The natural concept of chains is that they are as strong as their links. Hence to make a chain strong, the links must be made strong.

The service-profit chain is based on this concept. A theory evolved by a group of researchers from Harvard University in the nineties, it dissects the levers that translate good service into profitability. These levers are represented by links in an eight-link chain as depicted below.

The service Profit Chain

The service-profit chain works this way: Employee satisfaction increases when the internal service quality is enhanced. When the employee is satisfied, loyalty increases which raises productivity.  Higher productivity results to delivery of greater external service value to customers and this enhances customer satisfaction and loyalty. Profit and growth are then stimulated by customer loyalty.

Hence if you wish to influence growth and profit you need to look at the root which is internal service quality.

The internal service quality is the quality of support services employees receive from fellow employees within the organization. This often gets little attention because traditionally the focus is more on external customers. And it’s usually difficult for employees to identify their customers when those customers are internal to the organization. However, the internal service quality is of key importance. . It can be seen as how employees are equipped with the skills and power to serve customers. It’s also the impact of each employee’s work on other departments and can be measured by the feelings that employees have toward their jobs, colleagues, and organizations.

From the service-profit chain shown, it’s from the internal service quality that the journey to profitability begins. And just as in a chain, the first link leads into the second, and the second into the third, and it continues to the eighth link which is profit.

So to maximize your profits, you need to strengthen all the links in your service profit chain – not some. This is because every part of the chain is important. If employees are satisfied but not productive, then it will not lead to value, which will not lead to customer satisfaction and so on.

Leaders who understand the service-profit chain develop and maintain a corporate culture centered on service to both customers and fellow employees. They know that focusing only on service to customers is a flawed strategy because it does not take care of the internal service quality hence leaving that link weak. And since a chain is as strong as its weakest link, profit and growth will not improve.

Some years back, a US fast food giant Taco Bell found that its stores with low workforce turnover (a key marker of employee loyalty) enjoyed double the sales and 55% higher profits than stores with high turnover. To boost profitability across stores, it enhanced internal service quality – for instance, by giving employees more latitude for on-the-job decision making.

This is a typical example of the application of the understanding of service-profit chain. To increase profit across stores in Taco Bell, the leaders did not increase target on sales, neither did they reduce workforce to minimize costs, rather they tackled the problem from the root after assessing their service profit-chain and adjusting one of the levers.

The outcome of understanding the service-profit chain is an increased and careful attention to the needs of both customers and employees. Organizations can do this by connecting front line workers more effectively with leadership through vertical collaboration. More specifically, they should have a good customer feedback loop, a good employee feedback loop, and a good process for making sure input, feedback and ideas get implemented.