According to the service profit chain theory, satisfied employees deliver satisfied customers, which means sales will rise and profits will grow. So in a service business, if you focus on keeping employees happy and motivated, that’s job done. Who could disagree with that? I can.

I once worked with a contact centre business in the US mid-west which had the happiest employees in the state, and probably in the entire contact centre industry in the USA. Why? Because they had full employee benefits: specifically, comprehensive healthcare. This business found recruitment and employee retention easy, of course, and it won large contracts from telephony and cable companies across the US. Its staff, the agents, were trained in representing whichever client company they were assigned to, and took calls to handle customer inquiries, sell packages, and “save” customers who were trying to terminate their cable or telephony service. The leaders of the call centre group took pride in investing in their people, because in outsourced customer contact centres, the quality of your agents and their ability to learn new tasks is critical. To grow, the business has to win new contracts, and train existing or new agents in new assignments, with new scripts, pricing packages and the rest, so they can represent the new clients and handle calls from their customers. The agents did a great job, delivering a good experience to the callers and the client company alike, and clients were very satisfied with the call centre agents’ performance. Of course, satisfied clients wanted to give more contracts to their best-performing supplier.

But winning call handling contracts is a competitive business; new competitors were setting up shop, increasing the options available for clients awarding contracts. As a result, pricing was cut-throat – as supply in the sector grew, contracts were being won or renewed at lower rates. But even when the rate per call was forced down, this business’s happy employees did not see a cut in pay or benefits. They did a great job, and everyone was happy – except the shareholders. The business lost money faster and faster as it won new contracts, with the longest serving employees setting the benchmark for pay and conditions. Newer contracts were less profitable, and every time an old contract was renegotiated, the shareholders bore the pain, not the employees. Sounds crazy doesn’t it? But the fixation on looking after the agents and keeping them motivated, in order to deliver great customer service, had become a non-negotiable inside that business. Only with new leadership, and significant challenge from new shareholders, did anything change.

The fallacy of the service profit chain is that a single-minded focus on employees will deliver results, when in fact employee satisfaction is necessary but not sufficient. Of course it’s important to have motivated employees, but a total fixation on any one stakeholder group in a business will fail the others. Even the much lauded John Lewis Partnership, whose purpose is “the happiness of all our members, through their worthwhile, satisfying employment in a successful business” recognises that employee happiness at the expense of business success is not sustainable. The JLP purpose is very unusual in being so focused on employees; more commonly, a good purpose expresses why an organisation exists, what it’s there to do ? generally, something its customers will find useful. Google’s for example, is “to organize the world’s information and make it universally accessible and useful”.

It’s important to simplify and focus inside a business, and maybe that’s why the service profit chain idea is so appealing. Resist its siren call and instead ensure the enterprise has a clear purpose. It’s harder to get to, but provides a more powerful and lasting focus. A purpose which articulates how the whole enterprise creates value in the world does two vital things.

First, it ensures everyone knows why they’re there. It’s not just to do whatever it is they are currently keeping busy with, nor to keep employees sweet, nor even to make shareholders happy – these things are an outcome of serving a useful purpose for customers. This is essential to the current and future value that the organisation creates. A clear purpose is a spur for continuous improvement, modest tweaks and radical innovation, because it’s a constant reminder that everything the enterprise does is ultimately for a reason which comes from customers; keeping purpose in mind keeps an enterprise connected it with the outside world. This, more than anything, maintains shareholder value.

Second, it gives people meaningful work, which has been shown to be probably the most important single factor in creating employee satisfaction. Which has to be good, because, as we all know, satisfied employees lead to satisfied customers.

Comment, Thought leadership | February 2013