Optimising Client Profitability for Professional Services firms

These are challenging times. We have economic turbulence, hyper competition, falling revenues and clients expectation for more for less but quicker.

Optimising Client Profitability for Professional Services firms

The response to this has been to reduce costs as hard and as quickly as possible including letting go a lot of the less experienced fee earners. The end result being that now that the clients want more work done for less, we no longer have the less experienced (cheaper) resources available, in some cases we have partners doing the work that was previously done by an associate or solicitor. These new challenges along with two old ones, namely discounts and productivity/efficiency has made it extremely difficult to improve profitability. In this article we are going to look at Five Steps to Optimising Client Profitability. I am ignoring the obvious continual monitoring and controlling of costs and focusing what you need to do to squeeze more profits out of existing revenues and making the business sweat.

“Clients are looking for more to be done, quicker and for less.”

Managing Partner

The 5 Step Plan to increase profit

Step 1 Identify with client are profitable
Step 2 Work on the profitable clients
Step 3 Get the right people doing the right work
Step 4 Control and monitor discounts 2
Step 5 Address efficiency / productivity

“We are retaining some clients by agreeing to a 50% reduction in Fees but how do we make a profit on these clients when we have reduced our cheaper level resource or partners are not passing the work down the line.”

Finance Director

Example of Impact of the Five step plan

ExampleScenario AScenario B
Fees (100% recovery @ Std Rte) 100100100
Discount applied -10-50
A – discount reduced to 5%, realisation increased to 95%
B – discount reduced to 0%, realisation increased to 100%
100% increase in Profit200% increase in Profit

Step 1 – Identify which Clients are profitable

The first thing to do is to identify which clients are profitable; typically 80% of profits come from between 10 and 20 % of the clients. It is important to note that client profitability is not a split by client of the firm’s profit. it is a separate calculation which is relatively easy to calculate, there are any number of ways to calculate this, it doesn’t really matter which way you use as long as you apply it consistently.

Step 2 – Work on Clients which are profitable

Make sure you allocate your resources to profitable clients.
As resources get tight with limited amount of cheaper resource available it makes sense to ensure the work you do focus on is profitable work. You can significantly increase you profitability by choosing to work on the more profitable clients.

Step 3 – Ensure the right people are doing the right work

Having identified your profitable and unprofitable clients you can now look to address the unprofitability. What we have seen over last two years is that people are holding on to work and not passing it down the line to the correct level. A practice areas leverage may be 5 to 1 in body count but if you calculate leverage by the amount of non partner to partner hours worked on a client, it has dropped in some cases to as low as 1 to 1. If the partner holds on to the work as it comes in you will find it difficult to make any profit on the client and your standard measures will show that the cheaper resources are not busy (but the partner is) the wrong decision is often made to cut the cheaper resource thereby entering into an ever decreasing circle of reducing profitability.

Step 4 – Discounts, who is getting them and who deserves them

This is an old issue, some partners discount their rate even if the client hasn’t asked for one or discounts are applied to clients upfront on the basis that there will be a volume increase in the work with the client, this often never materialises. It is important to note a 10% discount on your rate could equate to as much as 30% of your profit. Discounts should not be given as a matter of course and where a client insists there will be high volume then agree a scale of discount based on the volume, e.g. 1st €100k at 0% discount, €101k to €250k at 5% and > €250k at 10%. We have seen some clients profit double as a result of better management of discounts, a firm made €10k profit on €100k of fees having applied a 10% discount. To double this client’s profit you either need to double the amount of work from them (which is extremely difficult) or remove/reduce the discount, you can soften the discussion around discounts by combining it with step 3 and step 5, thereby reducing the overall cost to the client while increasing your profitability.

Step 5 – Productivity/efficiency – work smarter not harder

There are a whole range of tools available that will help improve productivity/efficiency from improved time capture to automated processes. The key is to acknowledge that some parts of the business are transactional or process driven, this must be monitored and addressed to improve realisation / recovery rates. E.g. you make €10k profit from €100k of fees which took €110k worth of time; our realisation/recovery rate here is 91%. Increasing you realisation/recovery will significantly improve your profitability as it goes straight onto the bottom line.

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By Declan Tyrrell | Sales Coach & Facilitator

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