November 1995 - The loss of loyalty

How important is loyalty in today's workplace? There are several reasons for addressing this question, not least that attitudes towards loyalty among managements and employees appear to be changing as a result of workforce reductions and new working practices.

There is a moral question. Should an employer have a duty towards the well-being of an employee, particularly if in doing so there is a risk to the prosperity of the business? Milton Friedman, the prominent US economist, has said that economic performance is the only responsibility of business, and Peter Drucker, the management writer, while not going so far as Friedman, argues that it is at least the first responsibility.

This suggests that it is important to examine the business case for loyalty. Is the mutual loyalty of employer and employee good for business, and what happens when loyalty is lost?

Among most employees, at least, loyalty still seems to be valued. More than three quarters of the 1,000 UK employees questioned in a survey carried out by Templeton College, Oxford, on behalf of the Institute of Personnel and Development, said that they remained loyal to their employer, although many admitted their trust in the management had been dented. Nearly half of those surveyed said they regarded their current job as a long-term position.

So, however much people should, as Charles Handy, the employment writer, says, prepare for 'portfolio' careers - where their job comprises a package of freelance work for different customers - the truth is that many are not doing so, nor do they want to.

Once established, loyalty seems to be one of those qualities that persists beyond rational thought. Charles Heckscher, who holds the chair of Labour Studies and Employment Relations at Rutgers University in the US, was surprised to find, in a series of interviews covering 250 middle managers across US industry, that some managers remained loyal to their companies after quite brutal redundancy programmes. He describes their loyalty as an emotional attachment, a love of the company.

In White Collar Blues*, a study of management loyalties, he found that this commitment to the company was far more common than loyalty to an individual leader, and it sometimes transcended managerial aims. In some companies, employees had developed methods of doing their jobs the way they thought best, sometimes contradictory to the wishes of management.

Most of the managers Heckscher interviewed thought loyalty was a good thing, equating it with trust, caring and respect. They contrasted it with what they viewed was a cold, unfeeling approach in the modern use of temporary employees. Not all agreed with this, however. Some equated loyalty with blinkered, unthinking obedience and the complacency that can arise among comfortable employees. One manager went so far as to say: 'If you want loyalty go get a dog.'

This last point has some resonance in Heckscher's thinking when, in conclusion, he dismisses the need for this old-style loyalty, arguing that companies can bind their employees with a new ethic, a shared sense of purpose.

But that is far from adopting a strategy of head-count cutting for the sake of the bottom line, a point stressed by Geoff Armstrong, director general of the IPD at its conference in Harrogate last week.

'Nobody ever cut their way to success. Nobody ever cut their way to growth,' he said. 'If even a tiny proportion of the tens of billions of pounds written off in the eighties and nineties against redundancy and rationalisation had been spent on training, research and innovation, on finding new products and services, customers and markets, just think how much better our economic performance would be.'

This might not have been realistic in a short-term economic climate of boom and bust where redundancy programmes have sometimes proved the only option available for survival. But it is difficult to ignore the implication that such programmes are a sign of a failure in business to establish a foundation for long-term success.

What price loyalty, then, in the lean and mean business environment of the 1990s, when gurus are preaching the need for responsiveness to continuous change and when some observers believe business is giving up on loyalty? The business case for its retention is made by Frederick F. Reichheld in a forthcoming book, The Loyalty Effect**. He suggests, as the Oxford survey would appear to support, that loyalty is not dead.

Reichheld links employee loyalty to that of customer loyalty. Both, he argues, are essential to consistent long-term growth and profits. Yet many US companies do not seem to have recognised this. On average, says Reichheld, US companies now lose half their customers in five years, half their employees in four, and half their investors in less than one year.

While some businesses may have no choice but to cut their head counts to avoid going under, many of today's lay-offs, observes Reichheld, have been carried out by profitable companies. He quotes a decision by a profitable Rank Xerox to cut its workforce by 10,000 - a 10 per cent cut - to improve productivity. Its stock rose 7 per cent on the day of the announcement.

'This kind of news exhilarates short-term investors,' writes Reichheld. It does not, he adds, exhilarate employees. 'What it does is stifle creativity, discourage risk-taking and destroy loyalty.'

Investors in such cases may be like those cynics who, in the words of Oscar Wilde, know 'the price of everything and the value of nothing'. Reichheld recalls this when he points out that the immediate savings of laying people off are quite clear, the long-term consequences to cash-flow less so.

Personnel specialists have sought to quantify the cost of employer turnover by estimating recruitment and training costs, and the loss of productivity as inexperienced workers replace older hands. Some have tried also to account for the cost of the poorer service that may result from employee turnover.

These 'losses' have not convinced managers because of their lack of visibility, but they are losses none the less. A team from Bain & Company, the Boston-based consultancy where Reichheld is a director, calculated that a trucking client could increase its profits by 50 per cent by halving driver turnover.

It also found that employee retention was not only more cost-efficient, but had a direct link to the retention and acquisition of customers. In the car service business, for example, it discovered that outlets with the highest customer retention also had the best employee retention. The lesson was plain enough. Customers felt comfortable doing business with a local mechanic rather than with bigger chains where they rarely saw the same mechanic twice.

Additionally, new business arose not just from customer referrals, but from employee recommendations to their friends and families. This kind of referral drew in more new customers than advertising and promotion put together, Reichheld noted.

Reports of loyalty's demise may have been premature. It may, as Heckscher suggests, need some redefinition to remove any hint of complacency, but it should not be ignored in management statements about 'lack of job for life' that can undermine job security. Loyalty remains, says Reichheld 'one of the great engines of business success, and it is still alive and thriving at the heart of every company with an enduring record of productivity and growth'.

*White Collar Blues: Management Loyalties in an Age of Corporate Restructuring, by Charles Heckscher, published by BasicBooks a division of Harper Collins, price £16.99.

**The Loyalty Effect, The Hidden Force Behind Growth, Profits, and Lasting Value, by Frederick F. Reichheld, Harvard Business School Press, will be available in the New Year in the US, price $ 24.95.

© 1995 Financial Times Ltd. All rights reserved

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