Sep 6

Loyalty Matters

Heinz Landau
Heinz Landau is a seasoned business leader who has gained valuable working and leadership experience on three different continents.

Loyalty is a great strategy for employees, customers, managers and business owners. It maximizes economic and emotional value. We all know that the long-term success of any company depends upon the quality and loyalty of its people. Succesful organizations are built on relationships. It takes time to develop social bonds with our employees, our customers, our suppliers and other stakeholder groups like e.g. communities or NGOs (=non-governmental organizations). Time that we think we don’t have, because we focus more and more on short-term results, especially when coming under pressure.

But we would be well advised to spend time on cultivating loyal employees, customers and loved ones as loyalty experts Timothy Keiningham and Lerzan Aksoy state in their book “Why loyalty matters”. It is based on the most comprehensive study of loyalty ever conducted, the “Ipsos Loyalty Study”. The two authors state:

“The science is very clear: when it comes to business success, satisfaction in our relationships and even overall happiness, loyalty is essential.”

“The science is very clear: when it comes to business success, satisfaction in our relationships and even overall happiness, loyalty is essential.”

Nevertheless, since many years company – employee – loyalty is on the decline. Large corporations have laid-off thousands of employees and were often rewarded with a short-term gain in their share price. Even Japan, where lifelong employment with one firm used to be the rule, has given up this model.

Today, the new social contract between companies and employees looks different: employees try their best to make a contribution to the overall success of their company while companies help their employees to develop their competencies. Even, if these competencies will be applied by the employee in future in a different organization.

It seems that companies, their leaders and employees still don’t realize that the decline is not good for them.

Creating loyal customers is the aim of every business. Most CEOs state customer loyalty as a strategic objective. However, what is often overlooked is the fact that only with committed loyal employees customer loyalty and productivity improvements are possible. Employee lay-offs have a huge impact on the firm’s culture and typically result in declining customer satisfaction, but not in long-term savings or efficiencies.

The customer satisfaction index is a good indicator for the future financial performance of the company. The same applies to the employee satisfaction index. They are called “leading indicators” while the financial indicators like sales, profit or ROI (=return on investment) etc. are called “lagging indicators”. Knowing about the importance of the leading indicators, we conducted every six months employee satisfaction surveys and customer satisfaction surveys at my previous company.

Other important indicators that we measured regularly were the employee retention rate and the customer retention rate. We were aiming at a employee retention rate of 90%. I personally believe that every organization needs a certain amount of fresh blood. Therefore, 10% new employees, partly from the same industry and partly from other industries as well as some young graduates, were considered as a good percentage.

We had classified our customers into various segments based on sales value, profitability and sales potential. For our VIP and our A – customers, we aimed at a customer retention rate of 100% and were able to achieve almost all the time a percentage high in the nineties for these two customer segments. We understood the concept that without loyal employees there are no loyal customers.

Rensis Likert, an American educator and organizational psychologist, stated: “The greater the loyalty of a group toward the group, the greater is the motivation among the members to achieve the goals of the group, and the greater the probability that the group will achieve its goals.”

For leaders, building a firm of committed loyal employees comes down to demonstrate to our employees that our company deserves their loyalty. We also have to make sure that we recruit the right people. In Thailand where I am working employee loyalty is much lower than in many other countries. During the recruitment process, we sort out candidates who fall in the category of job-hoppers. After all, past behaviour often predicts future behaviour. So, if somebody had already three employers in five years, we are not considering that person. Due to the lack of suitable candidates, we sometimes have to compromise. Nevertheless, during the interview we try to figure out every candidate’s attitude towards loyalty.

Regarding the relationship with other stakeholders like a NGO – partner or suppliers, I manage from a long-term loyal partnership perspective. Many companies hold every three years biddings to reduce their cost further and to squeeze their suppliers like local and international shipping agents, freight forwarders, distribution and sales companies. I always treat those suppliers in the sense of true longstanding and loyal partnerships, and it has served me very well over the years. Loyalty is the glue that binds all these relationships together.

Loyalty is about being human. There is a direct connection between loyalty and happiness. Actually, loyalty is critical to our happiness. Happiness comes from close, supportive relationships. Research shows that we have fewer of those relationships today. Often, we make the wrong choices. We give priority to spending long hours in the company rather than spending time with our family and friends. Often, we choose things that don’t make us happier instead of connecting with those who make us feel good and fill us up emotionally.

Nowadays, due to the economic opportunities, employees move on and change employers much faster. Studies show that they are typically financially better off, but they are less happy. We are happier, if we feel loyal to our work. Research conclusively shows that “feeling a deep sense of belonging to the company where we work” is far more important to most employees in driving their happiness than is pay.

Loyalty is the foundation by which people develop succesful businesses and happy lives. Therefore, as leaders, we must create organizations that foster loyalty for our employees, customers and other stakeholders. We have to lead with a long-term perspective in mind, even in times of crisis. As employees, we have to be aware that loyalty shapes our identity, influences our psychological health (= happiness) and connects us to others.

As Keiningham and Aksoy state in their book: “Although each of us is unique, at our core, we all want the same things: to be happy, to be fulfilled, and to be loved. Moreover, each of us longs for a better world. We fail to recognize, however, that this wish for our own happiness and for a more humane world rests on the same foundation: our loyalty to one another.”

Loyalty requires to take action. And that’s what I wanted to achieve today: to inspire you to take an active role and to make loyalty a driving force in your life. And always remember that loyalty is not something you get but something you give.

Today’s blog is dedicated to my father who has always been a source of great inspiration for me and who is celebrating his 74th birthday today. Loyalty is one of his core values. He spent all his working life with one single company devoting more than 46 years of his life to them. And he is married to my mother since 53 years. And there are many other areas in his life where he demonstrated a high level of loyalty.

Being inspired by my father, loyalty has also become a core value for myself, although I have to admit that I am not always up to the very high standard in the field of loyalty my father has been and is still setting.

This entry was posted on Monday, September 6th, 2010 at 17:37 and is filed under Human Resources, Leadership, Management. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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  1. Dear Mr. Landau,

    no joke, but just yesterday I discussed about the same issue with my father. Thanks for your insights that are strengthening my own attitude toward this core value of life!

    Best wishes to BKK!

    And by the way, your Email about a research study of German football league makes me just thinking about your final statement that it is for sure FCB is going to win this year’s championship. When reconsidering the first matches maybe we should place Borussia also as our favourites for this year! Or can’t we take the first matches as benchmark :)

  2. happy suksan says:

    Thanks for you care for employees :
    “We understood the concept that without loyal employees there are no loyal customers.”
    Please keep writing the very insightful like this again.
    And please give my best reagrds to your all times idol.
    Belated happy birthday to Mr. Landau’s daddy.
    Good night
    happy suksan

  3. Milan Moravec says:

    Businesses and university campuses in the USA are into a phase of creative disassembly where reinvention and adjustments are constant. Hundreds of thousands of jobs are being shed by Lockheed Martin, Chevron, Sam’s Club, Wells Fargo Bank, HP, Starbucks etc. and the state, counties and cities. Even solid world class institutions like the University of California Berkeley under the leadership of Chancellor Birgeneau & Provost Breslauer are firing employees, staff, faculty and part-time lecturers through “Operational Excellence (OE) initiative”: 1,000 fired; 0 Vice-Chancellors fired. Yet many employees, professionals and faculty cling to old assumptions about one of the most critical relationship of all: the implied, unwritten contract between employer and employee.
    Until recently, loyalty was the cornerstone of that relationship. Employers promised work security and a steady progress up the hierarchy in return for employees fitting in, accepting lower wages, performing in prescribed ways and sticking around. Longevity was a sign of employer-employee relations; turnover was a sign of dysfunction. None of these assumptions apply today. Organizations can no longer guarantee work and careers, even if they want to. Senior managements paralyzed themselves with an attachment to “success brings success’ rather than “success brings failure’ and are now forced to break the implied contract with their employees – a contract nurtured by management that the future can be controlled.
    Jettisoned employees are finding that their hard won knowledge, skills and capabilities earned while being loyal are no longer valuable in the employment market place.
    What kind of a contract can employers and employees make with each other?
    The central idea is both simple and powerful: the job or position is a shared situation. Employers and employees face market and financial conditions together, and the longevity of the partnership depends on how well the for-profit or not-for-profit continues to meet the needs of customers and constituencies. Neither employer nor employee has a future obligation to the other. Organizations train people. Employees develop the kind of security they really need – skills, knowledge and capabilities that enhance future employability. The partnership can be dissolved without either party considering the other a traitor.
    Let there be light!