Source: Kazuki Yamamoto
Formulas, equations and rules of thumb continue to be a popular way to communicate important principles in leading and managing professional service firms. For your interest, here are the ones I use or refer to most often…
CHANGE
David Gleicher: D x V x F > R. D = level of dissatisfaction with the status quo. V = a vision of a future state i.e. clarity of what we’re moving to. F = first steps in a clear action plan. R = level of resistance to change. If R is more than the multiple of the other three, then no change. Click here for more. A graphical variation of this formula:
STRATEGY
A.G. Lafley and Roger Martin: Firm strategy = 5 questions – What are our winning aspirations? Where will we play? How will we win? What capabilities do we need? What systems and enablers are required? Click here for more.
Mehrdad Baghai et. al: McKinsey 3 growth horizons – concurrently manage both current and future opportunities for growth. Spend roughly 70% of your time on H1, 20% on H2 and 10% on H3. Click here for more.
George Beaton: Firms that fly = a shared vision + a strong culture based on shared values + shared power across the firm and key stakeholders + strong leadership and management to pull it all together and sustain it. Click here more.
Joel Barolsky: In the past… Firm Success = Ability x Stability (firms succeeded if they were competent practitioners and were able to keep the firm stable and collegiate). Over the past decade with the increase in client power and sophistication… Firm Success = Ability x Stability x Affinity (firms that have close trusting relationships with their clients outperform others). In a VUCA future… Firm Success = Ability x Stability x Affinity x Agility (firms that can make changes that add value quickly and efficiently will outperform others). Click here for more.
BUSINESS MODEL
David Maister: Profit per Partner = Leverage x Utilisation x Realisation x Blended Hourly Rate x Margin. Click here for more.
Ron Baker: Profit = Intellectual Capital x Effectiveness x Value-based Price. “Effectiveness” is a measure of the outcomes achieved for the client, not like the Maister equation which focuses on the cost of the inputs used to create the service. “Intellectual Capital” includes leveraging human capital, structural capital and social capital. Click here for more.
ORGANISATION DESIGN
Dunbar’s Rule: Our brains are only capable of sticking together within a community of around 150. Design organisations, offices, divisions, etc. with this number in mind. Click here for more.
REMUNERATION
J. Stacy Adams: People will trust a remuneration model when they perceive, [1] there is a sense of fairness of their contribution relative to their reward, AND [2] there is a sense of fairness of others’ contribution relative to the reward that others receive. Click here for more.
INDIVIDUAL PERFORMANCE
Mitchell and Porter: Performance = Motivation x Ability x Environment. Click here for more
David McClelland: Match jobs to an individual’s relative needs. People have three core needs, usually with different weights – Need for Achievement, Power and Affiliation. Achievement – the drive to excel, achieve in relation to a set of standards, strive to succeed. Power – the need to make others behave in a way that they would not have behaved otherwise. Affiliation – the desire for friendly and close interpersonal relationships. Click here for more.
Dan Pink: Drive = f(Purpose, Mastery, Autonomy). Click here for more.
STAFF TURNOVER AND PRODUCTIVITY
Mornell: If you make a mistake in hiring, and you recognise and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. Click here to read more.
Revenue per employee: In most industries, above-average firms produce revenue per employee that exceeds three times their average employee’s salary. Interestingly at Apple, it exceeds nine times. Click here to read more.
CLIENT RELATIONSHIPS
David Maister and Charlie Green: Trustworthiness = (Credibility + Reliability + Intimacy) / Self-orientation. Click here for more.
Joel Barolsky: Long-Term Relationships = (Understanding + Reliability + Value + Affinity) / Complacency. Click here for more.
Ford Harding: Geometric growth of social networks. With 90 strong connections in your personal network, you can make around 3,500 matches i.e. introduce one person to another for mutual benefit – see chart below. Click here for more.
SALES
Sales 101: Your Revenue = Number of Opportunities x Average Value x Overall Strike Rate. Click here for more.
Andrew Sobel: Number of Opportunities = Number of initial conversations you have or initiate x % that convert to a proposal. Click here for more.
McKinsey’s 2-4-8: Directors in McKinsey need to be working on 2 major assignments, be the process of proposing for 4 more, and in communication with 8 more prospective clients. Management within McKinsey follows up to ensure that 2-4-8 is a reality. Click here for more.
PRICING
The Discount Matrix: The amount of additional revenue required to make up for the lost profit as a result of a price discount:
SERVICE EXPERIENCE
Frederick Reichheld: Net Promoter Score = % Promotors (i.e. clients that score 10 or 9) – % Detractors (i.e. clients that score 1 to 6) on the question, “What’s the likelihood of recommending XYZ to a friend or a colleague?” Click here for more.
Customer Effort Score: “Firm XYZ made it easy for me to handle my issue!” (on a Strongly agree / disagree 7-point Likert scale. Click here for more.
What formulas or rules of thumb do you use? Please share using the comments feature…
Over the past 30 years, larger law firms in Australia have had to make only two major strategic decisions: [1] whether to become a national firm and how, and [2] whether to become an international firm and how?
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The strategy bit
account planning, Audit, business, business development, change management, client relationships, culture, growth, innovation, internal collaboration, key account management, marketing, pricing, strategy management
Transitioning your low-profit clients, aka saying 4Q to the Q4s
In Articles, Commentary on 11 May 2018 at 1:21 pm“Manage customers for profit, not just sales”, recommended Harvard’s Benson Shapiro in his famous HBR article way back in 1997. Three decades later, many law and accounting firms still haven’t got the message. Yes, revenue growth is really important in firms with high fixed-costs, but paying lip-service to client profitability is a major missed opportunity.
The Client Profit Matrix
Shapiro and his friends offered a useful tool to map your firm’s client portfolio. On the vertical dimension is relative price and on the horizontal is relative cost-to-serve, as illustrated below.
The Q1 Hi Price Hi Cost segment has those clients purchasing new-to-the-world offerings which require senior practitioner input and bespoke processes. It also includes those clients requesting full-service ‘turnkey’ solutions.
The Q2 Hi Price Low Cost segment includes those clients that think the best of you and that really value your services. Q2 also includes uninformed purchasers and unchallenging price-takers.
The Q3 Low Price and Low Cost segment are the bargain-hunters, no-frills and commodity buyers.
Q4 Low Price High Cost include those high-revenue (often labelled “strategic”) clients who leverage their bargaining power and demand value-adds, special services and reporting. It also includes the soul-destroying clients that require an inordinate amount of handholding. The third group, the ‘tail’, are very small clients that barely cover the costs of account establishment and maintenance.
The Power Axis and the Value Axis
Over time, Q4 clients are not sustainable. A special effort needs to made to move these clients closer to the value axis, the blue line in the chart where value is shared roughly equally in the exchange between the firm and the client.
The red line in the matrix is called the power axis. The part of the line in Q2 is where the firm has relative power over its client and bottom right Q4 where the client has more power than the firm.
Transitioning Q4 Clients
There are five broad strategies dealing with Q4 clients:
1. Reduce cost-to-serve – offer similar client benefits but deliver them at a much lower cost. This approach might include a combination of redesigning delivery processes, switching to lower cost resources, automation and cost-transfer i.e. get the client to do more. The banks’ strategy of shifting basic transactional banking services from retail branches to the web and smartphones is a brilliant example of this.
2. Service augmentation – create new higher value products and services and charge more for them. Part of this approach is to develop a deep understanding of which specific elements of value are important and tailor the offer accordingly (see this post for more). Branded technology companies are particularly adept at charging their customers premium prices for new models and inventions.
3. Unbundling – demarcating different product-markets along the value axis and negotiating different prices for each. The Big 4 accounting and consulting firms are quite adept at charging eye-watering hourly rates for their top corporate tax advisors while charging the same clients low fixed fees for commoditised compliance services.
4. Renegotiating – approaching the client with an open-book and requesting the relationship to be reset with a pricing and cost structure that’s fairer and more sustainable. There are many examples where new ‘co-created’ solutions yield better outcomes for both client and firm, but also strong incentives for long-term efficiency gains and innovation. The Perkins Cole-Adobe model is one recent example of this.
5. Say goodbye – if all else fails saying, “4Q” to Q4 clients is the best option. Retaining a value-destroying client over time is clearly not in the firm’s interest and walking away is the bravest and smartest thing to do. Gifting soul-destroying clients to your competitors can make you stronger and them weaker. There may be opportunities to transfer Tail clients to other providers better suited to meet their needs, in return for ‘right’ client referrals.
Client life cycles and migration paths
The Client Profit Matrix can also be a useful analytical tool to track client migration paths over time. One theory is that a typical client relationship will go from Q1 ==> Q2 ==> Q3 ==> Q4. At the early stages of a relationship, costs and price are higher as the parties get to know each other. As the relationship matures and other firms start to contest the client’s spend, prices start to drop. Over time, cost-to-serve rises as more bells and whistles are added.
Clearly, service innovation and better value communication are essential in slowing down this maturation cycle and keeping clients in the top-left of the matrix for longer.
The underlying intent of a ‘loss-leader’ strategy is to go quickly from Q3 ==> Q2 or Q1. It is interesting to track how many of the clients, in fact, make that move and what facilitates this migration. One recent example of this comes from Allens-Linklaters who acquired Canva via its low-cost, low-price online Accelerate platform. They recently reported helping Canva to grow to a $1 Billion market valuation.
Doing a longitudinal heat map of the Client Profit Matrix can be a very useful tool to track your firm’s overall strategic health. In the graphic below, one can clearly see the firm is losing ground and becoming weaker over time.
Call to action
Have a go at mapping your firm’s client portfolio. It will reveal your entrenched Q4s and force an honest strategic discussion as to which of the five transitioning strategies to pursue.
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