Drive Top and Bottom Line Results with People Performance: Engage and Retain People to Satisfy Customers and Increase Productivity.

Transcription

1 Drive Top and Bottom Line Results with People Performance: Engage and Retain People to Satisfy Customers and Increase Productivity By: Erik Berggren Director, Global Research Christopher Lozaga Research Analyst

2 In today s hyper-competitive business environment, companies must maintain the highest level of performance in order to succeed and win. As a result, companies must increasingly leverage every resource to create and maintain a competitive advantage. The resource most difficult to harness is people. This resource, however, is also where companies find their greatest gains in productivity, creativity, and innovation. People are central to the success of any organization. Simply put, great people make great teams that make great products, and deliver great service. In order to deliver excellent results, employees must be motivated and have the necessary competencies, or the capacity to develop them. Furthermore, the organization must have the proper tools and support for the employee to succeed. The desire to harness the latent potential of employees is driving the adoption of Human Capital Management (HCM) software, in order to motivate, teach and allocate resources. In the paper How Smart HCM Drives Financial Performance, Dr. Jac Fit-enz author of eight books and acknowledged father of HCM metrics, and Erik Berggren of SuccessFactors Research, proved that there is significant financial benefit to implementing a superior Human Capital Management system (see below). Now that this link has been established, it is critical to understand how HCM actually drives increases in revenue and profit. How Smart HCM Drives Financial Performance 2007 Finding 1: Finding 2: Finding 3: 67% of companies with stronger financial performance cover all managers and some levels below with the performance management system. Only 28% of the weaker performers do. 44% of the stronger performers have almost 100% aligned goals at the managerial level. None of the weaker performers do. 38% of the strong performers have a succession planning program in place. 0% of the weaker performers do. Source: Berggren, E., Fitz-Enz, J. (2007), How Smart HCM Drives Financial Performance,, San Mateo, CA. All rights reserved. 2

3 HCM Business Impact Model The Human Capital Management Business Impact Model illustrates the dramatic impact of HCM on all aspects of business. Two-way relationships are noted with two-way arrows, one-way relationships with one-way arrows and partial relationships with dotted-line arrows (figure 1). Employee engagement stands at the apex of this model, driving customer satisfaction, productivity, and retention, which in turn drive revenues and profits. This paper examines the following relationships in detail: 1. Engagement to Customer Satisfaction (2-way) 2. Engagement to Productivity (1-way) 3. Engagement to Retention (2-way) 4. Retention to Productivity (1-way) 5. Retention to Customer Satisfaction (1-way) 6. Retention, Productivity and Customer Satisfaction to financial performance. Defining Engagement While retention, productivity and customer service are self-explanatory, it is important to understand what Retention engagement is, and how it is defined for the purposes of this paper. The Conference Board 1 recently conducted a survey of 12 research studies that were focused on understanding and driving employee engagement, which they define as: a heightened emotional and intellectual connection that an employee has for his or her job, organization, manager, Employee Engagement Productivity Increase top line Revenue and bottom line Profits Fig. 1 HCM Business Impact Model Customer Satisfaction or co-workers that, in turn, influences him or her to apply additional discretionary effort to his or her work. Driving Engagement The aforementioned Conference Board survey found eight drivers of engagement across all of the examined engagement studies (see Figure 2 below). These eight factors can be Eight Factors that Drive Engagement Trust and Integrity Relationship with One s Manager Nature of the Job Career Growth Opportunities Line-of-Sight between Individual Performance and Company Performance Employee Development Coworkers/Team Members Pride About the Company Fig. 2 Engagement Factors 1. Gibbons, J. (2006), Employee Engagement: A Review of Current Research and Its Implications, The Conference Board, New York, NY. All rights reserved. 3

4 summarized through one theme: self-determination. In order to operate with self- determination, an employee must have trust in their business processes, a clear understanding of the business environment, the ability to gain the skills necessary to succeed in the environment, and a career path within that environment. This is evident in a published paper with Emerald, Transparency Drives Strategy Execution 2, where Erik Berggren of and Rob Bernshteyn, VP of Product Management and Marketing at SuccessFactors, discuss the importance of a transparent environment for driving strategy forward. They explain the link between strategic transparency and employee performance and the open, navigable environment desired by self-determined, engaged employee. Engagement to Customer Satisfaction It is logical that an engaged employee would produce higher levels of customer satisfaction. An engaged high performer would offer better customer service, with more frequent engagement with the customer. The HCM Business Impact model links engagement to customer satisfaction. The Harvard Business Review article, HIGH CUSTOMER ENGAGEMENT LOW These partially optimized units are 1.7 times more effective than the baseline. [1] Baseline units are nonoptimized. EMPLOYEE ENGAGEMENT These optimized units are 3.4 times more effective than the baseline. These partially optimized units are 1.7 times more effective than the baseline. Fig. 3 Employee & Customer Engagement HIGH Manage Your Human Sigma 3, shows the clear bidirectional relationship between engaged customers and engaged employees. As customers and employers become more engaged, performance increases dramatically. However, customer satisfaction is not only the product of outward facing employees. Timely order fulfillment and product quality are also critical to customer satisfaction. According to a Northwestern University 4 study: Employee Satisfaction and Employee Engagement have both direct and indirect effects on subsequent market and financial outcomes. Employee Satisfaction directly influences Customer Satisfaction, while Employee Engagement s effects on Customer Satisfaction are indirect through market orientation and Customer Behavior. Customer Satisfaction to Engagement As stated, there is a two way relationship between Engagement and Customer Satisfaction. The latter also drives the former. Engaged employees and satisfied customers form stronger relationships and employees are more likely to engage with happy customers more frequently and with greater attention. This connection is often overlooked in research, and should be explored further in future studies. This is particularly important in today s environment, where the definitions of customer, partner, colleague, and Global Engagement 14% of the World Workforce is highly engaged 84% of Highly Engaged Employees believe they can positively impact the quality of their work 86% of the World Workforce is moderately engaged or disengaged 31% of disengaged employees believe they can positively impact the quality of their work Source: Talent Management in the 21st Century: Attracting, Retaining and Engaging Employees of Choice WorldatWork Journal, 1st Quarter Berggren, E., Bernshteyn, R. (2007), Transparency Drives Strategy Execution, Emerald Press, London, U.K. 3. Coffman, K., Fleming J. H., Harter, J. K. (2005), Manage Your Human Sigma, Harvard Business Review, Boston, MA. 4. O Cozzani, C. Organizational Characteristics to Employee Attitudes and Behavior, Forum for People Performance Management, Evanston, IL. All rights reserved. 4

5 competitor are blurred. A positive relationship in this uncertain environment encourages learning, and employees are more likely engage with those persons whose company they enjoy, irrespective of employer. Engagement to Productivity Again, it is logical to expect that an employee who is vested in his or her work, and who is willing to contribute extra effort, will be more productive. This increase in productivity is the anchor of the Success Factors Research HCM Business Impact model. A recent article from EDS 5 reveals a concrete correlation between engagement and Cost of Goods Sold (COGS). Businesses with an engaged workforce have an average one to two percent lower COGS. Conversely, businesses with a highly disengaged workforce have up to four percent higher COGS. Engagement not only increases the speed and quality of execution, but also nurtures an environment in which employees are willing to reach outside of their silos and create better business processes. This motivation leads to more efficient, productive business processes. ISR, a leading employee research firm, found that companies with higher engagement have 5.75% better operating margins than those less engaged 6. Engagement to Retention According to a recent study from, quoted in Forbes magazine 7, the voluntary turnover of high performers costs US businesses a staggering 340 billion dollars per year. Furthermore, the departure of a top performer often constitutes a disruptive turnover, leaving knowledge, skill and productivity gaps within the organization. Most employers misunderstand this relationship, and focus their retention programs on extrinsic rewards, such as salary and benefits. An underlying assumption is made that higher pay will lead to higher employee satisfaction. However, a Towers Perrin study revealed that salary is only the 4th HIGHLY ENGAGED MODERATELY ENGAGED DISENGAGED Have No Plans to Leave Fig. 4 Intent to Voluntarily Separate most important driver for retention, superseded by an inspirational manager, opportunities for advancement, and the reputation of the company as a good employer 8. When the top intrinsic drivers of retention are compared with the drivers of engagement, clear, one-to-one relationships can be seen. It is no wonder that engagement leads to higher retention of high performing employees, as many of the drivers are the same. The study also confirms that there is a powerful link between retention and engagement. As shown in Figure 4 above, 59% of highly engaged employees have no plans to leave, versus 35% of moderately engaged employees and 24% of disengaged employees. 5. Gebauer, J. (2005), Building the Global Village, Synnovation: Quarterly Journal of the EDS Agility Alliance, Vol 1. Issue ISR Research. (2006), Global Employee Engagement Study. ISR Research. Chicago, IL. 7. Barret, V.M. (2007), Fight the Jerks, Forbes Magazine. New York, NY. 8. Towers Perrin. (2003), The 2003 Towers Perrin Talent Report: Working Today: Understanding What Drives Employee Engagement, Stamford, CT. All rights reserved. 5

6 Retention to Engagement Retention also drives engagement. In his presentation, Enthusiastic Employee: How an Engaged Workforce Delivers Profits, Thought Leader David Sirota, PhD., found a high.36 correlation between employee satisfaction and camaraderie. He found this to be a nearly universal factor among all tenure groups, races, genders, and management levels. Clearly, high turnover disrupts camaraderie. Through retention of high performers, camaraderie will help drive engagement and create an equitable environment, which is also highly correlated with satisfaction by Dr. Sirota. Retaining Top Talent The link between engagement and retention is strong Three of the strongest factors for retention, according to Towers Perrin, correlate strongly with the factors that drive engagement, found in the aforementioned Conference Board study. 1. Opportunities to Advance One s Career This retention factor maps directly with the career growth opportunities sought by engaged employees. 2. Employee Learning and Development Also linked to career growth opportunities, skill development drives both engagement and retention. 3. Reputation of the Company This retention factor maps directly with the Pride About the Company engagement factor. While not always a controllable factor, it illustrates the strong similarity in those factors that encourage engagement and retention, respectively. A SuccessFactors customer, Quintiles Transnational, found that HCM can have dramatic effect on how workers feel about their environment. In their findings, the percent of workers who agreed with the statement I feel I am part of a team increased from 49% to 81% after the implementation of the new processes, which also led to a 7% reduction in turnover. Retention to Productivity Tenured employees, those with three or more years of service with a company, are difficult to replace they have been fully trained, fully integrated into the working culture of the company, and are fully productive. Retention of engaged performers reduces the need to constantly re-staff and retrain, and gives employees time to form productive, working relationships with one another. When HCM is used to drive retention, it can help reduce the risk of knowledge gaps forming because of an unexpected departure. Retention not only affects daily productivity, but also the ability to effectively execute long-term strategy. Turnover results in time and effort expended to train employees with the skills required to execute the strategy. Similarly, it takes time for new employees to understand the strategy. Multi-year, forward-looking strategies require that resources, including people, are aligned and ready to execute. 9. Baker, A. (1998), Employee retention improves with virtual routing systems. Call Center Solutions. All rights reserved. 6

7 Retention to Customer Satisfaction Customers typically prefer a consistent experience, service or product, over time. Retention programs are designed to retain exceptional employees, to ensure that the customer can expect exceptional, consistent customer service, or product quality, in the case of product development and manufacturing. For call centers, retention of high performers is particularly important for satisfying customers. Inexperienced operators lead to higher abandoned calls and higher queuing 9. Call Center Solutions noted that high turnover should be avoided in order to ensure customer retention: The connection between agent retention and customer retention will only grow stronger in the coming years. For many vertical markets, such as health care, and some horizontal markets, such as technical consulting, individual agent skill is the foundation of companies market and competitive positions. Engagement, Customer Service, and Retention to Revenue Growth and Profit HCM Drives Engagement, which drives Customer Service and Retention, by aligning goals, objectively RELATIVE STOCK RETURN (%) 1 YEAR PERFORMANCE reviewing performance, and tracking learning and development. In her paper, Maximizing Your Return on People, Dr. Laurie Bassi, a partner, shows precisely how a mature HCM implementation leads to higher performance 10. Dr. Bassi conducted a study of American Standard sales offices, AVERAGE OPERATING INCOME PER HEADCOUNT HCM MATURITY SCORE Fig. 5 HCM Maturity & Performance BOTTOM QUARTILE which revealed growth rates 60% to 130% higher for offices with a mature HCM system. Learning capacity, workforce optimization, knowledge accessibility and employee engagement all played a critical role. The report also showed a strong linkage between maturity of HCM systems and financial performance at financial companies. Figure 5 below shows stock performance on the y-axis and HCM maturity on the x-axis. In the aforementioned Quintiles Transnational case, operating income per headcount was also seen to dramatically increase with an effective HCM investment. Figure 6 illustrates the increase in average operating income as HCM implementations improve in effectiveness. The top 25% most effective HCM implementations have substantially higher average operating income per headcount LOW AVERAGE HIGH AVERAGE TOP QUARTILE EFFECTIVENESS OF HCM SOLUTION Fig. 6 HCM Effectiveness vs. Operating Income Bassi, L., McMurrer, D. (2007), Maximizing Your Return on People, Harvard Business Review. Boston, MA. All rights reserved. 7

8 Conclusion The HCM Business Impact model demonstrates the clear linkages between engagement, customer service, productivity, and retention. An engaged employee is more likely to put extra thought and effort into their work, engage the customer more frequently, speak highly of the company, and is far less likely to leave. This adds tangible value and savings for businesses that invest in HCM. This investment in improved process and smart technology can help drive engagement, therefore improving productivity, customer service and retention, which ultimately drives revenue and profit. Dr. Peter Cappelli and SuccessFactors Research revealed in a recent presentation that 65% of the costs of doing business are labor related 11. Employee performance is crucial. Businesses with engaged employees simply perform better, and are all the more suited to the hyper-competitive business environment of today. HCM drives this performance, engaging and retaining employees, leading ultimately to satisfied customers and superior financial performance. Driving Real Performance Engagement Engagement with employees within a firm has shown to motivate the employee to work beyond personal factors and work more for the success of the firm. The Gallup Organization Inspires Retention Work groups whose members are positively engaged have higher levels of productivity and profitability, better safety and attendance records, and higher levels of retention. Not surprisingly, they re also more effective at engaging the customers they serve. Manage Your Human Sigma Customer Satisfaction In a competitive marketplace where businesses compete for customers, customer satisfaction is seen as a key differentiator and increasingly has become a key element of business strategy Lawrence J. Gitman Productivity Mature systems support consistent application across units driving down G&A expense. More importantly they promote communication with employees, giving them clarity in terms of their effect on the business, thereby driving motivation. This leads to productivity and financial gain. How Smart HCM Drives Financial Performance 11. (2007) All rights reserved. 8

9 References Baker, A. (1998), Employee Retention Improves with Virtual Routing Systems, Call Center Solutions. Barret, V.M. (2007), Fight the Jerks. Forbes Magazine, New York, NY. Bassi, L., McMurrer, D. (2007), Maximizing Your Return on People, Harvard Business Review, Boston, MA. Berggren, E., Bernshteyn, R. (2007), Transparency Drives Strategy Execution, Emerald Press, London, U.K. Berggren, E., Fitz-Enz, J. (2007), How Smart HCM Drives Financial Performance, SuccessFactors Research, San Mateo, CA. Coffman, K., Fleming J. H., Harter, J. K. (2005), Manage Your Human Sigma, Harvard Business Review, Boston, MA. Gebauer, J. (2005), Building the Global Village, Synnovation: Quarterly Journal of the EDS Agility Alliance, Vol 1. Issue 2. Gibbons, J. (2006), Employee Engagement: A Review of Current Research and Its Implications, The Conference Board, New York, NY. Gitman, L. (2004), The Future of Business, South Western College Publishing. ISR Research. (2006), Global Employee Engagement Study, Chicago, IL. Towers Perrin. (2003), The 2003 Towers Perrin Talent Report: Working Today: Understanding What Drives Employee Engagement, Stamford, CT. Cozzani, C. Organizational Characteristics to Employee Attitudes and Behavior, Forum for People Performance Management, Evanston, IL. All rights reserved. 9

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