I recently came across an article with the interesting title, “Employee Loyalty is Dead. Good Riddance.” It made me wonder, if customer loyalty is so important to business success, why is employee loyalty so unimportant? Putting aside any moral questions, is there a value of loyalty that American business is ignoring, and if so, exactly what is that value? The answers might be surprising.
A Harvard Business Review article by Heskett, Jones, Loveman, Sasser and Schlesinger introduced the service-profit chain. The article states that there is a direct link between employee satisfaction/loyalty and profitability. The authors reported on the efforts of Taco Bell to enhance employee satisfaction and loyalty. They discovered that the 20 percent of Taco Bell’s stores with highest employee satisfaction had double the sales volume and 55 percent greater profits than the 20 percent of the stores with the lowest employee satisfaction.
The Corporate Leadership Council reported that Sears found that every five percent increase in employee satisfaction lead to a 1.3 percent increase in customer satisfaction, which, in turn, generated a 0.5 percent increase in revenue growth.
Their voices are not alone. Other studies have uncovered similar though perhaps not as dramatic results with employee loyalty averaging an 11 percent boost in productivity. The message is clear: employee satisfaction leads to employee loyalty, employee loyalty leads to customer satisfaction, customer satisfaction leads to customer loyalty, customer loyalty leads to greater profits.
Improved sales are not the only benefit from high employee loyalty. Walker Information’s Loyalty in the Workforce report states that 92 percent of a company’s loyal employees said that they worked hard to make their company successful, while only 49 percent of the non-loyal workers said the same. Walker also reported that 89 percent of the loyal workers were willing to help other workers while only 60 of the non-loyal would volunteer to help co-workers.
Loyal workers also stay longer, about three times longer than non-loyal employees. Turnover is expensive, ranging from 100 to 150 percent of an employee’s annual salary, so keeping workers longer can have a significant impact on the bottom line. However, as some researchers report, that is not the total cost. Add in a loss of productivity and reduced customer satisfaction that accompanies turnover and you start to see the real cost of employee dissatisfaction.
The unmistakable conclusions: employee loyalty leads to employer profitability. Poor employee loyalty can reduce revenue while it raises costs.
The impact of poor employee loyalty
What are the causes of poor employee satisfaction and loyalty? Well studies show that a major cause is the fear surrounding job loss. Certainly losing a job can be stressful, but studies show that even those who did not lose their jobs can be affected by a layoff. Survivor guilt, also called “layoff survivor syndrome,” can have a negative impact on those still with jobs after a layoff, resulting in a workforce “demotivated by anxiety.”
Seemingly unrelated costs can increase as a result of this employee satisfaction gap. The University of Michigan’s Institute for Social Research reports that “…persistent job insecurity has a negative impact on worker health. In fact, chronic job insecurity was a stronger predictor of poor health than either smoking or hypertension.” They go on, “chronically high job-insecurity is more strongly linked with health declines than actual job loss or unemployment.”
The “offshoring survivor,” is in the same unpleasant situation as the traditional layoff survivor. Those left behind can feel betrayed and the possible targets of a future job loss. Social scientists speak of the “psychological contract,” – the tacit agreement between employer and worker that if the employee works hard and does a good job he will be rewarded with future employment. Offshoring breaks that contract and leaves the worker discouraged. How real is the problem? 61 percent of the more than 12,000 IT professionals who participated in an InformationWeek survey said outsourcing hurt employee morale.
The shrinking offshore pie
The benefits of offshoring are not what they used to be. A recent survey by The Conference Board and Duke University’s Center for International Business Education and Research found that the average savings from offshoring IT services decreased from 38 percent ten years ago to 27 percent today. A 2008 University of California study found that offshoring software development now results in a net saving of only between 20 and 24 percent; about half of what was reported a decade ago. Other industries have realized even smaller current gains.
A main cause of this decline is inflation. According to a 2008 McKinsey study, in the five years from 2003 to 2008, while the average annual wage inflation was 3 percent in the US, it was 21 percent a year in Brazil, 14 percent in Argentina and 19 percent in China. And the trend is only likely to get worse. They concluded that what made sense to manufacture overseas in 2003 might not make sense in 2008 and that offshoring companies face what in the ‘60s was called “a time-agonizing reappraisal.”
Adding to the misery is a potential flaw in all of these studies due to the baseline used: pre-offshoring US worker profitability. None of the studies mentioned above reported taking into account post-outsourcing worker discouragement for the US employees left behind.
Tough New Questions
The cost/benefit factors associated with post-offshoring worker productivity are many and varied. How many workers are left in the US? What percentage of the entire workforce are they? What is their expected contribution in the post-outsourcing world? Even with these factors set aside, and recognizing a reduced offshoring benefit of say 25 percent and now adding in a discouragement cost of say 11 percent, that still leaves a 14 percent advantage to offshoring. But it is also unlikely that these numbers will get better or even stay the same for the outsourcing company. The future is more problematic with the weakening of the dollar, stagnant US wages, recent significant inflation in the third world (incorporating rising oil prices driving up transportation costs and the dissipation of labor arbitrage), a resurgence in global political unrest (particularly in the oil patch), and more realistic reports on the actual saving associated with offshoring, can turn the offshoring slam dunk into a missed shot.
The one thing we can say about loyal American workers is that they provide stability. So the question for those considering offshoring is how much risk are you willing to absorb for a declining 14 percent return?
George Tillmann is a former CIO, management consultant, and the author of The Business-Oriented CIO (John Wiley & Sons, 2008). He can be reached at email@example.com.