A professional services firm has four client-related levers to pull to maximise its profitability.
Let's start by sketching an all-too-common scenario.
ABC corporation has a long-standing relationship with a professional services firm, let's call them Lex Law. Lex Law undertakes a wide range of work for ABC and has just completed a major matter, the first of several expected from ABC in the year ahead. During this matter, Lex Law negotiated quite a few changes in scope, nevertheless, the job was delivered close to the agreed date, but not entirely within the revised budget. Lex Law made a few changes in key personnel during the matter; some at the request of ABC.
In discussing the outcomes, ABC’s board expressed a degree of disappointment with the result which, in some respects, was below expectations. This was embarrassing for ABC’s general counsel (GC), given her close relationship with Lex Law. In response, she decided to question some of the cost over-runs and is considering whether using Lex Law on the next matter is in the best interest of ABC and herself.
The next project
In deciding which firm to brief for ABC’s next project, the GC has four options:
Say nothing about the recent project and brief Lex Law, the devil she knows so to speak.
Call for a formal debrief of the recent project with ABC, lay her cards on the table, and invite Lex Law to indicate how they intend to prevent a recurrence of the problems she experienced.
Without telling Lex Law, try out another–equivalent in her opinion–firm that has been courting her.
Formally advise Lex Law that she is sending the next project to another firm.
It’s worth noting that this spectrum of choices faces every client with every purchase decision they make; it’s not confined to situations where the client is consciously unhappy for some reason.
In short-hand, these options are called Loyalty, Voice, Neglect and Exit (L-V-N-E) and were first researched in organisational settings and famously published by Albert Hirschman (1). Hirschman’s framework is widely used in researching and managing clients’ buying behaviour.
A client exhibits Loyalty when they re-purchase from the same firm, irrespective of how they view the cost of switching to another provider. Loyalty is active when, as a client, you deliberately offer feedback in an endeavour to preserve or improve the value you receive. Loyalty may, however, be passive, in which case it may be a precursor to Voice, Neglect or Exit.
Voice refers to any attempt by you as a client to change, rather than escape from, an unsatisfactory situation. Voice may be a constructive response, such as suggesting ways for the incumbent firm to improve the situation. Or it may be confrontational, e.g. by making a formal complaint.
Neglect includes switching some of your work to another firm/s without advising the incumbent. It may also manifest as a reduction in the care you take in keeping your current firm informed about your organisation, and thereby diminishing their advantage.
Exit means terminating the current relationship your work to another firm/s.
Understanding clients’ options through this L-V-N-E lens informs a firm’s strategies designed to deliver and measure client service excellence.
The profitability of a professional services firm’s client portfolio will be maximised to the extent it has in place effective strategies to:
Increase clients' propensity to re-buy, grow its share of clients' wallets, strengthen the firm’s social bonds with clients, and give clients reasons to recommend the firm to others (= foster Loyalty). In addition to retaining and growing satisfied clients, the firm’s overall cost of acquiring new work is reduced by these strategies.
Make it easy for clients to provide feedback and complain if they are not fully satisfied (= encourage Voice). Early warnings enable a firm to take prompt action to handle the problem and minimise write-offs, bad debts and morale-sapping, time-absorbing complaints.
Prevent escalation of client dissatisfaction by detecting it early and thereby stopping competitors slipping in ‘through the back door while the firm is asleep’ (= minimise Neglect). Client churn is costly for incumbents. It has been estimated that for each year of a relationship with a client, the provider’s profit margin from that client increase by a few percentage points. (3)
Not give clients any reason to terminate the firm’s services (= prevent Exit). Not all exits can be avoided. Some are caused by factors unrelated to the value of the firm’s service to the client, e.g. the company is acquired and professional services work is transferred to the acquirer’s advisers.
Jugular questions arise from these strategies:
If a firm is starting out, where should it begin?
And, if a firm is already on the journey and is not entirely happy with its client service excellence and its own profitability, how should it re- focus its efforts?
The answer is "Drive a culture of continuously improving the firm’s client-centricity".
A firm with a culture of client-centricity is one that fosters clients' loyalty, encourages clients' voice, minimises clients' neglect and prevents avoidable exits by clients (2).
Driving a culture of client-centricity
Driving a culture of client-centricity starts with measurement.
“Without data, you are just another person with an opinion” is an apocryphal saying of W. Edwards Deming, pioneer of the quality management movement.
The wisdom of the old saying 'What gets measured, gets managed' is apt and a timely reminder to ask ‘Is your firm measuring and acting on the right things with the right frequency?’.
Professional services firms can benefit greatly by learning from their clients about the merits and methods of gathering, reporting and acting on customer feedback. Sophisticated, customer-focused companies use a range of feedback and behavioural metrics to ensure their fingers are constantly on the pulse of the customer.
Measurement makes progress (or lack thereof) visible, holds people accountable, and ensures corrective action is taken.
What should be measured in a professional services firm
Having read thus far, it should be clear what all professional services firms should measure, report and act on:
Trends in the number, value and type of jobs for key clients (this data is available from the firm’s practice management system)
Share of key clients' wallets (this data needs to be estimated by regularly collecting and collating intelligence from those in the firm with an ‘ear to the ground’ of what’s happening in their clients)
Clients’ satisfaction with their relationship with the firm (by periodically survey every 6 or 12 months with a tool like beatonbenchmarks)
Clients’ satisfaction with the jobs undertaken by the firm (by mid- and end of job survey usingwith a tool like beatondebrief).
These client-related metrics should be available on dashboards that link to and allow drill down into the firm’s financial metrics, e.g. total spend per client, write-offs, profit margin for each client, and other CRM data, e.g. key relationships, important announcements.
The logic presented here suggests a virtuous cycle: the degree to which your firm is measurably client-centric will reflect in the profitability of your clients (4).
In other words, both its clients and the firm win when a firm increases its client-centricity:
I say ‘suggests a virtuous cycle’ because, with one exception, there is no empirical evidence – of which I am aware – of causality, namely that an increase in client-centricity results in an increase in profitability. The exception is the Maersk shipping case study, published by beyondphilosophy, which shows that a 1% increase in cargo volumes is associated with every four point lift in Net Promoter Score® (5).
Until data is available to elucidate this it remains a hypothesis, but one on which both firms and their clients would be wise to note. The idea passes the sniff test and is intuitively sound.
(1) Hirschman, Albert (1970). Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. Harvard University Press
(2) Client centricity: How to execute and measure ROI by Paul Hugh-Jones
(3) See, for example, The Loyalty Effect by Thomas F. Reichheld
(4) The profitability of a matter depends on the fees collected and the direct and indirect cost incurred by the firm. My assertion that the profitability of your portfolio of clients is reflected in the degree to which your firm is client-centric requires fee-setting and cost control.
(5) Click here to read about this case study on the beyondphilosphy website
My thanks Ben Farrow and Paul Hugh-Jones for their reviews of the first drafts of this post.