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Five ways to improve your firm’s balance sheet

In Articles, Commentary, Legal Technology on 8 February 2020 at 4:19 pm

Full text of my opinion piece first published in the Australian Financial Review on 7 February 2020.

Law firm partners focus a lot their profit and loss statements but tend to glance over the asset section of their balance sheets.

This is a missed opportunity.

There are three main reasons assets are largely ignored. Firstly, in ‘zero-in zero-out’ partnerships with 100% dividend payout ratios tracking long-term asset value is relatively less important. Secondly, in some firms, the accountants lump all intangibles into a vague and unhelpful construct called ‘goodwill’. And thirdly, balance sheets tend to list boring things like plant and equipment.

Original AFR article

From a strategic management perspective, there is a significant benefit in framing goals around making the firm more valuable. This means identifying all the assets, both tangible and intangible, that the firm uses to create and sustain value.

A more detailed balance sheet can also be useful when it comes to partner performance management. Growth in asset value should be the heart of what’s expected of partners, especially in regard to their non-financial contribution.

Tangible assets are easy to quantify. The intangibles less so.

Here are five important intangible assets in your firm that are worth measuring, protecting and leveraging.

#1 Relationship capital

Relationship or social capital refers to the strength and stickiness of existing client relationships and, where relevant, referrer and community connections.

While there are no simple measures of relationship capital, good proxies include total client lifetime value, client commitment indices, net promoter scores, client loyalty rates, average service mix per client, share of wallet of platinum and gold clients, social network strength and percentage of sole-sourced work.

#2 Human capital

Human capital refers to the quality, performance and commitment of all partners and staff. Management reports often include data on salaries, recruitment, training and turnover, but these don’t get to the heart of tracking human capital growth or depletion. Additional measures might include:

Toe-to-toe analysis comparing the quality of key practitioners in the firm versus direct competitors
Loyalty and career intention indicators
Succession and talent development pipelines by practice area
Diversity and inclusion metrics
Glassdoor, Seek and social media ratings
Employee net promoter scores
Leadership capacity and capability
Culture maps, highlighting hot spots or blind spots
Real-time measures around staff morale, firm climate, employee experience and discretionary effort.

#3 Brand capital

This refers to the strength of the firm’s brand and reputation in key target markets. Traditional measures include brand awareness, consideration, preference, use, board room impact, recommendation and social media following. An ability to attract star recruits is also an indicator of its brand capital.

One benefit of a strong brand is the ability to command a price premium. By way of example, in 2019, Apple’s brand premium enabled it to capture 66% of smartphone industry profits, 32% of overall market revenue while only selling 13% of total handset units.

Proxy measures around the firm’s pricing clout impact might include the percentage of bids won where the firm was priced higher than competitors, depth of discounting and percentage of matters with supernormal margins.

#4 Data capital

Most firms are sitting on mounds of valuable data with most of it stored on disconnected databases collecting digital dust. The main data islands include:

client data such as matters delivered, interactions, service feedback, event participation, agreed pricing and billing,
staff data such demographics, salaries, tenure, engagement, training, feedback and performance records,
operational data such as time records, matters processed, productivity and utilisation, and
financial data such as revenue, margins and expenses.

Joining these data sets and applying some smart predictive analytics will allow firms to make much better decisions. For example, the analysis could point to using a specific team with a particular process to do a specific type of matter for a certain client category using a defined pricing model. Each of these choices might mean a 2% improvement, but accumulatively you’re looking at +10% gain without working any harder.

#5 Intellectual capital

The last category is for important bits of firm know-how that don’t neatly fall into one of the other four areas. This might include the proprietary legal products, algorithms, websites, domain names, precedents, templates, applications, patents and trademarks.

Growth in intellectual capital could be assessed by things such as the firm’s investment in research and development and its innovation portfolio. Quantifying the revenue from new products and services can indicate success or otherwise in this asset class.

A call to action…

Take a quick glance over your firm’s strategy papers and board reports over the past 12 months. Is there a way to elevate your firm’s strategic thinking by delving into the intangibles that will sustain your long-term success? I bet there is.

If you enjoy my articles, please consider donating to my team participating in the 100km 2020 Oxfam Trailwalker. Learn more here

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business, business development, client loyalty, executive leadership team, growth, innovation, key account management, marketing, planning, pricing, professional service firms, strategy management

What law and accounting firm clients really care about

In Articles, Commentary on 28 February 2018 at 8:19 am

Last week, Bain published a simply brilliant article in the Harvard Business Review exploring what B2B clients really care about. There are so many rich insights and applications for law and accounting firms, including five practical ideas described in this post.

40 Value Drivers

The Bain framework presents 40 ways in which your firm can create value for its clients, categorised into five areas: Table Stakes; Functional Value; Ease of Doing Business Value; Individual Value and Inspirational Value.

Screen Shot 2018-02-23 at 8.00.24 am

Five practical ideas to use in your firm

Idea #1: Have value conversations

Sit down with your client, take out the 40 Value Drivers diagram and ask them to identify the most important value drivers for them personally, their team, their procurement department and their organisation more broadly, and why?

During the conversation explore which value drivers are likely to be more important in two years time.

Get your client to evaluate your firm’s current service offering and relationship and how it compares with key competitors. Use it to explore opportunities to create more value and to test ideas for new offerings. Ask what they’d be prepared to pay more for? Ask what they’d prefer not to have if it meant a lower overall cost?

Idea #2: Re-clarify your value proposition

Your value proposition (VP) is your promise of value to clients. Your VP should be perceived to be superior to clients’ other choices and deliver a sustainable return.

At a firm level, you may wish to explore which of the 40 drivers are core to your firm’s VP or brand promise. Do you go wide and promise lots of things, or go deep and promise one or two things better than anyone else?

Next time you’re pitching for work or writing a tender document, use the framework to get real clarity of your unique selling proposition or USP.

Idea #3: Reassess your firm’s purpose

How does your firm’s current purpose statement measure up in the Inspirational Value category? Does it inspire and truly resonate with stakeholders?

Your firm is a combination of a private enterprise delivering profits to its owners and a social enterprise delivering a broader community benefit. There is an emerging generation of clients and staff that connect much more deeply with a firm purpose that reflects both social and financial outcomes.

In an era where true differentiation based on service and quality is almost impossible, there’s a good chance Inspirational Value will become the battleground of the future.

Idea #4: Foster creative thinking

Running a hackathon, design thinking or ideation workshop? Go through each of the 40 value drivers and explore three or four fresh ideas in each. Deep diving around the client and their needs is always a great place to start.

Idea #5: Update your CRM

Tweak your CRM to make sure you capture insights around what your clients really care about and what drives value for them. Add five new fields to your CRM around the five categories of value creation with drop-down menus of each element and comments.

Your ideas

I’d love to hear your ideas on how to use this brilliant new model.

Source: strikingly.com

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business, business development, change management, client loyalty, client relationships, culture, executive leadership team, governance, growth, innovation, internal collaboration, Leadership capacity, marketing, Measurement, planning, professional service firms, strategy management

Are your practice groups primed to win?

In Articles, Commentary on 26 April 2017 at 8:23 am

If each of your practice groups is primed to win, then there’s a pretty good chance your firm will win as well.

With this in mind, there’s much benefit to be derived by assessing all of your practice groups on two dimensions:

A winning strategy – from strong to weak, and
Execution capability – from strong to weak.

Illustration of portfolio map – not real data

If most of your practice groups are in the weak-weak quadrant, perhaps it’s time to take that call from the headhunter. If all the groups are strong-strong, don’t change a thing! If you have a mix of everything, it’s time to get to work…

A winning strategy

There is a range of factors to take into consideration to assess whether a practice group has a winning strategy for the next three years:

Does the practice have clear aspirations to win? Is there a stretch intent?
Are they competing in sizeable, growing and profitable market segments?
Does the practice have a compelling value proposition, that is, clear reasons why clients should choose them over others?
Does the practice have a profitable and sustainable business model? Bonus points if the model is scalable.
Is there a Plan B if non-traditional competitors strengthen?
Are there pilots and experiments in place creating options for future growth?
Is there a clear implementation roadmap with accountabilities, measures and timing?
Is it clear what they say ‘no’ to, and why?

Execution capability

On paper, the practice group might have a world-beating strategy but it may not have the skills, resources and systems to implement it.

a cup of coffee on the wood table.cafe latte with tulip latte art pattern on the wooden background.

Source: fotolia

The first, and most important, the question is whether you have the right practice group leader. Is she a true leader or merely a convenor? Does she lead or just manage? While she might seek to lead, does she have loyal followers? Does she have the ability to inspire and support team members to be their best? Is she strong enough to stand up to the recalcitrants?

Other questions to ask around execution capability:

Is the team a real team or just a loose coalition of colleagues?
Does the team generally follow-through on their commitments?
Does the team own its strategy and take accountability for it?
Does the team have the right talent necessary to win, now and in three years time?
Does the group have access to the right technology, processes and systems to underpin its business model?
Is there sufficient open-mindedness to adapt to new inventions and work methods?
Are there mechanisms in place to regularly review progress and tweak their plans?

The portfolio

While it’s important to assess the competitiveness of each practice, there’s also a lot of value in assessing the inter-dependencies, synergies and gaps across the portfolio. Another portfolio overlay is the amount of partner equity allocated to each group and expected ROE (return on equity).

A review of the portfolio should indicate which practices require investment, divestment or just be maintained. Handling the politics of these decisions is a topic for another post, or three.

In conclusion

While a firm is more than just the sum of its parts, the parts play a critical role in sustaining success. Your firm’s strategy needs to reflect firm-wide themes like overall market positioning, culture, brand, strategic clients, talent, R&D, infrastructure and support. It also needs to deep dive into the practice portfolio, making sure each plays its part and leverages the strengths of the whole.

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account planning, business development, client loyalty, client relationships, growth, innovation, internal collaboration, key account management, Leadership capacity, Measurement, professional service firms, Sales management, strategy management

7 key enablers of smart collaboration

In Articles, Commentary on 10 March 2017 at 7:27 am

In January 2017, Harvard professor and ex-McKinsey consultant, Heidi Gardner, published Smart Collaboration. The book describes the results of her 10-year study into the benefits of collaboration in professional service firms. Gardner concludes that firms that effectively integrate cross-team solutions to solve clients’ problems will significantly outperform those that just rely on cross-selling solo-specialists:

Screen Shot 2017-03-09 at 5.13.44 pm

The book is great in making the case for collaboration, but is a little thin when it comes to the “how to” bit. This post is my take on execution, and describes seven key enablers of smart collaboration…

#1 The right clients

The business case for collaboration is much stronger when your firm is servicing [i] large client organisations, [ii] with complex and diverse needs, and [iii] relatively sophisticated approaches to purchasing professional services. For instance, a small monoline insurer with a cab-rank panel structure would not be a prime prospect.

#2 Capability breadth

Gardner states that the true benefits of smart collaboration come from combining the skills and experience of a range of different practitioners to solve the client’s most pressing problems. This multi-disciplinary approach is hard to copy, is less price sensitive and much more fun to deliver.

It follows, therefore, that firms need to have service depth AND breadth for collaboration to payoff. Larger full-service firms would have relatively more opportunity than others.

#3 A culture of “our” client, not “my”client

In many firms, the prevailing culture is one where client relationships are primarily owned by individual partners, rather than seen as assets of the firm. In these instances, distrust of colleagues to serve “their” clients is more common than not. Trying to facilitate smart collaboration in a deeply individualistic culture is a long and hard road.

Many of the professional service firms I work with think they are collaborative, but in reality they’re collegiate. The latter describes a club of friends happy to socialise together. The former describes a one-firm firm where everyone is hardwired to win and deliver together.

#4 Great client leaders

Client Relationship Partners work across practice teams to bring the best of the firm to the client, and the whole of the client to the firm. These boundary-spanners are crucial in growing the network of relationships between the firm and the client. Success is more likely if the firm empowers this important leadership role, and invests in developing its client leader talent pool.

#5 Effective client knowledge sharing

Gardner states that a “collaborative technology platform” is essential in connecting partners with the right opportunities, as well as mitigating some of the obstacles to collaboration. While I broadly agree, many firms fail to get a positive return on their CRM investments, not because of technology issues, but because the cultural and strategic settings don’t facilitate communication and knowledge sharing.

Collaboration is enhanced by partners having a good understanding of [i] the firm’s full capability set, [ii] the client’s context and needs, and [iii] the details of the firm-client interaction.

#6 Consistency in energy and standards

The outcomes of a team are significantly enhanced when all team members have similar service standards. Problems arise if one team member thinks a “responsive” email reply is 24 hours, while another thinks its 24 minutes. It also helps if all team members have a similar drive to succeed and share common values around client focus.

There are two schools of thought around consistency of service style. Those who argue for a house-style cite benefits of a seamless client experience, resource fungibility and delivery efficiencies. The contrary view is that differences in style facilitate diversity and creativity. I’m more in the latter camp.

#7 The right measures and rewards

In the words of Peter Drucker, “what gets measured gets managed”. In the words of James Goldsmith, “if you pay peanuts, you get monkeys”. If the firm incentivises solo-specialist behaviours and outcomes, the chances of meaningful collaboration are exceedingly low.

Call to action

Gardner’s research clearly illustrates the benefits of smart collaboration over cross-selling. If you sense the potential in your firm: [i] write down each of these seven enablers; [ii] give your firm a score out of 10 on each, and [iii] identify the key actions to shift the dial in the next six months, and closer to a 10 over the next 36 months.

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account planning, business development, client loyalty, client relationships, growth, key account management, planning, professional service firms, Sales management, strategy management

The Taxi Taxonomy – four things to learn if you’ve only got a taxi ride to prepare

In Articles, Commentary on 14 June 2016 at 12:06 am

You’ve got a meeting with a prospective client and you’ve left your preparation to the last minute. What are the ESSENTIAL things to learn during your taxi ride on the way to the meeting?

The Taxi Taxonomy, presented in the two-by-two below, is a client analysis cheat sheet. It is no substitute for more in-depth preparation, but provides a useful start to the intelligence gathering process. The Taxonomy suggests classifying your analysis into four Ps (to make it easier to remember):

Profit drivers* – the revenue, cost and other strategic priorities of the organisation;
Political drivers – the cultural and political state of the organisation;
Position drivers – the role and requirements of the person you’re about to meet; and
Personal drivers – their key personality attributes and preferences.

There is a continuum of data ranging from the overt to the obscure. The overt can usually be ascertained from web and social media searching. Obscure data most often comes from speaking with those with direct first-hand experience, including employees, clients, suppliers or business partners.

The Taxonomy in Practice

A client of mine gets her business analyst to prepare a one-page Google Doc summary based on the four quadrants in the Taxonomy before every client meeting. With repeat clients much of the data is the same but any new items or changes are highlighted. She then updates the Google Doc with new or fresh insights after each visit. Ironically this is usually done on her smartphone during the taxi trip back from the client.

MBA IN A DAY

For those interested, I will be expanding on this framework and presenting many others at a forthcoming public seminar called MBA IN A DAY. The seminar is targeted at mid-career lawyers looking to enhance their knowledge of business and develop a deeper understanding of their clients and prospects. Many lawyers are experts in the law but have received very little training in business. Click here to read more: http://mbainaday.strikingly.com/

Source: Fotolia

* For non-profit organisations and government agencies, this quadrant might be reframed as Purpose drivers, and include things like social charter, development strategy, cost and operational priorities and H2 and H3 opportunities.

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account planning, Audit, business development, client loyalty, growth, internal collaboration, key account management, marketing, planning, pricing, professional service firms, strategy management

Stress test your client strategy

In Articles, Commentary on 9 February 2015 at 8:12 am

Most client plans I see are tactical, short-term and myopic. They are really sales pipeline documents with coffee catch-ups tacked on. There’s often very little about intended client strategy. By client strategy I mean a game plan to win – a big picture view as to how to respond to and potentially shape the client’s needs and buying patterns over time. A clear articulation of how to run faster and smarter than major competitors.

In my view, client strategies can be categorised into five areas. These categories provide a useful checklist in stress testing your key account plans.

#1 Price, risk and cost

Price and risk-sharing is a strategic arena that provides a wealth of competitive opportunity. Firms can leapfrog rivals by offering alternative pricing and risk-sharing models that go beyond convention and better address fundamental client needs. A recent case study on Bendigo and Adelaide Bank is a good illustration of this.

A number of professional service firms are creating an edge, not by race-to-the-bottom discounting, but by negotiating long-term incentivised retainers to deliver positive outcomes to both the client and the provider. I think there’s rich pickings for firms that can truly understand the nature and scope of client risk and identify options to de-risk the client’s business.

Another strategy in this category is to reengineer the firm’s processes to significantly reduce cost-to-serve and to enable the firm to have greater price-setting discretion. Similarly, exploring new ways to measure and enhance perceived value can drive client commitment.

#2 People and relationships

Many clients plans concentrate on relationship mapping and connecting. This is great, but cherrypicking is a client strategy often not considered with any rigour. Cherrypicking starts by asking, “if we had to hire three people that would fundamentally advantage us with this client, who would they be?”. These new hires might be in a competing firm, in the client organisation or in an adjacent provider. A quick business case analysis of the options can be extremely revealing.

I recently heard of an accounting firm that captured the lion’s share of a major client’s spend by headhunting a senior manager from a rival firm. Client feedback revealed this manager had become the ‘go to’ adviser and was far more important to the client than the figurehead client relationship partner.

#3 Data and technology

Information and communications technology is increasingly being used improve client connectedness and service. A great illustration of this is a leading Australian law firm that provides each client end-user a tailored smartphone app that features:

contact details and specialisations of service providers
seamless integration with Skype for videoconferencing
real-time project status updates
billing data and analysis
relevant legislation, case law and industry updates
on-demand and live professional development modules
upcoming events and service improvements
a feedback and suggestion space
FAQs
discussion forums.

Big data is going to be one of the next frontiers of client strategy. At the moment, most firms and clients operate with islands of data that are not linked in any meaningful way e.g. procurement, matter management, time recording, document management, billing, HR, client satisfaction, etc.. There’s much opportunity to integrate and analyse all this data and offer both the client and the firm deeper insights into how to run more effective and efficient projects.

#4 Delivery, capacity and coverage

At the heart of the Big 4’s multidisciplinary strategy is a compelling value proposition: our capacity, coverage and consistent service delivery allows you, Mr/Ms Key Client, to lower your transactions costs, leverage your scale, make you look good, de-risk innovation, facilitate new market entry and improve compliance across ALL of your operations. Did I mention ‘make you look good!’?

Benchstrength or depth of expertise in a particular area important to the client can be at the heart of a firm’s client strategy. It’s not that the expertise itself is superior but rather it’s the critical mass of high quality talent and a strong team approach that builds trust and creates preference in the client’s mind.

#5 Knowledge and expertise

The fifth area of client strategy relates to the firm’s knowledge – both [1] technical discipline expertise, and [2] understanding of the client’s business and industry. The key here is the firm’s ability to contextualise advice and make it relevant to the client’s specific needs. A firm may have a wizz-bang CRM, but it’s useless if they can’t use this knowledge to pre-empt competitors, bring fresh ideas to the client or simply make the advice more cost-effective and valuable.

In my experience many firms over-estimate the distinctiveness and durability of their knowledge. Consequently, if you’re number 2 or 3 on the client’s pecking order i.e. the challenger brand, investment in deepening client knowledge and its application can be at heart of your client strategy.

Another related client strategy in this category is “flanking”. This is about avoiding direct head-to-head competition with a strong incumbent and instead picking up work around the edges in new expertise areas and/or locations. Once a foothold is created a direct assault on the incumbent can then be launched.

In conclusion

In stress-testing client plans it’s important not to get too hung up on the client plan document itself. A plan is not a document. A plan is the outcomes you’re seeking and your intended actions to achieve those outcomes. What’s critical is that there clear evidence of robust strategic thinking and discussion around how to compete, where to invest and, the hardest bit, deciding what not to do.

Check out Barolsky Advisors’ Profit Growth Now! to make a step-improvement in your firm’s critical client relationships.

Photo source: http://picrutes786.blogspot.com.au

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account planning, Audit, business development, client loyalty, client relationships, innovation, key account management, planning, pricing, professional service firms, Sales management, strategy management

Adding Adding Value

In Articles, Commentary on 3 November 2014 at 8:18 am

Does your firm having adding value to clients as a core objective? I’ll bet it does.

Does your firm really measure how it adds value to clients? I’ll bet it doesn’t.

Most firms ask their clients to rate overall value for money in their client listening research. To my mind this is a generic approach to assessing value and a major missed opportunity.

A new way

I think there would be significant benefit adding a section to your client feedback tools under the heading ‘Adding Value’. This section would be tailored for each client and it would ask the client to agree or disagree with a series statements as to how the firm has added value, or what difference it has made over the preceding period. This would not be merely a restatement of activity or inputs but rather outcomes achieved and real benefits delivered.

So, for example, this section might include statements like:

Helped with the successful launch of new product XYZ and in creating 15% market awareness in 6 months.
Improved consistency of safety incidence reporting contributing towards a 5% reduction in lost-time injuries.
Reduced risk exposure to ABC claims from High to Moderate.
Settled the MNO matter with a sum $1 million less than that provisioned.
Realised incremental rental income of $500K through early project completion.
Delivered tailored training program that contributed towards a 5% improvement in staff productivity.
Helped with effective rollout of new corporate compliance program via dedicated secondee.
Rejigged proposal templates and process leading to a 7.5% improvement in the bid-win rate.

The client respondent would also be asked to identify other things, big or small, that they felt have added value. They might list some valuable off-the-cuff advice provided for free or an introduction to a valuable business contact. This open-ended section would catch all the tangental things that the client perceives have been of benefit. Sometimes the smallest things can have the biggest impact.

Ideally this value added assessment should be part of a periodic relationship review conversation. It could be used in a quantitative survey but then you miss the opportunity to have a deep dive discussion into what value is and isn’t from the client perspective.

Communicating value

Communicating the benefit you deliver is essential in justifying the price you charge. The problem is that in many professional services value is in the eye of the beholder. If Perceived Value = Perceived Benefits – Perceived Costs, then it’s incumbent on the provider to work extra hard to communicate and amplify the perception of benefit. Getting their agreement or otherwise to a series of value-added statements makes the benefit more conscious and tangible. It also reveals what elements of your offering are more valuable than others.

Finding the words

Harry S Truman once stated, ”it is amazing what you can accomplish if you don’t care who gets the credit”. One of the challenges with this suggested approach is that the client may perceive the whole exercise as a kudos claiming exercise. They might think you’re trying to steal their thunder. I think this can be partly addressed by [1] explaining the rationale for the questions, [2] describing in detail the firm’s specific role in creating the outcome, or [3] using softer phrases like ‘contributed to’ or ‘helped with’. Having the statements as propositions that the client can agree and disagree with, also reduces the risk of coming across as too self-serving.

Identifying the outcomes achieved might be difficult if the service is purely a commodity or the firm’s service role is basic compliance. However, if your firm is a non-commodity player then the only reason for not doing this is laziness or a lack of creativity.

Call to action

One simple next step is to pick a key client of the firm you have a good relationship with. Write down a series of draft value added statements and ask your client which ones they support, which they don’t and which ones are missing. I bet you’ll both find the conversation fascinating and value-adding in so many ways.

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account planning, business development, client loyalty, client relationships, innovation, key account management, professional service firms, strategy management

Your loyalty levers: head, heart and ego

In Articles, Commentary on 22 May 2014 at 9:05 am

Sticky profitable clients are nice. Most professional service firms just love them. I’m sure you do too.

But what keeps these clients loyal to your firm and willing to come back for more?

Research evidence suggests that client satisfaction is an important driver of client loyalty, but as the chart shows it’s not the full story. There are many instances that for a given level of client satisfaction, clients of one firm are significantly more loyal than another. It would appear that there are other hooks, zippers or levers that facilitate client loyalty. These levers generally work both as a positive motivation to stay, but also as a disincentive to switch.

In my view, there are three primary loyalty levers and they relate to your client’s…

Head – the perceived financial benefits gained/foregone as well as the anticipated time, costs, hassle and risks of switching.

Heart – the emotional and social benefits gained/foregone.

Ego – the impact of staying/switching on client’s personal status, reputation and position of influence.

There has been extensive commentary on client loyalty strategies particularly around developing closer personal relationships. Rather than repeat all of this, I thought I’d share a few head, heart and ego ideas that have received less air time.

#1 Multiple services

Beaton Research and Consulting data shows that client loyalty increases as the number of services bought by the client grows. Their data shows client loyalty goes up by 10.4% when moving from 1 to 4 service lines in legal services, 12.3% in accounting and 6.6% in consulting engineering. While cross-selling is good for the revenue line, it’s also really good for the client loyalty line. Intuitively this makes sense. The more services you provide, the more you know and understand about the client’s business, the more personal connections there are and the higher the perceived switching costs.

#2 Loss of future financial benefit

Colin Jasper and I argued in an earlier post that there is much merit in exploring relationship pricing arrangements that provide incentives for both parties to commit to working together for the long-term. Client loyalty is incentivised by having a retainer arrangement in which the client foregoes significant future financial and strategic benefit if they end the relationship. Discounted hourly rates that are easily matched by competitors do not qualify as a loyalty incentive.

#3 Cultural alignment

One of my clients has scored major brownie points with his clients by actively supporting their causes and CSR projects. Every effort is made to attend client-sponsored charity events, make donations and provide people and resources for joint community development projects. Underpinning this activity is the message is that we’re like you; our values and your values are similar; culturally we’re aligned. He says this approach not only fosters client loyalty but it widens clients’ ‘zone of tolerance’ on pricing and occasional service stuff-ups.

#4 Buying in self-image

While clients will seldom reveal this decision criterion in surveys or interviews, their actual behaviour betrays them. There are numerous instances of clients staying loyal to prestigious firms not because of superior service or advice, but just because they’re prestigious. Simply put, they like sunning themselves in the firm’s after-glow. Their status is reinforced by the company they keep. Going ‘downmarket’ is a major threat to their ego. Many clients don’t like to admit it, but they often buy in their own self-image.

Related to this point is the ‘making them look good’ phenomenon. Some firms are experts at making their clients look like superstars. Switching to an alternative provider may reveal a hidden capability flaw or risk being seen to perform at a lower level.

#5 Co-creation

Clients are less likely to walk away from anything that they’ve invested a lot in. Getting clients to co-create new products, processes, projects or programs helps encourage this investment. To illustrate, one mid-tier law firm in Australia recently initiated a project to redesign the workflow process with a major insurance client. The intent was to reduce handovers, minimise errors, take out resources, speed up time and reduce cost. The end result: the client got a lower unit fee and the firm enjoyed a greater share of wallet and a commitment from the client to ‘co-act’ (their words) together into the foreseeable future.

Your call to action

Focusing on improving client satisfaction is a good thing, but if you really want to create sticky profitable clients its time to think more creatively in playing to your client’s head, heart and ego. What’s more, if you’re seeking to win a new client that appears to be wedded to a competing firm, having a deeper understanding of their relationship can help craft a winning strategy.

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business development, client loyalty, client relationships, key account management, marketing, Measurement, professional service firms

The two sides of the client loyalty coin

In Articles, Commentary on 29 November 2013 at 12:32 pm

CASE ONE: I continue to book and fly with Qantas but I would not recommend them to others. My desire to accumulate frequent flyer points is stronger than my need for a more customer-focused airline.

CASE TWO: One of my clients has lots of raving fans but is struggling financially. He gets great feedback, but for various reasons, his customers are not spending more with him.

These two case studies support Don Peppers’ argument that there’s an important distinction to be made between attitudinal loyalty and behavioural loyalty. Client recommendation or advocacy, as measured by the Net Promoter Score (NPS) is really just an ‘attitude’, it is not really an indicator as to whether the client will give you more of their business. My loyalty to Qantas is behavioural but it’s not backed up by a positive attitude towards them. Put simply, there are two sides to the client loyalty coin. The goal in your firm is to have clients that give you BOTH a good rap and a good Dollar.

The New Client Loyalty Matrix

Plotting attitudinal loyalty and behavioural loyalty yields a New Client Loyalty Matrix:

So what are the strategic implications of this new Matrix? Here’s my initial list, but I’d welcome your thoughts and comments.

At a minimum, you should measure both dimensions of loyalty for all key clients. I think most firms will have reasonably good data on attitudinal loyalty, but many will just use historical financial performance at the indicator of behavioural loyalty. I’d argue that getting deeper insights into future behaviour and the true nature, degree and predictors of client commitment is a frontier few have forged.

Just measuring and focusing on NPS drives clients towards Quadrant VII. The goal should be to get your key clients towards Quadrant IX.

Most new clients start out in and around Quadrant V. It would be an interesting piece of analysis to track the progression of all new clients with say the first 18 months of being with the firm and see where they land up, AND WHY?

Most of your best referrers would be in Quadrant VII. It’s worth having another look at these and other fans with closed wallets and seeing whether there’s something the firm can offer them that would be of value. In other words, move them right on the Matrix. To illustrate this, one mid-tier accounting firm found that its traditional referrers were a happy hunting ground for the firm’s personal wealth management and SMSF services.

Your most vulnerable clients are those in Quadrants III and VI. They may be giving you most of their business at the moment but their heart’s not quite in it. Their spend with you might be as a result of a long-term contract or a company-wide directive such as global panel alignment. Relying on these type of arrangements for your client’s loyalty might have short-term benefits, but in my experience, it usually ends badly.

One needs to understand the specific drivers to get a client that’s in Quadrant V or VII and shift them over time to Quadrant IX. Providing great service, good value and being nice guys might get to Quadrant VIII but more structural or deeper strategic interventions would get you to IX. For example, negotiating some type of an incentivised retainer arrangement could get you there.

The best opportunities for growth will most likely will come from your competitors’ clients that are in Quadrants III and VI. Their behavioural loyalty to your competitor might be more to do with perceived switching costs than any other factor. If your offer includes paying for these switching costs then suddenly you’re in the game. As an example of this, one law firm got a prospect to switch by offering discounted “getting to know you rates” for the first three months of a relationship as recognition of these switching costs and to symbolise their willingness to invest in the relationship.

True commitment

In some industries, it is almost impossible to create truly committed clients. For example, servicing public sector organisations that are bound by strict probity requirements might make “Consider” the highest level of behavioural loyalty. I think the implications from the Matrix still hold up, you just need to adjust the scale to what’s possible.

Your call to action

Your immediate call to action is to take a fresh look at the questionnaires and discussion guides you are using to solicit feedback from your clients. Are they asking the right questions to adequately measure both attitudinal and behavioural loyalty? Are they providing insight into the things your firm needs to do to, the actions to be taken to get the client in or around Quadrant IX?

My other challenge to you is to plot all your firm’s top clients on the Matrix and stress test your whole client portfolio. Is it sustainable? Where are the points of vulnerability? What broader capabilities do you need to develop to get better at driving both types of client loyalty? What does your overall relationship capital base look like and what could you do to make it more valuable?

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A blog by Joel Barolsky of Barolsky Advisors

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