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The Secret to Happy Customers in a Bad Economy

Think of the lean economy as a chance to strengthen your business, improve relations with customers, and even make your
employees more loyal. This full article from Harvard Management Update describes steps for dealing with customer service
when the economy goes south.

by Jimmy Guterman HBSWK Pub.

You hear a lot of advice these days about the need to make customer
service your company’s preeminent concern. But Hal Rosenbluth,
chairman and CEO of the corporate travel-management firm Rosenbluth
International (Philadelphia), is firmly in the employees-come-first camp.
When your employees are properly trained and motivated, he argues in
The Customer Comes Second and Other Secrets of Exceptional Service
(Morrow, 1992), and when you give them the authority and resources
they need to solve customers’ problems, improved service and delighted
customers are the natural consequences.

Yet in the wake of the terrorist attacks of September 11, Rosenbluth had to send a pair of memos to
his staff. The first laid out the company’s dire situation. The second, sent less than a week later,
explained why the earlier moves weren’t working, gave the rationale for furloughs, and indicated what
salary cuts and other belt-tightening moves Rosenbluth and his senior managers were taking.

Rosenbluth International is by no means the only company in this difficult situation. As every manager
knows, devoted and motivated employees serve customers better; customers happy with a
company’s products or services are likely to make employees feel better about their work. But
companies are asking—or forcing—managers to cut costs as much as possible in as many ways as
possible as quickly as possible. Nearly all the fat has been cut from many companies. Now, to stay
in business during a downturn, many companies are finding they need to cut muscle, too. The result?
Employees who survive the layoffs are often demotivated and scared about their future. Service quality
suffers, which prompts customers to consider jumping ship.

The way out of this dilemma is to avoid the false dichotomy between customers and employees. You
can still support both groups even if you can’t devote as many resources as you’d like to either.
Thinking strategically about both groups and treating them respectfully ensures that the virtuous
circle—the vital link between engaged employees and highly satisfied customers—remains unbroken.
And it sets up your company for greater success when the economy turns around.

If you have to lay off employees, do it with respect—and with the quality of the customer
experience firmly in mind. First, the harsh reality: "Loyalty doesn’t mean taking care of an
employee who’s not producing value," says Frederick Reichheld, director emeritus of Bain &
Company (Boston) and author of Loyalty Rules! (Harvard Business School Press, 2001). "That’s just
being paternal, and doing that is a recipe for disaster. Loyalty means putting the welfare of customers
and employees ahead of short-term interests." Acknowledging this reality can help you identify easy
places to trim payroll in a downturn, although Reichheld insists that you should be doing it in good
times as well as in bad. But the more complicated scenario is when you’re forced to contemplate
laying off productive employees.

It’s not inherently disloyal to employees to let them go during tough times, but experts suggest doing
so only after other avenues have been fully explored—and after you’ve clearly communicated what is
happening, as Rosenbluth did with his two company-wide memos. Because of the way he handled
the situation, employees, even those who were losing their jobs, were more likely to respond with
respect and perhaps even a feeling of loyalty toward Rosenbluth International.

"Those who take the easy, immediate approach of downsizing without sizing up opportunities to do
something more imaginative are going to have problems," says James L. Heskett, professor emeritus
at Harvard Business School. The Service Profit Chain (Free Press, 1997), a book he coauthored with
W. Earl Sasser, Jr. and Leonard A. Schlesinger, describes the positive feedback loop that results
when companies have both satisfied customers and motivated employees.

Not surprisingly, then, Heskett says it’s a big mistake to make layoffs without carefully considering
their effect on service quality. "The smartest companies today, even when they’re in trouble, are
moving employees around, having them share jobs, having them work reduced hours so the company
can preserve jobs," he says. "Although the jobs may be different and may not add up to the same
number of hours or amount of compensation employees enjoyed during the best of times, at least
these people are still working. That creates trust between employees and management, and that’s
going to affect how these employees deal with customers. Tough times are a great time to reinforce
to everyone in the organization that they are there to serve customers, that the company isn’t going to
abandon customers either."

"Everyone has done layoffs," notes Patricia Seybold, CEO
of the Patricia Seybold Group in Boston and author of The
Customer Revolution. "But how the best companies deal
with tough times is encouraging for those of us looking
forward. They’re convinced that keeping the quality of
customer experience front and center is key to
survivability, then viability, then profitability. We’re seeing
more and more companies making quality of customer
experience a big chunk, from 20% to 100%, of
performance-based pay. Companies who do this swear by
it because it helps focus employees on the customer."

It also helps if you can scrounge up some extra money for the employees left on board, advises
Heskett. For those who must go, the best procedure is to "lay off people as if they were future
customers," he says. "When you let someone go, try to put together a safety net, do the best you
can do, provide relocation support. Treat these people as potential future customers and potential
future employees—as if they will one day be in a position to send business to your company."

Customers pay attention to how the companies they patronize treat their employees, adds Heskett.
Down the road, when customers are more likely to dig more deeply into their pockets for a purchase,
they will remember which company tried hard to keep employees on board and which sacrificed
workers to the company’s stockholders.

Consider laying off nonproducing customers, too. The notion of firing certain customers often
gets lost in the din of talk about downsizing. Granted, companies need demanding customers if they
want to become great companies. Fred Wiersema, founder of the Center for Market Leadership at the
management consulting firm DiamondCluster (Chicago) and author of The New Market Leaders, calls
these demanding clients "stretch customers." Not all stretch customers are profitable for a
company—nor should they be. Rather, they tend to be "forerunners of the demand that the market will
show eventually," says Wiersema. "If a company can satisfy a stretch customer, it will get better at
what it does. This is why stretch customers are incredibly important for a company in the long term.

"But it’s important to differentiate between that kind of customer and a lagging customer that a
company shouldn’t spend time on, because lagging customers can disrupt the business. You have to
size up your customers and decide who you can serve. If you have customers who don’t offer
substantial revenue, if they’re not strategically important, if they’re more trouble than they’re worth,
then your employees should not be devoting too much time to them. It frustrates the employee and
doesn’t do anything for the company."

Just as laying off employees shouldn’t be a knee-jerk reaction, so too should you think strategically
about the customers you let go. "You have to be open and honest with suppliers and customers when
they come up short rather than just bolting or dropping them," says Reichheld. "This is a time to
remind all your partners what you stand for, what your principles are. You have to explain how the
actions you’re taking are consistent with your principles, that you’re not bending the rules when times
are tough."

A downturn is an opportunity to build loyalty. There’s a silver lining behind the current dark
clouds, Reichheld continues. "Back in the go-go late 1990s, when every employee thought he could
leave and get a raise—or threaten to leave and get a raise—it was a bad time for many companies to
get loyalty right. Now, corporate leaders have much more leverage not just to think about the next
quarterly profit but also to think about core principles and loyalty. Unfortunately, most leaders can’t
tell you what it means to be loyal—that failure has led to mediocre service and high prices that
alienate customers and employees alike."

While Rosenbluth seeks to build loyalty by tending to employees first, Wiersema maintains that
"customers are the scarcest thing out there. You can still find funding and it’s easier now to find
people with skills. In bad times, customers show a flight to quality and it’s the companies that have a
clear customer orientation that will thrive and gain employee loyalty. Employees who feel their
company has its act together find dealing with customers a pleasure, even in bad times."

Keeping one group happy will often make both groups happy, says Marc Drizin, vice president of
Walker Information (Indianapolis), which advises companies about their relationships with employees
and customers. "It doesn’t take a genius to realize why Southwest is doing better than the other
airlines since September 11. It consistently does the right thing; that’s why it has the strongest
employee and customer loyalty in the industry. Customers remember companies that do well for
employees in bad times. Customers and employees are so intimately connected; I don’t know how
you can separate them."

· · · ·

Reprinted with permission from "Don’t Let Your Customer Service Suffer When Your Workforce Shrinks," Harvard
Management Update, Vol. 7, No. 1, January 2002.

Jimmy Guterman is president of The Vineyard Group, a consultancy in Chestnut Hill, MA. He can be reached at
[email protected].

http://hbswk.hbs.edu/pubitem.jhtml?id=2874&sid=0&pid=0&t=customer

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