The Empathy Fix

What is empathy worth? And how can it be leveraged?

• Large institutions have lost their connection to customer and need to rebuild trust
• A core part of the trust equation, is empathy
• Empathy is a distinct human characteristic that drives decisions and behaviour
• There are 3 different types of empathy to understand
• Practising empathy effectively can lead to improved customer relationships and more engaged and effective staff
• SPP has developed an eScore as one method for tracking empathy, noting that it is a practice, and therefore needs guidance and ongoing application

Large institutions need to rebuild trust.

The Hayne Royal Commission proved that Australian Banks, as one example, have lost the trust of large segments of customers – this trust needs to be rebuilt.

Trust is at the core of our financial system and, as we’ve seen, once it’s lost, it’s not easily regained. Consumers need to be able to trust that the individual or the institution they are dealing with is putting their interests first, second and third. The Royal Commission has shown that too often this has not been the case.

Treasurer Mr Josh Frydenberg in response to the Hayne Royal Commission

Institutions must not take their social license for granted

Australian banks enjoy a privileged position in part thanks to regulators having favoured stability at the expense of competition. They are among the most profitable in the world, reporting profits as high as the total value of all agricultural produce in Australia at 3% of GDP.  Australia’s big four banks’ average return on equity (ROE) of nearly 14% is at least 4% higher than the US average (~10%) and more than double that of EU-28 banks (at 5.6%).

But despite a doubling of profitability since the financial crisis of 2008, Australian banks still score very low on customer trust both within the domestic and global environments. More recently, the Hayne Royal Commission, shareholder concerns, and the debate in media have made it clear that the big Australian banks are faced with increasingly higher expectations to do “the right thing”.

In the current climate, maintaining profitability and sustaining a high ROE will require banks to invest to build customer trust and earn their social license to operate. Doing the right thing equates to “doing better” from a moral and trust standpoint.

A core component of trust is Empathy – yet it is difficult to manage

Customer trust is a function of credibility, reliability and empathy discounted for the self-interest of the organisation or the operator. Rebuilding trust requires an organisation to demonstrate all of these attributes.

While each attribute is large and complex, SPP observes that empathy is an important area that can get lost, and certainly warrants more attention

SPP has focused on the empathy component of this equation to better understand how organisations may benefit from honing their ability to deliver an empathetic customer experience and place to work. This means looking at empathy from the perspective of embedding it in day-to-day business operations rather than from a more typical human resources perspective.

Exhibit 1: Maccherone’s Trust Algorithm

Empathy is a distinct human characteristic that drives decisions and behaviour.

Empathy is “an affective or cognitive process of tuning into another person’s psychological or emotional state, while recognising the other person as distinct from one’s self” (Decety & Jackson, 2004).

In layman’s terms, empathy is putting oneself in another person’s shoes and using this perspective to influence how one acts or responds to a situation.

Empathy has three key components.

There are effectively three types of empathy that are commonly quoted in psychological literature:

1. Cognitive: knowing what someone else is feeling
2. Behavioural: intention to respond compassionately
3. Affective: feeling what the other person is feeling

Empathy is in partly innate and partly learned. Challenging oneself to develop more empathy will have positive spill-over effects to one’s happiness (Bartlett & DeSteno, 2006 link to source).

In addition to this, empathy is something that people hold in varying degrees and have varying capacity for. While some personality types are well equipped to have an innate feeling for how another person perceives one’s behaviour, others lack this capacity entirely.

For an organisation, this makes empathy a difficult issue to tackle and as a result, it too often ends up in the ‘too hard’ category. While the issue is complex, SPP suggests that there is much to be gained from working on empathy in a structured manner.

Distinct benefits can come from an improvement in empathy

For a large organisation, the benefits of improving empathy within the organisation has three areas of benefit:

1. Improved customer experience leading to financial benefits through increased NPS, satisfaction, loyalty and retention.
2. More engaged and motivated people within the organisation who are likely to be happier at and outside of work, resulting in cultural and social benefits that translate into financial benefits in the long term.
3. Ability to respond appropriately and effectively to the findings of the Hayne Royal Commission and to public and media concerns.

Many organisations have gotten this wrong – and have paid a high price

When organisations fail to convey empathy, they put their customer relationships and overall reputation at risk.

One such example is the Wells Fargo account fraud scandal that emerged in late 2016. Aggressive sales KPIs and ruthless management led front line staff to open millions of accounts for people without authorisation.

Wells Fargo was among the few big US banks enjoying a relatively strong position and reputation during the GFC; however, the account fraud scandal greatly damaged the reputation of the institution.

Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders, while producing solid financial results. Of course it’s having an impact on performance at the moment.

Tim Sloan, Wells Fargo CEO, Q1 2017 Report

SPP’s E-Score can help to diagnose and monitor empathy across an organisation

While empathy is a complex issue to address, Australian institutions, including banks, can and should endeavour to make it part of everyday business operations. SPP’s E-Score provides a structured method to diagnose and monitor performance and progress on building empathy across an organisation.

SPP’s E-Score establishes a baseline measurement against three core diagnostic components: customer experiences, staff experiences, and governance. This enables the organisation to identify targeted interventions aimed at improving the way in which the organisation delivers empathetic experiences at the right moments. These recommendations are likely to fall under four organisational dimensions – Structure, People, Processes and Strategy.

These are described in more detail in the conceptual view below of the E-Score framework, which can be applied to diagnose, monitor, and improve empathy within organisations.

Exhibit 2: SPP’s Score

So where to next?

With a structured mechanism to measure empathy, organisations can drive improvement across multiple organisational dimensions – building trust among customers and staff.

The Exhibit below highlights examples of the sorts of activities that can be undertaken to improve the way your organisation delivers an empathic experience.

Exhibit 3: Organisational dimensions and activities to improve your E-Score

SPP appreciates the importance of incorporating a structured approach to working with empathy organisation-wide and would be happy to discuss how we might help your organisation improving in this domain.

Appendix

Definitions of the components of Maccherone’s Trust Algorithm.

 The definition of the four components of the trust algorithm is as follows:

Credibility: How well you, the operator and by extension the organisation, know the subject matter at hand and is able to convey that to the customer.

Reliability: The consistency of service delivery over time. How often and quickly you live up to your promises and do what you say you are going to do.

Empathy: Recognising that there are sub-components of empathy presented earlier in this article, at this higher level it is defined as putting oneself in another person’s shoes and using this perspective to influence how one acts or responds to a situation.

Self-interest: The interest and incentive structure that the operator and the organisation are working by and how the customer understands and interprets this.

These four components interact as per the below exhibit to drive, or erode, trust.