Fishy Assets
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Fishy Assets
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© The Z/Yen Group of Companies 2008
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Robert
Pay, Jaffe Associates [A
version of this article originally appeared in “Fishy Assets” (estimating
client asset values), Managing Partners’ Forum Review, Number 19, pages
2-3, Professional Connections International (July/August 1999)]
Fishing
for Customers: Valuing them as Assets
Managing client relationships in a partnership has some interesting similarities
to managing fish stocks in a fishing zone.
Assets are useful or valuable qualities or things.
They require care and attention. Asset
value needs to be preserved and, where possible, enhanced. Fish stocks are
an asset. To give some examples,
fisherman can bid for quotas, exchange quotas, have overlapping fishing of
different stocks over the same ground and need to maintain their fishing assets.
There are some challenging implications from this simple association.
For any significant asset, an auditor expects seven typical pieces of
evidence - Cost, Ownership, Disclosure, Value, Existence, Responsibility and
Benefit. These pieces of evidence
produce the somewhat surreal, but relevant, mnemonic device, COD-VERB.
In client relationships, the relevance can be as follows:
An example from one accounting firm may help to illustrate the confusion.
The firm had a major television company audit on which it lost money
every year. The firm believed it
needed the television client's name to get other business in the media sector,
but could not show any increased work.
In fact, the firm had lost a few pitches to competitors because of potential
conflicts of interest. The
client saw the audit as a bit of under-priced work by a firm from whom the
client had no intention of buying other services.
The client was spending millions on advisory services from other large
accountancy practices. What was the
value of the client? Negative
value? Why were those responsible not changing or dropping the
relationship? Whose client was it
really - the auditors or the advisors? Was
it a client at all? Before the
legal profession gets too smug, it is easy to find analogous examples, e.g.
commercial departments overlooking large litigation opportunities.
COD-VERB, or "clients as assets", is a big concept with big rewards.
By viewing clients as assets owned by the firm, but managed by partners,
each partner begins to think like a fisherman.
What grounds should I bid for this season?
What type of fish should I catch? Should
I hand my unproductive clients to others who may have more interest?
What do my fellow partners expect me to deliver from my client base?
If this is going to be a bad year, what am I doing to replenish the
stocks in the portfolio? Each
element of the mnemonic is inter-related, without Costs then Benefits are
inaccurate, without Responsibility then Disclosure has no impact, etc.
The most difficult, but interesting starting point is possibly valuation,
on which we will focus for the rest of this article.
Valuation of clients is tricky, but certainly not as impossible as many firms
have claimed when we began working with them.
In fact, lifetime customer valuation is used intensively in some business
sectors.
The key objective is to analyse existing clients to work out a starting
valuation formula. The valuation
formula can be used by managing partners on the portfolios of clients for which
individual partners are responsible.
The resulting value is a target for the fees which the firm expects a partner to
generate from the portfolio of clients the firm has given him or her to fish or
which he or she should return. For
those of a religious mind, Matthew, 25: 14-30, the parable of the talents, shows
that this is not a modern idea: "For unto every one that hath shall be given,
and he shall have abundance: but from him that hath not shall be taken away even
that which he hath" (29). Developing a valuation formula begins with a simple tabulation of existing clients and their characteristics. Diagram 1 shows an easy starting point, fees and some of the possible fee factor determinants, size of client, number of employees, tax charges.
Things can get richer, for instance fees by type of work and large numbers of possible fee factors, perhaps as many as 30 or 40. Using some basic regression analysis, we normally find that three to five factors will explain over 80% of a client's billings, as illustrated in Diagram 2.
The results can be as straightforward as:
While the valuation formula will be inaccurate when applied to any specific
client, it can be used successfully to value the portfolio of an individual
partner.
A valuation formula can be used in at least three powerful ways:
More rewarding client relationships should arise from partners in the firm
finding the partner best suited to develop the client.
All too frequently, the client service partner is the partner who found
the client first or the partner who ‘inherited’ the client as a manager, with
little heed paid to who would best ‘fish’ within the client for the firm.
All too commonly, the client service partner does not wish to ‘rock the boat’ by
introducing risky new service areas.
Such client service partners destroy cross-selling initiatives within their
portfolio. By focusing on expected value, client service partners may
wish to give up clients whom they cannot develop or do not wish to develop.
In accountancy firms, this often means that the partner best placed to
develop the client in the interests of the firm is a consultancy or tax partner,
not an audit partner.
As a final example of usage, a valuation formula can be used to estimate the
potential value of a new prospect or set of prospects.
When bidding for an initial piece of work, partnerships often discount.
But discounting is frequently pointless if there is little further work
to gain. Using a valuation formula can help to assess the importance,
or insignificance, of a new, small piece of work.
Having won a new client with a small piece of work, the valuation
formula, combined with targets, ensures that the firm obtains the Benefit it
priced so aggressively to obtain.
By valuing clients, treating clients as assets (remember COD-VERB) and
integrating this type of approach within the partnership remuneration process,
managing partners can feel more comfortable that the correct decisions are being
made more regularly at the level in the firm where it will do the most good -
the client/partner interface. Michael Mainelli is a Director of Z/Yen Limited (www.zyen.com), the UK’s leading risk/reward management firm and non-executive Chairman of Jaffe Associates. Robert Pay is Managing Director of Jaffe Associates (www.get-serious.com), which provides sales, marketing and business improvement services to professional firms. |
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