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A Powerful Alternative to Cutting Costs
Business Journal

A Powerful Alternative to Cutting Costs

by John H. Fleming

2009 has been a tough year for economies around the world as credit markets and consumer spending remain constrained. The latest Gallup consumer research shows that consumer confidence in the United States is improving somewhat, but spending levels in 2009 remain well below those in 2008. According to the U.S. Department of Commerce, retail sales in the United States through July of 2009 (excluding automobiles) were down approximately 9% compared to the same period last year. None of this is good news.

How well can managing your company's employee and customer engagement help when markets are turbulent and trending down?

Against this bleak backdrop, retailers and other companies around the world are struggling to find ways to do more with less -- and to keep moving forward against serious headwinds. Many retailers continue to trim budgets, lay off employees, and even close locations. While many of these steps seem like obvious and even responsible responses to the current economic environment, Gallup research suggests that there are other, perhaps less obvious, steps that companies can take to successfully navigate this sluggish economy and to buy time and remain financially viable until conditions improve. But instead of relying solely on cost curtailment, downsizing, and organizational realignments, these steps focus on optimizing the human element of your business by engaging your staff and your customers.

For more than 10 years, Gallup research has consistently found that engaged workgroups are more productive and profitable -- and deliver superior customer outcomes -- compared to their disengaged counterparts. Engaged workgroups have significantly better staff retention, lower absenteeism, fewer accidents, and yield lower levels of "shrink" (e.g., theft or breakage) than disengaged workgroups. These kinds of cost reductions not only result in greater operating efficiencies, but those benefits accrue to your bottom line as well.

Gallup research also has consistently found that emotionally engaged customers deliver superior financial returns than disengaged customers. Fully engaged customers deliver a 23% premium in terms of share of wallet, profitability, revenue, and relationship growth than the average customer, while disengaged customers deliver a 13% discount. Moreover, local work units that engage customers at high levels deliver significantly better financial performance (on the order of two times better) than low-engagement units.

Our research, which is described in detail in the book Human Sigma: Managing the Employee-Customer Encounter (Gallup Press, 2007), suggests that optimizing both of these human elements delivers significantly stronger financial performance than focusing on either in isolation. In fact, units in your organization that simultaneously optimize both employee and customer engagement significantly outperform units that optimize just employee or customer engagement -- or fail to optimize either element -- on measures of financial and operational success. (See graphic "The Impact of HumanSigma.")

The Impact of HumanSigma

Much of our analysis of the financial impact of HumanSigma management -- managing both employee and customer engagement in tandem, rather than independently -- has been conducted during reasonably "normal" economic circumstances. But what about in conditions like those that prevail today? How well can managing your company's employee and customer engagement help when markets are turbulent and trending down? Fortunately, some recent data in the retail and retail banking industries can help answer this question.

HumanSigma management at a large retailer

Retailer H is a large multisite, multiformat retailer located in North America. It operates more than 400 stores and has been working on its HumanSigma performance for the past two years. Over the past year, the company has seen dramatic improvement in its HumanSigma performance. One year ago, just 3% of its stores were "optimized" -- that is, just 3% of its stores had both employee and customer engagement scores above the 50th percentile in Gallup's retail database. However, after just one year of active intervention at the store level, almost half (47%) of its stores had improved by at least one HumanSigma level, pushing an additional 18% of stores into the optimized performance band. (See graphic "HumanSigma Performance Bands.")

HumanSigma Performance Bands

How did Retailer H accomplish this? Gallup has found that one of the surest ways to drive organizational change is to focus action locally -- where employees spend the bulk of their time and where customer interactions happen. In our experience, teams that share and discuss their results, develop realistic and specific action plans, and then follow through on those plans almost invariably improve.

The active interventions at Retailer H included a range of activities at the local, team, and enterprise levels. Chief among these was local action planning related to local teams' and stores' employee and customer engagement scores; these plans were designed to address the unique issues affecting local teams and stores. These action-planning activities were intentionally kept simple. Each store team focused on just one or two improvement opportunities.

None of these local actions, however, would have been possible without the active support of the leadership and headquarters teams. Supporting these local activities at the enterprise level allowed Retailer H to build an infrastructure to facilitate its "think globally, act locally" focus.

In addition to the actions taken at the store and team level, Retailer H identified and deployed a team of internal champions who acted as local engagement coaches for the store teams. Leadership coaching of mid-level and senior-level executives provided leaders with opportunities to understand their individual performance results. The coaches also helped leaders think about their own levels of engagement and brainstorm ways that they could involve their teams in creating solutions.

Focused and uniquely branded program launch events helped to create a foundation of understanding across the enterprise. They also provided a means for all staff to apply the tools to their stores in an individualized way.

For any large organization, such substantial performance shifts represent exceptional levels of improvement. But the most impressive aspect of Retailer H's performance was that this was all done against a backdrop of declining retail sales across North America.

Equally impressive, however, were the financial results that followed. During the time Retailer H was undertaking these efforts, same-store sales (year over year) for the chain as a whole declined by 1.3%, and profit declined by more than 3%. But in the highest performing stores -- those that were optimized -- sales and profit actually grew by approximately 1% and 0.4%, respectively. In contrast, in the poorest performing stores in HumanSigma levels 1 or 2, sales and profit declined by roughly two times the company average.

Against the overall company's declining sales and profit performance, stores that improved their HumanSigma performance held their own in same-store sales (losing just 0.1%) and had profit declines that were about one-third smaller than the company average.

HumanSigma at a community bank

Retail Bank W is a community bank with more than $3 billion in assets and more than 30 branches. The bank has been working on improving its HumanSigma performance for the past five years. Like Retailer H, over the past year, the company has also seen dramatic improvement in its HumanSigma performance.

Engagement is always on this CEO's agenda: It's a continual topic of conversation in meetings, e-mails, and addresses to the company.

One year ago, a respectable 75% of its branches were optimized. Less than 5% of its branches were in HumanSigma levels 1 or 2 (the two lowest performing bands), but the momentum had stalled. However, after a year of reinvigorated intervention at the enterprise and branch levels, almost half (41%) of its branches had improved by at least one HumanSigma level, pushing an additional 16% into the optimized quadrant (and most of those moving into level 6, the highest performance band).

Like Retailer H, these interventions included a range of activities at both the local and the enterprise levels. Chief among the activities at the local level was a renewed focus on local action planning on the bank's employee and customer engagement scores, a focus that had been lost during the time momentum had stalled.

Retail Bank W also took action at the enterprise level. In addition to making a number of leadership changes, Bank W's CEO recommitted to his role as a true engagement champion. Employee and customer engagement are always on his agenda: Engagement is a continual topic of conversation in meetings, e-mails, and addresses to the company. As he makes his rounds throughout the company, he personally comments on the success stories that circulate within the company, and he congratulates the successful teams.

As proof of his commitment to driving higher levels of performance, the CEO also challenged his organization to meet the goal of "90/90" -- to be at the 90th percentile on both employee and customer engagement. He's made this an inspirational goal, though, rather than a punitive target. Bank W's leadership does not hound business units to reach an arbitrary number, which could lead to undesired behaviors. Instead, the CEO uses the target to paint a vision of the future for his organization. Our consultants speak to a lot of executive leadership teams about the importance of executive buy-in, support, and modeling behavior as a means to create an environment where engagement can flourish. They never have to have that conversation at Bank W.

Beyond personally "walking the talk," Bank W's CEO also created a new position: HumanSigma manager. This manager, who reports directly to him, is responsible for coordinating and aligning all employee and customer engagement activities. The HumanSigma manager works on an individual level with many of the bank's teams, especially those that have continually struggled to improve their engagement performance. She is in the branches every week, making sure that managers and teams have enough support to perform effective impact planning.

Finally, in an effort to facilitate the bank's continued momentum and growth, the HumanSigma manager has begun to help the bank focus on the individual strengths of its employees. She and other staff members are certified as Strengths Performance Coaches, and they coach managers one-on-one to support them in using their strengths to boost individual and team performance. Bank W also sends its managers through the Gallup Great Manager Program, a program designed to help their best managers become even better -- faster.

These kinds of performance improvements are impressive under optimal conditions, but they are even more impressive considering that they were all accomplished against the well-publicized difficulties in the retail banking sector. More importantly, this concerted focus on improving employee and customer engagement has paid off handsomely for Bank W. While other retail banks have announced layoffs and other cost-cutting measures, Bank W has remained steady and on course. Compared to its industry peers, whose earnings per share (EPS) dropped by an average of 33% during 2008, Bank W's EPS dropped by less than a third of that (9%).

And for the preceding year, which could best be described as a mixed economic environment, Bank W's EPS performance actually improved by 4% while its peer group's EPS declined by 8%. Even during the good economic environment from 2004 to 2007, focusing on engagement paid off for Bank W. During that period, its earnings continued to outpace those of its peers, growing 12% compared to a net decline of 2% among those peers.

These two case studies dramatically illustrate the impact that managing your company's HumanSigma performance can have on the top and bottom lines, even -- and perhaps especially -- in times of economic uncertainty and downturn. Gallup has estimated that the improvements at Retailer H conservatively netted $16 million in additional sales and about $8 million in additional margin on an annualized basis.

So rather than looking just to cost-saving measures to shore up your financials, look also to optimizing your HumanSigma. Not only will your organization be more likely to hold its own, but it will be ideally positioned for success when conditions improve.


John H. Fleming, Ph.D., is Chief Scientist -- Marketplace Consulting and HumanSigma at Gallup. He is coauthor of Human Sigma: Managing the Employee-Customer Encounter.

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