Making money in today's competitive environment for clients and professional staff requires a different approach. During the last year, my consulting has focused more on serving fewer clients and measuring client profitability than on expanding practices. This may sound like a crazy idea. Haven't we always thought that if we were not growing we were dying?

There are many successful accounting firms that have built their practices by aggressive marketing, client service and work product quality. These firms also believed that they could serve any client and do everything for all clients. They also rewarded partners for bringing in new business.

The problem was that not many firms paid much attention to whether the new work was profitable or not. While this strategy worked for many firms in the 1980s and 1990s, it doesn't work as well today.

Serve fewer clients

This may sound like heresy, but firms need to get away from the emphasis on revenue growth. Remember the old English rhyme - "Revenue is vanity, margin is sanity, but cash is king." The emphasis on top-line growth does little to build client satisfaction or loyalty. If your vision is on top-line growth, your only concern, as a rainmaker, is to get the next client - profitable or not. We all know of firms that have a revolving door policy for clients - in the front door and out the back.

To be successful today, firms must serve fewer, more profitable clients and develop deeper relationships with them. Clients know they have many choices when it comes to working with professional advisors. Do you know why your clients stay with you? You need to find out why your most profitable clients stay and then focus your firm's efforts to satisfy those clients. But do you know who the most profitable clients are?

When staff was abundant and firms could hire staff by paying a reasonable compensation, firms did not have to pay too much attention to individual client profitability. Since the problem of finding qualified people is not going to go away any time in the near future, the above strategy of serving fewer clients puts all your human resources to better use.

Rather than spending your marketing dollars on bringing in more business, they can now be spent on understanding current client needs better, providing a higher level of service and generating more loyal clients. Marketing can now spend more time helping identify new services for the existing clients.

Focus on profits

It seems strange, but part of the failure to focus on more profitable customers comes from inadequate accounting. While most accounting firms measure realization by client, they fail to measure profitability. Some firms measure the gross profit they are generating from each client, but they stop there, failing to take into consideration the costs that occur after gross margin.

The resources that it takes to sell, administer and service clients makes the issue of real profitability more complicated. For example, consider the corporate client with a relatively small level of sales but a healthy gross margin in both percentage and absolute terms. This client uses the firm for a lot of small projects, always calls at the last minute and expects delivery yesterday. On top of this, the client stretches payment terms to 120 days or more. This may not be a truly profitable customer.

On the other hand, you may have a client who only uses your services once a year, and has a gross margin that is relatively lower as a percentage of revenue. This client generates only one invoice, pays in a timely manner and gives you plenty of notice when he needs your services. Which one is the more profitable and desirable client?

Without knowing the costs that occur after gross margin, one cannot answer the question. However, it is a question that is too infrequently asked.

What to do

The first thing a firm needs to do is to determine the profitability of each client. It can then tier its clients by different profitability levels. Take the top 10 percent to 20 percent of your most profitable clients. What do they have in common - e.g., service requirements, revenue, etc.? What types of products and services do they purchase? Are these clients more profitable because they are more loyal? Are they long-term clients, and therefore you don't spend a lot of marketing expenses on them?

Next, establish guidelines for accepting new clients and retaining existing clients. This should include not only profitability, but also opportunity for additional services to the client, engagement size, etc.

Third, end unprofitable client relationship after you have analyzed each client. If you do this, client turnover will decrease, additional value-added services will be provided to the clients you retain, and firm profits will continually improve. Partners will focus on those clients that have the greatest chance to be the most profitable.

This strategy will cause some pain to the existing organization. But is there any other choice? There can be only a handful of clients that fall below your target profitability. These may be exceptional referral sources. There is no other reason to keep unprofitable clients. The cost to the firm is just too great.

Managing partners must get their partners and all service providers to focus on the client's relationship and experiences with the firm. When a firm focuses on developing deeper relationships with its clients, it soon becomes evident that it can no longer serve with excellence all the clients it has.

August J. Aquila, Ph.D. is the director of management consulting for The Growth Partnership Inc., a full-service consulting firm to the accounting profession. Reach him at (952) 930-1295 or aaquila thegrowthpatnership.com.

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