Thursday, 12 January 2012

Anchors away! How to work out who to drop...

 by Tony Vidler.

Let's begin the new year by challenging the number 1 Myth pervading professional service firms - Big is good.  Big is NOT necessarily good when it comes to an ideal sized client base.  A big client base can simply be an anchor.

Most professional service firms seem to feel that there is strength and better profitability in achieving a bigger size.  More clients equal more success.  Continually adding new clients adds more profitability.  Well that wasn't my own experience, and nor is it the experience of many others I work with.

Yet the myth persists, that getting more clients fixes everything.  What's wrong with the ones you have?

Maybe there is nothing wrong with your existing clients.  But then again maybe there is something wrong with some (many?) of them.  There might not be anything "wrong" with the people themselves - it is just that they are not the right fit for you and your business.  One of things we never speak about in polite business society is "not all clients are good clients".  There are some clients you just shouldn't have. 

A respected adviser once said to me when he was reviewing his business model, "I decided to go through my 400 clients and only keep the ones who trusted me, actually followed my advice,  and would never sue me".  He kept 8 of them, and sold the rest of the business.

That is too difficult a move for most advisers, however it graphically illustrates the point that not all clients are ones you should be working with.  If you know who is the right sort of client, and focus your attention on those ones, then not only do you build a better business over time, but you have a far more fulfilling and enjoyable life I'd suggest.  That same adviser had rebuilt his business over a 3 year period to about 170 clients, serviced by himself & 2 other advisers, and with an unbelievably high turnover (we are talking many millions in revenue in that business).

Clearly the business referred to is an exceptional one, operating in a particular niche and providing the very highest possible range of personalised service and expertise.  It is not a typical advice business in other words.  But it did start out as a fairly normal type of advice business.

Small can be very good.  Big can be very good too of course - but it should not be thought of as an automatic path to business security.  While it is true that many fixed costs inside a professional service firm are reasonably static, or not proportionately related to number of clients one has, there is usually some sneaky overhead-creep that goes along with increasing the size of the client base being serviced.  The variable costs directly related to marketing & servicing naturally go up with increasing client base size.

One of the more interesting and worthwhile things an adviser business can ever do is to spend some serious effort analyzing the business they have.  Work out what your servicing costs per client are each year for example.  Work out what the overheads per client are.  Understand what your clients cost you - and not just in hard cash, but in support personnel time and in adviser time.  If you go through the exercise I would venture that you will be quietly amazed at what you are spending on average per client.  And we haven't discussed the lost opportunity costs....

A quick example to make the point.  Let's say you send a greeting card 1 x p.a, a couple of newsletters p.a., review letters and reports mailed 1 x p.a., disclosure 2 x p.a., maybe a seminar 1 x p.a. for clients, and perhaps one invitation to a function each year.  These things are pretty typical and can easily add up to a cost per client of $150-200 in direct servicing costs.  Apportion out your fixed costs amongst the clients....often another $150/head fairly easily.  Staff time dealing with a couple of calls and emails a year?  Another $50-75.  Adviser time?  Another 2 hours a year - call that a minimum $300.

So, the client is costing you perhaps $800 a year to keep.  (Can you AFFORD to bring on more?)

The really interesting part though is when you begin the process of segmenting your client base and working out what each segment brings in revenue each year.  Your very top end clients, that follow your advice, and think about their affairs will be presenting you with average revenue of $1,200-$2,000 p.a. on a reasonably consistent basis.  Every 2-3 years there will be a big bit of work done with them that provides a lot more.  And they will, if the relationship is nurtured well, provide you with more clients of that type.  The lifetime value of these clients can be immense.

Clearly a good investment.  Get more of them.

However, at the other end of the scale I regularly witness advisers holding on to smaller clients.  Perhaps they purchased something from the firm 9 years ago, or sought some advice and paid for their plan 4 years ago, or were handled as a bit of a pro-bono exercise.  When you drill down and look at the ongoing value these "clients" present the numbers are startling.  It is not uncommon to see an average revenue per client below $100 p.a. at this end of the client base.

Yet advisers think that those clients should receive the same "basic service" (albeit without the function invite) as every other client.  Result?  They cost you many hundreds of dollars a year to keep.

The primary rationale for keeping these types of clients is flawed.  It is usually "I don't have to spend money marketing for new clients - these are my new business opportunities for years to come".  Sorry, you've already had them for years and haven't been able to make inroads yet, so what are the chances that will change in the next couple?  Really?

Some advisers take it further and actually go out looking to buy client bases of this sort - so you get to pay a lump sum in today's dollars that represents some multiple of anticipated future earnings for people that cost you money to keep right away.  I may not be a great businessperson, but that one doesn't look like a good deal.

The reason for outlining this is to simply challenge the accepted wisdom that "big is good" when it comes to running a professional services firm.  Big MIGHT be good, but it might not either.  A big revenue base is certainly good.  A big fistful of profit each year is good too.  A big reputation is good.  But a big "client base" that is predominantly low-value transactional customers is not a good client base at all.  It is a prospect bank perhaps.  In reality, it is rarely even that.  Such customers who do not value advice, or the adviser, or place any significant store on the service they receive are not worth keeping.  They are an anchor preventing, or slowing down, your ability to sail for new worlds.

If you do nothing else in your professional service firm this year about your back office, do this one thing.  Analyse your client base.  Segment it, and decide logically what each segment represents in terms of current and future value to your business.  Understand what each segment costs you to maintain.  Understand the risks of continuing to be seen as the possible professional adviser to apportion responsibility to, for people who do not actually value the advice or the adviser, and who are a drain on the firms resources.

It may be that providing different service or support offerings for different classes of customers is the way forward.  Perhaps some simply need to be culled.  Some will undoubtedly benefit from your increased attention and move up the value chain...but not everyone.

Working out who to drop is often the best way forward.  It is not a quick process, but it will be one of the most beneficial things you can do for your firms future. Drop the anchors, and get going.

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