Is the front line customer service employee a commodity?

A client recently posed an interesting question: Should frontline customer service employees be viewed as commodities where one employee is relatively the same as the other? My client is the Human Resources Director, so unsurprisingly she thought the answer is no. However, her company’s Chief Financial Officer firmly believed the answer is yes.

Who do you think is right? 

The argument for "No"

My client believes there is a meaningful difference in each individual’s ability to be trained, deliver exceptional service, and ultimately generate profits. If you want to attract and retain better talent, you need to invest more in your employees in terms of wages, benefits, and training. There is certainly plenty of empirical evidence to back up this claim (see my recent post, “Three reasons to give customer service employees a raise”).

The challenge, of course, is proving this to a skeptical CFO or even the company’s CEO in a time when the company is focused on reducing costs. Any increase in wages, benefits, or training expense will immediately be seen on the company’s profit and loss statement, but the resulting impact won’t be readily apparent. Even if revenue or customer satisfaction begins to rise, it will be hard to prove that this wasn’t really caused by an improving market, a clever advertising campaign, or a new product line.

The problem my client has in making her case is a lack of hard data to show that she’s right.

The argument for "Yes"

The CFO’s primary concern is controlling costs and maintaining cash flow at a time when profit margins are shrinking. To him, adding costs immediately makes that problem even worse. It’s foolish to spend the money if he can’t prove that investing more in employees will provide a positive return on investment. He is also drawing from his own belief that frontline customer service employees’ performance is more a reflection of the system (products, processes, and management) than their individual strengths.

The CFO’s challenge, however, is the same as the Human Resources Director’s: a lack of hard data. Sure, he can see labor expense on the profit and loss statement, but looking at those numbers in aggregate can obscure what’s really going on. An outstanding employee might generate twice as much revenue as a co-worker, but then leave the company for a higher paying job with better benefits. The replacement employee may cost more to train while producing less revenue, but that story won't be told on the company's financial statements.

Who is right?

My view is both could be right. Great employees will flourish in almost every environment, but those employees are also hard to find. Mediocre employees can become great given the right products, processes, and management, but you need to invest time and money in those things to ensure your employees have the right support.

The best way for the HR Director and CFO to settle their debate is through testing and evaluation. For example, rather than giving all employees a raise, they can pick a test group of new hires to start at a higher salary. This minimizes risk and expense, but it also allows them to compare the test group’s performance to the rest of the new hires who join the company around the same time.

Where do you come out? Are frontline customer service employees truly unique and special? Or, are the vast majority of them really interchangeable?

Three reasons to give customer service employees a raise

A number of years ago, I managed the call center for a catalog company that sold a wide range of imported collectables. Our call center reps had to have a lot of knowledge about our diverse products, generally dealt with sophisticated customers who had high expectations, and were expected to handle both sales and customer service calls. You might expect to pay a little extra to attract good employees, but our company had cash flow problems. As a result, the company's owners mandated a starting wage that was in the bottom 25% for this type of position. Understandably, we had a hard time finding great people who were willing to work for so little when they could make more money doing the same job somewhere else.

Business owners instinctively want to pay their frontline customer service employees as little as possible, but what if paying low wages actually increased costs and hurt profitability?

Research published earlier this year in the Harvard Business Review by M.I.T. Professor Zeynep Ton suggests that it may make economic sense for retailers to invest more in their employees. She studied retail chains such as Costco and Trader Joe’s that offer low prices, but have achieved high levels of profitability and customer service while paying relatively higher wages, offering more training, and staffing more employees than their competitors. (See the article here plus a related blog post.)

Of course, paying top dollar isn’t the right strategy for every business. In this post, I’m focusing on three potential benefits of paying your customer service employees more.

Reason #1: Gain Access to the Right Talent
Good employees don’t come cheaply. They tend to have more options than less skilled or poorly performing employees. The best employees are also more likely to be employed by someone else when you start searching for them. Unless you have an incredible reputation as an employer of choice, people aren’t going to take a pay cut or make a lateral move to join your organization. Offering a higher starting wage gives you access to more potential qualified candidates.

How can you tell how much to pay? Here are three things you can try:

1. Create a profile of an ideal employee. (You can use my simple competency model.)
2. Go to salary.com and find the salary range for the position you are trying to fill.
3. Experiment with posting the same job at different rates of pay and compare the applicants you receive to your ideal employee profile. If good candidates are scarce, you may need to pay more.

Reason #2: Get Better Results, Faster
If you pay more for better employees, you should expect those employees to bring more skills, ability, and passion to the job than someone who is willing to work for less. For example, when a client of mine increased the starting rate for an open position, they were able to hire someone who needed far less training than their last hire. In less than a month, the new employee was one of their top performers. The slight increase in pay resulted in a substantial cost savings in terms of reduced training expense and productivity gains.

Will paying more yield better results? Look to these key result areas to see if it makes financial sense:

• Training. Can you save time and money by hiring someone who needs less training?
• Staffing. Can you hire fewer people by hiring someone who has a wider range of skills?
• Quality. Can a higher-caliber employee pay for themselves by making fewer errors?

Reason #3: Reduce Turnover
Good employees won’t stick around very long if they feel undervalued, especially if they can get the same job for higher wages. The real cost of employee turnover can be enormous when you factor in the cost of covering for absent employees (overtime, lost productivity, etc.) and the cost of recruiting and training new ones to take their place. Paying just a little more might be much less expensive than the high cost of employee defections.

How can you calculate the real cost of employee turnover? 

1. Try using this turnover cost calculator (Excel spreadsheet).
2. Calculate the cost savings of a modest reduction in turnover.
3. Experiment with investing some of that cost savings in higher wages.

Are employee wages the only factor? No, of course not. There is a whole list of factors that influence employee performance, engagement, and retention. However, the advantage of focusing on employee pay is it is generally easier to make the cost/benefit calculation compared to other possible strategies.