How often in our busy working lives do we hear colleagues, clients or business contacts refer to the “80/20 Rule”, also known as the Pareto principle? While people often quote that 80% of new business comes from 20% of marketing expenditure or that 80% of a firm’s profits derive from just 20% of its clients, how many use this wisdom to nurture the most profitable clients and focus their attentions on securing more clients of the same ilk?
The reason legal practices continue to push time, effort, resources and money into the 80% of clients that produce only 20% of the profits rests with you and your fellow partners (although you may be more enlightened as a reader of Managing for Success)! How often have you heard a client partner justify the retention of a client who demands the world in terms of service and delivery, quibbles about every fee raised, takes an age to pay for your good work and is a Professional Indemnity (PI) case waiting to happen? The fact that there is an infinitesimal chance of that client referring some decent work to your practice in 20 years time does not make up for the fact that the resources subsumed by him could be targeted at a more financially rewarding client!
And what is quite often missed is the de-motivational effect on your highly professional and well trained staff of dealing with someone who they know has by far the upper hand in their particular commercial relationship with you.
Solving the conundrum
Vantis has developed a review of legal practice performance called “Top Line, Bottom Line” which has proven an effective tool in enhancing the profitability of both clients and non clients. One of the elements of the review is a client evaluation module which looks at the practical steps a practice can take to improve the quality of their client base and therefore profitability.
Of course, it all starts with the appointment of a champion to drive the initiative through against what may be a reticent and distrusting client partner audience. The champion needs to be fairly senior within the firm, authoritative, and able to take a balanced commercial judgement on which clients should be retained and those that should not. The review concentrates on two areas. Firstly, on client acceptance procedures, and secondly, on a review of the existing client base.
Client acceptance procedures
Why take on more of that 80% proportion of clients in the chase for turnover when you could be attempting to attract more of the top 20% who are going to reward you better for your work. Your champion needs to consider the following if he or she is going to achieve success and boost margins:
- A review of the firm’s marketing strategy to ensure that it is directed to the clients that you want, not simply those that happen across you. Why advertise in Yellow Pages if your practice deals with company commercial work which is often derived through recommendations?
Analyse your client wins, determine the sources of generation of those new clients within your target audience and devote more marketing and PR resources to those areas.
Meet the potential client and get a feel for what motivates them and how they are likely to treat you. If the vibes are bad you can decline the instruction and your partners should not chastise you for it.
Ensure the right person is dealing with the initial client enquiry. How often is work taken on at too low a price because the assessment of the original requirement was incorrect?
Have a definitive set of templates for providing quotes to your new clients. Be explicit at the outset as to what is included in the quote and what is not and you will flush out those looking for a bargain (hopefully at your competitors’ expense) and reduce the possibility of having a time consuming disagreement over fees at a later date.
Ask for payment on account of costs. There is nothing like seeing the colour of a client’s money to know if they are serious or not and the results may surprise you. We at Vantis were recently instructed to deal with the sale of a longstanding client’s business, the instruction being very heavy on expensive time commitment from day one. We requested a £10,000 payment on account (from the directors personally, given the nature of the work) and this sum was gratefully sent over within a matter of days.
Existing client review
Clients can be reviewed in a number of ways but the rational is generally the same:
- The champion, managing partner or management committee should determine a set of criteria for the assessment of each client.
If possible, your operating system could be programmed to run a report categorising each client based on the criteria you have set. If this cannot be done a report will need to be manually constructed.
The champion then reviews the client categorisations with each client partner to consider the results on a line by line basis and determine what actions are required. These actions can be positive as well as merely reverting to discouraging the client. A little more investment of time with a client that, say, is categorised as a C client on an A to E grading system may well move them up the chain to become a B or even an A client.
A continued monitoring and support system needs to be introduced so that client partners are not left to manage the ongoing process by themselves. Support may be required from a professional point of view, in terms of marketing or PR, standardisations of procedures or methods of communication. The project champion is in a perfect position to assess the practice’s overall need to manage clients more effectively through their dialogue with client partners and will be able to recommend and implement changes to see through potential improvements.
As to the criteria for determining which client is grade A and which is grade E, the criteria should be set according to the characteristics of your firm, and can be financial or non-financial. In our ‘‘Top Line, Bottom Line’’ review we talk to client partners to assess their clients using the following criteria:
- The client’s potential for growth
- The nature of work undertaken
- Debtor days
- The client’s reaction to fee quotes and billed costs
- The number of actual recommendations received
- An assessment of the PI risk
- An assessment of the client’s own commercial risk.
In some practices, where perhaps there is more management information available, the client review may focus on the following financial criteria:
- Average charge rate per hour delivered to the client
- Percentage work in progress recovery
- Lock up days
- Fee quantum.
There is no right or wrong method of reviewing a client, and there will always be exceptions to the rule. However, with drive and determination from the top, the commercial benefit is there for all of your partners to enjoy and will help them get somewhere towards the utopia of dealing solely with interesting work for good clients prepared to pay for all of your time within reasonable settlement terms!
For further information, please contact Nick Paterno or complete the online form below.