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By Bill Thomas
OE&D Practice Leader
Qittitut Consulting, LLC

Who comes first—customers, employees or shareholders?

icon_pdfMy recent articles about Harley-Davidson and the power of culture generated some interesting discussions. I closed the article with the comment: "If you take care of the customer, everything else takes care of itself." The rationale being that if you focus on the customer, your revenues will grow and you'll be better able to reward your employees and your shareholders.

I also believe that companies who have satisfied customers are more likely to have satisfied employees. Nobody likes working for a company that's getting constantly hammered by its customers over price, quality, service or other issues. When customers hold a company in high regard, it's much easier to nurture employee loyalty and a spirit of winning.

Nonetheless, one reader responded to my article with his own spin by saying: "If you take care of your employees, they will take care of everything else." Touché! There are certainly a number of companies out there who seem to follow that philosophy.

It's Electric!

One of them may well be Lincoln Electric, a manufacturer of arc welding products, robotic welding systems and ­specialty cutting equipment. Headquartered in Cleveland, Ohio, this company of roughly 6,000 worldwide employees hasn't laid off a single U.S. employee in more than 50 years. In fact, they guarantee lifetime employment for all FTEs with three or more years of service. Why they do that, and how, has been part of a well-established case study at Harvard.

LE has also been visited by numerous Fortune 500 execs over the years seeking to better understand their "formula." For example, despite having some of the ­highest-paid plant workers in the world, they are still able to dominate their industry with ultra-competitive prices. How can they do both?

Their formula isn't as simple as treating their employees right. To the contrary, it's a series of carefully balanced trade-offs. Management has to be deeply committed to their employee-friendly policies, and employees have to accept a degree of flexibility.

And it works

For example, in addition to job security, the top factory worker can earn up to $100,000 a year which includes profit sharing and incentives that can be as much as 100% of their base pay. In one three-year period, LE paid out almost $200 million in profit sharing to its Cleveland employees alone. When the company had its first loss in 1992, it borrowed millions of dollars to continue its pay practices. That's commitment!

In exchange, employees agree to reduced hours, job reassignments and corresponding pay cuts when business conditions warrant it. They also generally have higher overtime levels in peak periods to avoid hiring additional workers. Workers don't get any sick days or holidays and they pay for their own health insurance. Employees further agree not to join a union. That's mutual commitment!

Employees are guaranteed "a" job, not "a specific" job. They are cross-trained in many different areas and moved regularly to meet or create changes in production levels. For example, employees in sales and admin roles might be moved to the assembly line to meet a production target. Production employees might be put into sales roles to drum up business during economic downturns. In all cases, employees get paid for the job they're doing at the time, not the job they did previously.

Assembly line employees are paid based on how much (i.e., the number of parts) they produce, the quality of their output and a year-end bonus that's tied to a merit review and rating. The company also has a different and highly effective model of employee engagement. Both these practices are key to their success.

So which is it?

The results seem to speak for themselves. Lincoln Electric is an awesome model of efficiency. It's viewed as an innovator and leader in its industry with its committed and ­talented workforce, worldwide manufacturing capability, commitment to quality, strong customer service, incentive performance system and a culture that's hard to imitate. Intangible as these things might be, they clearly create value for LE's various stakeholders.

I admit that putting employees first at LE appears to be a winning formula. But can it be replicated in other companies? Is it a formula an HR leader can bet the farm on? Is it employees before all else?

I maintain that it's not. Allow me to describe a bit more about this fascinating company, and why I'm sticking to my guns that the customer comes first—and all else follows.

Responsibility and recognition at Lincoln Electric

As I have already described, Lincoln Electric has found a ­balance of practices that makes their employee-first model highly effective. They believe two key elements, responsibility and recognition, must exist for employees to be productive.

LE employees have three primary responsibilities:

  • Attendance—if they don't come to work, they aren't paid.
  • Earning power—employees are paid on a piecework basis and must guarantee the quality of each piece they produce
  • Self-management—the supervisor-to-employee ratio is 1 to100, so all workers must manage, and all ­managers must work.

LE's employee engagement model reinforces both the self-management responsibility and the focus on recognition. Employees who have performed outstanding work are invited to participate on an employee advisory board. These employees meet regularly with LE's CEO to discuss relevant challenges and ways of improving the company's operations and performance. The minutes of the meetings are published and posted to keep all employees informed of plans and developments.

The power to earn

A pay-for-performance system drives earning power re­spon­­sibility. Semi-annual merit reviews rate each employee on areas such as quality of work, absenteeism, number of customer rejections, dependability, ideas and cooperation. There are also daily incentives for production workers.

Employees receive merit bonus points that can result in bonuses that equal their annual wages. The more points you earn, the larger your annual bonus. But you can also lose points. If you are absent for any reason, your points are reduced. If a customer rejects a product for quality ­reasons, everyone who worked on that product loses points. This might be an employee-first company, but the focus on employee responsibility and customer satisfaction is obvious.

What about the shareholder part of this value triad? Overall, shareholders seem to have been rewarded by the company's efforts and results. Their stock price today shows a 55% increase over the last three years—three ­economically tough years.

Best practice or best wishes

So regardless of which one should come first, LE seems to be turning in a solid performance for all its stake­holders. Will the approach work in other organizations? Is it an approach that HR leaders should rush in and ­propose to their CEOs? Yes, and no.

There's nothing about these practices that make them unique to Lincoln Electric. They can be replicated by ­others. For example, numerous companies have been ­saluted for their no-layoff policies (SC Johnson, AFLAC, Nucor, FedEx and others). But LE's no-layoff policy is just one piece of a number of mutual compromises between the company and its employees. Their culture makes this possible for them, where other cultures might reject similar efforts. LE officials themselves admit that it's a difficult model to administer. But it works in their culture, because of their culture.

If you think you'd like to borrow certain ideas from Lincoln Electric, I maintain that the customer, not the employee, should be your starting point. I say this for ­several reasons. One is that an employee-first model will usually only work with an enlightened senior management team. Most HR leaders, however, aren't that fortunate, and have to work really hard to sell their ideas to upper management. If you're one of the fortunate ones—go for it.

Customers, employees and shareholders

My second reason is if you're making an HR pitch to the CEO in today's environment, it better be one based on a tangible business issue, not one based on employee advo­cacy. If you go to your CEO with some ideas for creating a more committed and engaged workforce, they may or may not listen. But if you go in with specific ideas for driving customer satisfaction and retention, account growth and thus revenue growth, I'll bet you get their attention!

Lastly, a customer-first HR strategy stands a far better chance of more quickly impacting business results—both top and bottom line. An employee-first approach will take time to demonstrate its financial impact (especially any top line impact), and may well run out of support before it runs its course.

Do your Business and HR strategies address all three stakeholders? Do they identify and leverage the value-creating connections between them? If you have examples of HR practices that help you drive customer value, we'd like to hear from you.

  • We hired Qittitut to help us develop and implement a Customer Excellence strategy designed to measure, improve and leverage the satisfaction and loyalty of our customers—and further differentiate us in the marketplace. Their expertise in this area and their ability to quickly understand our industry and culture were invaluable to our efforts. I would highly recommend them to any company seeking to take their customers’ experience to the next level.

    Director of Customer Excellence, Gas Pipeline Company

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