Suddenly Loyalty Is Back In Business

By Wendy Cole

Loyalty was supposed to be dead. During the labor shortages of the late 1990s, ambitious workers found that the best way to get ahead was to jump from job to job. Then when the economy cooled, long before Sept. 11, the first response of many managers was to shed lots of employees. Little wonder that the average 32-year-old today has worked for nine companies. And she has probably bought nine brands of shampoo from a dozen drugstores, supermarkets and websites. For many customers, loyalty to a product or retailer seems quaint in an era when buying decisions are made at the click of a mouse.

Yet against all odds, the pursuit of loyalty--among corporate executives, employees and customers--is making a comeback. In industries as varied as car rentals, plastics and truck manufacturing, smart companies are finding ways to inculcate worker loyalty and cut the high cost of recruiting and training new hires. Those companies are also finding it more important to please existing customers at a time when new ones are harder to find. "The revival of patriotism and rediscovery of community can be the foundation for rekindling commitment to the workplace," adds David Stum, president of Aon Consulting's Loyalty Institute. "Workers like to be part of organizations they can be proud of."

Before Sept. 11 the U.S. work force was extraordinarily footloose. In February an Aon survey of 1,800 workers nationwide found that just 65% intended to stay with their organizations for "the next several" years--a five-year low--and only 45% would remain if offered a similar job with slightly higher pay. But a follow-up poll conducted in October showed that 54% would say no to an offer of a similar job with better pay. Especially since Sept. 11, "there are so many distractions in the world," says Chris Yetman, human resources director at Advanced Elastimer Systems, a plastics manufacturer based in Akron, Ohio. "The more uncertainty you can remove about where employees stand, the more they can focus on their work."

Advanced Elastimer reduced its annual worker-turnover rate from 14% in 1999 to 7% today, in part by instituting career-development discussions with all employees each year, plus separate annual performance appraisals and frank conversations about how compensation decisions are made. The company expects its reduced turnover to save $2 million a year in expenses for worker recruitment, relocation and training. Advanced Elastimer pays at least $50,000 to replace a typical employee.

Similar savings are available to most firms. Frederick Reichheld, a management consultant with Bain & Co. who studies worker commitment, has found that a 5% increase in employee retention can yield profit increases of 25% or more. "The more chaotic the environment, the greater the need for loyalty," says Reichheld. "When frontline workers have to act quickly and make decisions on their own initiative, they must be able to trust one another to behave in the best interests of the team." Some companies assume that in hard times, their workers will be grateful to have a job and be unlikely to jump ship. But, Stum says, "employee commitment is critical to pulling out of an economic downturn."

Consider Enterprise Rent-A-Car. It has set up each of its 4,800 branch offices worldwide as a separate entrepreneurial business in which employees are encouraged to find new ways to boost customer referrals and retention. If a customer forgets her driver's license at home, an agent will drive her back to pick it up. If the license has expired, he'll take her to obtain a new one. "We do whatever is needed," says George Judy, who oversees seven Enterprise branches around Madison, Wis. Enterprise revenue grew 13% in its past fiscal year, which ended in July. Its main rivals grew at about half that rate.

Truck manufacturer Navistar (now International Truck and Engine) turned around abysmal employee morale and dismal earnings a few years ago, in large part by introducing more regular contact between headquarters' executives and plant workers. Each month members of the top brass visit all eight of their plants, giving frontline workers the chance to offer suggestions and air grievances. The overall improved communications cushioned the blow of plant layoffs over the past year because workers and their unions have been kept informed about the state of the business and the basis for the cutbacks. "Good employees understand when cuts are being made for the right reasons," said Maril MacDonald, who is based in Chicago and is a business strategist for major corporations, including International Truck.

Building loyalty doesn't mean that a company is committed to retaining people for life or that workers are compelled to stay. Loyalty today describes the quality of a working relationship rather than just its duration. And that relationship has not necessarily been enhanced at firms that in the 1990s created on-site gyms or Take Your Dog to Work Fridays--or even at those that showered workers with stock options. "This kind of corporate candy may taste good, but it has no long-term nutritional effect on the workplace," says Stum. Bain & Co.'s Reichheld, author of Loyalty Rules! How Today's Leaders Build Lasting Relationships, adds that, especially since Sept. 11, "people are thinking about building relationships and working with people they care about." And there is evidence that consumers are thinking along similar lines, particularly in their relationships with local merchants.

Here are some of the strategies that successful companies are using to cultivate and maintain loyalty among executives, employees and customers:

KEEP IT SMALL. Employees are most dedicated and motivated when they work in teams of 10 or fewer, say loyalty experts. Enterprise, the largest U.S. car-rental agency, with an annual revenue of $6 billion, has branch managers oversee no more than eight agents. "As branches get busier and bigger, we split them up," says senior vice president Sandy Rogers. The result has been "higher growth and profitability."

WATCH THE FRONT LINE. In a sales or service business, that's the best way to enhance the bottom line. Consider the typical cell-phone company, which each year loses nearly 40% of its customers, a figure that U.S. Cellular president John Rooney calls "a personal affront." He says he's less interested in luring new customers with rock-bottom, gimmicky calling plans than in making sure existing customers are happy with the plans they have selected. U.S. Cellular requires new sales and customer-service reps to undergo six weeks of training that emphasizes behavior rather than gadgetry. "We tell frontline people their objective is not to sell a product but rather to make customers smile," says Rooney. In a contracting economy, savvy companies realize that sales growth is more likely to come from holding on to current customers than from making new conquests. In the 18 months Rooney has been on the job, the company has trimmed its monthly customer-turnover rate from 2% to 1.7%--for an annual saving of $40 million in marketing costs.

FACE UP TO BAD NEWS. Just as International Truck keeps its unions informed about its finances in good times and bad, Cisco Systems has held firmly, amid the tech recession, to its policy of revealing all product bugs on a public Web page as soon as a problem is reported. In contrast, companies such as Microsoft have been criticized for keeping glitches a secret. Cisco's bug database and online message board help programmers and customers avoid massive problems and share fixes. Says Reichheld, who has studied Cisco's approach: "Loyalty is impossible without trust. And trust is impossible without accurate, reliable information."

OFFER JUST DESERTS. The Vanguard Group mutual fund company rewards employee loyalty and effort through an incentive program that accounts for as much as 30% of an employee's compensation. Even with a jittery stock market, employees stand to do well because results are determined as much by the company's progress toward its business goals as by the performance of its stock. "It's not strictly tied to the euphoria of the bull market or the despair of the bear market," explains chairman John Brennan. Employees seem to like the arrangement: turnover each year is less than 10%, about half that of competing money-management firms.

HANG TOGETHER IN HARD TIMES. J&R Music and Computer World in New York City would seem to have every reason to head for the hills. The 300,000-sq.-ft. retailing giant is just a block from ground zero, and was coated with soot and concrete dust from the attack. It remained closed for six weeks after the attack, but all 800 employees continued to receive full pay. Rachelle Friedman, co-chair of the 30-year-old family business, says, "Our employees are our biggest asset. They're like family." Though J&R cut prices and introduced free shipping, declining sales forced the firm to eliminate 48 positions in October--its first layoffs in 30 years.

Many J&R customers say they still recall the store's refusal to price gouge after John Lennon's murder in 1980--just weeks after the release of his last album, Double Fantasy. J&R had 3,000 copies and could have sold them for double the original price but didn't. "This time a lot of customers told us they waited to buy new music and DVDs until we reopened," says Friedman. She thinks business will return even amid the economic slump: "When things are bad, people find comfort in listening to music and watching movies." And they find comfort doing business with people they respect.