Operations

The service-profit chain

The service-profit chain is used primarily in service-sector firms, such as retailers, restaurants, hotels and airlines

The service-profit chain is primarily used by firms in the service sector, such as retailers, restaurants, hotels, and airlines. It explains the key causal links between employee service levels, satisfied customers, and firm profitability, and it demonstrates the importance of having engaged employees on your team.

When to use it

● To identify the drivers of your profitability in a service environment.
● To diagnose customer retention and loyalty issues.
● To diagnose employee morale issues.

Origins

A group of Harvard Business School faculty members, including James Heskett, Thomas Jones, Gary Loveman, Earl Sasser, and Leonard Schlesinger, created the service-profit chain in the 1990s. While the term "service-profit chain" was coined in 1994, it was based on many years of research into the relationship between a firm's service quality and its long-term performance.

What it is

Firms selling services must consider the drivers of long-term success in a different way than those making and selling products. It is intuitively obvious that high-quality service – for example, a hotel receptionist going out of her way to assist you – is a good thing, but we must consider what motivates the receptionist to act in this manner, as well as the consequences of her actions.

The service-profit chain is a comprehensive framework that explains the causal links in the business model of a service firm. It identifies the key parameters you must manage, how they interact, and what measures you should prioritize.

How to use it

By defining the elements of the service-profit chain and the links between them, you can create a very practical framework that can help you diagnose how successful you are and where the problems may be. This allows you to define the changes that may be required to improve the overall strength of the chain. Working backwards, the key links in the chain are as follows:

● Customer loyalty drives profitability and growth: According to research, a 5% increase in customer loyalty results in a 25–85% increase in profits. This is the fundamental starting point for comprehending the service-profit chain.
● Customer loyalty is driven by value: In your experience, what makes you loyal to a service company such as a hotel, restaurant, or airline? It is the belief that you are receiving value, such as the attentiveness of the staff or the quality of the product. Customer satisfaction is driven by value, which translates into customer loyalty.
● Employee productivity drives value: While most service companies have a product component to their offerings (such as the hotel room itself), it is usually the quality of the service that creates the perception of value. When employees want to stay with the company and are productive, value is created. As a senior manager, your policies and actions have a direct impact on employee retention.
● Employee satisfaction and loyalty are key drivers of productivity: When employees are positive about the company for which they work, they are more willing to devote their free time to it, and their positive attitude rubs off on others.

● Internal environment drives employee satisfaction and loyalty: Many factors influence how employees feel about their work, including the quality of their colleagues, their working conditions, the incentives they receive, and the specific roles they are asked to fill. All of these things are ultimately under the control of the organization's senior leaders.
● Leadership underlies the chain’s success: The policies and actions of the firm's leaders underpin the serviceprofit chain. Leaders decide how work is organized, what actions are rewarded or punished, and who to hire and how to manage their new hires

Top practical tip

You can't work on a single idea – such as improving employee incentives or customer service – and expect to see results throughout the service-profit chain. Only when changes are made in the context of the entire system will improvements occur..

If you have to start somewhere, it makes sense to focus first on the quality of the internal working environment. If you create a supportive and engaging workplace and offer training and advancement opportunities, you will have happy and productive employees, which will trickle down to the rest of the links in the chain. The lesson is critical for businesses that are prone to cutting costs in order to improve their performance.

It is worth noting that the service-profit chain was designed for service firms, but increasingly, firms selling products are also in the service business (for example, think about buying a car – the service you receive from the dealer and the garage doing the servicing has a big impact on you). As a result, these concepts can be applied to businesses in virtually any industry.

Top pitfall

The 'chain' metaphor is important here because the system is only as good as its weakest link. Spending a lot of time measuring and improving customer loyalty, for example, is pointless if your employee turnover is extremely high or if you have disengaged employees. In that case, you must address the issue of employee satisfaction, possibly through better training or the appointment of more effective senior managers.