2006 – In search of the ultimate measure
of employee performance
In A Hitchiker’s Guide
to the Galaxy, by the late Douglas Adams,
it took the computer, Deep Thought, some seven
and a half million years to work out that the
answer to the ultimate question about life, the
universe and everything was 42.
It never did in fact discover
the ultimate question. So it was only a matter
of time before someone in the management industry
would seize on the idea that there may be some
ultimate question in business and use it for the
title of the book.
Publishers are masters of hyperbole,
which probably explains why an early copy of The
Ultimate Question: Driving Good profits and True
Growth* spent the Christmas break sitting on my
The book, however, is written
by the former Bain & Co director, Fred Reichheld,
whose work I have admired for many years. Mr Reichheld,
author of two previous books on the value of loyalty
in business, pursues his interest in this new
work, exploring the idea that there may be a single
straightforward metric that connects the customer
experience with profits.
The book is timely since its
appearance dovetails neatly with a conversation
launched in the week before Christmas at the inaugural
meeting of the Human Capital Standards Group,
a partnership body exploring common approaches
for the collation and reporting of employee information
The group, hosted by Investors
In People and drawn from industry and management
bodies such as the Chartered Management Institute,
The Work Foundation and the Chartered Institute
of Personnel and Development, is seeking to pool
existing knowledge of human capital metrics in
order to establish some basic standards and measures
that can be used for comparison across industry.
The need for these measures was
highlighted in the Accounting for People report
published in 2003. It was stressed again in the
now defunct reporting standard prepared for mandatory
Operating and Financial Reviews. Mandatory reviews
were abandoned by Chancellor Gordon Brown in the
autumn, leading to fears within the human resources
profession that the impetus for the reporting
of employee information had been lost.
The concern is understandable
because a regulation is always useful for concentrating
minds. But I have never felt comfortable with
the idea of reporting or measuring areas of business
performance as an issue of compliance. If companies
are to take seriously the value of measuring aspects
of employee performance they must be able to see
the business case for doing so.
Investor interests at the December
meeting made it clear that demand for comparative
measures of human capital remained strong among
fund managers and institutions. They want to see
standard measures allowing them to make valid
comparisons across sectors and industries.
Mr Reichheld makes the same point
in his book. He compares the confusion created
by a variety of measuring systems used in different
companies with the “confusion reminiscent
of medieval European villages, where trade was
difficult because each town had its own system
of weights and measures.”
He writes: “Today’s
non-standard metrics clog the arteries of commerce
and learning just as they did hundreds of years
ago. The absence of a standard, intuitive system
makes it harder for customers to report their
feedback consistently and harder for companies
to interpret and use it.”
His book makes the distinction
between what he calls “good” and “bad”
profits. If some business leaders believe that
all profits are good, they are mistaken, he argues.
Profits earned at the expense of customer loyalty
are likely to lead to shrinking business. Typically
customers may be lost through some economy such
as reducing the number of people minding a call
centre or charging an exorbitant telephone rate
in a hotel.
Good customers not only stay
with a business, an irony of their loyalty is
that they often pay more than those who are constantly
switching allegiances as they respond to special
offers. It follows, therefore, that fickle customers
are less profitable for business yet they are
the ones that often command most attention.
Mr Reichheld parcels customers
in to three groups: “promoters”, “passives”
and “detractors”. Promoters are those
who tell their friends about the product or service,
passives are neutral, and detractors are what
he calls “unhappy customers trapped in a
His “ultimate question”
for customers is quite a simple one: “How
likely is it that you would recommend this company
to a friend or colleague?” Customer reaction
can be determined by scoring the answers on a
10-point scale from 0-10. The percentage of detractors
or unhappy customers subtracted from the percentage
of promoting customers produces what he calls
– the net promoter score, to his mind the
single most important indicator of healthy profits
that carry in-built growth potential.
This customer feedback can be
translated directly in to employee management
through training, reward and promotions. One company
that has done this perhaps more tellingly than
any other is Enterprise-Rent-A-Car, the largest
car rental company in the US.
Using a measure called ESQi (Enterprise
Service Quality index) that rated customer satisfaction
on a five-point scale, the company and its research
consultants were able to pin down two questions:
“Were you completely satisfied?” and
“how likely are you to return?” The
feedback from these questions, more than any others,
pointed to the likelihood of a customer returning.
It was only when the customer
relationship was understood in such detail that
the senior management could set about aligning
training, recognition, pay and employee advancement
around a focus on customer service. Unlike some
companies, where sales people will urge customers
to mark them kindly on satisfaction surveys, any
attempt to rig the feedback system at Enterprise
can lead to disciplinary action.
If this kind of customer measurement
can be distilled in this way, the same can be
achieved in employee measures. For customer read
employee; yet, just now, approaches to measuring
in employment resemble those medieval village
systems. But new evidence is emerging all the
time that is pointing to refinements.
A large-scale joint study, funded
by various employer bodies, has been launched
in the UK by the Institute of Employment Studies
and the Work Foundation to test the impact of
some 37 employment metrics drawn up in previous
work undertaken by the IES. Pooling this work
with other research undertaken by the Work Foundation
should enable the list to be fined down further.
The Chartered Management Institute has also offered
to feed in its own separate research findings.
The idea is to establish various
metrics, some that could be used competitively
by companies and some that might be usable as
common comparisons if adopted across industry.
The standards group, meanwhile, drawing on a powerful
lobby of management, industry, consulting and
investor expertise, will seek to co-ordinate and
promote a series of core measures that can be
tested among employers within the joint research
The study is mindful, however,
of the need of companies to adopt simple and economically
viable systems. As Mr Reichheld points out, customer
and employee surveys can easily begin to suffer
from “question creep” as they become
overloaded with unnecessary queries.
If customer surveys can be simplified
it follows that the same principles could be applied
to employee satisfaction surveys. Indeed there
are many similarities to the customer-focused
approach in this question aimed at employees:
“How likely is it that you would recommend
this company to a potential recruit?” The
scaled responses to a question such as this might
say a lot about a company’s reputation.
Will this be the year that companies
and their employees finally measure up in a way
that means something to all of us?
*The Ultimate Question: Driving Good
profits and True Growth, by Fred Reichheld is published
in March 2006 by Harvard Business School Press, price $24.95.