11/01/2014

The Loyalty Effect

By Bryan Lubic

What is the Loyalty Effect?

The Loyalty Effect is a management strategy that focuses on "finding and keeping good customers, productive employees, and supportive investors...in order to generate superior results," (Reichheld, 1996, p. 1).

In the late 1980s, consultants at Bain & Company conducted on extensive research of company performance and found that "it was impossible to maintain a loyal customer base without a base of loyal employees; and that the best employees prefer to work for companies that deliver the kind of superior value that builds customer loyalty," (Reichheld, 1996, p. 2).

The focus and the central strategy is that "creating value for customers is the foundation of every successful business system. Creating value for customers builds loyalty, and loyalty in turn builds growth, profit, and more value," (Reichheld, 1996, p. 3).

The Loyalty Effect became the foundation for the Net Promoter Score, a method of measuring customers’ loyalty by sorting them into different categories in order to focus and drive engagement and ultimately, profits (Markey & Reichheld, 2011). Companies using the Net Promoter Score "commit to specific processes and systems that help everyone focus on earning the passionate loyalty of both customers and employees," (Markey & Reichheld, 2011).

The conclusion the consultants reached was that "since the only way a business can retain customer and employee loyalty is by delivering superior value, high loyalty is a certain sign of value creation," (Reichheld, 1996, p. 5).

The bottom line: The essence of any business is to create value for its customers. That value is created through the business itself: products, services, systems, and employees. Employees, then, are a central component of an integrated whole. As Kaufman and Markey (2013) explain, "making employees loyal advocates of their employer is not an end goal in itself, but rather a means to achieving customer and financial goals," (Kaufman, Markey, Dey Burton, & Azzarello, December 11, 2013). 

Why does "The Loyalty Effect" Matter in Career Development?

For current and future employees, The Loyalty Effect offers important lessons.

First, value creation is the central focus of a company, and therefore, an employee. This means that employees must understand how the company--and how they, as employees--create value for their customers. After all, employees must "contribute beyond the cost of his or her salary and benefits," (Reichheld, 2001, p. 137). Teaching and helping employees see the importance of creating value, and how value is created for that employer and its customers, is critical for success for the company and the employee.

Second, understanding which companies focus on creating value is an excellent way to find a rewarding workplace. As Reichheld explains, "work that is congruent with personal principles is a source of energy. Work that sacrifices personal principles drains personal energy. Loyalty leaders offer people a fulfilling work experience and pride in their loyalties, which are based on values rather than on mercenary convenience," (Reichheld, 1996, p. 29). Whether currently employed or in active search, this approach can be used to identify companies that would be rewarding places to work.

Third, this approach can be used to identify the right kinds of employees, retain the most productive employees aligned with the company, and implement systems that sustain the continuing creation of value.

For companies, The Loyalty Effect is also insightful and actionable.

The key strategy is "...to inspire employees to shoot for world-class performance targets by surrounding them with other employees with similar ambitions," (Reichheld, 2001, p. 135). This means potential employees must have excellent team and communication skills, as well as a drive to improve and win.

In fact, Reichheld explains that "loyalty leaders don’t waste their time on minimum performance standards; they do everything in their power to help their people accomplish astonishing levels of performance," (Reichheld, 2001, pp. 135-136).

Connecting this to employee development, Kaufman and Markey argue that "besides improving revenue performance, engagement also affects the bottom line. More engaged employees are less likely to quit, which reduces hiring and training cost," (Kaufman, Markey, Dey Burton, & Azzarello, December 11, 2013).

How Can You Use The Loyalty Effect in Your Role?

Career development or human resource professionals can use the strategy of The Loyalty Effect to help employees and job seekers learn and understand the importance of value creation, which is a key component of any business, venture, non-profit, etc. Additionally, you can help your clients to see themselves as valuable and as creators of value, and to focus their efforts on understanding and creating value for a company.

Companies and organizations can follow these suggestions (Kaufman, Markey, Dey Burton, & Azzarello, December 11, 2013) to ensure success:

• Make sure line supervisors lead the effort (not HR);
• Supervisors must be prepared and trained for effective dialogue with their teams around performance;
• Teams must be focused completely and totally on their customer;
• While metrics matter, it's ultimately all about the dialogue around performance, customer delight and loyalty, and engagement.

Bringing it All Together: How it Connects to Career and Organizational Development

As I learned more about The Loyalty Effect and the Net Promoter Score and System, I saw several connections to career and organizational success.

First, the focus on delivering value to your audience--whether a customer, an employee, or the company itself--is powerful and effective. When job seekers and employees understand the value they can offer, and communicate how their value contributes to and aligns with the organization, they increase their chances of finding a fit.

Second, the focus on creating value and loyalty is a powerful clarifying device. Organizations that use the Net Promoter Score are data-driven, and master the metrics that matter most: measures of loyalty. Using measures of loyalty, for customers as well as employees, allows organizations to understand how long their loyal customers and employees will do business with and recommend them to others. This is precisely what leads to long term success for the company as well as its employees: loyal customers (and employees!!) for life.

Finally, using loyalty as a way to connect employee engagement to company success reaffirms the importance of "internal" customer service. If employees are not loyal, or would not recommend their own employer to others, how can the business succeed for any length of time? Bain's consultants discovered that loyal, engaged employees are more productive, satisfied, and stay longer. Sure, even the most engaged employees call it "work" and not "vacation." But the reward of a challenging, productive job that is also personally and professionally fulfilling is, quite simply, invaluable.

References

Kaufman, J., Markey, R., Dey Burton, S., & Azzarello, D. (December 11, 2013). Who's Responsible for Employee Engagement? Retrieved from http://www.bain.com/publications/articles/whos-responsible-for-employee-engagement.aspx

Markey, R., & Reichheld, F. F. (December 8, 2011). Introducing: The Net Promoter System. Retrieved from http://www.bain.com/publications/articles/introducing-the-net-promoter-system-loyalty-insights.aspx

Reichheld, F. F. (1996). The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value. Boston, MA: Harvard Business School Press.

Reichheld, F. F. (2001). Loyalty Rules! How Today's Leaders Build Lasting Relationships. Boston, MA: Harvard University Press.

Bryan Lubic, M.A., CCMC, loves all things related to personal and professional career and leadership development. He currently serves as the Director of Career Education and Advising at University of California, San Diego, where he is privileged and proud to lead a team of six super-stellar advisors on a bold journey to support the success of students and alumni in reaching their awesome and inspiring professional goals. He’s (kind-of, sort-of) (in)famous for using Post-its and (occasionally bad) puns in creative and inspiring ways to help people have their own “A-Ha!” moments. He can be reached at blubic@ucsd.edu