Hospitality Industry
7 min read

The importance of the Service Profit Chain

EHL Insights
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The Service Profit Chain establishes relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity. The basic principle of the Service Profit Chain theory is based on the fact that customer satisfaction starts with good staffing and treatment of ones own employees. Simply put, committed employees convey their satisfaction to the customer, and hence, the chain of service profit is set in motion.

Employee satisfaction is key

Understanding the theory behind the Service Profit Chain begins with accepting the premise that bottom line profitability is achieved by developing customer loyalty, and that a key ingredient of customer loyalty is employee satisfaction. Paying close attention to the key elements that drive profitability in the new service paradigm is essential.

This means:

  • Investing in your people.
  • Investing in technology that support frontline employees.
  • Investing in recruitment and training practices.
  • Investing in compensation systems that are linked to performance for employees at every level.

Resulting in:

  • Customer loyalty that stimulates profit and growth.
  • Loyalty as a direct result of customer satisfaction.
  • Satisfaction influenced by value of services provided to customers.
  • Value created by satisfied, loyal and productive employees.
  • Employee satisfaction from high-quality support services and policies.
  • High quality support services that enable employees to deliver results to customers.

Service Leadership

The Service Profit Chain is strengthened by a different kind of leadership; one that emphasizes the importance of each employee and customer. For such leaders, walking the talk is essential. The customer mindset is made real based on a highly developed interaction with employees. Hiring employees with the right attitude is essential; only focusing on quantifying is missing the heart of business - which is PEOPLE. If an organization wants to tap into the virtuous circle of service profit chain, it has to start with the right leadership mindset, hence the relevance of service or servant leadership

"The ultimate goal of Service Leadership: achieving a customer-focused, agile organization comprising of an interdependent and connected network of small teams, relentlessly pursuing increased customer value through rapid development cycles, unencumbered by hierarchy or bureaucracy and led by managers that promote a service culture through collaborative working and rewarding collective achievement." - Benjamin Laker, Forbes.com

Service leadership involves the use of innovative measurement techniques. These are techniques that measure employee satisfaction, loyalty and productivity on the value of products and services delivered. This allows leadership to build on customer satisfaction as well as loyalty, and to assess the impact on the company's growth and profitability.

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The key to lasting business success is people

Although not often stated in such elemental terms, customer loyalty and employee satisfaction are directly related. In fields where customers interact with varied service providers, notably the hotel and hospitality industry, it is evident that customer satisfaction is a key factor, determined in large part by experiences with multiple personnel -- from a valet parking attendant to the front desk clerk to the housekeeping staff. One less than satisfactory incident can affect the entire experience of a luxury hotel visit. A less-than welcoming greeting at a fine restaurant is as much a deterrent to customer satisfaction as an overdone steak, and may have an even greater effect on a customer's perception of quality. The Service Profit Chain model seeks to identify and address the weak links in human terms.

It's not really a novel concept. It was the core message of Horst Schultze, co-founder of the Ritz-Carlton Hotel Company. He was recognized in 1991 by HOTELS Magazine as "corporate hotelier of the world," and it was under his leadership that the Ritz-Carlton chain was awarded the Malcolm Baldridge National Quality Award, the first and only hotel company ever to win that particular honor. With Schultze at the helm, the company won the award not once, but twice. His message is amazingly simple: He tells leaders in any field to "serve your people by leading them to excellence. That's leadership."

At EHL, we concur that the key to lasting business success is people, despite the fact that we also leverage technology to the greatest possible extent to enhance our training programs, teach operating methods, build competencies, forecast trends, analyze day-to-day fluctuations and plan for the future. There is a critical interplay between the two, and balance is essential, as discussed in a recent article, Industry 4.0: Why People-centric Leadership Is Key, by Dr. Achim Schmitt.

His point is that the digital transformation throughout the education and training segments of all industry today has created a new environment that too often relies on statistics, "Big Data," artificial intelligence (AI), virtual reality (VR) and other "mechanical" means of analysis. But it's the interpersonal contacts and relationships, and "human perceptions" that are more important. They are, as Dr. Schmitt notes, the prerequisites for creativity, loyalty and flexibility, and they became more important in the uncertain environment caused by the pandemic.

Taking it one step further, he contends that:

"Instead of a sole focus on customer-centricity, we teach that people-centricity is key. People centricity involves not just the customers, but all stakeholders including your employees, business owners and suppliers. Our curriculum reflects a commitment both to digital innovation as well as preservation and expansion of human themes: the creation of community, social accountability, a sense of purpose and belonging."

We believe that Schultze would agree. The legendary hotelier, who authored a book entitled "Excellence Wins, A No-Nonsense Guide to Becoming the Best in a World of Compromise," began his career as a server's assistant at a small resort in Germany more than 65 years ago. During his long tenure with hotel chains, including Hilton and Hyatt prior to Ritz-Carlton, he was committed to a single principle -- that of service, and his operational standards and people-centric approach have become global standards. One of his often-repeated tenets is "Caring is what service means."

How does this apply to the Service Profit Chain?

Three decades ago, a group of researchers at Harvard University developed a theory that business profit is tied to customer loyalty, and that there is a causal relationship between employee satisfaction and the development of such loyalty. According to the Service Profit Chain model, loyalty is influenced primarily by the value of services provided to customers. That value is created and sustained by satisfied, well-compensated, well-trained, motivated, productive employees who believe that their contributions are valued by their superiors. Their value is affirmed in numerous ways by immediate supervisors and top management. In a culture based on mutual respect, all ideas and suggestions for improvement can be discussed and problem-solving is a joint effort.

Conversely, any weakness along the entire chain reverberates in both directions and, ultimately, affects the bottom line. Strong links promote understanding, encourage effort and build excellence. The entire chain becomes stronger and that is the ultimate goal.

There is nothing "magic" about the basic concept. Indeed, it is so basic that it might be dismissed by some who believe that success and profitability should be hard work, and that there is nothing "fun" about doing a job well or interacting with customers. The Service Profit Chain refutes that notion, by establishing a direct link between employees who truly enjoy what they are doing and "happy customers" who spend money, patronize their favorite businesses and tell their friends about their good experiences.

It follows, then, that the greatest benefits to the bottom line can be achieved by corporate leaders who pay attention to the needs of their workforce, not only in a general sense, but also by encouraging creativity and idea-sharing. An environment that offers rewards and recognition for those who go "above and beyond" what is normally expected, both within the organization and in customer service, is a breeding ground for success. By building a culture of caring, with a goal of excellence at every level, it follows that the end result will be a higher level of satisfaction and loyalty, and by extension, profitability.

Understanding the Service Profit Chain

For the hotel and hospitality industry, the concept of customer service is a primary pillar of business. Instilling that concept of service from the bottom to the top of the employee chain is crucial. Ideally, it is an ethic that extends all the way from the "server's assistant" to the executive branch. But, all too often, the message is directed from the top down, with no provision that enables lower-rung employees to make a difference. In Service Profit Chain terminology, building an Employee Feedback Loop is critical.

A second consideration is that complaints sometimes don't make it to the top of the ladder. It is most often front-line employees who hear customer complaints. And customer dissatisfaction is not necessarily transmitted by the customer to management. Frequently, a customer simply makes the decision to go elsewhere. A Customer Feedback Loop is equally vital, and it should become the mechanism that allows management to receive and assess ideas for improvement from employees at every level.

The third key element of an effective Service Profit Chain is action. Information is useless without a commitment to take action when warranted to improve operating procedures, training and customer service.

The business model, essentially, has interrelated steps, each one serving as a platform that leads to the next; and then, finally, to the primary objective which is, of course, success and profitability. Let's briefly look at each step:

  • Employee support and enablement: Pay and benefits, auxiliary services, general policies, reward programs, and other corporate programs that offer value to individuals fall in this general category. Ideally, there will be a commitment to listen to suggestions, offer training programs and incentives for advancement and achievement, and an effort to identify and encourage excellence at every level.

  • Employee satisfaction: The level of satisfaction is measurable: High employee retention, loyalty, skills development and a willingness to assume additional responsibility or accept advancement within the organization are the results.

  • Workplace productivity: Performance is directly related to satisfaction, which hinges on the degree of support and enablement that the company provides.

  • Value of services provided: A productive workforce and a highly-functioning work environment will offer value in terms of products and services to every customer. In the most basic terms, it is "service with a smile," and such a culture offers value to the consumer, no matter what the situation.

  • Customer acceptance: Satisfaction is a given when a consumer receives value for the money spent. Higher dollar expenditures may require more service, better quality materials and products and additional benefits, but the basic premise is the same. A friendly smile and a sincere welcome can set the tone for everything else that happens during a hotel stay.

  • Customer loyalty: Loyalty is developed over time and through repeated encounters. A customer who has no complaints may not return because there are other choices available. A customer who receives exemplary service may not leave a glowing comments, but will be more likely to return again. Loyalty must be developed.

  • Revenue/Profit: Finally, satisfied, loyal customers will return again, spend more money and tell their friends and associates of their experiences, leading to higher revenues and profitability.

Looking forward to the future of Hospitality Management

At EHL Swiss School of Tourism and Hospitality, our vision has always been to "empower students to make guests feel at home, but better." It is this emphasis and the high standards that we set not only for our students, but for guest experiences, that defines our programs and our direction. Throughout our 50 plus years of teaching experience, our focus has been to provide a smart direction for hospitality leadership that includes a mix of respect, empathy and caring for others with the need for autonomous thinking, extensive training and comprehensive understanding of the industry as a whole, now and in the future.

Visualizing the Service Profit Chain model as a circle of links is helpful because it emphasizes the continuum of the relationships. But it can also be viewed as a stepladder traversed repeatedly in both directions. Either can be effective.  Value breeds satisfaction which leads to loyalty; and loyalty leads to financial return, which benefits not only the company, but, ultimately, the entire workforce of the company. Above all, happy employees are the basis for lasting success. Or, as expressed by Horst Schultze, "The more accurate truth is this: Do what the customer loves and the money will follow."

 
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