Wednesday, January 25, 2006

Would You Recommend Us?

That simple query to customers is shaking up planning and executive pay.

It wasn't exactly Thomas Edison and the lightbulb, but for Peter McCabe, it was a eureka moment all the same. In the fall of 2004, McCabe, chief quality officer for General Electric Co.'s (GE ) health-care business, read a Harvard Business Review article recommended by a colleague. It suggested companies measure customer loyalty by asking one simple question rather than relying on lengthy satisfaction surveys: "On a scale of zero to 10, how likely is it that you would recommend us to your friends or colleagues?"

The article showed that "net promoter scores," which measure the difference between the percentage of customers who give high responses ("promoters") and those who give low ones ("detractors"), correlate closely with a company's revenue growth. Promoters are defined as customers who give the company 9 or 10, while detractors hand out "0" through 6. Customers who log 7 or 8 are deemed "passively satisfied" and aren't calculated in the final score. The article's finding stopped McCabe in his tracks. "Wow, this is kind of perfect," he thought.

McCabe and others at the famously metrics-driven company had been looking for a better way to measure customer loyalty. At the time, some of GE Healthcare's units were using traditional customer satisfaction questionnaires as a gauge. But those indicated only vague feelings rather than the more telling action of praising a product to a friend -- and they didn't track with repurchase rates. As a result, such surveys often got the brush-off from employees who saw them as a "hobby" of the marketing or quality-control department, says McCabe.

He and other GE Healthcare executives quickly rolled out net promoter scores in place of the satisfaction surveys some divisions were using. "It was a 'Texas hold 'em' kind of thing," he says. "We went all in." Twenty percent of managers' bonuses were tied to the scores, which closely tracked sales growth. Then, in January, 2005, members of McCabe's team shared the idea at GE's annual global leadership meeting in Boca Raton, Fla., where CEO Jeffrey R. Immelt greeted the approach with enthusiasm. As a result, in 2006 all GE businesses must report net promoter scores for the first time. "I have little doubt that this will be as big and long-lasting for GE as Six Sigma was," says McCabe of GE's vaunted and much-copied quality system.

With rhetoric like that, it's no wonder net promoter scores are becoming a popular, and, many say, powerful way to measure customer loyalty, drive compensation, and flag troubled products. By asking customers whether they would put their own credibility on the line by recommending a company to a friend, net promoter scores, say fans of the concept, are truer indicators of loyalty and future behavior and, therefore, sales growth. American Express Co.'s (AXP ) U.S. consumer-cards president, Jud Linville, calls the scores a "beacon." Management and information technology consulting firm BearingPoint Inc. (BE ) is considering tying bonuses to the scores after it found that clients that give high net promoter scores also show the highest revenue growth. Software maker Intuit Inc. (INTC ) is even reporting its scores in conference calls with analysts.

The approach is gathering steam at a time when CEOs are increasingly focused on getting closer to customers. It also plays into the executive lament that loyalty management programs, which track customer retention, are among the most ineffective tactics in their toolbox. Pair that with mounting recognition of the power of word of mouth and social networks, and it's easy to see why buzz is building. There's even a book on the horizon: The Ultimate Question by Fred Reichheld, founder of Bain & Co.'s loyalty practice and author of the article that piqued McCabe's interest, is due out on Mar. 2.

Still, Reichheld's concept is controversial. Many in the customer satisfaction industry say it is facile, and they worry that companies will start using the analysis without doing enough follow-up research to understand what's going right or wrong with their offerings. They also question the precision of the metric. Angry detractors who rate the company a "0" on the 0-to-10-point scale are weighted the same as uninspired customers who give it a "6." "Clearly, it's attractive to have something simple," says Claes Fornell, the University of Michigan researcher behind the American Customer Satisfaction Index, which tracks national customer sentiment about some 200 companies. "But to have something simplistic that points you in the wrong direction is not recommended, either."

As academics debate the details, managers are putting the scores into practice. At AmEx' consumer-cards unit, for example, low scores act as a tip-off that something may be wrong. One co-branded card suffered from low scores despite high customer usage and acquisition rates. That alerted managers to probe further. They discovered a need to simplify a complex application and make card rewards match up more closely with customer spending. The result? Net promoter scores almost doubled.

One effect of the new approach is that companies are spending more time listening to promoters and detractors. In the European unit of GE Healthcare's services business, which maintains its hospital imaging equipment, managers following up with naysaying customers found that a chief complaint was slow response times from competent engineers. So the division is overhauling its call center and putting more specialists in the field; now net promoter scores are jumping by 10 to 15 points.

McCabe says higher scores have already been linked to a greater likelihood that GE Healthcare will win new contracts from existing hospital clients. "Ultimately, it's not about the score," he says. It's about "focusing on the customer."

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