Allegiance_Peppers_and_Rogers_Engagement.pdf

white paper | 2008

Engagement

The New Competitive Advantage

Creating Value by Strengthening Employee and Customer Engagement

Engagement: The New Competitive Advantage

Creating Value by Strengthening Employee and Customer Engagement

executive overview

“

The future isn’t what it used to be,” Yogi Berra once wryly noted—and that

insight is truer now than ever before. Increasingly, companies are realizing that a

future defined in terms of the traditional axes of competition—product, price, place,

and promotion—will no longer propel growth, but simply allow parity with the com-

petition to be perpetuated. Winning today requires a new competitive advantage:

people—both employees and customers—who are not only satisfied, not only loyal,

but also engaged. You know it when you see it: an enthusiasm for your company, an

emotional connection to your brand, and a level of energy that is unmistakable.

It is this passion that causes employees and customers to be engaged with your

business—and thereby to deliver enhanced profits.

Yes, you’ve heard the talk about engagement before, and there certainly has been

a lot of it in recent years. What’s different now—what’s reallydifferent now—is that

there is a way for companies to “walk the talk,” and to move engagement from a

conceptual notion to a concrete opportunity that actually delivers results. The reader

of this white paper will walk away with an enhanced understanding of engagement,

a recognition of why it is so critical today, a realization that it can be measured and

managed, knowledge of what drives it, and an appreciation of its multifaceted

impact on the business—plus, tools, tips, and techniques to get going.

Table of Contents

The New View of Engagement ............. 2

The Business Imperative

for Engagement ...................................... 4

Today’s Practical Solution for

Tomorrow’s Profitable Success............. 7

Q&A with Don Peppers ...........................9

Ten Takeways To Get Going .................10

The New View of Engagement

Engagement has as many definitions as it does proponents,

but three core elements are common among them all. First,

engagement is generally understood to have a rational or

intellectual component, capturing the extent to which an

employee recognizes and agrees with the company’s mis-

sion or a customer values the attributes of a brand, for

example. Second, there is a behavioral factor (e.g., recom-

mending or purchasing) in which high energy and discre-

tionary effort are present. Third, there is an emotional facet,

exhibited as an attitudinal attachment or as enthusiasm.

While these elements of engagement are fundamental, this

scholarly perspective does not easily support the practical

application or measurement of the concept, nor does it incorpo-

rate the basic building blocks of satisfaction, quality, or loyalty

that have been proven to be important for business success

and on which many companies have already expended signifi-

cant resources. Building and extending upon that foundation,

the new view of engagement involves five levels (see Figure 1).

At its most basic level, an engaged employee or cus-

tomer must be satisfied—the person’s expectations of the

performance of the company or the product must be met. If

this is achieved, then there exists the opportunity to build

loyalty—the intent of an employee to remain a member of

“Engagement is the soft and fuzzy business of connecting

your products and services to the human heart. But, today it

is completely practical, delivering hard, measurable benefits.”

— Kyle LaMalfa, Best Practices Manager, Allegiance

the company’s workforce or of a customer to continue

patronage of the company. Loyal individuals have the

option of recommending the company to friends, and

doing so defines the next layer of the hierarchy. For

employees, the viewpoint that the company is one of the

best places to work—or, for customers, that it has the best

products or services—represents one more step up the

engagement ladder. Finally, the last tier of the continuum

involves an emotional connection, reflected in an employee

being proud to work for the company or a customer being

excited about the direction of the company.

“This view of engagement,” notes Kyle LaMalfa, Best

Practices Manager at Allegiance, “positions the more tradi-

tional facets of employee and customer interactions, such

as satisfaction and loyalty, into a more comprehensive and

practical context. It also exposes the myth that willingness

to recommend is the peak on a company’s climb toward

excellence.”

Used as a measurement model, this multicomponent

view of engagement allows a business to understand both

the transitory and the more stable aspects of its relation-

ships with employees and customers. For example, while

measures of satisfaction are prone to increase or decrease

based upon the single most recent interaction, those high-

er-level measures that probe the dimensions of excitement

toward the company are not. Additionally, while it is possi-

ble to “game the system” and disguise the true status of

the relationships when only measuring satisfaction, doing

so with a more comprehensive set of engagement meas-

ures becomes nearly impossible.

“To achieve success,” explains Chris Cottle, Vice President

of Corporate Marketing at Allegiance, “it is now vital that a

company orient its radar toward engagement. It is in fact the

new business imperative.”

Figure 1: Hierarchy of Engagement

Excited/

Proud

Best Products &

Services/Employer

Recommend

Loyal

Satisfied

Trust

Engagement is a hierarchical organization of perceptions and

emotions toward a company and its products and services by its

employees and customers, built upon a foundation of trust.

Source: Allegiance

case in point

RS Medical Uses Feedback to Strengthen Products

RS Medical is America’s premier

provider of physician-prescribed

home electrotherapy rehabilitation products and servic-

es, whose customers include physicians, patients, and

their insurance companies. 1 Today, the company is col-

lecting feedback from both its employees and cus-

tomers to enhance their level of engagement as well as

address specific business needs.

With customers, the measurement of satisfaction and

the collection of (and response to) feedback is a require-

ment for meeting industry accreditation standards. As a

consequence, the company has made a commitment to

obtaining and using customer feedback, and is receiv-

ing suggestions for product and service improvements

that are now reviewed by its Customer Satisfaction

Committee. Whether the feedback channel is the web,

the call center, or a paper questionnaire, it is all central-

ized into one single database for ease of management

and reporting.

“RS Medical now has the tools to address all types of

feedback,” explains Alicia Munoz, Quality Project

Specialist at RS Medical. “We can specifically point to

tangibles. We now have workflows and processes to

address any number of feedback issues. Consistency

and integrity of the response can now be monitored.” 2

“I can honestly say that here at our corporate office,

everyone is so very pleased because we are all on the

same page,” notes Munoz. “Employees have especially

benefited, as they can anonymously communicate

issues with Human Resources. For the first time, com-

pliments about our Field Sales Personnel are captured

for all to appreciate. And now, we finally have baseline

feedback that can be used to benchmark ourselves as

an industry leader.” 2

The Business Imperative for Engagement

Engagement is the lynchpin of business success. Building on

the seminal work of James Heskett, a faculty member at the

Harvard Business School who advanced the “Service-Profit

Chain” 3 in 1994, researchers and practitioners have since

empirically linked employee satisfac-

tion to employee retention and pro-

ductivity, to customer satisfaction, to

customer loyalty, and ultimately to

revenue growth and profitability.

Today, the business case for both

employee engagement and customer

engagement is compelling, and

encompasses the critical and timely issues of (1) productivity,

ensuring that each resource is fully utilized for maximum gain;

(2) performance, delivering financial benefit through both cost

control and revenue generation; and (3) sustainability, enhanc-

ing the likelihood of a persistent advantage for the firm.

Moving a workforce of 10,000 from low to high engagement

has been estimated to have an impact of over $42 million. 6

“This isn’t just

warm, fuzzy

stuff. It’s solid

business logic.” 4

—Myron Ullman III,

Chairman and CEO,

JCPenney

As compared to companies experiencing single-digit rates of

growth, those with a double-digit rate have 39 percent more

employees who are highly engaged—and 45 percent less

who are highly disengaged. 16

Total shareholder return (TSR) increases in concert with

employee engagement: in companies where 60-70 percent

are engaged, the average TSR is 24 percent; where 49-60 per-

cent are engaged, TSR drops to 9.1 percent; and, where less

than 25 percent are engaged, TSR is negative. 6

The earnings per share (EPS) metric exhibits a similar pattern:

the top 25 percent of public companies with the highest levels

of employee engagement have an EPS growth rate 2.6 times

that of below-average companies. 17

Best Buy, for example, was able to demonstrate that an

increase in engagement among store employees of 0.1 on a

five-point scale results in an annual profit increase of $100,000

for the store. 18 At JCPenney, it has been shown that stores with

high levels of engagement (i.e., in the top 25 percent) deliver 36

percent greater operating income than stores of similar size

with low levels of engagement (i.e., in the bottom 25 percent);

they also produce about 10 percent more in sales per square

foot than average. 4

Productivity

Depending upon the industry, personnel-related costs can

account for up to 60 to 70 percent of a company’s total

expenditures. 5 As a consequence, it is essential that busi-

nesses secure the maximum return from their investment in

human capital. Today’s best companies are making it happen

by building and nurturing employee engagement.

Consider the facts. Increasing an employee’s level of

engagement from low to high yields a 21 percent increase in

performance. 6 Those employees with the highest levels of

commitment perform 20 percent better. 7 Offices with

engaged employees are 43 percent more productive. 8

Engaged customers are more beneficial for a business,

too. They deliver repeat business through enhanced loyal-

ty . 9,10 They are easier to persuade and are prone to your pro-

motions. 11 They add value to your business through word-

of-mouth recommendations. 12,13

Figure 2: Impact of Employee Engagement

on Financial Performance

40%

High Engagement

Low Engagement

27.8%

20%

19.2%

13.7%

Performance

Engagement with the company by its employees and with

the brand by its customers each deliver significant financial

performance for the firm. (see Figures 2 and 3).

-3.8%

-11.2%

-20%

Employees. Considering employee engagement, the perform-

ance benefits are substantial.

-32.7%

-40%

Operating Income

Net Income Growth Rate

EPS Growth Rate

Engaged employees intend to stay with their current

employer at a considerably higher level than those who are

disengaged (85 versus 27 percent), 14 minimizing the costs

of replacement, which can be as much as 150 percent of the

salary of the position. 15

High levels of employee engagement are associated with posi-

tive 12-month changes in operating income, net income growth

rate, and earnings per share (EPS) growth rate. 19

Source: ISR Research

Customers. Executives from around the globe agree: the

benefits of building customer engagement are significant,

including improved customer loyalty (80 percent), increased

revenue (76 percent), and increased profit (75 percent). 10

Their perspective is consistent with independent research

demonstrating that highly engaged customers deliver a 23

percent increase in share of wallet, profitability, and revenue

as compared to the average customer. 20

An examination of the casual-dining sector documents the

benefits of customer engagement (see Figure 3). When compar-

ing those with a high level of customer engagement to those

with a low level, a marked difference in financial performance

emerges. High customer engagement delivers a return on

investment of 7 percent, versus -22 percent when engagement

is low; for the gross margin metric, the spread is larger, 29 per-

cent versus -12 percent; and for earnings per share, the differ-

ence is even greater, 75 percent versus -50 percent.

Figure 3: Impact of Customer Engagement on

Financial Performance

80%

75%

High Engagement

Low Engagement

60%

40%

39%

29%

20%

-8%

-12%

-20%

-17%

-22%

Employees x Customers. While employee engagement and cus-

tomer engagement individually drive high levels of business per-

formance, together they are a potent combination. An analysis of

1,979 business units in 10 companies shows that those with high

levels of engagement for both are roughly twice as effective

financially as those that excel on only form of engagement, as

measured by total sales and revenue. For one luxury retail chain,

the joint impact of employee and customer engagement deliv-

ered an average of $21 more in earnings per square foot, for a

total of more than $32 million for the entire chain. 20

-40%

-50%

-60%

ROA

ROI

ROE

EPS

High levels of customer engagement are associated with

improvements in many financial metrics, including return

on assets (ROA), return on investment (ROI), return on

equity (ROE), gross margin (GM), and earnings per share

(EPS). 21

Source: PeopleMetrics

case in point

Vectra Bank Colorado Focuses on Listening

Vectra Bank Colorado is a full-

service financial institution, offer-

ing banking, trust, investment, and financial planning

products and services to individuals and businesses. 22

“How our people treat our customers, how they serve

them—and our ability to listen to our customers, hear

what they want, and be able to respond...would be a

reason why customers would bank with us, or employ-

ees would choose to work with us,” 22 explains Erica

McIntire, Senior Vice President and Director of Marketing

Communications at Vectra Bank Colorado. To achieve

this competitive differentiation, the bank collects feed-

back from a representative sample of employees and

customers at monthly intervals, and analyzes it to

understand and improve engagement at a detailed level

(e.g., by demographic groups or for individual bank

branches). The success equation is simple yet powerful:

“Happy Employees + Happy Customers = Revenue,” 22

notes McIntire.

For example, the bank identified the need (and has

now implemented a program) to provide unexpected

rewards and recognition as a consequence of the analy-

sis of employee feedback. With customers, the bank is

able to know if a problem exists with a product, route the

feedback to the right person in the bank, and save the

relationship. This ability to listen to customers “gives us

the opportunity to build and strengthen customer rela-

tionships—fulfilling our brand promise,” 22 says McIntire.

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