The Importance of Client Selection and Relationship Management
Nearly half of over 6,000+ small- and medium-sized practices (SMPs) from over 150 countries that responded to the 2018 IFAC Global SMP Survey identified pressure to lower fees as their top significant challenge. The IFAC Guide to Practice Management for Small- and Medium-Sized Practices provides comprehensive guidance to SMPs, including detailed material covering firm planning, how to grow, client relationship management and risk management.
This is the first of a three-part series addressing this critical area and covers client selection and agreeing terms of engagement, knowing your client and client classification. The second part will feature approaches to fee increases and value pricing and the third will highlight credit control, collection techniques and dealing with conflict. The articles are a result of discussions at recent IFAC’s SMP Committee meetings, which included practitioners from around the world sharing their perspectives and insights on client selection and relationship management.
The identification of what constitutes the “right client” will vary from firm to firm. A new firm will have a different screening process compared to a mature and established firm. In addition, not accepting a potential new client will often be based on current workload, location and competition. Selecting the “right” client at the outset is essential to the firm’s success, as well as for staff satisfaction and retention. Firms should have a formal process in place for the acceptance and continuation of clients.
There are firms which have strict criteria to judge potential new customers and see the opportunity cost of working for the “wrong” client as too high i.e. bad customers drive out good customers. As an example, Paul Kennedy in Transforming Your Practice for the Future notes how their firm is now very careful about who it works with, focusing on just owner-managers who are serious about their business and have control over their destiny. This approach resulted in the firm transitioning from 500 plus clients to 50 with total revenue actually increasing in subsequent years. Criteria for selecting new clients can include being in business for a period of time (e.g. 3 years), owner-managers that are open to advice and pleasant to deal with and a clear opportunity for the firm to add value to the business via forward looking services. This approach is fundamentally highly selective over which customers not to take on and engage. In recent years, the conversion rate of Paul’s firm from prospect to client is around one out of four or five referrals.
Client selection may also be motivated by a strategic decision. For example, a firm may accept a client based not only the fee, but because it provides an opportunity to enter a new market or to obtain specific knowledge. The matter of independence is also critical in the performance of services. Firms should approach instances of potential conflict in serving a particular client or industry with perceived risk and determine how those risks can be eliminated or reduced.
Engagement Terms and Conditions
One of the most important aspects of a professional relationship is a clear understanding of what the relationship is about; what specifically it is that the client has engaged the firm to do. The formal way of acknowledging this is in the form of an engagement letter, or engagement document. This is where the firm provides a formal, written understanding of what the client is seeking and also outlines the terms and conditions of trade. It is important not to overlook the benefits of a proper engagement letter as it will help the firm during the relationship and also, if necessary, when ending it. In some jurisdictions an engagement letter is mandatory but if it is not then it is certainly good practice.
Such a letter confirms the arrangement—or provides the opportunity to clarify any uncertainties—which may exist between the client and the firm. It goes a long way toward avoiding client disputes, as the terms of the engagement are clearly stated up front in a clear and explicit manner. It is in the interests of both the client and the firm that this occurs, preferably before the engagement commences, to avoid misunderstandings with respect to the engagement.
Examples of the types of matters to include in an engagement letter, include:
- Purpose: The engagement document should explain that its purpose is to set out and confirm the understanding of the practitioner of the terms of the engagement.
- Objectives of the engagement: A brief summary of the objectives of the engagement, including reference to the fact that procedures performed will be limited exclusively to those related to the engagement.
- Scope of the engagement: Pertinent details of matters such as: time period covered, period of appointment and time schedules, references to any legislation and professional standards that may be relevant to the engagement and details of information to be provided by the client (and by when).
- Engagement output: Details of reports or other anticipated outputs, including: expected timing, intended use and distribution of reports and nature of any anticipated disclaimer or arrangement that limits the liability of the practitioner.
- Fees and billing arrangements: Reference to the basis of fees (e.g., time-based billing, fixed price contracts, contingent fee arrangements or other similar agreement). Details of agreed-upon billing schedules should also be included.
Review and Re-Engagement
Firms should understand of the importance of reviewing their client relationships to ensure that they are satisfied with the service they currently receive. This also provides the client with the opportunity to offer feedback, if needed, on how the firm can improve its services. In addition, it provides the practitioner with the opportunity to discuss new or additional services that may be relevant to the client.
In light of this, the firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements. These should be designed to provide reasonable assurance that the firm will only undertake or continue relationships and engagements where it:
- Has considered the integrity of the client and does not have information that would lead it to conclude that the client lacks integrity;
- Is competent to perform the engagement and has the capabilities, time and resources to do so; and
- Can comply with ethical requirements.
The firm should obtain the information it considers necessary before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering accepting a new engagement with an existing client. Where issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, it should document how the issues were resolved.
With regard to the integrity of a client, matters which the firm should consider include, for example:
- The identity and business reputation of the client’s principal owners, key management, related parties and those charged with its governance. Specific requirements may be required by law in some jurisdictions.
- The nature of the client’s operations, including its business practices.
- Information concerning the attitude of the client’s principal owners, key management and those charged with its governance toward such matters as aggressive interpretation of tax regulations, accounting standards, and the internal control environment.
- Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
- Indications of an inappropriate limitation in the scope of work.
- Indications that the client might be involved in money laundering or other criminal activities. Very specific requirements may be required under Anti-Money Laundering or Counter Terrorism Financing Law (AML/CTF) in some jurisdictions.
- The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.
Knowing Your Client
“Knowing your client” certainly means understanding their business affairs. It’s also about understanding what motivates them, what their fears are, and why they do what they do. It’s valuable to understand what’s important to clients—their values and their core characteristics. It requires constant appraisal and monitoring. For example, it helps to understand the vision they have for their business, the financial and performance management, as well as if the entity is exploring the technology that is consistent with their operations, financial capability and needs. .
Establishing a deeper client relationship makes good commercial sense. In the majority of situations, the costs are far less to retain a client than they are to acquire a new one. In addition, getting to know clients:
- Builds a closer relationship;
- Strengthens the firm position as the clients “trusted business adviser”;
- Means that price becomes less of an issue;
- Increases client loyalty, which means clients will be less interested in approaches from competitors;
- Increases client retention, and therefore profitability and value of the firm;
- Increases staff satisfaction, as they also build relationships with clients;
- Increases efficiencies: the firm and its clients know each other’s systems and methods and how to work together; and
- Tends to be more professionally satisfying.
One of the key elements in client relationship management is continual focus on the client.
The reality for most firms is that the relationship they have with their clients varies. Firms may provide the same professional services, such as an audit or tax return preparation, to many clients, but the relationship differs from client to client. This is because it is people who run each business, and people are different wherever you go.
It is important to understand how clients interact with the firm and just what the client relationship is based on. One effective way to do this is to classify clients. This allows an assessment of which clients have a strong relationship with the firm, and which do not. It also provides insights on where resources should be allocated and if there are any areas requiring special attention.
There are many ways to classify clients. Questions to ask include:
- How much time does the client spend with the firm?
- How many services do they currently utilize?
- Do they pay the bills on time?
- Do they dispute or argue over fees?
- Does the firm make a good recovery on the fees?
- Can the firm add further value to their business?
While the primary motivation is to deliver high quality services to clients, basic business principles must also be applied to guarantee a long and viable future for the firm. The price should be set to reflect the cost structure and deliver a suitable profit for the time and investment by the partners and staff. It should be clearly communicated to clients how, and when, they will be invoiced and that they are expected to pay promptly.
The client classification exercise may also allow the firm to consider special pricing arrangements. These may apply in different circumstances. Preferential pricing may be considered for clients who utilize a large number of services. This may enhance the client relationship and show loyalty and appreciation to the client for their support of the firm e.g. by providing lower prices in some areas.
Preferential pricing may also be considered for clients as an incentive or inducement to increase the number of services they utilize. For example, a firm could offer 10% off fees on the additional service in the first year of use.
Firms that go to the effort to rank their clients often do so on the basis of the fees the clients pay. This is one important indicator; however, remember to also use some “non-monetary” criteria, as the firm deals with clients on many levels.
It is important to share this information with all the employees in the firm so that they know where clients sit in the firm rankings. This will help them deliver the appropriate level of client care and support. It will also keep them alert to the opportunity to up-sell and cross-sell additional services to those clients who utilize a lower number of services.
The Global Knowledge Gateway includes a number of other articles, videos, and resources on these topics, including:
- Three Ways to Effectively Manage Fee Pressure
- Transforming Challenges into Opportunities: Fees Pressure
- Transforming Challenges into Opportunities: Competition
- Your Brand has Value, Time to realize its Tangible Benefits!
- Communicating Value and Quality with Price