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Agency Theory: Why the Customer Should Always Come First

by internationaldirector

Written By: Morgan Jones – Corporate Finance

Behind the success of one of the biggest initial public offerings (IPOs) in the history of the world is a man with a rather unconventional principle. Jack Ma, the founder of Alibaba Group, believes that before the maximization of shareholders’ wealth, an organization should work towards the satisfaction of its customers and employees. As his mantra goes, “It is the customers number one, employees number two and the shareholders number three.”  He believes that if customers are happy, the business is happy; and when the business is happy, the shareholders are happy. 

The opponents of this approach argue that when the employees’ interests are placed first, the services in the organization improve, and the customers become satisfied. The key point in the argument is that when employees are given the priority, they are likely to respond automatically and with one heart, and extend themselves to their customers. While this is partly true, records show that placing the employees first does not always guarantee improved customer service.

Putting employees first may make them feel superior to customers.

In a study by LinkedIn to establish the top 40 companies that are best at finding and retaining great employees in the United States, Goldman Sachs took the number three spot, despite its poor reputation for customer satisfaction. In fact, The Harris Poll Reputation Quotient Report places Goldman Sachs in the second position on a list of the companies least trusted by customers in the US. This is one of the many cases in which placing the employee first does not guarantee customer satisfaction.

The critics of the “employee first” principle argue that the approach enables employees to put their interests before those of customers. In a resignation letter published in The New York Times, Greg Smith, a former Goldman Sachs employee, unveils the company culture in which the customers’ interests are sidelined by the way the company operates to make money. This is strong evidence that placing employees first can prove to be harmful to customers.

When customers trust you, the government will trust you.

Jack Ma believes that if the customers love you, the government will have to love you, too. Case in point: the Chinese government has been vital in the growth and success of Alibaba. The company has scored numerous deals with the government, the majority of them being in cloud-computing services. Under normal circumstances, a firm that has developed trust with its customers is likely to win the trust of doing business with the government. When an organization achieves the local government’s trust, it gains recognition from international investors. Alibaba’s approach to business has not only enabled it to acquire valuable relations with local partners but given it a reputation among foreign partners. Its numerous partnerships across the globe have placed it amongst the fastest-growing e-commerce companies in the world.

The more an organization invests in customer satisfaction, the more stamina it develops to weather hard times. In most cases, doing business with the government is enough to guarantee support during economic storms. The association with government gives a firm the reputation it requires to break into new markets and grow its market share.

When an organization fosters better relations with its customers, it becomes easy to identify and retain the best customers. Zachary Goldstein, the founder and CEO of Thanx, recommends the implementation of royalty programs as one of the measures in a customer-oriented approach. The benefits of these programs include the provision of frictionless user experience and incentives for frequent customers and those with lifetime value.

Placing the customer first means opening the lines of communication to receive feedback and structuring the company’s products and services to meet client needs. It means giving the best possible services with a satisfaction guarantee. With this approach, customers are assured that they pay only when they are satisfied.

A customers first approach is crucial in hiring the right staff.

When the customer’s interests are placed first, it becomes easy for the organization to determine the skills and talents that fit the target market. By understanding how customers want to be served by the business, the organization can structure its hiring criteria to identify employees with specific skills to meet client needs. For existing employees, the organization can arrange for training to ensure that they are better equipped to handle their customers’ needs.

If a customer-oriented culture is implemented right from the beginning, there is a likelihood that employees will stick to it even in the hardest of times. Prioritizing customers and investing in developing lifelong relationships with them is the surest way to increase revenues and business growth. In an organization in which the “customer first” culture is well-developed, a performance-based remuneration for employees is likely to be effective. With high customer acquisition and retention, the business will grow, and the shareholder’s wealth will be maximized.

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