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Book

Loyalty Rules!

Loyalty Rules!

How Today's Leaders Build Lasting Relationships

  • August 11, 2001
  • min read

Book

Loyalty Rules!

An excerpt from the first chapter, "Timeless Principles."

Loyalty, the key to success in today’s economy? Be serious! What relevance could such a quaint, old-fashioned notion hold for a world in which customers defect at the click of a mouse and impersonal shopping bots scour databases for ever better deals? What good is a small-town virtue amid the faceless anonymity of the Internet’s global marketplace? Loyalty must be on a fast track toward extinction, right?

Wrong. Chief executives at the cutting edge of e-commerce—from Cisco’s John Chambers to eBay’s Meg Whitman, from Dell Computer’s Michael Dell to Intuit’s Scott Cook—care as deeply about customer retention as does any top-notch bricks-and-mortar executive, and consider it vital to the success of their online operations. Whitman reports, “Loyalty is the primary ingredient in eBay’s secret sauce.” Web-savvy leaders know that loyalty is an economic necessity; acquiring customers on the Internet is enormously expensive, and unless those customers stick around and make lots of repeat purchases over the years, profits will remain elusive. And they know it’s a competitive necessity; in every industry, some company will figure out how to harness the creative potential of the Web to create exceptional value for customers, and that company is going to lock in many profitable relationships at the expense of slow-footed rivals. Without the glue of loyalty, even the best-designed e-business model will collapse.

But that’s customer loyalty. We all know that employee loyalty is another story. It takes a typical Silicon Valley firm only two years to lose half its employees. With the new economy’s surge in job hopping and career surfing, how can any company hope to hold on to its workers? And how about supplier loyalty? The burgeoning Internet-based auctions, which blow apart traditional supply-chain relationships, seem to make loyalty all but irrelevant. Investor loyalty? Online trading has accelerated investor annual churn rates toward 100 percent. Employee, supplier, and investor loyalty—all must be anachronisms of the digital economy.

Wrong, wrong, and wrong again. Customer loyalty hinges, as it always has, on committed teams of high-caliber employees and suppliers, which in turn require a core of owners committed to building an enduringly successful enterprise. The challenge of building loyalty has indeed stiffened as the new economy has blossomed and presented enticing alternatives for customers, employees, and the whole range of business partners. But along with the enormous potential of the new economy have come increased risk and volatility. In this environment, it’s become clear that loyalty is an even more vital asset for success in the age of the Internet. Building loyalty has in fact become the acid test of leadership.

Bain Book

Loyalty Rules!

Learn more about how today's loyalty leaders build lasting relationships.

It’s a test that most leaders are flunking. Fewer than half of all employees of U.S. companies now consider their employer to be worthy of loyalty. Bemoaning the decline of loyalty, leaders fault the Internet, rapid changes in technology, shifting government regulation, cutthroat competition, fickle customers, and greedy, short-term investors. Some have concluded that loyalty is no longer relevant in modern society, where self-interest sets the tone for employer-employee relations. But they are kidding themselves. People yearn now more than ever for leaders and institutions worthy of their trust and commitment—to help guide and enrich both life and work. When business leaders observe diminished loyalty in the people around them, it is not because a confusing new economy has robbed loyalty of all relevance, but rather because the core principles embodied in their leadership have proven unworthy of loyalty.

The case for loyalty

Loyalty remains the hallmark of great leadership. It provides a far more exacting standard for leadership excellence than do the profits demanded today by impatient shareholders. The long-term rewards of loyalty ultimately outstrip even the most spectacular short-term profits. We are not, however, talking about a trade-off between loyalty and long-term profits. After all, what kind of customer, or supplier, or dealer, or employee would cast his or her lot with a leader who could not offer outstanding financial potential? Loyalty obviously demands superior profits, but it demands more. It requires that those profits be earned through the success of partners, not at their expense. Loyalty can be earned only when leaders put the welfare of their customers and their partners ahead of their own self-serving interests.
Herein lies the essential paradox of business loyalty. If loyalty is really about self-sacrifice—that is, about putting principles and relationships ahead of immediate personal financial gain—what relevance can it possibly hold for business, which is in large part driven by the pursuit of self-interest?

Too few managers can answer this question coherently. They have convinced themselves that maximizing shareholder value provides the sole principle for successful business practices, and that through faithful commitment to this principle, they have fulfilled their professional and ethical obligations to partners. In reality, though, these leaders are confusing profits with purpose. Whether they know it or not, they have abandoned what I’ll call the “high road” of business practice. A single-minded focus on financial results will not create the conditions for loyalty or long-term success, and it may well lead an organization down a slippery slope to the “low road.” On the low road, where money matters more than people, it becomes standard practice to take advantage of customers, employees, vendors, and a host of other business associates whenever they are vulnerable. Here, the goal of strategy is to create market power; the job of leaders, to utilize that power to strangle competitors, bully vendors, intimidate employees, and extract maximum value from customers—all in faithful duty to shareholders, whoever those shareholders happen to be this month. In this Darwinian struggle, only the toughest individuals survive, and trust is a weakness to be exploited.

Low-road strategies can generate impressive financials, for a time, and buoyant earnings and stock price provide the necessary bribes required to keep followers committed. Eventually, however, the load road leads to trouble. There will come a time when the firm gets blindsided by a competitor, or fails to anticipate a shift in market preferences, or discovers that a new technology has made its business model obsolete. And then, the true value of loyalty will become apparent. When profits inevitably get squeezed and stock price plummets, the company can no longer fund the bribes. Yet somehow, leaders must rally their partners to fight rather than switch; customers, employees, dealers, and suppliers must bind together and find a solution. Unless leaders have built relationships based on loyalty—loyalty to something more fundamental than today’s earnings or stock price—then nothing will keep partners from jumping ship the instant a better opportunity comes along.

Many executives have confused employees, vendors, dealers—and even themselves—about the relationship between treating people right and financial success. The idea that the sole purpose of business is to generate profits, or that maximizing shareholder value matters more than treating people with dignity and respect, is absurd. Yet these common misperceptions are no more absurd than their mirror images. It is equally absurd to think that businesses can treat people right without achieving outstanding financial results, or that adhering to high standards of decency and consideration is somehow inconsistent with maximizing growth and profits.

There is indeed a high road in business, and it is the only road to lasting success. If you hope to lead others successfully or for very long, you must break through the widespread disillusionment and confusion by demonstrating that your leadership is founded on principles worthy of loyalty; principles that will inspire commitment among customers, employees, and investors; principles that cultivate partner growth and prosperity, not simply your own profits. You must show all your partners—including shareholders—how these principles create the most solid foundation for financial excellence and sustained success.

Wishful thinking? Read on, and you’ll find plenty of examples of successful loyalty leaders who can serve as practical role models for your journey along the high road. What’s their secret to building loyalty in this increasingly volatile environment of the new economy? Well, for starters, they understand the enormous value of loyalty, so they measure it.

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