Do your employees affect customer loyalty? According to a recent Gallup poll, 20 percent of your employees who have contact with your customers are doing more harm than good, and only one-tenth are working to improve customer service and company performance. We learned in last month’s column that customer loyalty affects company profitability. This month, we continue exploring Frederick Reichheld’s well-regarded book, “The Loyalty Effect,” and the connection between loyal customers and loyal employees.


In your marketing materials or core values, you probably include a phrase like, “People are our greatest asset.” But what do you mean by that? You have a good idea of the cost of compensation and benefits and how much billable work your employees produce, but the accounting process is not designed to assess the value of their commitment. Despite human resources analysts’ attempts to quantify the cost of recruitment, retention and turnover (including lost productivity and decreased quality of customer service), the cash-flow consequences are not precisely known.


Reichheld found that reducing employee “churn” (turnover) rates also improved the retention of loyal customers. The problem was the pressure investors placed on CEOs to maximize stock value, which often translated into short-term profit goals rather than long-term value creation. Loyal employees create value, but loyalty is a two-way street, and management wasn’t playing its part.


More than 20 years ago, legendary management expert Peter Drucker dismissed “People are our greatest asset” as an empty platitude. In the September­October 1992 issue of Harvard Business Review, he counseled companies to “attract, hold, recognize and reward, motivate, serve and satisfy” their employees, marketing “membership” as well as products and services.


Meanwhile, CEOs of profitable firms approved massive layoffs, and the true cost of treating employees as if they were expendable went unrecognized. Early retirement incentives and staff reductions of highly compensated people created “layoff survivor syndrome” among those who remained, only to wonder whether they were next. The survivors faced this uncertainty as they shouldered the burden of the work previously done by the employees who left, often without additional compensation. Many of the survivors began to protect themselves by putting their own careers first and reducing their commitment to the company.


The American Management Association and The Wall Street Journal have published reports showing that fewer than half of layoffs improve profits, and restructuring often negatively affects overall company performance. Dumping the “greatest asset” reduces overall company value. Ironically, downsizing doesn’t produce the intended results.


Electrical contractors, as well as these Fortune 500 companies, will experience the same consequences. Reichheld argues that, once your company has established a solid base of loyal customers that will provide a cash flow surplus, your best strategy is reinvesting a healthy share of the funds into keeping your most loyal employees and recruiting others like them. Your most expensive people are also your most productive and most experienced at building and sustaining the long-term customer relationships that contribute to higher profit levels.


In many industries, a nomadic career path has replaced a lifelong bond between employee and employer, and executive recruiters advise MBA graduates that staying more than a few years with one company exemplifies narrow focus and lack of ambition. This is anathema to the electrical contractor trying to recoup an investment in hiring and training, but the new reality is that even your best and brightest are probably spending company time building security nets and keeping their eyes open for opportunities elsewhere.


Conversely, remember that some “defectors” who have left your company may create a pipeline for referrals to new hires. Even though people move on for their own benefit, they often appreciate your investment in them, so do your best to send them off with congratulations and best wishes. Ultimately, your goal is to reduce the cost of hiring and training as well as to improve the retention rate. Retain employees long enough to recoup the cost of hiring and training them, and hopefully you can keep them longer, so they become highly productive.


Keeping them requires that you have a track record of avoiding layoffs, retaining your highly compensated people, and giving them the ability to create valuable customer relationships.


These loyal employees take ownership of their jobs and, by staying, decrease your costs related to recruiting, training and turnover. The money saved can be invested in higher compensation and other rewards for employees, as well as increasing customer value and satisfaction. Most important, these loyal employees provide the security and trust for your customers that build long-term relationships. The cycle perpetuates satisfaction and profitability and makes it less likely that you will face the decision to reduce your workforce. It’s a win for everyone—you, your employees and your customers.