New data: Does employee satisfaction drive customer satisfaction? Not really!

This article is an updated version of what I wrote on the same subject a year ago. For those who remember that post, or already understand the background and references to other research on the topic, I have written a simple summary that you can find here. I don’t believe it will be possible to understand the summary version if you have never read the full article. 

First, is there any evidence for what most people believe?

It is obvious to everyone who works on customer experience that happy employees make happy customers. But… is there actually any evidence for this? Not much, though you would not know it at first. This research I report below was completed in March 2018 and confirms a study I performed a year earlier. In March 2017, I used a new method to study the relationship between the two factors, using public data sources. In short: happy employees do not make customers happy. Nor do unhappy employees. Some industries appear to be exceptions. Overall, employee happiness explains 4.4% of customer experience variations across 345 businesses that sell to American consumers. I believe one reason for this low percentage is that many companies have no direct contact with their end customers.

What this means for most businesses is simple: your customer experience investments should be concentrated on other things. To find out what things, ask your customers.

The pitiful state of research on the subject

Try an online search for ‘Employee and customer satisfaction.’ Most results are about employee engagement rather than satisfaction. As this is written, the top result is Employee engagement: the wonder drug for customer satisfaction, on the Forbes website. The author, Kevin Kruse, provides a link to a list of over 30 studies that are intended to be relevant. They make excellent points on employee engagement, which differs somewhat from employee satisfaction. However, only one of them contains multi-company deep research. More on this below. Other studies cover individual companies, including one on Caterpillar, and one on an unnamed department store, for example. Most of the studies listed make no mention of customer experience at all, but focus on other business outcomes. Yes, more engaged employees produce better financial outcomes. Employee engagement indices are calculated as an average of answers to multiple survey questions. At HP, it was an aggregate of eight answers, including questions about training, processes and procedures, and ongoing feedback. There is no standard measurement. The Temkin Employee Engagement Index asks three questions, none of which is about happiness. Employee satisfaction and employee engagement are different concepts.

The media industry

The Forbes article links to research by the Northwestern University Forum for People Performance Management and Measurement that is the only one of the list of 32 that actually includes deep and relevant research. The team studied 100 companies in the media industry. They did indeed find a statistically significant correlation between employee engagement and customer satisfaction for the companies studied. The R² number from their analysis was 0.08, meaning that 8% of the variability in customer satisfaction is explained by the employee-satisfaction data.

Is the state of current research really “pitiful?”

When discussing the state of this research in various internet forums, I am systematically told that I am wrong about it. When I ask for proof that I am wrong, I am pointed at articles that the person ‘correcting’ me has usually not read or understood. Indeed, as often happens in scholarly papers, the writer has read the abstract of an article they refer to, but not the full article. I don’t feel this is the place to go into extreme detail on the subject, but would still like to pick one example, just to be clear that I  am not making this all up.

A search on the subject quickly reveals a quite old Harvard Business Review article on The Employee-Customer-Profit chain at Sears. The summary that others, such as Yingzi Xu and Robert Goedegebuure have taken away from the article is that 60 to 80 percent of customer satisfaction depends on employee satisfaction. The article does not say this at all. It says that 60 to 80 percent of customer satisfaction was shown to correlate with just 10 of the 70 questions on the Sears employee survey. None of the 10 is the overall satisfaction question (though “I like the kind of work I do” is on the list) and the HBR authors position the 10 questions as being a “management scorecard.”

I don’t exclude the existence of good research. I just have not been able to find it. I admit that some research is only available for a fee, and I have not been willing to go that far.

American Quality Digest article from 1998 put me on the right track

H. James Harrington made a lot of people uncomfortable in 1998 when he published Happy Employees Don’t Equal Happy Customers in the American Quality Digest. He used the American Customer Satisfaction Index (ACSI) numbers for as many of the Fortune ‘100 Best Companies to Work for’ as possible the time. Only five of the Fortune list were in the top 100 of the ACSI list. Surely his results were a fluke, or were not logical in some other way?

My new data sources

At the time, Harrington used the American Customer Satisfaction Index benchmarks and compared them to the Fortune list of the best 100 companies to work for in America. The challenge is that the ACSI benchmarks cover consumer industries and a lot of the Fortune list are companies that are B2B, so are not covered by ACSI. I have therefore used a different, broader, and perhaps controversial source for employee satisfaction data: Glassdoor. We can debate the level of positive or negative bias that may be present in Glassdoor data. My working hypothesis is that the bias is equal for all companies. As the comparison being made depends on relative rather than absolute numbers, I don’t believe the bias has any significant effect.

Overall Results

In short, there is a very weak relationship between employee satisfaction and customer satisfaction. I was able to match 345 ACSI ratings with corresponding Glassdoor ratings. Using linear regression, just 4.4% of the variability in customer satisfaction is due to employee satisfaction. For the stats experts, the number does not change with quadratic regression.

High-touch and low-touch companies

I used my own judgement to define some industries, such as restaurants, as ‘relatively high-touch’. This gave a list of 125 such companies. I call the remaining 220 companies ‘relatively low-touch’.

• Using linear regression, employee satisfaction explains 9.6% of the variation in customer satisfaction, compared to 5.1% in the low-touch group.
• Using quadratic regression, the numbers rise to 16.0% and 6.9% respectively.
• The numbers are highly statistically significant. This means they should be representative of all large companies whose end customers are US consumers.
• Whichever regression method is used, the message should be clear: for two-thirds of companies, employee satisfaction does not matter much. For the high-touch companies, it matters less than you might expect.

Results by industry sector

The ACSI data is grouped by industry and the industries are grouped into ten sectors. The number of companies in each industry is relatively low, so it is hard to be confident in the correlations at that level. (I say this based on paranoia, despite noting that the results are similar to those from last year, and that most large companies in each industry have been covered.) The numbers are more meaningful by sector. It should not be surprising to see the sectors with the greatest amount of human contact at the top of the list. The transportation sector has the smallest number of companies on the list. It includes nine airlines, and three transportation companies (UPS, FedEx and the US Postal Service).

The 0.313 R-squared number for the transportation sector, for example, means that 31% of the ACSI variation is explained by the Glassdoor variation. For the sectors at the bottom of the table, there is no apparent relationship between the two.

Not really surprising

I don’t find these results surprising at all. Almost everything you read on this subject is anecdotal. It is easy to find articles on single employers who make both their customers and their employees happy. Nobel-winner Daniel Kahneman has written about ‘What You See Is All There Is’ as a common cause of misinterpretation. Where the only data being presented is on customer and employee satisfaction, humans jump to an unconscious conclusion that these are the only factors that matter. If you were to start by brainstorming all possible things that could impact customer satisfaction, employee satisfaction would be on the list along with a lot of other potential factors, such as product quality and brand image.

Most articles you read on the subject of the current research just present the two factors, leaving you to conclude that only these two are important. I am not going to say employees don’t matter at all. They just don’t matter much for the average company. Think about the number of companies you like where you have no interaction with the employees at all. This is the case for most eCommerce interactions, for example. Amazon is an outstanding customer experience performer for eCommerce, but just about average for employee satisfaction.

One difficulty with the study

One potential objection to some of the data points in the study is that the Glassdoor data is provided by employees of the company, while consumers may actually interact with franchisees or other resellers. This would be the case for General Motors brands included in the study, and for some restaurant chains for example. There is no known public source of employee satisfaction data for franchisees and resellers.

Conclusion and hypothesis

If you brainstorm a list of possible factors that could impact customer satisfaction, employee happiness deserves a place on the list. So do many other factors. In one such brainstorming session a senior manager suggested that the financial health of a supplier is an important factor for large corporations engaging in long-term contracts. I suspect it would be easy to come up with twenty or more factors that could bear scientific investigation. As far as employee satisfaction is concerned, my hypothesis is that it matters most in high-human-touch businesses. There is a major challenge in proving this. Many large companies outsource their service and sales call center operations, for example, so the ‘high human touch’ is not being handled by company employees at all.

Finally, if you would like to do your own analysis, visit our ‘Resources’ page here to download the Excel file and a PowerPoint presentation. I also put the presentation on LinkedIn SlideShare here. When doing your own research on the subject, bear in mind that employee engagement and employee satisfaction are different concepts. And as always, drawings are by Peter FitzGerald.

[P.S. on March 13th: I have now published the list of the ten companies that are in the top 10% for both employee and customer satisfaction, and those that are in the bottom 10% for both. You can find that blog post here.]

If you like this article, please be sure to sign up for our newsletter here. This new content is also in our book Customer Experience Strategy – Design and Implementation. If you already have a Kindle version of the book, you should have received an automatic update as of March 7th. The print version has also been updated. All four of our books are available on Amazon.