Beneficial Assets: Rewarding Client Relationship

Key to the context for managing client relationships within a partnership is the concept of viewing clients as assets - taking a harder view of clients in terms an auditor of assets might find familiar. We previously examined a handy mnemonic, COD-VERB, our fisherman's friend. COD-VERB encapsulates the seven vital pieces of evidence for assessing any significant asset - cost, ownership, disclosure, value, existence, responsibility and benefit. The two preceding articles took a more detailed look at value and responsibility. This article examines the vital evidence of benefit. We will look at measuring benefits coming in and sharing the benefits which arrive.

Benefits in Kind

'Benefit' is not just income. Benefits include anything which enhances well-being or advantage. Clearly, income is one key benefit. Arguably, income, from whatever source, is the ultimate benefit, however legitimate benefits have variety. Other benefit types can include reputation-enhancement, referrals, supplier discounts, and reduced bid costs or staff motivation. In our experience, the value of other benefit types can fluctuate wildly, so wildly that they need strict control. For instance, some firms control discounts by insisting that only the managing partner can approve a discount as a trade-off with a 'soft' benefit such as a good name on the client list. Benefits other than cash need control or firms can rapidly lose control of income - despite a stream of prestigious 'wins' the firm is a loser.

For anyone in a partnership, the following example may be scarily familiar. The thought leaders in a mid-range accountancy firm wanted to compete with the Big 5, rather than serve their profitable SME market well. Numerous workshops with partners indicated an immense inferiority complex which could only be solved by gaining a FTSE 250 client audit. Not wishing to square up to a world where they were unlikely to gain a FTSE 250 client - or even if successful in that, not likely to be able to compete with the Big 5 - the best and the brightest began a campaign to get into the FTSE 250. The programme had some insidious effects.

In order to move up the league table, the best and the brightest came off the firm's core business to focus on the campaign. Naturally (in their view), the campaign involved significant discounting on audit to get the attention of potential targets. The 'marzipan layer', the professionals just off partner who make most firms profitable, learned a valuable lesson - to get ahead here you don't need to be profitable, just get a FTSE 250 client. Ultimately, two FTSE 250 clients took the bait. Two partnerships flowed from these successes, despite the lack of profitability on the clients. "These recent wins show that our firm is in the top rank of service quality". By now, firm profitability was dropping. The SME marketing message was now hopelessly confused and income in that sector began to drop. Partners who serviced SME clients well were being poached or leaving of their own accord in order to get the income they felt they deserved, rather than subsidising some vanity clients and overblown marketing efforts. The FTSE 250 clients appreciated the personal touch, but soon left because the firm was incapable of servicing their international requirements. Ultimately, the firm was forced into a merger on poor terms.

Mistakes can also happen as a result of overly focusing on the bottom line. We advised a law firm where its litigation department had had two very good years. Consequently a batch of new partners had been made in the department and after a year or so the profitability of the department had dived. The increased profitability of the litigation department had been due to the clients of the firm's banking department because of skilful relationship management of a few clients by banking partners. It had absolutely nothing to do with, as was claimed, the 'generalist skills of our litigators'. Perhaps the new litigation partners could over time be depended on to drum up new clients as well as new work and could depend on the recent growth in work. The result was a renewed focus on the profitable relationships and a concentration on the banking industry - though because of current overcapacity it may take several years to undo the damage to partner drawings. Reference to a firm's markets and its client base as well as its financials makes for more realistic decisions.

There are a number of lessons in these examples, including 'market to today's customer well, rather than tomorrow's'. However, the lesson about benefits is that we must move to direct monetary measurement of the benefit as soon as possible. Perhaps the accounting firm could have lost money on the FTSE 250 clients but still made money through exploiting the relationships. Stricter measurement might have ensured that this was the focus of the partnership rewards, not just a couple of quasi-blue chip names. There are many potential intangible benefits from almost any client relationship. We are not trying to say they don't exist. We're trying to point out that they will remain intangible unless people are measured on turning them into cash benefits. One managing partner we know has said, "I don't need more than two columns of recognisable client names for the brochure. I don't care how blue chip they are. I do need profits for my partners."

A significant amount of work is required to develop a measurement system that balances some of these tensions and leads to informed decisions. Getting the measurements right helps to focus minds on how to achieve income from relationships that per se are not sufficiently profitable. For instance, can we get a key client to refer us actively? Will they introduce us to their customers? Who in their industry will genuinely be more interested in us because we work with them? If we can't get these benefits, how are we going to get more income from them?

Spreading the Benefits

The other side to benefits in client relationship management is spreading them around the firm. Too often, the genuine contributors to the firm are not given recognition. While the communications machinery trumpets the greater glory of the professional who presented the winning pitch, how much of the machinery is devoted to trumpeting the achievements of a manager who trebles the size of the fees? In one firm this disparity only became clear after several years of faulty appraisals.

In this firm, utilisation was a key factor in appraisals. While using utilisation by itself for appraisals is flawed, frequently a lazy person's surrogate for income - amongst other things - this firm persisted. At year-end, each professional was listed in order of utilisation on the simple premise that high utilisation indicated good staff performance and low utilisation indicated poor performance. Interestingly, the partners frequently thought poorly of the highly utilised staff. They turned out too often to be timeservers who had got lucky or replaced a star performer after the client had been settled in. On the other hand, lower utilised staff were often well thought of by the partners. In most cases they had been put on to tough marketing pitches which had low hit rates, but everyone agreed that they had done sterling work. As for the middle sector of utilisation, well it seemed quite meaningless if no one could determine which way was up in performance. Again, staff rapidly gained an understanding that taking risks helping out in marketing often didn't produce as much career result as putting hours in on average clients. What needed to be added to utilisation as a performance measure was 'desirability'. The system for booking staff was beefed up, given teeth and measured. For the first time the firm had an indicator of how much partners desired certain staff for work, particularly marketing work which hurt utilisation. The new performance measure combined desirability with utilisation. Being sought after for marketing became career-enhancing.

Without measuring benefits received from clients, not just fixed pitch wins, and then using further measures to share those benefits with the partners and staff who generated them, marketing is doomed to fail. Despite years of experimentation with other systems, commercial firms return time and time again to commissions for the sales force. Professional firms are different. Above a certain level of income, professionals will still work long hours for more complex reasons than pure financial return. Nevertheless, as people they need to see some returns on their efforts fairly directly. Without a system to measure and share those returns, the managing partner isn't managing the most fundamental feedback loop in the firm - the cycle that motivates the stars to bring in the income.

Robert Pay is the managing director at business development consultancy Jaffe Associates.

Michael Mainelli is a director of Z/Yen Limited, a risk/reward management firm and non-executive chairman of Jaffe Associates.

[A version of this article originally appeared as "Opinion: Beneficial Assets: Rewarding Client Relationship", Managing Partners’ Forum, Number 21, (November/December 1999) pages 2-3.]