Have you had sleepless nights lately trying to figure out how to:
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Get the most value from customers?
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Create market power?
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Strangle competitors?
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Buy the best data warehouse tools and/or customer relationship management software and make them work?
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Hold on to the best employees?
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Meet quarterly profit goals?
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Maximize shareholder value?
There is one acid test of leadership in today's tough economy — building loyalty.
Is that a joke? What relevance could such an old-fashioned idea hold in an arena where customers “defect at the click of a mouse and impersonal shopping bots scour databases for ever better deals?” says Frederick F. Reichheld in his latest book, “Loyalty Rules.”
The National Employee Relationship Report, a study done by Bain & Co. in May 2000, shows that most leaders are flunking the loyalty leadership test. “Fewer than half of all employees of U.S. companies now consider their employer to be worthy of loyalty.”
While some employers have “concluded that loyalty is no longer relevant in modern society [since] self-interest sets the tone for employer-employee relations,” Reichheld scoffs that these leaders are kidding themselves.
“People yearn now more than ever for leaders and institutions worthy of their trust and commitment — to help guide and enrich both life and work,” Reichheld continues. If business leaders observe diminished loyalty in the people around them, it's usually because their core principles as displayed in their actions as leaders have proved unworthy of respect, commitment and loyalty.
These leaders are confusing profits with purpose, Reichheld contends. They have abandoned the “high road” of business practice with a single-minded focus on financial results. When money matters more than people, then the business often will take advantage of customers, employees, vendors and a host of other business associates.
Why do people do it? Reichheld calls it “low-road strategies,” or cutting corners at the expense of people. These strategies can generate impressive financials, for a time. Eventually, however, the low road doesn't work. When the gravy train dries up, leaders who have built relationships based on loyalty are better able to keep partners from jumping ship the instant a better opportunity comes along.
But this is no “old-time religion” sermon that Reichheld is delivering; it's based on solid research. Major corporations have had outstanding financial results generated by leaders who built a measurable advantage in loyalty. “Loyalty leaders do not act out of charity. In fact, their records show that they have prospered magnificently.”
These leaders include:
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Enterprise Rent-a-Car, whose philosophy is “Put customers first and employees second, and profit will take care of itself.” Enterprise outran Hertz and Avis to become the largest car rental firm in North America. It continues to grow at more than 20 percent per year in a sluggish industry. With some 45,000 employees, the company hires more college graduates than any other firm in the country. Enterprise's CEO has said that “a major difference between Enterprise and our competitors is that their business is cars and ours is people.”
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Cisco Systems, whose employee turnover ran less than 10 percent during the 1990s, although it's headquartered in Silicon Valley, where turnover averaged 25 to 30 percent over that period.
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Northwestern Mutual Life Insurance Co. has consistently focused on creating superior value for its policyholders. “The Quiet Company” has so successfully parlayed its superior customer retention into lower costs and faster growth that it's become the industry leader in individual life insurance.
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SAS, the statistical analysis software firm, boasts a 5 percent turnover rate among software engineers compared with the industry's average of more than 20 percent.
Reichheld promises that leaders who comprehend loyalty's true nature and its economic potential know that it can't be a one-way street. “They earn people's loyalty when they treat them in a manner that inspires their trust and commitment. Model leaders understand both the short-term costs and the superior value of long-term investing in human capital, of attracting and retaining a select business team. They know that when you treat people with dignity and respect, communicate honestly, help people discover their full potential by guiding them into roles that play to their special strengths, and strive to create and nurture mutually beneficial partnerships, then you will become a leader worthy of trust and commitment and your business with thrive.”
Interestingly enough, most of the loyalty leaders profiled in “Loyalty Rules” will retire with a personal net worth in the tens or hundreds of millions. A handful already have become billionaires by devoting themselves to their partners' success and by inspiring others to follow suit.
Can something this virtuous truly show up on the bottom line?
The point is to avoid making this some absurd either/or proposition such as, the sole purpose of business is to generate profits and maximize shareholder value…or, adherence to high standards of decency and consideration is inconsistent with maximizing growth and profits.
So then where does loyalty begin?
“The center of gravity for business loyalty…is the personal integrity of the senior leadership team and its ability to put its principles into practice,” Reichheld preaches.
Where do you stand on issues of excellence, simplicity, honesty, fairness, respect, and responsibility?
And what does your staff think?
Victoria James is president of Victoria James Executive Search Inc., Stamford, CT.
Connie LaMotta is president of Workplace Strategies Associates, Upper Nyack, NY.
