People Performance Management: The Science That Supports Soft Metrics
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The relentless pressure to cut costs by boosting operating efficiency leads management teams almost invariably to view people as a fixed cost to be minimized. The more labor they can remove from the price of a product or service, the more competitive the product or service will be in the marketplace. This idea has prevailed for a century, but today's increasingly competitive global marketplace is leading companies to reconsider it.
To understand why a shift of perspective is necessary, one must only look at how the world is changing. Don Schultz, professor emeritus at the Medill School of Journalism at Northwestern University, summed up the global landscape like this last November: "Everything is being commoditized; price is the only game in town. ... Supply-chain and price competition are zero-sum games. Most products and services are instantly replicable." Managers in businesses of all shapes and sizes are wondering how to develop a long-term competitive advantage when other organizations can always find a way to knock off their products or services and sell them more cheaply.
According to Schultz, the answer is a shift from a focus on the supply chain to a focus on the demand chain. The traditional business model puts product, price, and place (i.e., the supply chain) ahead of marketing. The demand-chain model reverses the formula, putting the focus on customers and how to keep them coming back. In today's world, a company's brand drives the perception of value and leads to customer retention. Schultz sees brands as more than slogans and logos; he defines a brand as the sum of customers' experiences with the organization over time. Because line employees are central to customer experiences, they are the key creators of a company's brand. In Schultz's view, increased profits derive directly from satisfied employees (see exhibit 1 below).
To research the link between employees and profits, the Medill School's integrated marketing communications department formed the Forum for People Performance Management and Measurement in 2002. In doing so, it created a new field, people performance management (PPM). PPM is the study of how companies can improve their management of human capital resources across the spectrum of their audiences, from customers to employees. Mounting evidence gathered by the forum and other academics is lending credence to Schultz's model of corporate profit drivers. This research suggests that the businesses which will grow fastest in the coming decade are those that look to their relationships with people -- both customers and employees -- to achieve their performance goals.
Empirical Evidence
One of the earliest studies on the subject was published in 1998, in the Harvard Business Review article "The Employee-Customer-Profit Chain at Sears." This study of 800 Sears stores found that a 5 percent increase in employee attitude scores resulted in a 1.3 percent increase in customer satisfaction and a 0.5 percent increase in revenues.
James Oakley, Ph.D., assistant professor of marketing at the Krannert School of Management at Purdue University, conducted a study last year for the Forum for People Performance Management and Measurement that used a different approach but obtained a similar result. Oakley researched certain business characteristics of 100 media companies based in the United States. The companies were selected randomly but included organizations covering a wide spectrum in terms of market size, region of the country, and company size. Oakley gauged the organizational culture, organizational climate, human resources systems, and market characteristics of the participants through a series of surveys he distributed to their customers and to employees in production jobs (i.e., employees who do not interact directly with customers). He also examined the companies' financials.
As exhibit 2 (below) demonstrates, the study found a direct link between employee satisfaction and customer satisfaction, and between customer satisfaction and financial performance. This finding provides solid support for those who argue that organizations seeking to improve performance should focus on the demand side of the business, rather than solely on the supply chain. When employees deliver a product or service to a level expected by customers, the company will be rewarded with repeat business and, in turn, more profits. Intriguingly, the employees who participated in this study -- whose impact on earnings this data demonstrates -- do not have contact with customers.
Oakley's research also suggests ways in which companies can improve employee attitudes to boost profits. As exhibit 3 (below) demonstrates, the study found that the organizational characteristic which correlates most closely with employee satisfaction is organizational communication, a measure of both downward communication (from higher-level to lower-level employees) and upward communication (vice versa). The quality of this information flow, as measured by employee surveys, accounts for a full 45 percent of the variance in respondents' job satisfaction. None of the other 13 organizational characteristics measured in the survey had a statistically significant impact on employee satisfaction. Companies that want to improve workers' job satisfaction should start by improving their communication with employees.
In addition, employee satisfaction was found to be a significant antecedent to employee engagement (i.e., employees' level of inspiration and commitment to the company's mission). The combination of measures of employee satisfaction, managerial facilitation, job design, and the presence of a cooperative or a competitive culture account for nearly 90 percent of the variance in employee engagement. Interestingly, Oakley found that having either a substantially passive or a substantially aggressive culture is a predictor of negative employee engagement. Employee engagement was then found to have an indirect effect on corporate performance. Improving this metric has a direct and positive impact on the company's market orientation (the term the study uses to describe a set of organizational behaviors including customer focus, market focus, and coordination), which in turn improves customer satisfaction.
