For the last 40 years I have been passionately interested in the factors that are associated with practice profitability. I’ve seen some fabulously profitable practices (e.g. where owners are making in excess of $1 million each per year) and some extraordinarily unprofitable ones where, even after many years in the business, the owners are putting in just as much effort as their colleagues in highly profitable firms but they are making only a fraction of the income.
My research clearly shows that in many (I suspect ‘most’) firms close to 50% or more of their clients are unprofitable to service. I published a detailed discussion of this last year in a blog post called Are all your clients profitable to service? The “solution” to this issue is simple: deploy the right people, on the right tasks for the right clients at the right price and everything will take care of itself. I doubt that many people would disagree with what I’ve prescribed here but what is “right” in each case is the hard part in practice.
However, if I was allowed to keep just one thing I have learned about practice profitability it is this: CLIENT SELECTION is paramount. When you get that right and stick to it, most other things will fall into place. The clients you choose will determine what services you can provide, that will determine what prices you can charge and who your “competitors” are, that will determine where you sit on the industry value curve, that will determine what type of people you need and can attract, and that will determine what you strategic options are.
Unprofitable firms are all over the industry value curve, profitable firms know exactly how to add value to the customer franchise they have choose to work with (that’s the effectiveness aspect of their execution) and they deploy the right people and systems to deliver that value in a way that they are able to capture their fair share (that’s the efficiency aspect of their execution.)
My thoughts on the importance of customer selection are neither new nor original and it surprises me why so many people ignore it. I think the main reason for this is the pursuit of “money” in the short term rather than being willing to have a clear strategic plan and sticking to it. I have urged our clients to rid themselves of unprofitable and difficult customers and without exception, those who have followed my advice have been surprised by the positive outcomes they experienced.
This is further evidenced by a case study David Maister describes in his excellent book Practice What You Preach. Mortimer Ransford is a 200 person professional service firm that doubled its revenues and margins in 18 months. Although it is not an accounting firm, what Colin Ransford, the CEO, says in relation to client selection is very relevant—I have added emphasis.
We really believe that chasing money is not what makes money. We believe that if you have the right client base, the right people with the right attitudes and the right systems, the money will follow.
We made a big decision two years ago, turning down (for the first time) a potentially lucrative opportunity, because it was really boring work. We asked, “Is this what our life has come to, pitching for this kind of work?” On the same grounds we resigned [fired!] one of our largest accounts, one we had worked with for four years, and one that had consistently earned us strong revenues. When we first started on the account, it was exactly the type of work we wanted. However, over time we became the ‘bottom of the food chain’ for this client.
We didn’t like working that way, we deserved a lot better. The work was neither intellectually challenging nor strategically satisfying, and we knew that at some point the client would spot our boredom, because we could not cover it up for so long.
So we decided to walk away. It’s easy firing a small client, but this was huge. We stopped being nervous about two weeks after we dropped this client, because we realized that resigning the business was the best thing we’d ever done. In fact it was so obvious we asked ourselves why we hadn’t done it earlier.
Ransford reports that the benefits from doing this were tangible and immediate:
- A strong message was sent to the team to the effect that the top guys were willing to make tough decisions and put their money were their mouth is – not just talk about “doing great work for great clients”, and we “care about our people and we give them interesting work to do” etc.
- The action signaled to the team that management was in touch with the quality of the firms clients and it was okay to alert management if necessary to situations where particular work is not challenging and the best use of one’s time.
- It gave a sense of renewal to the team. The boring work that some of them were required to do prevented “our really good people from being able to develop much more interesting client opportunities, ones that they would get a much bigger kick from, and ones that would dramatically improve the firm’s performance.”
- Whenever they turned down an opportunity (which happened 70% of the time) they “nearly always discover an upside.” They found that turning down work results in you becoming “sought after.” He continues, “Our reputation has grown and our revenues have gone through the roof.”
In my own experience, when you turn away work or fire clients in respect of whom you know you can’t add much value, you free up resources, and that gives you a reason to look for opportunities to deploy those resources more effectively and by effectively I mean in a way that really does create value either by getting out and bringing in the “right” clients or finding value creating opportunities within your existing client base.
Most firms that are failing to achieve their full potential have clients who are silently crying out for help. When I do presentations to groups of accountants I ask the question: “how many of you routinely do end-of-year business performance reviews with your clients? Rarely, do more than 30% of hands go up! Interestingly, or perhaps I should say, frighteningly, I have also seen studies that report 70+% of business clients say “they would like their accountants to do more to help them run a better business.” There is a clear supply-demand gap that is not being filled by our profession.
Now, given that a review meeting of that type — if done properly, as in forward looking, is an opportunity for you to:
- Create a greater perception (and reality) of value by going beyond a review, compilation and tax return followed by a “see you next year” departure greeting.
- Uncover opportunities for advising your clients on how to improve the profitability of their business. What’s really important here is the fact that you can only do this by adopting a forward looking perspective rather than the backward-looking view that most accountants are associated with; i.e. the idea that we report on history rather than play a role in creating it.
- Manifestly position yourself as more than a bean-counter. This is a major differentiation key and a strong cause for quality referrals. In fact, the review meeting is itself an opportunity for you to ask for a referral in a totally professional and inoffensive way.
- Show the client that you actually care about his/her business and financial well being. Remember, at a 40% marginal tax rate, helping a client improve the profitability of a business by $1 will add $0.60 to his/her bottom line, and increase the value for the business by $3 to $10. On the other hand, reducing the client’s taxable income by $1 puts an additional 40 cents in the bank. I’m not suggesting you should not help the client reduce taxes; I’m suggesting that you can and should do both—at least give your client the opportunity to make that choice and if the client rejects your offer to help then maybe this is not the client you’ll be growing the firm with. More importantly, you don’t what this client referring more people of his/her ilk. Remember also the poignant saying “clients don’t care how much you know until they know how much you care.” One of the best ways to exhibit this is to engage in a conversation about the client’s financial wellbeing.
So let me conclude with a thought … 1–2 hours spent on an annual business performance review with a business client who you believe has at least $100k of profit improvement potential that you’ve been able to identify with 1–click in GamePlan will be the most effective marketing initiative you could employ in the next 12 months and all it will cost is 2 hours of your time — my goodness did I really say two hours? Ron Baker would tell me to wash my mouth out.
Here’s what one of of our members, Tom Vermeulen, thinks about the process:
Presenting the Annual Business Performance Review and Game Plan as part of the tax return exit interview is the best thing I have ever done. Clients are open and receptive at this time of year like none other. I have sold several long-term business plans and Management Control Plans to be implemented after tax season.