Great service does not always lead to customer loyalty

From the blog of consultant Mitchell Osak.

Conventional wisdom says that consistently providing service excellence will deliver high levels of retention. According to new research from the Harvard Business School, this is not always the case. Companies that offer high levels of customer satisfaction may still experience loyalty problems if competition offers even better service. In fact, the research suggests that the customers you think are your most loyal are likely to be the first to jump ship when a challenger to your service superiority enters the market.

The researchers, Harvard Professors Dennis Campbell, Frances Frei and doctoral student Ryan Buell explored the link between service levels, customer loyalty, and competitive strategy in the U.S.banking sector. The 2002 to 2006 study analyzed data collected from a large U.S.domestic bank that competed in more than 20 states.

The study’s findings confirmed some earlier research on the impact of corporate and service strategy on retention. In a nutshell, companies who generate high customer satisfaction scores remain at risk when competition raises the service stakes. Conversely, the research indicates that firms rated low in service quality are relatively immune to premium competitive service offerings.

The reasons for these counter-intuitive findings have a lot to do with the customer expectations established in part by the incumbent provider. The longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors. Given their higher expectations, service-driven customers are more willing to try other firms and products that trumpet and deliver service excellence.

Despite these conclusions, managers should be mindful of throwing out the service baby with the bath water when setting strategy. The study found that even though high-end customers can be fickle, a company can still attract and retain customers in a variety of markets with a superior customer experience. There are a number of ways to do this:

Avoid complacency

Firms can avoid resting on its service laurels by staying abreast of customer needs, focusing on continuous improvement initiatives and proactively investing to significantly enhance their customer service experience.

Consider each product category separately

Customers will trade off price and service depending on the product they are seeking and the importance they attach to it. In general, customers – in the long run – purchase the goods that represent their ideal combination of price and service. As such, delivering more service than is needed (or is willing to be paid for) would be sub-optimal.

Understand that service sensitivity varies by market…

According to the researchers, there are considerable differences in the type of customers you attract and retain between markets. This variance suggests that managers should tailor their service and marketing strategies depending on local market conditions, competitive threats and customer needs.

…But be wary of too much customization

Local market service strategies come with considerable costs in terms of operational complexity and brand dilution. Firms need to carefully weigh the pro and cons of service customization for each market.

Make it difficult to leave

If high service levels by itself won’t ensure loyalty maybe raising a customer’s switching cost or providing loyalty-based incentives would do the job. For example, managers could offer discounts for long term contracts, extend warranty periods or launch high-value loyalty programs.

How serious is your CEO about Customer Focus?

After 25 years in this business as a consultant I can only agree with all colleagues that leadership is at the heart of sustainable success. No organization shall rise above its leadership... I keep repeating this over and over again. I saw it confirmed in my own practice when for the first time in a long period I recently felt I had to resign a client relationship because the CEO just was not getting it, and thus most of his management team (not leadership team).

I read a post from author and consultant Jeanne Bliss (who I greatly admire) and realized how pertinent her detailed view on this issues is. Hence I decided to quote it below.

"I’ve never seen a CEO who wouldn’t sign up for customer loyalty, customer focus and just plain improving things for their customers. It’s getting them to drive the company to do something about it that’s the challenge. A number of telltale signs determine pretty quickly whether a company is serious about the job or not – beginning with the CEO and leadership and cascades all the way through the ranks of the company. Specific leadership actions occur in companies that have taken the commitment past lip service. Understanding customer issues and what drives customer loyalty become the stuff of everyday conversations. The issues are trended and understood and talked about. Building customer experiences and relationships is considered the true work of the organization – not something layered on the “real” work of achieving quarterly sales goals.

CEO’s that drive this work understand that it’s the inspiration, leadership and organizational change that are the sticking points in making progress.

CEO Has Personal Ownership

A CEO leader on a customer mission takes responsibility for driving value for customers and improving the customer experience. This is not something jobbed out to someone else to do. Although they will need a lieutenant to help drive the work (because they have an entire company to run after all), the CEO is an engaged and active participant.

Commitment Questions 1 and 2:

1. Does your CEO clearly articulate what he/she wants the company to become for customers and constantly reinforce and drive the company in that direction?

2. Is there a commitment for organizational transformation, not some one-off tactics and silver bullets?

The CEO Makes the Customer Champion an Officer of the Company

Because these leaders recognize that this is organizational transformation, they grasp completely that it will not happen with a public proclamation and a great kick-off memo (sad, but true, how many of us have received those?). It’s understood that they need an executive level partner to bring the transformation about.

The point about making the customer champion an officer is not an insignificant one. When the customer effort is considered a strategic priority, the work simply needs to reside at that elevated level. An officer level caliber leader is needed to drive the action and the company will take their cue about the work’s importance from the title in the organization box.

Commitment Questions 3 and 4:

3. Has the CEO layered this work onto someone’s already over-full plate, or is there recognition that this is a critical job for the organization that requires an immense time commitment?

4. Has the CEO ensured that the customer champion is an officer of the company with the full support and engagement of the CEO, leaders and the organization?

There is Clear and Regular Accountability for Customers

This is a huge sticking point for the work. CEO’s who get this demand regular accountability for the sole purpose of identifying and tracking progress with the customer agenda. The metrics and performance requirements are clear. Regular accountability means, for example; trending and tracking customer complaints by category and setting metrics for improvement. Regular accountability means that customer losses are understood and accounted for and explained. Regular accountability takes the key customer interaction points down to operational metrics which the CEO tracks as fervently as the number of products sold – because in those moments experiences are made or broken.

Commitment Questions 5 and 6:

5. Does your CEO actively hold people accountable for customer performance? Is there clarity in what’s expected and does the organization practice discipline around identifying what should be measured and managed?

6. Are forums for accountability regularly scheduled and enforced as a key strategic meeting for the success of the company?

They Provide Political Air Cover

Committed CEO’s provide the necessary political air cover to drive the work ahead. They bring around the non-believers of the customer effort. Because this work traverses across the organization, the CEO steps in when necessary to course-correct and drives the action when it stalls. These CEO’s don’t sweep the naturally competing silo priorities under the rug. They are acknowledged and the gnarly work is done to determine where the agreements must be made, where the compromises must be set, and where the new lines of accountability must be established.

Commitment Questions 7 and 8:

1. Does your CEO commit time and resources to be a solid partnership with the customer leader?
2. Does your CEO play an active role in understanding and participating in the rigor of aligning the company when necessary?

There is Corporate Patience for the Work to Take Hold

This work is not for the mild-hearted or the quarterly inclined. Everyone needs to understand that becoming a ‘customer’ company is a multiyear endeavor. They can’t bail in the first year because the results don’t come as simply and cleanly as seeing response rates on a marketing campaign, tracking sales goals or the number of hits on your website. The CEO must personally have the belief and commitment that this is the right course.

Commitment Questions 9 and 10:

1. Is your CEO committed to the timeline required (in the neighborhood of five years) and are they willing to suspend the usual short-term expectations of immediate results to have patience for the customer work to take hold and yield results?
2. Will they sustain the patience inside the corporation and with the board to stay the course so that results can be achieved?

They Demystify the Roadmap and Suspend the Disbelief

The corporate ‘Nay-Sayers’ will be quick to voice that this work has been tried before and failed. But committed CEOs have grasped all that and factored it in. And since it’s all been considered, there is a clear plan, an achievable plan that is laid out before the organization. A reality-based roadmap is established, funded, followed and followed up on.

Commitment Questions 11 and 12:

1. Are the stages, expectations and processes to drive the work identified realistically and planned so people understand the roadmap, where it is leading and why it is set forth?
2. Have the resources been applied so that the roadmap is grounded in the reality of what the company can achieve and fund?"

The 85/15 Rule: Get at the Root Causes of Poor Customer Service

I am a fervent fan and former associate of author, speaker and consultant Jim Clemmer. He is insightful, pragmatic and accasionally coins some new expression such as "snoopervisor". He is about as pragmatic as I am.... here's what he wrote:

Last month I was approached by a misguided manager looking for training and motivation programs to “fix” their frontline service staff. This is a fairly wide spread and common problem showing a lack of understanding about basic customer service cause and effect. And it’s focused on treating symptoms rather than the underlying disease.

How reasonable would it be to hold a shipping dock worker responsible for the quality of the goods in the boxes he or she is shipping? Not only would that be unfair, it would be bad management. A good manager would argue, quite rightly, that the manufacturing process should be traced back to find the ultimate source of the defects.

So, how reasonable is it to hold the frontline server responsible for the quality of the products or services he or she is delivering? Sometimes poor service is their fault. Some servers are rude, sloppy, or uncaring. But most often the person on the front serving line is a symptom carrier, not the source of the problem. While he or she may be contributing to low service delivery, blaming him or her is also not only unfair but looking for answers in all the wrong places.

Even if poor service did originate with the service deliverer, who hires, trains, rewards, coaches, and measures that person? Like so much about culture, performance, and leadership it really is common sense; if you put a good person into a bad system, the system will win most of the time. This obvious observation has been proven so many times that it has become a truism called “The 85/15 Rule.” The 85/15 Rule shows that if you trace service breakdowns back to the root cause, about 85% of the time the fault lays in the system, processes, structure, or practices of the organization. Only about 15% of the service breakdowns can be traced back to someone who didn’t care or wasn’t conscientious enough.

But the last person to touch the process, pass the product, or deliver the service may be burned out by ceaseless service problems, overwhelmed with the volume of work or complaints, turned off by a “snoopervising” manager, out of touch with who his or her team’s customers are and what they value, unrewarded and unrecognized for their efforts, given shoddy materials, tools, or information, not given effective coaching and feedback, measured (and rewarded or punished) by results conflicting with his or her immediate customer’s needs, unsure of how to resolve issues and jointly fix a process with other functions, trying to protect themselves or their team from searches for the guilty, or not knowing where to go for help. All this lies within the system, processes, structure, or practices of the organization. And all this is a leadership, management, and culture issue.

Many of the manifestations of the “our staff are the problem” assumption stem from the all too common, but badly misguided, inclination to go on “seek and destroy missions” by asking “who” rather than “what” went wrong. Symptom carriers of the organization’s system and process problems are hunted down and hung by the neck on lampposts. The result is a culture of fixing the blame rather than the problem. This creates a culture of fear, cover your backside, and finger pointing. That’s clearly not a culture that creates higher customer service.

Treating symptoms can provide quick relief and make us feel like we’re fixing the problem. But until a management team is prepared to treat the underlying leadership and organizational root causes by applying The 85/15 Rule, they will be locked in a repeating loop of mediocre or poor customer service.