drives profitability &1. Customer loyalty drives profitability & growthgrowth Reducing Defections 5% Boosts Profits 25 to 85% 85 75 50 35 25 0 10 20 30 40 50 60 70 80 90 Branch Deposits Credit Card Insce brokerage Software Credit Insce %increaseincustomervalue
18. 18. 1818 Banc OneBanc One MeasuresMeasures Customer retentionCustomer retention Depth of relationshipDepth of relationship Lvl of customer satLvl of customer sat ImpactImpact ROA > 2xROA > 2x nearestnearest competitorcompetitor
19. 19. 1919 480000480000 thethe number of customersnumber of customers polled by Xerox every year.polled by Xerox every year.
20. 20. 2020 Loyalty Productivity Capability Quality of Service (internal & external) Retention Referrals reduce Acquisition costs Share of Mind Employee Value Satisfaction
21. 21. 2121 Loyalty Retention Referrals reduce Acquisition costs Share of wallet Customer Value Satisfaction .Value
22. 22. 2222 Loyalty Retention Referrals enrich Investor base Share of Portfolio Investor Value Satisfaction Value
23. 23. 2323 Long Term Revenue Growth & Profitability Customer Em ployee Investor Value Profit Chain