Cheryl Pasquale, a branch manager at Charles Schwab, starts her workday with this morning ritual: As soon as she arrives at her desk, she fires up her laptop, logs on to Schwab's intranet, and pulls up the latest customer feedback report for her office. Generated by a brief survey the investment firm e-mails out daily, the report shows the most recent responses from her team's clients.

Scrolling through the results, Pasquale reviews how well the six financial consultants she supervises handled the previous day's transactions. She sorts through the aggregate scores from customers and reads the comments of individuals who gave high or low marks and sees if any particular kind of interaction has elicited praise or complaints. As she clicks through the screens, Pasquale notices that several customers have voiced frustration with how hard it is to use the in-branch information kiosks. She decides she'll ask her team for insights about this in their weekly meeting. Some customers are confused by one of Schwab's forms; she reminds herself to raise this with other branch managers at the regional meeting later in the month. And she spots an opportunity to counsel a new account rep on how to build better rapport with clients in their next one-on-one training session.

A "manager alert"—a special notice triggered by a client who has given Schwab a poor rating for a delay in posting a transaction to his account—grabs her attention. The client has indicated that he's willing to discuss the issue in a follow-up call, so Pasquale makes a note to try to reach him that day. Surprising as it may seem, she usually looks forward to such calls. They give her a chance to find out what's on customers' minds and solve their problems—and potentially turn critics into fans.

Every day, managers at each of Schwab's 306 branch offices and five call centers conduct a similar drill. It's an integral part of a new focus on direct customer feedback that the firm's founder, Charles Schwab, credits with turning around the company. When he came out of retirement to take its helm in 2004, the business was struggling. "We had lost our connection with our clients—and that had to change," Schwab confessed to shareholders in the annual report. The new customer feedback system has helped reestablish that connection. In 2008, the firm saw its revenues increase by 11% and the scores that customers gave the company jump by 25%. And while the financial services industry was rocked by turbulence, Schwab clients entrusted $113 billion in net new assets to the firm, and the number of new brokerage accounts increased by 10%.

Getting Customer Feedback Right

Most companies devote a lot of energy to listening to the "voice of the customer," but few of them are very happy with the outcome of the effort. Managers have experimented with a wide array of techniques, all useful for some purposes—but all with drawbacks. Elaborate satisfaction surveys that involve proprietary research models can be expensive to conduct and slow to yield findings. Once delivered, their findings can be difficult to convert into practical actions. The results also may be imprecise: Our research shows that most customers who end up defecting to another business have declared themselves "satisfied" or "very satisfied" in such surveys not long before jumping ship. The practice of sending executives out to spend time in the field can generate fresh insights, but few management teams sustain such efforts-and even if they do, they often struggle to convert those insights into prescriptions that frontline employees can follow. Bringing in "power customers"—heavy spenders who tend to be deeply committed to the company—to talk about their experiences can shine a spotlight on critical issues. But frontline employees can't easily learn about their own behaviors from those customers or develop remedies for the problems they raise.

A growing number of companies have developed effective customer feedback programs that head off those challenges right from the start. Instead of building elaborate, centralized customer research mechanisms, these firms begin their feedback loop at the front line. Employees working there receive evaluations of their performance from the people best able to render an appraisal—the customers they just served. The employees then follow up with willing customers in one-on-one conversations. The objective is to understand in detail what the customers value and what the front line can do to deliver it better. Over time, companies compile the data into a baseline of the customer experience, which they draw upon to make process and policy refinements.

The strongest feedback loops do more than just connect customers, the front line, and a few decision makers in management, however; they keep the customer front and center across the entire organization. A number of tactics, such as hiring "mystery shoppers" to test customer service or arranging periodic forums between employees and customers, help strengthen this organization-wide focus. One approach that we believe works well across a range of industries is the Net Promoter Score (NPS), which one of the authors of this article, Fred Reichheld, created seven years ago.

NPS immediately categorizes all customers into one of three groups—promoters, passives, and detractors—allowing employees throughout a company to see right away whether a customer experience was a success or a failure-and why. NPS is generated by asking customers a single question, "How likely would you be to recommend [this company or product] to a friend or a colleague?" Respondents giving marks of 9 or 10 are promoters, the company's most devoted customers. Those scoring their experience 7 or 8 are passives, and those scoring it from 0 to 6 are detractors. NPS is the percentage of promoters minus the percentage of detractors. Customers are then asked to describe why they would be likely or unlikely to recommend the company. The insights gathered from their answers enable employees to quickly identify issues that create detractors—and the actions required to address them. (For more on NPS, see "The One Number You Need to Grow," HBR December 2003.)

Gathering Feedback on the Front Line

Say that thousands of transactions occur daily between customers and frontline employees at your company. Each is an opportunity to create a new promoter. But which customer experiences matter the most? We have learned that the most important interactions are "moments of truth," those relatively few points of contact that hold the greatest potential to delight-or alienate-an organization's customers. As they mine the steady flow of customer feedback, companies should pay particular attention to these touchpoints.

That was the rationale of Allianz CEO Michael Diekmann when he set out to bring his global financial services enterprise closer to its customers, in 2004. Diekmann and his leadership team recognized that no group was better positioned to pinpoint the make-or-break customer experiences—and come up with effective ways of improving them—than the tens of thousands of customer-facing Allianz employees who delivered services day in and day out. The company's management began by assembling a small customer-focus team, reporting directly to the board, that would design, build, and test a feedback system and then roll it out to frontline employees in most of the 70 countries where Allianz operated. The team chose NPS as its core metric.

Here's how the Allianz system works: After every transaction, an independent polling firm immediately contacts the customer and conducts a brief survey. It e-mails the results immediately to the employee who provided the service and publishes aggregated results on local intranet "dashboards" for everyone to review. Frontline employees then follow up by calling a sample of customers who've agreed to be contacted. After listening to the issues customers raise, they correct the problems or escalate them to someone who can.

Because the frontline employees take responsibility for lifting their work unit's feedback scores, they meet frequently to devise service improvements, both large and small. In one of the firm's European health insurance-claims operations, for example, NPS feedback revealed that unexplained delays in reimbursements were a big source of customer frustration. When claims representatives followed up with dissatisfied customers, they learned that customers had to call back repeatedly to inquire about the status of payments and describe medical conditions again and again. The reps' solution: On the initial call, every policyholder would be assigned a case manager who would handle all contact until the claim was resolved. To manage customer expectations, any delay in the reimbursement process would trigger a call or text message informing the policyholder of the claim's status. Soon after the new protocol was in place, the claims unit saw a double-digit increase in its NPS and a significant rise in policy renewal rates.

This kind of closed-loop process can fade away without strong leadership and cultural reinforcement. Allianz's Australian property-and-casualty unit, half a world away from headquarters, faced this challenge by having the top executives personally call customers each month and by using employee rewards and recognition. Managers in each sales office, claims facility, and call center maintain a "compliment database," where they register feedback that praises frontline employees by name. Individual employees' successes are celebrated at regular office "town hall" meetings hosted by a senior Allianz executive.

Managing Change Through Feedback

For many companies, the route to the end customer is circuitous. They sell their products to distributors, retailers, and other intermediaries. Frontline sales reps typically have little incentive or ability to reach beyond their immediate customer and connect with the people who end up choosing or using the products.

That was the situation that Grohe, a European manufacturer of premium kitchen and bathroom fixtures, found itself in. Grohe sells its products in 130 countries through more than 20 divisions, to customers like home-improvement chains, hardware stores, and building supply outlets. After new owners took control of the company in 2004, its market share began dropping steadily.

CEO David Haines decided that customer strategy was the key to reviving Grohe's growth and set three priorities. First, Grohe needed accurate insights into the chain of customer relationships to determine how frontline sales reps and marketing support teams might intervene to boost sales. Second, the company needed to quickly measure whether the new approaches its sales reps tested were working. Third, it needed a feedback system that would promote continual frontline learning and would work well in all its markets.

Brief telephone surveys revealed a major disconnect between Grohe's distributors, wholesalers, and retailers and their customers—the folks who influenced or made the ultimate purchase of the company's fixtures. Grohe sales reps learned that their direct customers, most of whom also sold competitors' products, required a lot more help communicating the attributes—innovative design, ease of installation, dependability—that were Grohe's competitive advantages.

Grohe quickly launched programs to address these shortcomings. Sales reps began sponsoring workshops in distributors' showrooms to teach contractors how easy the products were to install. They provided new floor and window displays to showcase the products' decorative appeal. And they recruited a select group of high-volume distributors into an elite "Grohe Club," offering incentives and extra sales support. To close the feedback loop and determine whether the techniques were boosting customer loyalty and sales, Grohe conducted regular NPS surveys with the distributors. In the year after it launched the new program, Grohe saw its NPS climb more than 20 percentage points.

The company also uses NPS in controlled experiments to field-test ideas before rolling them out systemwide. For example, in one of its markets, the company began tracking how often sales reps visited their customers and what effect the number of visits had on NPS. It found that scores spiked at three visits and began to fall off with more frequent contact. By cutting back on the unproductive extra calls in most of its sales territories, Grohe freed up an estimated 25% of its selling capacity.

At companies where strong customer feedback systems take hold, business-unit leaders and frontline employees start to own customer loyalty the same way they own their targets for revenue, profits, and market share. Indeed, increasing positive customer feedback and meeting conventional financial objectives are becoming one and the same goal. Analysts at Grohe, for instance, have calculated that a 10% improvement in NPS correlates with a six- to seven-percentage point increase in revenue growth.

As employees at Grohe, Schwab, Allianz, and other companies we've worked with have seen, you can't fix problems you don't know you have. And unless you keep the customers you already have coming back for more and recommending your company to their friends and colleagues, it's hard to grow a business.

• Have you reached a consensus
  on your business's five most critical
  "moments of truth" with customers?
• Do employees and managers get
  customer feedback routinely, on a
  daily or weekly basis?
• Do you let customers know the
  impact their feedback had on improving
  your processes?
• Do you know what percentage
  of detractors your operations now
  convert into promoters through
  service recovery processes?
• Can you put a dollar value on
  turning a detractor into a promoter?

Give Customers a Voice in Running Your Business

Many companies have discovered that closed-loop customer feedback systems can energize their frontline workers. To inspire customer-centered learning throughout an organization, however, you also need feedback loops in the executive suite and the middle ranks. There, customer input can influence decisions on everything from where the company will compete to product development, pricing, policies, and processes.

The top-level strategy loop. Direct input from customers can help make strategies coherent. Allianz, a Munich-based financial services firm, uses Net Promoter Scores to benchmark the strengths and weaknesses of its major business units around the world. Annual NPS surveys measure how each operating enterprise (OE) performs against its competitors in the eyes of customers. The surveys identify which OEs are customer loyalty leaders, which are at parity with their rivals, and which are laggards. When Allianz compared the scores and annual growth rates for each OE, the results were striking. Best-in-class OEs (with scores higher than their competitors) increased revenues significantly faster than OEs that trailed their rivals. CEO Michael Diekmann used those findings to send an unambiguous message to the global organization: Improving the customer experience is a core mission.

The midlevel functional loop. Middle managers in operations, marketing, and finance must convert strategies into policies and processes that attract and retain high-value customers. If these managers don't have direct customer feedback, tight budgets and other constraints can lead them to shunt customers to the sideline. The sad fact is that many organizations jeopardize their goodwill with customers by pushing up profits at their expense.

Integration into the learning loop with customers can help functional managers avoid the wrong trade-offs. For instance, instead of trying to hit Six Sigma quality levels at every touchpoint—which can be prohibitively expensive—companies can learn to focus on the few that really build or destroy loyalty.

For American Express, one of those touchpoints was the replacement of lost or stolen charge cards. While combing through Net Promoter Scores and customer transactions, company analysts saw that initial requests for card replacements went unresolved at about twice the rate of other call center requests. Even more alarming, the analysts discovered that the customers requesting replacements were some of the company's biggest spenders. Follow-up surveys with card members who encountered delays revealed that their NPS ratings were one-third lower than those of peers who did not need a replacement. Tools that measure customer satisfaction only in the aggregate might never have uncovered the problem.

The company's operations managers pulled process improvement teams off many other less-urgent initiatives and focused them on card replacements. The teams developed new card replacement protocols, which increased first-call resolution rates by more than 20% and raised the NPS of the customers involved to parity with other customers.

When using NPS to set strategic direction at the top; refine processes, products, or policies in the middle; or sharpen service at the front lines, customer-focused organizations are not preoccupied with simply attaining high scores. Instead, they spur organizational action, close the loop with customers, and collect subsequent customer feedback to gauge if the actions they took produced results.

Rob Markey and Andreas Dullweber are partners, and Fred Reichheld is a fellow, of consultants Bain & Company.

2009 Harvard Business School Publishing.