If your company can be counted among the many that have adopted the language of “internal and external customers” as a method to improve service quality delivery, you may be inadvertently doing harm to your organization.

Businesses will fail if they can’t win consumers in the marketplace while at the same time delivering bottom-line results. But in today’s marketplace, consumers have rising expectations: they are not just demanding that businesses provide high-quality products and services at fair prices; they are also demanding to be treated with respect across a series of service attributes such as reliability, responsiveness, empathy, and competence.

To ensure that customers experience excellence in value delivery, both economically and psychologically, businesses must be intensely focused on understanding drivers of customer value and satisfaction. However, it is my contention that far too many organizations dilute this focus by promoting and fostering a popular misconception: that co-workers, other business units, company task forces, branch offices, and company-owned sales and distribution channels are “internal customers.”

Simply put, there is no such thing as an internal customer.

INVENTING A NEW CLASS OF CUSTOMERS

The Management and Control of Quality, a widely used textbook by James Evans and William Lindsay,   instructs students that every employee is and has “internal customers who receive goods or services from suppliers within the company.” The authors elaborate:

An assembly department, for example, is an internal customer of the machining department, and managers are internal customers of the secretarial pool. Most businesses consist of many such “chains of customers.” Thus the job of an employee is not simply to please his or her supervisor; it is to satisfy the needs of particular internal and external customers. Failure to meet the needs and expectations of particular internal customers can result in a poor-quality product.

This concept of internal customers was first introduced by total quality management innovator Joseph M. Juran while helping the Japanese improve their production processes in the 1950s. Internal customers expressed the idea of service to people inside the organization who depended on the activities and output of other members of the same organization. The concept caught on and by the 1990s, consultants and educators had adopted and were promoting the idea in service quality training.

The idea of servicing those within an organization had particular appeal in the North American economy when manufacturing jobs were transferred to offshore manufacturers and knowledge work and service-based jobs increased. Functionally oriented production gave way to the idea that work is a series of linked components, the content and quality of which is developed by an upstream chain of internal customers, ultimately delivering a product or service that meets the demands of the external customer. As Evans and Lindsay write, the concept of internal customers “allows workers to understand their place in the larger system and their contribution to the final product.”

The meme of the internal customer gathered even more credibility when promoted by popular management provocateur Tom Peters in his blockbuster book, co-authored with Robert Waterman, In Search of Excellence: Lessons from America’s Best-Run Companies. Peters remains a raving fan of the idea of internal customers, making the point clear on his blog and proclaiming in a YouTube video , “Bottom line: Your internal customers are more important than your external customers.” Peters’s point is that putting employees first will engage and motivate them to do what is necessary to ensure that the expectations of paying customers are met.

Many successful and competent CEOs have become champions of the internal customer concept. For example, as former BB&T CEO John Allison notes in The Leadership Crisis and the Free Market Cure:

Departments have customers, which are often internal. They should identify the needs of these internal customers in the context of the “ultimate” customer of the organization. If the members of a team understand who their customers are and how their work impacts the organization’s ultimate customers, fellow employees, communities, and shareholders, [the team members] will be far more likely to accomplish their task effectively and be much more satisfied with their work.

CREATING A DANGEROUS AMBIGUITY

Advancing the idea of internal customers engenders a process of improving relations within the business by training employees to treat their peers as they would external customers, providing their peers (the internal customers) and external customers with the same high level of service.

Few would disagree that it is important to treat employees well if you want them to treat customers well, and it is generally agreed that when employees are treated with respect and encouraged to contribute to the best of their abilities, they will put forth a better effort and get more satisfaction from their jobs.

Involving employees in establishing operational methods, procedures, and systems to improve quality delivery and remove constraints of waste and bureaucracy is beneficial for both employees and customers. As Mihaly Csikszentmihalyi notes in Good Business: Leadership, Flow, and the Making of Meaning, when employees lack opportunities to learn, participate, and exercise their capabilities to the fullest on the job, “work inevitably becomes a source of alienation and apathy.” And it’s a given that customers are unlikely to be wowed by alienated, apathetic, bored, listless, stressed, and perhaps even angry employees.

The value of employee engagement and the optimization of work and business processes should not be confused with the larger point about internal and external customers. The error is not in encouraging employers and employees to understand how best to serve each other, show appreciation, and encourage staff engagement and feedback. The sentiment of Juran, Peters, and others to this extent is sound and should be adopted by leaders. Rather, the error and ensuing harm are embedded in the idea that it is desirable to bring about these changes by training employees to think of co-workers in the same manner as they currently think about external revenue-contributing customers.

ADVANCING AN INAPPROPRIATE ANALOGY

By inappropriately defining and misidentifying the customer, people who want to do right for their customers and contribute to the success of the business are very often inadvertently being trained, encouraged, and empowered to do the exact opposite when it comes to actual practice.

Employees who are told that they and their fellow employees are the company’s customers, and are rewarded for satisfying co-workers’ expectations as their first priority, will inevitably assess their own efficacy by how efficient they are at serving other employees. This approach results in the organization adopting an internally focused orientation and mindset. Service to the bureaucracy becomes the benchmark of excellence with only a tangential acknowledgement of the importance of fulfilling the needs and desires of “real” customers in the marketplace.

The ambiguity in identifying the customer who is to be served results in potentially severe, unintended consequences. The April 2017 public relations fiasco involving United Airlines in which a passenger was forcibly removed from a plane and subsequently hospitalized was caused by confusion over who the company served. As the CEO noted in his first attempt at an apology , United employees were just following company protocol—protocol that was established for the convenience of employees at the expense of customers. The policy is clear that even once a customer is boarded, the customer may be removed from the flight if a representative of the airline decides a seat is required by an employee. The policy puts employees (internal customers) ahead of passengers (external customers). The policy could easily have been inversed so that passengers would never be forced off a plane if voluntary incentives did not work; rather, employees would be transferred by alternative transportation, including charter flights.

When businesses structure their processes and policies around satisfying these non-customer groups as their highest priority, they often lose the pulse of the market. In the worst cases, this all-too-common, internally focused business orientation divorces the business’s work from customers, and as such, destroys business values and undermines the purpose of every business to profitably gain and keep customers.

Both customers and shareholders abandoned United Airlines as a show of disapproval for the company, and this is happening to every business that customers decide they can do without. To be market-driven and customer-focused, a company cannot afford the invasive and destructive diversion from reality that comes with creating and spreading the idea that employees are the primary customers to be served.

Yet the notion persists that identifying and serving internal customers is the path to service excellence. In his 2011 video, Peters approvingly provides two examples of what this would look like in practice. The first is a commercial loans officer submitting an application from his customer to the risk management department. The loans officer “wants that person in risk analysis to pick his folder out of the pile first and work on his project. [The loans officer] can deliver his project … earlier if he can get it sorted out inside the company.”

In Peters’s second example, he asserts that “the most important customer for the waiter or waitress is not the person buying a meal; it is the chef. Will your plate come off first? Will your plate be cooked absolutely perfectly? If the chef loves you, the chef will pay more attention to you.”

Peters’s advice, however, creates unhealthy competition at every link along the production chain. For Chef Charles to consistently receive management approval, he must give preferential treatment to Waitress Wendy and other internal customers based on arbitrary preferences (or worse). Management approval also implicitly supports providing a lesser or different level of service delivery to other co-workers in a progressively declining order based on the chosen criteria of preference. Unfortunately, my waiter happens to be Hapless Howard, who has to keep apologizing to me that my food isn’t ready yet, even though others who came in later are already eating. My food isn’t ready because Hapless Howard isn’t adept at winning preferential treatment from Chef Charles.

In management’s effort to provide better service to external customers by providing service first to internal customers, the external customers—the restaurant patrons—have two hurdles to overcome: getting service and getting service from the right internal customer. If management was, instead, committed to providing outstanding service to external customers first, they would have to devise a system by which my satisfaction as an external customer doesn’t depend on the preferential relationships and perhaps arbitrary and unreasonable processes among internal customers.

Operationalizing the internal/external customer dichotomy as corporate policy leaves the door open for employees to legitimately game the system to please other employees at the expense of external customers. The standards for work across transfer points are left to be set by the internal customer receiving the work, and that may or may not correspond to customers’ needs and promises made to fulfil them.

Consider an employee who prefers to receive shipping orders in large batches because it improves her time management and ability to complete the heavy workload of tasks being demanded by her boss. To cope with the pressure, the employee (an internal customer) asks her internal supplier (another internal customer) to hold customer orders until ten have been received. Now, instead of all external customers receiving next-day shipment, shipments arrive anywhere from two to seven days after the order is placed. The employee is happy, and the employee’s boss is happy with the work being done. There has been an increase in customer inquiries and complaints to the call centre, but they report to a different division. The call centre responds to and deals with calls from dissatisfied external customers in a timely manner, so the call centre’s metrics look good. And while the internal customers are satisfied and happy that they are serving each other first, none of them realize that they are the cause of the company’s developing problem in retaining the real customers.

Or consider the United Airlines example. If I’m being measured on timely departures, then the quicker I can get security on the plane to strong-arm a passenger off, the sooner the flight can depart. The flight crew is happy, the gate crew is happy, and the airport management team is happy. Nobody seems to mind that the brand reputation of the airline is pathetic, and customers, if given a choice, would abandon the airline on a moment’s notice.

The recent Wells Fargo scandal highlights the potential for deeply buried, catastrophic problems. Wells Fargo employees nationwide had been serving each other well since 2011—putting internal customers ahead of external customers—by opening millions of unauthorized bank and credit card accounts to meet corporate growth targets and individual sales and bonus targets. By putting the needs of internal customers, including shareholders and Wall Street analysts, ahead of the needs of bank customers, Wells Fargo created and perpetuated a dysfunctional and destructive culture that morphed into fraudulent criminal activity.

“We are eliminating product sales goals,” announced CEO John Stumpf in response to the scandal, “because we want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers.” One can read into Stumpf’s admission and apology that his “eight is great” quota—a directive to staff to increase banking fee revenues by cross-selling eight Wells Fargo products to each customer—was not in the best interests of the customers and was, instead, at the heart of a process that made internal customers the highest priority.

IS THE (INTERNAL) CUSTOMER ALWAYS RIGHT?

The idea of having or being an internal customer is popular among employees because it is tangible and easy to embrace. For the most part, internal customers know each other on a first-name basis. They are easily at hand and can be communicated with directly by those with the role-vested authority to do so. Workers can experience the results of their efforts through immediate feedback. Did I get you the information on time? Were my calculations accurate? Did my project come in on budget? Did the brochure cover all the talking points? Was I polite? Was I engaged? Did I show up to your meeting on time and contribute effectively?

By comparison, the needs and wants of external customers and the paths to create value for them in a competitive marketplace are abstract, elusive, and difficult to quantify and satisfy. Ultimately, success in reaching external customers is measured by sales and profits, not 360-degree employee assessments and evaluations of internal service gaps.

When employees are told that they are customers and are more important than external customers, they are all too willing to assume the high-ranking status previously granted only to revenue-contributing customers, captured in the sayings “The customer is king” and “The customer is always right.” Being granted the status of customer allows employees to wield the weapon of admonition: If co-workers and managers don’t respond quickly and adequately to my requests and thereby threaten my own service commitments, then they are providing me with poor customer service. As their customer, they aren’t treating me with the respect I deserve and to which management says I am entitled.

One of the unfortunate effects of treating employees and other non-customer groups as customers is that managers will constantly be under pressure to allocate resources based on short-term employee whims and self-serving complaints rather than designing, producing, and marketing products and services. Instead, managers should be building effective systems across the value chain in partnership with employees to provide solutions and experiences that paying customers desire.

IDENTIFYING THE CUSTOMER

Why are executives so eager and willing to take simple, clear, and distinct concepts like customer and employee and create immense confusion by joining them under the same category (customer) and then splitting them apart again into distinct and conflicting concepts (internal customer, external customer)?

More than a decade ago, while engaged in strategic planning work with a large U.S. specialty retail chain with stores in 49 states, I met a corporate office human resources manager who informed me she was the designated corporate champion and gatekeeper of the “internal customer” concept and its communication. She tried to explain to me the official company philosophy established by the senior vice-president of HR with the approval of the CEO and executive team.

It had been decided that people who shopped in their stores would be called guests, while the word customer was reserved for anyone other than guests. Customers included people who had previously purchased from the company but weren’t currently in-store, plus people who had never purchased from the company, and all company employees. Customers became guests when they entered stores, and would move from one category to the other based on their physical location—a guest while in the store and a customer upon exiting; a customer during the day while an employee, but a guest if in a store shopping.

The one thing that was clear was that this company took seriously the idea of internal customers and was trying to make it work to their advantage. Earnest effort was made in staff training programs to inculcate official corporate doctrine that customers were the category of people who were not shopping in their stores, and that when employees were at work, they were to think of themselves not as employees, but as the company’s customers.

I mockingly responded that this meant the retail chain considered as their customers the millions of people in China who had never heard of the chain and had no means to shop in their stores, which was an absurd position to be espousing. (For all practical purposes, this was pre-Internet shopping for this organization.) Corporate doctrine also meant that you would never find a customer in their stores.

ESTABLISHING A GENUINELY CUSTOMER-FOCUSED SERVICE CULTURE

Is there anything wrong with the long-standing simple language of customer and employee? In general use, customers are the people who buy and use companies’ products and services to satisfy their own value-seeking needs and wants. You can call them guests or consumers if you want and if it is a difference that makes a difference or is meaningful for your business. Walt Disney insisted that Disneyland customers be referred to as guests as a way to increase employees’ attention to service and customer respect. But there was never any confusion about the role of cast members: they were to create happiness for guests.

The main point is that employees are not customers. Co-workers and bosses are not customers. The sales force is not a customer. Supply chain partners are not customers. Whenever you hear an employee, manager, or executive refer to the ultimate, or true, or real customer, be on your guard. You are likely dealing with someone who has a muddled concept of who the customer is, and is unlikely to be a helpful ally in achieving what Peter Drucker promoted as the purpose of a business: to profitably gain and keep customers.

A better value-added approach to guide employees is to adopt the adage “If you are not serving a customer directly, you’d better be serving someone who is.” This is a clear, direct, and helpful message that focuses staff on the chain of actions required to deliver value to customers. It assumes a market-oriented approach to managing the business and can serve as the basis for establishing a genuinely customer-focused business and service culture.

The important message that value-added work is intrinsically connected to serving customers can help each employee conscientiously assess and understand how their knowledge, behaviour, and activities contribute to fulfilling customers’ needs. Employees who are encouraged to see how their role contributes to the overall management system will appreciate how it is necessary that employees work cooperatively in partnership with others as internal service providers to create and deliver customer value.

It is difficult to succeed in business given all the financial, social, regulatory, technological, people, and operating issues that must be dealt with on a daily basis. Don’t let a fuzzy concept of who the customer is stand as a further obstacle to creating and delivering real value to your real customers, to the benefit of your real employees and real shareholders.

Never lose sight of the truism that unless customers are more satisfied with your offering than they are with the next best alternative, they won’t be your customers for long, no matter how satisfied and content your employees are with the service they provide and receive from each other. Customers, not employees, decide the ultimate fate of businesses.