Skip to main content

Leadership Is Communication: The Service-Profit Chain

By May 23, 2016Article

One of the most fascinating management theories is known as the service-profit chain, which holds that profitable growth is closely linked to employee engagement.

The service-profit chain was first proposed in a seminal 1994 paper titled “Putting the Service-Profit Chain to Work,” by James Heskett and his colleagues at the Harvard Business School. Through extensive studies of service industries, the Harvard researchers found that profits and growth are stimulated primarily by customer loyalty, and customer loyalty is a direct result of employee engagement.

Think of it this way: Engaged employees become satisfied employees. Employee satisfaction drives employee retention, which increases employee productivity, which in turn drives service value. With service value comes customer satisfaction, leading to customer loyalty. Over time, customer loyalty drives greater profits and growth. Put simply, engaged employees create loyal customers that generate increased profits.

The Harvard researchers found that retaining customers just one more year, on average, has a significant impact on the bottom line. A five percent increase in customer loyalty can increase profits by 25 to 85 percent.

Based on these direct chain links, it’s clear that successful leadership depends on employee engagement. But to truly engage employees, managers must first offer a clear plan of where they want the team to go.

Having a vision alone is not enough – leaders must also articulate that vision clearly and persuasively. And they must demonstrate consistent behaviors in their daily activities. In other words, leadership is all about communication, not only in how one speaks and writes but also in how one acts and behaves.

Effective communication is a skill that must be nurtured and developed. Some managers downplay the importance of communication because they consider it a “soft” skill that can’t be measured. This view is self-defeating because strong communication is perhaps the single most valuable management tool to drive organizational performance. After all, what could be more important than giving your people the information and feedback they need to succeed?

Software platforms make communications a dialog, not a monolog

Effective communications have a powerful effect on employee morale and engagement, but success depends on using the appropriate communication channels. For instance, highly emotional or complex issues deserve direct conversations, rather than impersonal emails or simple text messages.

Software platforms can provide a useful framework to unleash the full power of employees by increasing communications that align personal and organizational objectives. New crowdsourcing software can help managers identify organizational concerns while enabling employees to vote on mutual priorities and solve problems together. In this way, workers feel that they have a real voice in decision making, rather than just taking orders from the boss. In addition, online collaboration tools can increase buy-in by aligning team members around shared projects.

To achieve the full benefits of a service-profit chain, leaders must emphasize the value of effective communications. This includes regularly holding direct communications with employees to understand their concerns. Leaders also need to recognize that communications are a two-way street. Speaking clearly is crucial, but it’s equally important to make sure your message is being heard and understood. It’s best to express your points with conviction, and relate them to your larger goals. Then make sure to listen closely to confirm that the other person grasps your meaning.

In a 2008 follow-up paper and book for the Harvard Business Press titled “The Ownership Quotient,” Heskett found that firms that adopt the service-profit chain model can achieve a sustainable competitive advantage by instilling a greater sense of ownership and loyalty in their people. “High levels of ownership from both employees and customers enable their organizations to be more agile, more in tune with their respective markets, and more consistent in their financial performance,” Heskett wrote.

Leaders who focus on employee engagement can position their companies for more profitable growth, which ultimately is the main goal of shareholders too. Building engagement requires strong communications, and leaders who communicate well can succeed in aligning the best interests of all stakeholders – including customers, employees and investors – so that everybody wins.

Brian Anderson is chief marketing officer at POP. He has over 25 years of global marketing experience in technology, business to business, and business to consumer markets. He has a proven track record of success in branding, revenue growth, M&A, IPO, as well as multiple key marketing disciplines.














Copy link
Powered by Social Snap