I recently wrote an article for the Illinois Society of CPAs on the topic of “D” clients. Don’t mistake this post as being tone-deaf to the current crisis – this is applicable in both good times and bad.
As a growth consultant, it’s not often that you will hear me talk about walking away from business, but if you are serving too many C-, D-, and even F-grade clients at the expense of your A- and B-grade clients, that’s when the warning bell rings. If your time is consumed with smaller, fee-sensitive, low realization work, that means that your larger, non-fee-sensitive, high realization clients aren’t getting the attention they deserve. While it may still seem counterintuitive to shed clients when you’re trying to grow your business, there are times when firing clients actually facilitates faster and greater growth.
When I speak to partners about best practices in firing clients, I commonly hear comments like, “We aren’t afraid of firing clients,” or, “We fire bad clients all the time.” However, a light probe of these statements generally reveals that these were extreme cases where clients acted unethically or treated staff poorly. Though that’s certainly a good reason to fire a client, it’s not the concept we are exploring today. Having a comprehensive client evaluation program is about much more than getting rid of a few bad apples.
Why is this so important today? First, it’s incredibly difficult to find and keep great staff in today’s job market. When you build a strong team, you want them working on top-tier clients, period. Next, your firm is not the same as it was five years ago. Your larger clients have gotten bigger, while others have largely stayed the same. At some point, you will have upskilled your talent and firm to service those larger accounts, leaving the smaller accounts that haven’t kept up their growth to drag down your profitability and growth. Third, compression of the tax season is a common reason why some firms finally shed smaller and one-off clients. Serving a high volume of low-value clients is simply not the way a modern CPA firm can survive. Finally, profitability at our firms has been in a vise the last several years; technology, personnel, and overhead expenses are growing faster than revenue in many cases. You simply cannot afford to serve highly price-sensitive clients that generate huge write-offs while hoping to grow your bottom line.
So, what does a comprehensive client grading program look like? It’s a simple matrix that allows you to assess the quality of your client relationships. You will want to consider the following aspects for each of your client relationships:
1. Fees: Does the client meet the minimum fee threshold set by your firm? If you don’t have a minimum fee, perhaps you have been increasing your starting fee over the years and some clients have never caught up.
2. Realization & Payment History: Are you making a minimum of 80 percent realization on the client? The average realization rate for firms hovers around 85-90 percent. Do they pay on time or are they often beyond (or way beyond) your terms?
3. Number of Services Utilized: Is this a tax return-only client or audit-only client, or do they also buy other services like tax planning, business valuation, consulting, etc.? Statistics show that clients who buy only one service have much lower long-term retention rates than clients who buy multiple services.
4. Growth Trends: Is this client growing, maturing, or declining? The economic phase of the client can give clues to their future profitability and retention.
5. Referral Power: Does this client serve as a conduit to other connections and clients? Are they making introductions and referrals for you? A client that helps you make connections and makes referrals for you is extremely valuable.
6. Ease of Working Relationship: Does the client treat your staff well and avoid pushing ethical boundaries? Are they pleasant to work with? If not, your staff will not like interacting with these clients and over time you may lose valuable employees.
You will note that the first three criteria for evaluation are largely objective, while the last three criteria are more subjective. That means no matter how scientific you want to be, you will never fully remove emotion and subjectivity from your client evaluation process. But, overall, this type of evaluation will give you a good idea as to which clients should be fired.
A good target to consider is 10 percent forced attrition per year, meaning cull the bottom 10 percent of your client base annually. Realistically, though, you can expect a strong argument from your partners against firing low-grade clients, as some of these clients are bound to be friends, relatives, and long-term relationships that escape the rationale of this kind of an exercise.
When you consider all the reasons why firing clients makes sense, you may be nodding yes more than you are nodding no. Just remember that every dollar of revenue is not created equally, and the dollars earned from serving low-grade clients at the expense of your high-grade clients may well not be worth it.
