How does behavioral economics apply to company performance? A Gallup expert explains.
Emotions play a far greater role in determining business outcomes across industries than many executives grasp, as Gallup research continues to demonstrate. In this interview with Scott Robbin, senior content associate at Argyle Executive Forum, Ed O'Boyle, global practice leader at Gallup, talks about the impact of emotions and applied behavioral economics in the marketplace.
In organizations where neither employees nor customers are engaged, nothing good happens.
Scott Robbin: Could you explain some of the pitfalls of basic economic theory and how human behavior differs from what economic theory assumes?
Ed O'Boyle: The work Gallup has done over the past 30 years -- and particularly over the past five years -- reveals the pitfalls of classical economic theory. This includes the assumption that there are rational answers to almost everything that happens. From Economics 101, it's the basic law of supply and demand. There is an intersection at which price should be set. There also is a theory that gathering and processing more information will lead to better decision making. Classical economic theory says people make decisions each day by processing a set of objective information based on a rational economic model.
Many of our senior scientists, including Daniel Kahneman, have pioneered the field of behavioral economics, which acknowledges that human beings are not entirely rational [in their decision making]. We base our consulting business on determining how those emotions can be understood and what role they play in predicting outcomes. Organizations in every industry and sector -- public and private -- can attempt to manage those emotional connections to maximize performance.
Expanding on this alternative theory of behavioral economics, how does the Gallup concept of applied behavioral economics differ from that of others in the field?
O'Boyle: We're looking through the lens of applied behavioral economics and how it applies to the decisions customers make regarding the brands they choose and why. Then we analyze how organizations manage themselves to maximize human behavior inside the workplace and obtain as much discretionary effort from employees as possible.
I will give you an example of human behavior and behavioral economics called the endowment effect. If an organization offers a set of features to customers and one of the features is rarely used or maybe not used at all, the organization may decide to remove that feature from the product offering. After the organization communicates the removal of the feature, everyone goes crazy and the phones light up with people complaining and threatening to close their accounts. Once I've given you something, regardless of whether you use it or not, you perceive it to be of value. I can't take it away from you because you have an emotional connection to that feature, even though the feature is not something you use every day or even intend to use.
Another example of applied behavioral economics is called status quo bias. Earlier this year in the financial services world, several big banks started to impose fees for using debit cards. When that hit the press, there was an uproar, and people were closing accounts and moving their business. Other banks started advertising that they weren't charging fees, so customers should come do business with them. Many of the customers reconsidered their entire banking relationship and looked for other institutions that weren't charging that same fee.
These are examples of people making a decision based on a motive that isn't completely founded in rationality. In the latter example, many customers might not have even been subject to that fee depending on their status with the bank, but they didn't stop to think through the decision rationally based on how it would actually affect them. This is how Gallup looks at applied behavioral economics.
Regarding company performance, what are some areas that Gallup identifies as holding the most untapped potential?
O'Boyle: As technology and other avenues for connecting with customers continue to evolve, we believe that a person serving another person is still the biggest area of untapped potential for all companies. It's a concept we call HumanSigma, which emphasizes the importance of the employee-customer encounter. Even if you're a company like eBay or Google and you deliver services online, there are still ways to ensure that employees make good decisions about how to interact with and engage a customer -- via chat, on the phone, or face-to-face in a retail or other service environment. Maximizing that potential will help organizations raise engagement levels with their existing customers and allow the organization to grow organically.
Gallup measures customer engagement, which uncovers how emotionally attached and rationally loyal customers are to our clients' brands. Our analysis shows that typically only one in four customers are fully engaged with a brand, meaning three out of the four customers are not completely thrilled. There is an opportunity for organizations to raise the engagement level with those customers -- but there is also an opportunity for another company to come and steal them away by engaging them in a different way.
Customer engagement is a source of untapped potential, and it's interesting for Gallup because we work with a lot of great organizations. We find that the interactions among sales and marketing, operations, and HR tend to be limited. Great organizations understand that the only way they can maximize customer output, customer engagement, and subsequent business results is to maximize their employee output and get people aligned with the brand promise. They drive real growth by empowering employees to do what's right in their customers' eyes. The untapped potential comes from understanding that interaction and maximizing its performance. We spend a lot of time with our clients helping them better understand that concept.
How have you been able to use this focus and analysis to achieve results for your clients?
O'Boyle: We talk about this as HumanSigma, and basically, there are four outcomes. In one outcome, you can have an engaged workforce and not have engaged customers. This means employees come to work charged up and feeling great about their jobs, but they don't use that feeling to improve the customer experience. A second outcome is that you have a thriving customer business with highly engaged customers, but your employees are not truly engaged. This means employees do not feel like a valued part of the organization's future, and as a result, they don't do anything to help sustain the engagement of the customers with whom they interact. A third outcome is that neither your employees nor your customers are engaged, and this situation completely drains your organization's bottom line. The last possible outcome is the best-case scenario, where fully engaged customers and engaged employees come together in harmony, which drives market potential.
In organizations where neither employees nor customers are engaged, nothing good happens. In organizations with one or the other -- an engaged workforce or an engaged customer base -- we see improvements over organizations that have neither in place. Our data suggest that when organizations engage their customers and their employees, they experience a 240% boost in performance-related business outcomes compared with an organization with neither engaged employees nor engaged customers. We know this works, and it can drive the results clients seek. Organizations that only maximize one or the other can experience growth in the short run, but they won't be able to sustain it over the medium to longer term horizons.
This article is adapted from one originally published in Argyle Journal. Reprinted with permission.