Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States
You only have two options when you’re experiencing a problem and you want to change it. You can exit the situation, or you can use your voice to try to try to change it. In 1970, Albert Hirschman wrote Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States to explain how these two forces could help to drive forward commerce and politics – and the conditions under which these forces might not be enough. The inclusion of loyalty was because it’s a mediating factor that influences when exit is used compared to when voice is used. What makes Hirschman’s work interesting is that it applies not just to commerce and politics. It applies to life. It applies to every relationship that we have with organizations and others.
There’s a fundamental premise behind the book, which is that things are – at all times – somewhat imperfect and need some process to combat the process of entropy and degeneration. This is, in nearly every aspect of our human existence, truth. We recognize that, without market forces, organizations will reduce quality – a concept Hirschman is focused on – or will raise prices to the point that they can. This is the heart of the monopoly protections that the government puts in place when competition is removed. It’s also why anti-trust laws exist to prohibit collusion that might suppress the forces of exit and voice that Hirschman explores.
The Options
There’s a third option that doesn’t make it to the marquee of the book. The option is to do nothing. However, it isn’t an option that steers the relationship in a positive direction, it simply blindly hopes that the situation will get better – and it’s the option that loyalty, in its most extreme form, results in.
The economic premise of exit is that if you withdraw your commerce from the organization, its monitoring systems will detect the loss of revenue and awaken leadership to changing the organization in a way that corrects the reasons for the exit.
Voice, on the other hand, seeks to provide feedback directly to the organization in a way that doesn’t involve economic harm. The basic premise is that the leadership of the organization is actively interested in the feedback of the customers, members, or citizens such that their feedback forms a first signal before exit becomes the required option.
The Mitigating Factors
At the individual level, we each have biases toward choosing to exit or apply our voice to a situation. In the United States, our history has been largely influenced by the key decisions to exit. It’s no wonder why, at a broader level, Americans seem more willing to exit an organizational relationship than to apply their voice. However, there are two key mitigating factors for choosing voice over exit.
The first is the issue of loyalty. The more loyal we are to a brand, the more likely we are to provide feedback directly via voice rather than leave. Look at this 2×2 grid, which places loyalty and the degree to which the organization is listening on axes:
Loyalty for an organization with high listening results in change and therefore high retention. However, for the organization with high loyalty and poor listening systems designed to pick up the voice of the customer, the result is repeated frustration by those who are loyal to the organization. In the low loyalty category, low listening results in rapid exit as customers need little proof that their best option is to exit. With low loyalty and high listening, organizations are confused why there seems to be nothing to hear. Many customers exit without even attempting to assert their voice.
However, this graph ignores the other mitigating factor that constrains exit. The greater the cost there is for switching, the greater the resistance of the exit option and thus the greater willingness to test voice as a vehicle for change. High costs of changing were an intentional strategy of wireless carriers in the past. Once a person was with you, they would be retained for a very long time, because the cost of switching was so high. Gradually these barriers to exit were brought down by governmental and market factors. Phone number portability transferred the ownership of a number from the carrier to the subscriber allowing them to take the number with them to another provider. Market moves like those of T-Mobile pushed against the long-term contracts.
When There is No Escape
In some cases, the cost of exit is so high that it practically becomes impossible. In the case of political systems, it’s possible to leave the city, county, state, or nation but at progressively higher and higher costs. These costs are impractical to most people. Highly constrained on the availability of exit, the result is voice – sometimes voices in active protest. With exit constrained, more energy can be invested in voice before people exhaust their patience.
Once patience with voice has been lost, the consumer will fall into a trapped, hopeless place where they no longer see any escape from their circumstances. This is problematic in two directions. First, being resigned that nothing can change, they no longer provide any direct input into the system for the organization to learn. The second direction is that pressure continues to build until a nontraditional solution for exit or organization change is attempted, often with disastrous consequences.
When There is No Voice
An opposite condition can occur when exit is too easy. It’s effectively costless to transition, and the exit happens without any signal to the organization. The result is that the voice option – the voice of the customer – becomes mute; no one bothers to offer up a voice, since doing so serves no purpose. Thus, loyalty mediates this problem in environments where exit is too easy. It encourages the use of voice where normally there would be none. We can see this in the airline loyalty programs. The programs are designed to keep flyers on an airline instead of exiting. Even in an environment where the time and costs should dictate the transactions, we find that loyal flyers go out of their way to continue to fly on their preferred airline. More importantly, they expect that they have a voice that will be heard.
The escalation teams for customer service issues at most major consumer organizations are named as “executive” care teams. The implication is that you’re getting the special treatment that only the most important people receive. Having engaged with many of these teams in the past, I can tell you that their efficacy for addressing problems is lousy. They’re happy to issue a credit, but when you need a service problem resolved, they can almost never help.
The Impact of Time
Buried at the end of Hirschman’s treatise is that there are, in some cases, hybrid versions of each. For instance, the boycott, where there’s a temporary exit. The service is intentionally avoided for a period of time even if long-term avoidance is impractical. More critically, he addresses the fact that loyalty has its limits. Loyalty doesn’t fundamentally change the cost/quality to retention ratio. Instead, it introduces a temporal dimension that is often ignored. We’ll tolerate poor service from our favorite restaurant occasionally. We may do so and neither resort to exit nor voice. We’ll just expect they’re having an off day. The degree to which we’re willing to do this is largely driven by loyalty.
A single stop at a restaurant with poor service will likely cause us to avoid it – exercising exit and not bothering with voice due to the low cost of changing. It’s the loyalty that keeps us coming back – or using voice when no exit cost exists. However, each time we encounter poor service, our loyalty will be a bit less – eventually, it’s not enough to hold back our desire for exit.
Desire of Autonomy
In some conditions, it may be desirable for an organization or its leadership to assert a level of autonomy. That is to say, they may want to dispense with all the messy feedback and painful review of the metrics that are moved by the exit of customers. They may thereby insulate themselves from the voice of the customer and remove the important leading metrics from their dashboards so that they can set out on their own course of change for the organization. While this can result in success, it’s quite dangerous and ill-advised in all but exceptional circumstances.
Take the story of Netflix and its desire to separate its DVD shipping business from the online delivery of movies. The attempt was a disaster – which was quickly remedied, to its credit. However, it is a good example of an internal decision that wasn’t subjected to the review of loyal customers before it was announced publicly and received a negative reaction.
The MVP Program
I remain honored to be a part of the Microsoft MVP program. It has taught me a lot about the sausage-making of building software products. It’s also taught me that sometimes the voice that we’re graciously granted doesn’t change products. Instead, it shapes how Microsoft announces their products to the broader market. We often notify the product teams of the kinds of resistance they can expect in the market, and that allows them to shape how they message the changes. While this isn’t the change that I hope to accomplish via my voice, I know that it serves an important role for the organization. They need high-fidelity feedback channels that will tell them when they’re off the rails. Sometimes, they can pick the train back up and put it on the rails again. Other times, they paint the wreck in pretty colors and hope the market doesn’t notice.
Politics
It’s important to revisit the concept of politics and the degree to which the option of exit is limited in politics. It’s hard to leave. Even in boundary places, where exit appears to be available without undue costs, there are hidden costs which must still be paid. Hirschman explains that consumers are free to send their children to private schools, but in doing so, they deprive the public schools of the most powerful voices in change. Even those who send their children to public schools must still contend with the rest of the community who has received sub-standard education – so, at some level, they cannot escape (exit) the challenges of poor schools.
Politics is a special place where the cost of exit is so high that voice is nearly the only solution.
Sunk Cost and Skipping Rocks
One of the dynamics that Hirschman explores is the interplay between loyalty and exit. This is a place where our sunk cost fallacy may drive the same direction as loyalty. In Thinking, Fast and Slow, Daniel Kahneman explains that we tend to keep investing once we’ve made an initial investment – even when further investment isn’t the right answer. We see this with employees. They tend to either have a short tenure with an organization or a long tenure. Once an employee has passed to a point of having worked at an organization for a few years, they’re invested and are much more likely to carefully use their voice to try to initiate change. (See The Art of Insubordination for ways to do this.) Employees without tenure with the organization have no sunk cost fallacy and therefore may decide that exit is their best option when confronted with an issue.
The lesson for HR managers is that their attempts to build loyalty should be equally distributed to include new employees. Tenure-based bonuses may be a good reward, but they do little to encourage loyalty of the newest employees – and therefore is an area that may be challenging from a turnover perspective.
Relationships
While the entire context of the book lives in the realm of our society, including our organizations, affiliations, and politics, there’s one important aspect of Hirschman’s work that bears exploration. He mentions only briefly about these options in families, yet it’s another important part of our lives, and one where the forces and options apply with perhaps greater impact.
To start, the book Divorce notes that after “irreconcilable differences” became an option to initiate divorce, there was a sharp rise in divorces. In the context of Exit, Voice, and Loyalty, when the exit was made an option, people took it. Alternatively, you could say that the cost was lowered; however, substantial stigma and therefore cost remained. In short, the high cost of divorce maintained marriages that would have otherwise fallen apart.
However, there’s more. If you evaluate Hirschman’s work in the context of estrangement, like those discussed in Fault Lines, one can see that either there’s a low value to the family relationships or a low loyalty to family – or both. This leads us to Francis Fukuyama’s work in Trust and how different degrees of trust shape society. Specifically, Fukuyama’s use of trust incorporates a degree of loyalty in it – and thereby changes the way that individuals react in families and in society.
What Hirschman views as competing options of exit and voice, Harriet Lerner views as The Dance of Connection. In her book, she thinks about how to use voice effectively, and when it’s time to exit a relationship. The principles drive all our relationships. The challenge in the sense of relationships is that our exercise of voice sometimes causes the other person to exit – whether the voice was used appropriately or not. Similarly, the market conditions for connections in our hyper-connected world are plentiful, and therefore the cost of exit seems small. Smaller than it should when we recognize that at the heart of what it means to be human is to be connected, and those connections are intended to be substantially deeper than the world we live in today with Facebook friends. Maybe it’s time to find out more about Exit, Voice, and Loyalty.