This article was first published by in December 2005.
It was subsequently republished in the Spring 2006 issue of Management Services , the official journal of the Institute of Management Services and in the November 2007 book Employee Engagement - Trends and Cases by K Sangeetha and Chitra Mukunnan (ISBN: 81-314-0487-0)

Employee Engagement
A Manifesto for Outstanding Organisational Performance

In the past, it has been labelled the biggest commercial untruth since “the cheque is in the post” .

Today, however, there is clear evidence that business leaders are not simply saying that “our people are our most important asset” – they are actually beginning to mean it too.

Why the change of heart? Because the body of evidence that employee engagement is a key driver of organisational performance grows almost daily. And with recent research by Towers Perrin highlighting the fact that approaching 90% of UK employees are either “disengaged” or just “moderately engaged” at work, there is a clearly still a significant performance improvement to be achieved if an organisation’s workforce can be properly inspired and motivated.

The Service-Profit Chain

For many, the employee engagement story begins in 1994 when James Heskett and his colleagues at the Harvard Business School published their seminal paper Putting the Service-Profit Chain to Work .

The Service-Profit Chain model they had created could hardly be more intuitive: Employee Satisfaction drives Employee Retention drives Employee Productivity drives Service Value drives Customer Satisfaction drives Customer Loyalty drives Profitability and Growth.

In short: Engaged Employees create Loyal Customers who in turn create Bigger Profits.

For a few, including Richard Branson at Virgin, this simple premise was the basis upon which they had already begun to build their businesses. Branson says:

“We embarked on consciously building Virgin into a brand which stood for quality, value, fun and a sense of challenge. We also developed these ideas in the belief that our first priority should be the people who work for the companies, then the customers, then the shareholders. Because if the staff are motivated then the customers will be happy, and the shareholders will then benefit through the company's success.”

Others, however, would need a more rigorous analysis if they were going to commit their organisations to this somewhat radical vision of “the shareholders come last”, and the Service-Profit Chain model’s greatest problem was that it was only supported by data collected by different companies at different points on the chain.

For example, in the banking sector it was known that a 5% increase in Customer Loyalty could produce Profitability increases from 25% to 85%. Meanwhile, an insurance company had shown that when an experienced employee left the business Customer Satisfaction levels dropped from 75% to 55%. Indeed, only quick service restaurant chain Taco Bell had begun to do anything like an end-to-end analysis of the chain observing that the 20% of stores with the highest Employee Retention rates enjoyed double the sales and 55% higher profits than the 20% of stores with the lowest Employee Retention rates.

As a result, although the Service-Profit Chain model seemed logical and sensible, the potential return on investment was unknown. This made it difficult for business leaders to assess how much effort they should be making to embed it within their organisations.

Welcome to the 21st century

What a difference a decade makes, because today’s business leaders have end-to-end Service-Profit Chain data coming at them from all angles!

Sirota Consulting studied 28 multinational companies though 2004 and found that the share prices of organisations with highly engaged employees rose by an average of 16% compared with an industry average of 6%.

And an ISR study published in August 2005 showed that companies with low levels of employee engagement saw net profit fall by 1.38% and operating margin fall by 2.01% over a 36-month period. In companies with above average levels of employee engagement profits rose by 2.06% and operating margin rose by 3.74% over 36-months.

And it gets even better, because the research has now been completed which identifies the key drivers of employee engagement. In other words, a “road map” for achieving outstanding organisational performance through the Service-Profit Chain has been developed and is ready for immediate implementation.

A road map for employee engagement

(1) Enhance leadership. Business journals are brim full with articles about leadership. Ignore them – they are all far too complicated. Effective organisational leadership is simple: (1) have a vision of where you want to get to, (2) clearly and persuasively communicate that vision to employees, and (3) be consistent in your behaviours as strive to achieve that vision. Do this and your employees will follow. Fail and you will be out there on you own.

(2) Involve your people and value their input. Business journals are also brim full with articles about change. Ignore these too because they typically start from the Machiavellian premise that “people hate change”. This is nonsense of course. People LOVE change – in fact they can hardly get enough of it. Through the 1990s the UK DIY retail multiples experienced growth of over 185% and in 2004 the sector was estimated to be enjoying a turnover of just over £7.3 billion. People hate change? And when the paint brushes and electric drills are put away for the night, these same people are tuning-in to makeover shows and gardening programmes. People hate change? No, if people are involved in change (Do It YOURSELF) and their input to the process is valued they will readily engage with it.

(3) Look after your reputation. If the world believes that your organisation is a poor “corporate citizen” they will tell your people. If your employees believe what they hear they will increasingly distance themselves from the business. And if they don’t, they will get increasingly frustrated if they see that you are doing nothing to correct these misperceptions. Either way, organisations that proactively manage their reputations will also enjoy higher levels of employee engagement.

Could it be any simpler?

Well, actually, it could – because a common theme runs through all three stages of the process: COMMUNICATION.

And a major study by Watson Wyatt – Connecting Organisational Communication to Financial Performance – has given us the ultimate end-to-end measurement: from key driver of employee engagement (communication) to shareholder return on activity. Their research found that “a significant improvement in communication effectiveness is associated with a 29.5% increase in market value” and that “companies with the highest levels of effective communication experienced a 26% total return to shareholders from 1998 to 2002, compared to a -15% return experienced by firms that communicate least effectively”.

Furthermore, they found that organisations that communicate effectively were “more likely to report employee turnover rates below or significantly below those of their industry peers.”

In short: Effective Communications create Engaged Employees create Loyal Customers who in turn create Bigger Profits.

But we need to be clear about what is being said here. The report highlights the return on effective COMMUNICATION, not information. And communication is not just about telling people what you want them to do or are about to do to them – it is about genuine two-way dialogue with both employees and the outside world. And although this is simple it is not easy.

In fact it is going to be REALLY DIFFICULT to implement because there are four substantial barriers in place in most organisations:

(1) Managers do not see communication as part of their day job. Most managers focus on “hard” measures, delivering the required outcomes on time, on budget, and on target. The “soft” stuff is all too often done on the side of the desk, as an extra-curricular activity, or abdicated to Personnel. Giving people the information and instructions they need to achieve these outcomes is clearly part of the manager’s role. Communication, however, is still seen as “soft” stuff, even though the reality is that it is the hardest driver of organisational performance managers have at their disposal.

(2) Managers have not developed their communication skills. Human beings are, bar none, the most effective natural communicators in the animal kingdom. A change in inflection, the tilt of the head and a knowing look can convey the most subtle nuances and utterly transform the meaning of a sentence. But this is NATURAL one-on-one or one-on-few communication using techniques our species has evolved over millennia and which we have practiced as individuals throughout our lives. ORGANISATIONAL communication operates on a totally different scale and uses thoroughly unnatural tools. Mobile phones, email, PowerPoint, teleconferencing – all are immensely powerful tools for communicating with a large, widely spread audience but all have been blamed for our failure to communicate effectively. Why? Because our natural communication skills are so good we take it for granted that we will be competent organisational communicators too. We are, therefore, making the assumption that we can use unnatural tools to engage with an unnaturally large audience without acquiring any additional skills. Naturally we are wrong!

(3) Channels are absent, inappropriate, or over-subscribed. Decades of failing to take organisational communications seriously means that in many businesses appropriate channels have not been created or effectively maintained. As the head of internal communications for a major blue-chip corporation recently commented “a decade ago the ‘internal communications department’ was an ex-journalist who churned out the employee newsletter once a month”. Things have moved on considerably, but even within progressive organisations there is still a legacy of poor channel infrastructure, usage and management to be tackled.

(4) Communication around corporate citizenship is disjointed. Like internal communications, “community communications” is a new and developing discipline which is working through a host of legacy issues. Foremost amongst these are the need for organisations to enter into a true dialogue with the communities within which they operate and for all of the positive interactions within these communities to be “joined up”. Again much progress has been made, but although Corporate and Social Responsibility (CSR) teams have done great work in gathering and promoting a wide range of issues, few companies could claim a truly strategic approach. And even fewer that CSR is owned by each and every employee, which is where it needs to be if employees are to feel personal ownership and pride in the organisation they work for.

A manifesto for outstanding organisational performance

It is clear, therefore, that employee engagement is a major driver of organisational performance. And effective organisational communication is a significant driver of employee engagement.

If, as I do, you find the argument persuasive and you want to begin the process of breaking down the barriers to successfully harnessing the Service-Profit Chain for your organisation, I believe that you should sign-up to the following four-point manifesto:

(1) Education: Every manager in your organisation must understand how effective communication drives performance

(2) Development: Every manager in your organisation must recognise the difference between natural and organisational communication and commit to developing the required skills

(3) Infrastructure: The organisation must invest in the development and maintenance of appropriate channels of communication

(4) Community: The organisation must actively mange its reputation as corporate citizen and positively engage employees and the wider community alike

This is a simple plan, but it is not a sequential plan – all four areas can, and should, be tackled simultaneously.

This means that it will not necessarily be an easy plan to deliver, but business leaders MUST deliver because with almost 90% of employees currently being either “disengaged” or just “moderately engaged” at work, the opportunity to drive outstanding organisational performance is simply too enormous to ignore.