Employee engagement: the what, why and how

Dec 06 2005 by Andy Parsley Print This Article

In the past, it has been labelled the biggest commercial untruth since "the cheque is in the post". Today, however, there is clear evidence that business leaders are not simply saying that "our people are our most important asset" Ė they are actually beginning to mean it too.

Why the change of heart? Because the body of evidence that employee engagement is a key driver of organisational performance grows almost daily. But with recent research by Towers Perrin highlighting the fact that employee disengagement is a global epidemic, organisations still clearly have much work to do to ensure that their workforce can be properly inspired and motivated.

The Service-Profit Chain

For many, the employee engagement story begins in 1994 when James Heskett and his colleagues at the Harvard Business School published their seminal paper Putting the Service-Profit Chain to Work.

The Service-Profit Chain model they had created could hardly be more intuitive: Employee Satisfaction drives Employee Retention drives Employee Productivity drives Service Value drives Customer Satisfaction drives Customer Loyalty drives Profitability and Growth.

Engaged employees create loyal customers who in turn create bigger profits
In short: Engaged Employees create Loyal Customers who in turn create Bigger Profits.

For a few, including Richard Branson at Virgin, this simple premise was the basis upon which they had already begun to build their businesses. As Branson says:

"We embarked on consciously building Virgin into a brand which stood for quality, value, fun and a sense of challenge. We also developed these ideas in the belief that our first priority should be the people who work for the companies, then the customers, then the shareholders. Because if the staff are motivated then the customers will be happy, and the shareholders will then benefit through the company's success."

Others, however, would need a more rigorous analysis if they were going to commit their organisations to this somewhat radical vision of "the shareholders come last". Yet the Service-Profit Chain model's greatest problem was that it was only supported by data collected by different companies at different points on the chain.

For example, in the banking sector it was known that a 5 per cent increase in Customer Loyalty could produce Profitability increases from 25 per cent to 85 per cent. Meanwhile, an insurance company had shown that when an experienced employee left the business Customer Satisfaction levels dropped from 75 per cent to 55 per cent.

In fact only quick-service restaurant chain Taco Bell had begun to do anything like an end-to-end analysis of the chain, observing that the 20 per cent of stores with the highest Employee Retention rates enjoyed double the sales and 55 per cent higher profits than the 20 per cent of stores with the lowest Employee Retention rates.

As a result, although the Service-Profit Chain model seemed logical and sensible, the potential return on investment was unknown. This made it difficult for business leaders to assess how much effort they should be making to embed it within their organisations.

Welcome to the 21st century

What a difference a decade makes, because today's business leaders have end-to-end Service-Profit Chain data coming at them from all angles!

Sirota Consulting studied 28 multinational companies though 2004 and found that the share prices of organisations with highly engaged employees rose by an average of 16 per cent compared with an industry average of 6 per cent.

Meanwhile, an ISR study published in August 2005 showed that companies with low levels of employee engagement saw net profit fall by 1.38 per cent and operating margin fall by 2.01 per cent over a 36-month period. In companies with above average levels of employee engagement profits rose by 2.06 per cent and operating margin rose by 3.74 per cent over 36-months.

And it gets even better, because the research has now been completed which identifies the key drivers of employee engagement. In other words, a "road map" for achieving outstanding organisational performance through the Service-Profit Chain has been developed and is ready for immediate implementation.

About The Author

Andy Parsley
Andy Parsley

Andy Parsley helps organisations positively engage with two key audiences: their employees and their customers Ė both existing and potential. A marketing communications expert, he is the founder of Green Lion Insights and Solutions Ė an employee engagement consultancy and a regular writer and speaker on employment issues.