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Passion, People and Principles

Client Focus and the Halo Effect

post # 393 — June 27, 2007 — a Client Relations post

Ed Kless, Senior Director of Sage Software, just wrote me an email asking this: “I have just finished Phil Rosenzweig’s The Halo Effect . It casts some serious doubts on the beliefs of many people in business today. In particular he calls in question the belief that customer focus causes financial performance. This has been a key belief of mine and was reinforced by your book Practice What You Preach. I would be most interested in your seeing thoughts (if any) as a blog post.”

Well, Ed, Rosenzweig’s book is, indeed very stimulating. He doesn’t actually question the conclusion (or belief) that customer focus causes financial performance; he challenges the validity, rigor and logic of the various studies that purport to have proven the link. In the language of the court system in Scotland, it’s a matter of “case not proven.”

Rosenzweig’s main point — the halo effect — is that it is a fatally flawed research approach to identify successful companies and then ask people (internal or external) what attributes these companies or leaders have. He argues that this approach could equally well uncover attributes that are the outcomes of successful financial performance, not the cause of it.

So, he points out, if you ask observers or employees at a financially successful company if the company is customer focused, there will be an “after-the-fact” bias to say “yes,” whether or not the company actually was, in some more solidly measured way, actually more customer focused than others.

Rosenzweig’s targets are books like “In Search of Excellence,” “Built to Last” and “Good to Great.” He doesn’t say their conclusions are wrong; he says their conclusions are not even close to being “proven” (contrary to what the authors say.)

My book, Practice What You Preach, is not covered by Rosenzweig (it wasn’t a best-seller) but I have no doubt he would make a similar critique of my methodology. I surveyed people in 139 businesses on 74 questions and explored the statistical relationships between that opinion data (on what was and wasn’t going on in their office) and the financial performance of those businesses.

I think I would argue two relative strengths of my study: By allowing the statistics to tell me which of the 74 questions had explanatory power, I allowed the data to be discriminating between which aspects of office culture was correlated and which wasn’t.

If you were nit-picking, you COULD argue that all I discovered is which characteristics have a high halo effect (i.e. are given high ratings by employees when things are going well) and those that have a low halo effect. But that’s a pretty complicated argument.

Secondly, I did use a statistical methodology (structured equation modeling) — used by none of the authors Rosenzweig examines — which allows you to test for causality (and the direction of causality) not just correlation. (Which is one of his big concerns.)

So, net, net, net — I think he’s written a terrific book to remind all managers to beware of quick fad conclusions, and to remind all researchers and consultants that many (if not most) relationships in business that we think we know for sure actually don’t have much of a solid research backing to them.

(Which by the way, was also the subject of Pfeffer and Sutton’s book: Hard Facts, Dangerous Half-Truths and Total Nonsense)


Dennis Howlett said:

I’m surprised at Ed’s take because like you, I did not come to Ed’s conclusion. Also, Ed comes from the world of value pricing. I don’t believe you can optimise a value based price *unless* you’ve got a first class relationship with customers. Note my word: *optimise.* To my way of thinking, that requires focus – and relentless focus at that – on doing many of the things you advocate. Number 1: put yourself in the customer’s shoes. What would you pay for XYZ service in ABC circumstances etc etc.

But I DO agree with the general thinking behind the ‘halo effect.’ I wonder how much of that has spilled into people’s rush to buy the iPhone for example. It sure as heck doesn’t look like a business class device.

posted on July 1, 2007

Ed Kless said:

Thanks, David for this post. It has been most helpful to me. I have been talking and writing about this with several of my closest advisors. I even wrote a more detailed post on the VeraSage blog.

One of the thoughts this has led me to is this – employee and customer satisfaction are not looked at enough. The Halo Effect is right on in its criticism of retrospective customer/employee satisfaction. However, your research and my gut tell me that if firms were to measure and concentrate on increasing employee and customer satisfaction with the frequency and zeal they apply to measuring financial performance (i.e., monthly) that we would, in fact, be able to develop key predictive indicators.

posted on July 5, 2007

Ken Hedberg said:

There is a body of rigorous research on this topic, referred to, appropriately enough, as “Linkage Research”. Jack Wiley and Scott Brooks of Gantz Wiley Research have led the way in Linkage Research for the past twenty years, and the research design questions you (and Kless & Rosenzweig) raise have been central to their concerns, as well. Bottom line, the research, when carefully controlled for causality, still clearly shows a causal linkage (read predictive) between employee satisfaction, customer satisfaction, and organizational profitability. By the way, Gantz Wiley was acquired last year by Kenexa. Check them out at http://www.kenexa.com.

posted on July 13, 2007

David said:

Thanks for the brain stimulating blog, it was a good read and an eye opener.

posted on February 24, 2008