LINKING COMPLAINT MANAGEMENT TO PROFIT

1 LINKING COMPLAINT MANAGEMENT TO PROFIT Robert Johnston Warwick Business School, University of Warwick, UK ABSTRACT This paper contends that complaint management should result in customer satisfaction but more importantly it should lead to operational improvement and improved financial performance. It is argued that many organisations ignore the operational value of complaints and as a result many complaint processes seem geared to trying to mollify customers rather than ensuring that problems do not reoccur. Using data from an empirical benchmarking study, based on a detailed questionnaire completed by customer service managers in 40 UK organisations, the relationships between seven key variables, complaint processes, satisfaction, retention, process improvement, employee attitude and retention, and financial performance are calculated and a relationship model developed. The results expose significant correlations between all variables in the model, as a result four acid tests of complaint management are proposed. It is suggested that financial improvements may be better leveraged by bringing about organisational improvements and by ensuring complaint processes are staff-friendly, rather than simply trying to satisfy customers. INTRODUCTION Interest in the impact of service delivery on business performance, particularly between service quality and profit, started with the PIMS study (Profit Impact of Market Strategy) (Buzzell and Gale 1987). Many ensuing studies have explored and confirmed relationships between several factors including service processes, retention, customer satisfaction, staff satisfaction, revenue and profit (see for example Schneider 1980, Reichheld and Sasser 1990, Rust and Zahorik 1993, Anderson et al 1994, Jones and Sasser 1995, Rust et al 1995, Schneider and Bowen 1995, Voss and Johnston 1995, Reichheld 1996, Anderson et al 1997, Heskett et al 1997, Voss et al 1997, Georgiades and Macdonell 1998, Loveman 1998). These studies have been predominantly concerned with routine service performance. This study aims to investigate some of these relationships with regard to non-standard service performance, i.e. service failures leading to customer complaints. Complaints are a natural consequence of any service activity because Mistakes are an unavoidable feature of all human endeavour and thus also of service delivery Boshoff (1997). Service recovery is the process of putting the situation right (Zemke and Schaaf 1990, Berry and Parasuraman 1991) though it has been defined more widely and more proactively as the action of seeking out and dealing with failures in the delivery of service Published in the International Journal of Service Industry Management, vol 12, no 1, 2001, pp 60-69 Robert Johnston is Professor of Operations Management at Warwick Business School, University of Warwick, Coventry CV4 7AL, UK, email bob.johnston@wbs.ac.uk The author would like to thank Bruce Rance, principal of the Customer Service Network, and Sandy Mehra from Coventry Building Society, for their help in the development of this paper.

2 (Johnston 1995). The term complaint management is used here to include service recovery and involves the receipt, investigation, settlement and prevention of customer complaints and recovery of the customer. A good deal has been written on complaint management including; the nature of complaining behaviour (see for example Halstead 1989, Feinberg 1990, Singh 1990, Johnston 1998); the importance of managing complaints and the value of service recovery (Berry and Parasuraman 1991, Hart et al 1990, Johnston 1995, Barlow and Møller 1996, Brown et al 1996); developing measurement instruments (Cooper et al 1989, Boshoff 1998); elements of recovery and recovery strategies (Barlow and Møller 1996, Boshoff 1997, Boshoff and Leong 1998, Johnston and Fern 1999); and more recently service recovery applied to internal customers (Bowen and Johnston 1999). This paper seeks to develop the small amount of work that has been undertaken investigating the effect of complaint management on profitability. The objective of this paper is to propose a model showing the relationship between complaint management processes and financial performance and undertake some preliminary testing of that model. The underlying hypothesis is that good complaint processes generate financial benefits. THE COMPLAINT MANAGEMENT PROCESS The interest in complaint management, from an operations perspective, is the process by which complaints are handled and customers recovered. The design, planning, control and execution of these processes are core operations tasks. Several factors have been identified to suggest what is meant by a good complaint management process (see for example Hart, Heskett, Sasser 1990, Johnston 1995, Barlow and Møller 1996, Boshoff 1997, Van Ossel and Stremersch 1998). These include: having clear procedures providing a speedy response the reliability (consistency) of response having a single point of contact for complainants ease of access to the complaints process ease of use of the process keeping the complainant informed staff understand the complaint processes complaints are taken seriously employees are empowered to deal with the situation having follow-up procedures to check with customers after resolution using the data to engineer-out the problems using measures based on cause reduction rather than complaint volume reduction. CONCEPTUAL MODEL The underlying assumption is that the prime purpose of designing and developing robust and effective complaint management systems is to deliver enhanced profits by increasing revenues and reducing costs (see figure 1).

3 Figure 1 The Conceptual Model Customer satisfaction Customer retention Complaint culture Complaint processes Process improvement Financial performance Employee attitude Employee retention Research has shown that excellent complaint management/service recovery can significantly influence customer satisfaction (see for example Berry and Parasuraman 1991). Furthermore in an earlier study it was found that the majority of highly satisfying (delighting) experiences were the result of something going wrong and the organisation making the effort to recover the customer: The recovery of failures can provide a major opportunity for organisations to create very satisfied customers. If mistakes and failures are an inevitable part of service then there are opportunities for organisations to create very satisfied customers (Johnston 1995). The critical issue about complaint management is that it is not necessarily the failure itself that leads to customer dissatisfaction, many customers accept that things can go wrong. It is more likely to be the organisation s response (or lack of response) to a failure that causes satisfaction (or dissatisfaction) (Bitner, Booms and Tetreault 1990, Feinberg et al 1990). The impact of satisfaction on retention has been well-documented (see for example Rust and Zahorik 1993, Anderson et al 1994, Jones and Sasser 1995, Rust et al 1995, Loveman 1998). Effective response to failures is also believed to have a high pay-off in terms of customer loyalty (Heskett, Sasser and Hart 1990, Berry and Parasuraman 1991, Bailey 1994, Spreng et al 1995, Van Ossel and Stremersch 1998). As Hart, Heskett and Sasser (1990) explained A good recovery can turn angry, frustrated customers into loyal ones. Indeed research on satisfaction with complaint processes specifically has also shown a clear relationship with loyalty and repurchase intentions (Halstead and Page 1992). Research by Jones and Sasser (1995) found that customers who were just satisfied were significantly less loyal than delighted customers. Given that a large proportion of delighting outcomes were the result of service recovery (Johnston 1995) this would suggest that service recovery could be an important loyalty lever. Furthermore customers who have been successfully recovered not only remain loyal but can become advocates for the organisation (Barlow and Møller 1996). Such advocates may then be a source of referral business because word of mouth can be very persuasive in terms of influencing customers to use an organisation and its services (Spreng et al 1995).

4 Customer retention has been shown to have a direct impact on revenue and profitability (see for example Rust and Zahorik 1993, Anderson et al 1994, Rust et al 1995, Loveman 1998). Loyal customers continue to purchase the service, generate long term revenue streams, tend to buy more, and may be willing to pay premium prices, all of which increase revenue and profitability. Further, it has been shown that customer loyalty is a more important predictor of profitability than market share (Reichheld and Sasser 1990, Reichheld 1996). Loyal customers may also lower marketing costs since retaining customers is usually significantly cheaper than attracting new ones (Peters 1987). Simply put Customer loyalty drives profitability and growth Heskett et al (1994). Furthermore since negative word of mouth is likely to result from customer dissatisfaction, not satisfying complaining customers may have a potentially greater negative effect on business earnings than that which is lost through the customer alone (Van Ossel and Stremersch 1998). A key benefit of complaint management is that complaints can also be used to support the drive for continuous improvement by focusing managerial attention on specific problem areas (Van Ossel and Stremersch 1998, Slack et al 1998). This potential however is often overlooked. Customers are often fobbed off with money or promises that the system has been changed for the future, but they are often left with the feeling that they, the customers, have basically expected too much, and any action is a goodwill gesture on the part of the service provider Armistead and Clark (1994). Complaints should lead to the identification of problems and action to ensure that such failures do not happen again. Indeed research carried out for the Citizen s Charter Unit in the UK (Mori 1997) found that about 50 per cent of people complain in order that the organisation might improve its services. It was also reported that that only 1 in 10 felt that the service had improved as a result. Spreng et al (1995) concluded that although service recovery processes and programmes can be expensive, they should also be viewed as opportunities to make improvements that will ultimately result in more satisfied customers, and also lead to cost reduction through those improvements preventing future service failures. Improving operational and indeed organisational-wide processes may represent a cost to the organisation and therefore have a negative impact on financial performance. Improving processes, increasing staff, redesigning jobs, increasing capacity, improving quality, for example, are all likely to incur costs. On the other hand, improvements may reduce costs in the longer term, not only processing costs but costs associated with absenteeism and attrition as employees feel the effects of having to deal with unresolved problems and irate customers (Bowen and Johnston 1999). Such improvements do not need to be linked to customer complaints. More proactively changes can be made by involving employees in identifying problems and potential problems. Service employees should be both inspired and obliged to provide information accurately and consistently about service failure/recovery, which management then can use to redesign the system Brown et al (1996). Good complaints processes, that are easy to use and satisfy customers, should result in employees feeling of greater control over the work situation and thus less stress (see for example Matteson and Ivancevich 1982). In turn, less stress tends to be associated with greater job satisfaction and organisational commitment, better job performance, and health (Fox, Dwyer, Ganster 1993, Motowidlio, Manning and Packard 1986). A good attitude

5 towards the job should then result in less stress, attrition and absenteeism and greater staff loyalty and retention, which should have a direct impact on financial performance. Organisational culture, in terms of visible structures and processes, strategies, goals and philosophies or unconscious beliefs thoughts and feelings (Schein 1985), exerts a powerful influence on organisational and operational processes. In particular organisational culture underpins the creation of a customer-focused organisation or organisations committed to service excellence (Johnson and Scholes 1993). It is suggested that organisational culture regarding complaints, such as the way it values complaints, whether complaints are seen as a nuisance or a gift will impact on the quality and robustness of the complaint processes (see for example Barlow and Møller 1996, Handy 1991, Kakabadse and Kakabadse 1999). METHODOLOGY Questionnaires were administrated as part of the Complaint Management Excellence Programme organised by the Customer Service Network in conjunction with Warwick Business School. This study is based on data from the first 40 responses. The questions were based on reviews of the literature, focus group interviews with customer service managers not associated with the study, and refined following a pilot study involving 20 organisations. The respondent in each organisation was typically the senior manager responsible for the customer service department. The organisations were self-selected to take part in the study. The survey comprised about 200 questions which were used to benchmark the organisations against each other. About half the questions collected data on numbers and types of complaints, training undertaken etc, the other half, 34 of which were the basis for this study, used a 1-5 scale with descriptions associated with points 1, 3 and 5 with 1 representing poor practice and 5 good practice. Fourteen questions concerned the complaint process (covering the criteria identified earlier). There were four questions on customer satisfaction, five on retention, six on improvements and five on financial performance including lifetime values, profitability, switching and referrals. The questions in each area were aggregated (unweighted) to form an index. RESULTS A preliminary analysis of the data has shown significant correlations between the variables at a 1% level with the exception of customer satisfaction/retention which is significant at the 5% level, see figure 2.

6 Figure 2 Correlation Coefficients Customer satisfaction 0.41 Customer retention Complaint culture 0.74 0.58 Complaint processes 0.75 Process improvement 0.65 0.90 Financial performance 0.84 Employee attitude 0.75 Employee retention 0.67 One weak link, which is not shown on figure 2, is the correlation between complaint processes and financial performance, with a coefficient of 0.56. This suggests that it is not the complaint processes per se that leads to financial benefit but how organisations manage the intervening variables, i.e. improve financial performance by satisfying and retaining the customer/employee and/or improving the product or bringing about process improvement. The complaint process may be good but if it does not lead to retention (staff or customer) or improvement it may have limited financial impact. The weakest relationship on figure 2 is between customer satisfaction and retention (0.41 significant at the 5% level). This is to be expected. Jones and Sasser (1995) found clear but differing and non-linear relationships in their research into customer satisfaction and customer loyalty in 30 different organisations in five service industries, in normal service situations, i.e. not after failures. The nature of the relationship between these two variables depends upon the ability of a customer to switch suppliers (see figure 3). Figure 3 Differing relationships between satisfaction and loyalty High LOYALTY Increasing ability to switch Low -5-4 -3-2 -1 0 1 2 3 4 5 Dissatisfied SATISFACTION Delighted Adapted from Jones and Sasser 1995 and Clark and Johnston 2000

7 The correlation coefficient between these variables did not include responses from the eight monopolistic organisations in the sample. These organisations which included state hospitals, utilities, and local authorities, were, unsurprisingly, not able to provide data on the effect of customer satisfaction on retention. To test out Jones and Sasser s contention, the remaining data points were split into those organisations where it may be easier for customers to switch, such as retailers, and those where it may be more difficult to switch, such as banks and life assurance providers. Figure 4 shows the data points for these organisations. Figure 4 Satisfaction and loyalty 5 4 Customer Retention 3 2 1 1 2 3 4 5 Customer Customer Satisfaction Satisfaction - CHART 11 / 127 Easier to switch More difficult to switch Although the sample size is small, it is difficult to distinguish different relationships between the easier to switch and the more difficult to switch organisations. It would appear that the satisfaction-retention relationship is less clear cut after a complaint than after normal service. Although the highest correlation is between customer retention and financial performance (0.90), the other two links in this chain, complaint process/customer satisfaction (0.58) and customer satisfaction/retention (0.41), are relatively weak suggesting this is the least likely route to gain financial benefits from complaints. Despite the fact that most complaint processes are designed to satisfy the customer, they are only having limited effect on satisfaction and even less impact on retention therefore financial performance. The stronger links between complaint processes and financial performance are through process improvement and employees. It would appear that in order to generate maximum financial benefit from complaints organisations complaint management processes should therefore be designed to focus on process improvement and employees, rather than customer satisfaction per se. Complaint culture appears to be an important driver, as indeed it could also be argued to be a result of the complaint processes.

8 CONCLUSIONS The results expose significant correlations between all of the variables, which provides some support for the underlying hypothesis that a good complaint culture and good complaint processes may well lead to improved financial performance. It would appear that some organisations are doing extremely well and leveraging many benefits from their complaint management processes and many organisations are not. As a result it is suggested that there could be four acid tests applied to complaint processes by which organisations could ascertain if they are getting the most from their complaint processes: Do they satisfy customers who have experienced a failure? Do they retain those customers who have experienced a failure? Do they improve organisation-wide processes as a result of information from failures? Do they help retain employees? Financial benefits accrue from satisfying and retaining dissatisfied customers through service recovery, by using information from complaints to improve both operational and organisational-wide processes and by satisfying and retaining employees. It is also suggested that this is contingent upon the organisation s complaint culture. Given the slightly weaker link between customer satisfaction and retention it is possible that financial performance is more likely to be improved by focusing on improvement rather than customer satisfaction per se and by making sure complaint processes are staff-friendly. Only about five organisations have 4+ rated complaint processes and resultant high scores in terms of satisfaction, retention, improvement and financial performance. The next stage of the research will investigate these organisations using case studies to identify firstly what makes their complaint processes so good and secondly how they go about deriving the financial and organisational benefits from their complaint processes. REFERENCES Anderson E.W., Fornell C. and Lehmann D.R., Customer Satisfaction, Market Share, and Profitability, Journal of Marketing, vol 58, July 1994, pp 53-66 Anderson E.W., Fornell C., Rust R.T., Customer Satisfaction, Productivity, and Profitability: Differences Between Goods and Services, Marketing Science, vol 16, no 2, 1997, pp 129-145 Armistead C.G. and Clark G., Service Quality and Service Recovery: The Role of Capacity Management, in Armistead C.G., (ed), The Future of Services Management, Kogan Page, London, 1994 Bailey D., Recovery from Customer Service Shortfalls, Managing Service Quality, vol 4, no 6, 1994, pp 25-28 Barlow J., and Møller C., A Complaint is a Gift, Berrett-Koehler, San Francisco, 1996 Berry L.L. and Parasuraman A., Marketing Services: Competing Through Quality, Free Press, New York, 1991 Bitner M.J., Booms B.H. and Tetreault M.S., The Service Encounter: Diagnosing Favorable and Unfavorable Incidents, Journal of Marketing, vol 54, January 1990, pp 71-84 Boshoff C.R., RECOVSAT: An Instrument to Measure Satisfaction with Transaction Specific Service Recovery, Journal of Service Research, vol 1, no 3, 1998, pp 236-249

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