No, I’m not talking about the kind of stress test that doctors have you perform on a treadmill to determine how much work your heart can handle. But that type of stress test did get me thinking about the state of the economy and the stress it is placing on most businesses. It made me wonder, if things get worse, which companies will be able to handle the additional work (so to speak). And what’s the right type of test to determine who will thrive and who might fail? I’ve identified three factors that I think should be a part of every “business stress test”.
· Financial Health
· Customer Loyalty
· Employee Engagement
All of these items are certainly interrelated, as diagnosed in The Service-Profit Chain, but we’ll take a look at the importance of each individually.
There are numerous financial metrics that immediately come to mind as important indicators of a company’s ability to withstand further deterioration in the economy: Current ratio, debt-to-equity ratio, interest cover ratio, activity ratio, operating margin, etc. All are important indicators of a firm’s ability to meet short-term obligations, the extent to which it’s using borrowed money, how effectively the firm is using its current assets, and whether or not it’s making money. There are, of course, many other financial indicators that are important in assessing the health of a business, but they all lack one important element: Insight into the ability of a company to generate future revenue.
That is why Customer Loyalty is on my business stress test list. At Walker, we’ve studied the impact of Customer Loyalty on preserving and enhancing revenue. Take for example the difference in revenue growth between Loyalty Leaders and Loyalty Laggards from the 2007 Walker Loyalty Report for Hardware and Software. Revenue growth for Loyalty Leaders is 4 percentage points higher than Loyalty Laggards.
Furthermore, customer-focused companies are more stable and predictable. Analyzing the upside and downside capture ratios among Walker’s portfolio of customers we find this group captures most of the market upside (92%) and only half of the downside (55%). Our business is helping companies deploy customer-focused strategies, so arguably our clients are customer-focused – that is why they’ve come to partner with us.
All said I’m not sure how you can gauge the health of your business and its ability to mitigate risk without understanding how loyal your customers are. This is a “must know” for all businesses and a vital stress test indicator.
Of course, one of the most important ingredients in delivering on a company’s value proposition is its employees. One of my colleagues, Chris Woolard, blogged about the importance of employee engagement during a recession: Loyalty Still Matters. Chris makes the point that in order to maintain Customer Loyalty you’ve got to take care of your employees. He goes on to share a few specific points that I want to relay: “If you don’t take care of your employees, they won’t take care of your customers. Loyal employees have a positive impact on customer loyalty and retention: where 92% of loyal employees do tasks for customers “above and beyond the call of duty”, only 54% of trapped and high risk employees do so. Where 89% of loyal employees help coworkers who have heavy workloads, only 60% of trapped or high-risk employees do. In a recession, of course, it is more important than ever to keep existing customers loyal, because the cost of acquiring new customers is so high.”
Knowing the attitudes your employees hold toward your company and their degree of engagement gives you foresight into your ability to effectively serve customers in the future. This makes employee engagement an important stress test metric.
I’ve focused on the importance of conducting a business stress test during a down economy and the indicators that I think should be included. But the reality is these are things a company needs to continuously monitor and actively manage. In fact, I don’t believe you can maximize your business performance without doing it – good times or bad.
Senior Vice President, Strategic Accounts