Author: Loyalty Beats A Short-Term Focus

IN this era of disposable workers, business consultant Frederick Reichheld says: Keep those employees.

Instead of downsizing, he maintains, employers should focus directly on sweeping up their employees in a "value-and-loyalty spiral" on behalf of the customer - and watch the profits grow.

Most businessmen would say they do aim to create value for their customers. But they usually focus on the bottom line, Mr. Reichheld says, which often leads to large cuts in staff.

The Harvard Business School Press today releases his new book titled the "Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value."

Head of a group called "Loyalty Practice" within Bain & Co., a consulting firm in Boston with offices in 19 countries, Mr. Reichheld has searched out and studied a number of companies that he maintains do focus primarily on creating lasting value for their customers. Employees fare well in these businesses, he says.

Some of the firms he examined are State Farm Mutual Insurance Co. of Bloomington, Ill., A.G. Edwards & Sons Inc., a St. Louis investment house, and Lexus/Toyota Inc. of Torrance, Calif.

Reichheld declares that loyalty is the prime quality that leads to value.

"Businesses need employees who are loyal to the idea of creating great value for customers, so much value that there is enough left over to reward employees and investors," he says in an interview.

Businesses, though, must in turn be loyal to their workers, he adds. Investors, too, need to comprehend how real value is created; this step "closes the loop" to allow a loyalty-based business to thrive.

Highly detailed studies over several years, he says, have enabled him to quantify the effect of loyalty. For example, a 5 percentage point increase in customer retention in a typical firm, he reckons, will increase profits by more than 25 percent and growth by more than 100 percent.

What keeps loyalty a "hidden force"?

"It's mostly the heavy focus today on accounting, a short-term focus on accounting fictions as standards," he says.

Statistics today seem to say that loyalty is dead, Reichheld acknowledges. He points out early in his book that, on average, US firms lose half of their customers in five years, half of their employees in four years, and half of their investors in less than one year.

But loyalty is not dead, this consultant insists - it just needs reawakening.

"In the section in his book on our firm," says Benjamin Edwards III, CEO of A.G. Edwards, "Reichheld portrays our people as loyal to a philosophy, not to management." This is better than being "loyal to profit or personality," Mr. Edwards adds. "And if I don't show the same loyalty, my people rise up and say, 'Hey, this isn't why we are here.' "

If the top managers at troubled Apple Computer Inc. had asked, "What is in our customers' best interest?" Reichheld says, they would have licensed their operating system, their core software, to other manufacturers years ago. "But they kept it to themselves because they thought that would make the most money for them, and that was a betrayal to customers and employees." That mistake allowed Microsoft's Windows software to become No. 1. Apple has, belatedly, begun to license its Macintosh software. The latest announcement came Feb. 19: Apple will license the software to Motorola Inc., a deal that will allow a Motorola subsidiary to distribute computers in China using the system.

"Layoffs have far more costs associated with them than most executives realize," Reichheld adds, since they "almost always" cause churn, an eventual dip in productivity, and poorer service to customers. He acknowledges that banks, airlines, and telephone companies have had to cut workers in many cases, even though this is "not desirable." He concludes: "It's a good time right now," he says, "for all businesses to get back to the basis of loyalty and partnership with employees and with customers."