Why does employee engagement matter?

Employee engagement matters because engaged employees create loyal customers who, in turn, drive profitable growth. That is the simple conclusion at the heart of "Putting the Service-Profit Chain to Work", a seminal study of successful service organisations published in the Harvard Business Review in 1994.

Based on an analysis of major US corporations such as Banc One, Intuit Corporation, Southwest Airlines, ServiceMaster, USAA, Taco Bell, and MCI, the Harvard study established the links in the Service-Profit Chain: Profit and growth are stimulated primarily by customer loyalty. Customer loyalty is a direct result of customer satisfaction. Customer satisfaction is largely influenced by the value they attach to the services provided. Value is created by satisfied, loyal, and productive employees. Employee satisfaction, loyalty and productivity are in turn stimulated by policies, practices and support services which inspire employees to deliver results to customers.

(Click on the diagram to view the Service Profit Chain)

In other words, the Service-Profit Chain shows how employee engagement impacts on customer satisfaction and profitability. And it shows management the importance of focusing on the factors which drive engagement: investment in recruitment, training and development, and the technology that supports people, together with performance management systems which properly link performance and pay.

For some business leaders the Harvard model did not provide the hard evidence they needed to justify the required level of investment. However, a number of other studies have made good the deficit, most notably the Sears Employee-Customer-Profit Chain Model which was at the heart of a far-reaching culture change and financial turnaround at the US retail giant in the early 1990's. This model shows that a 5 point improvement in employee attitudes towards their own job and towards Sears as a company predicts a 0.5% increase in revenue.

(Click on the diagram to view the Employee-Customer-Profit Chain)

Since the turn of the century a number of studies have supported these findings. In 2004 Sirota Consulting studied 28 multinational companies 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. And an ISR study published in 2005 showed that in companies with above average levels of employee engagement profits rose by 2.06 per cent and the operating margin rose by 3.74 per cent over 36-months. Conversely, companies with low levels of employee engagement saw net profit fall by 1.38 per cent and the operating margin fall by 2.01 per cent over a 36-month period.

For other business leaders the statistics are not necessary. To them the relationship between employee engagement and profitable growth is self-evident. When asked which measurements "give the best sense of a company's health" in a recent Business Week advice column, former GE Chairman and CEO Jack Welch replied: "Employee engagement first. It goes without saying that no company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it. That's why you need to take the measure of employee engagement at least once a year through anonymous surveys in which people feel completely safe to speak their minds." And as Richard 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."

In summary the research shows what some of the world's most respected business leaders already know: the links between employee engagement, customer satisfaction and organisational performance are beyond question. However, it also shows that high levels of engagement are far from being the norm. Indeed, recent research from Towers Perrin¹ describes employee disengagement as a global epidemic. Therefore, the challenge for many companies is to properly measure engagement, identify its key drivers and create a culture is which engagement becomes "the way we do things around here".

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¹ Towers Perrin: Employee disengagement a global epidemic, 2005