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Something is happening in the UK that no accounting firm can afford to ignore

Before I get to what that is I want to talk about the most important driver of long term firm profitability. It’s customer loyalty—I bet you’re not surprised.  Back in the 70’s and 80’s much research was done on what distinguished high profit companies from the rest of the pack.  One of the more popular studies which looked at the link between strategy and performance was the PIMS research – Profit Impact of Market Strategy. I don’t want to summarize this work here but one of its major conclusions was that relative market share was one of the most important determinants of profitability.  This led to a rash of mergers and acquisitions during  the 80’s and is still a popular argument for M&A activity today.

Unfortunately, in most cases mergers and acquisitions do NOT deliver the promise of improved profitability. A discussion of why that is so is not my purpose in this post.  What I do want to suggest however is that market share is not the primary driver of higher profitability but in those cases where it is highly correlated and superior profitability it’s because of a way more important determinant namely customer loyalty.  This is supported by the observation that in any industry you care to choose there is inevitably a significant difference between the level of profitability for firms of equivalent size.

In other words, as reported in The Service Profit Chain,  Reichheld and Sasser discovered it’s not the size of market share that’s important. It’s the quality of market share. More importantly they discovered that in various service industries, a 5% increase in customer loyalty could produce a profit increase of between 25%  to 85%.

Loyal customers represent significantly higher lifetime value to a firm.  There are several reasons for that which include:

  1. Loyal customers are repeat buyers which means once they have been “acquired” by the firm they do not incur any further marketing costs
  2. Loyal customers are likely to stay with a firm for a longer period of time
  3. Loyal customers understand how to fit in with the “way a firm works” so the cost of servicing them is lower
  4. Loyal customers generally have a good relationship with a firm’s team members and give them a greater sense of appreciation for the work they do which promotes team member loyalty – an equally important driver of firm profitability
  5. Loyal customers are less sensitive to prices because they see the “value” in other aspects of the firms service mix
  6. Loyal customers are much more likely to buy additional services which reduces marketing costs and improves sales productivity
  7. Loyal customers and much more likely to be strong referrers and are therefore a rich source of quality new customer growth with a dramatically lower cost of acquisition

There are two things that drive customer loyalty.  The first is whether the service outcome expectation has been met and the second is how the service delivery process has been experienced.  A model that nicely summarizes this was created by Ron Zemke and it looks like this:

 

 

 

 

 

 

 

 

 

 

The Loyalty Matrix reflects the fact that your customer base is always at risk (or worse) if you simply set out to meet expectations in relation to process and outcome.   You’ll only get one or two chances to recover from service failures but when you do you’ll often (50-80% of the time) retain the customer.  What’s really significant about this model is that to created loyalty and, more importantly, advocacy you need to excel and either or both the outcome and the process by which it is delivered.

For an accounting firm where the outcome (tax return, audit, advice etc.) is essentially generic and the customer has very little way to determine “quality” THE most important loyalty-creating strategy has to be service process centric. Another fact that is reflected by the model is that only a small proportion of your clients probably fall into the advocacy category (11% in this simple model).  However,  you could dramatically increase that by focusing on two strategies: first, better communicating the value of your service outcome and secondly, really working hard to improve the service experience clients have.

There are five keys to accomplishing these two objectives.  They are:

  1.  Implement a process to better listen, understand and respond to your clients
  2. Define the dimensions of superior service
  3. Set superior standards of performance and establish a monitoring system
  4. Train and empower your employees to meet your service standards
  5. Celebrate service achievements through recognition and reward

The first step in this process is having a better understanding of your clients’ needs and expectations.  The vast majority of firms I know take a lot for granted in relation to the quality of the relationship they have with their clients.  For the most part their clients are happy with both the service outcome and the process but from the feedback we have received from the hundreds of Client Advisory Boards we have done, rarely are they delighted.  In other words they fall within the “at risk – loyal” category that could account for more than half of your clients!  If it were not for switching costs, quite a few of these may move to another firm if they were presented with a “better” service offer.

And that brings me to the main point of this post.  In the UK Accounting Web is conducting the 2012 Practice Excellence Awards Initiative that will culminate in the presentation of the Awards to the winners on September 20 this year.  The awards for practice excellence are based on, what the organizers appropriately call, “the opinions of people that matter most … your clients.”

I was unaware of this program until being asked to deliver the Key Note address but when I learned what it was all about I was blown away.  I consider this to be an extraordinarily important initiative and one that every practice should participate in.  Getting objective, anonymous feedback from your clients about your service is an incredibly important element for developing a robust competitive strategy and could easily be a game-changer for your firm.  There is no question in my mind that the firms that will dominate the competitive landscape in the future will be those that offer a superior customer value proposition together with a superior team member value proposition.  In order to do that It’s essential you know what your customers think about you now.

Client feedback of this type is precisely the type of information we’ll be incorporating in the Practice Development Challenge we’ll be conducting in Australia (July 12-13) , the US (July 23-24) and the in UK (September  25-26) which is one week after the awards night.

Click on this link to participate you have only until May 31 to do so.  If you’d like a copy of the overview report from last year’s survey click here.  It will give you an idea of the type of benchmark report you’ll get that is personalised to your practice.

 

 

 

 

 

 

 

 

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