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Donkin on Work - Human Capital Management

January 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 desk.

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 in companies.

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 bad relationship”.

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 programme.

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.

©2006 Richard Donkin - all rights reserved