Classifying Clients
It is worth reviewing the various metrics and analytical methods used by professional services firms to classify their Clients in order to gain a deeper understanding of where the firm's business is now and where it could go in the future. There are many classification options. These can inform a more strategic direction to be given to the firm's Client fee earning teams and supporting staff. This analysis helps to decide the focus and deployment of limited resources.
Metrics
When assembling a Client portfolio, it is important to have in place the appropriate KPIs. Professional services firms use a wide variety of these measures to monitor their ongoing performance. They include:
• share of Client spend - the proportion gained by the firm;
• gross margin - by Client, sector, office, etc.;
• services provided - the extent of cross-selling;
• referral value - the value attributable to reported referrals;
• overall market share in a particular sector;
• income growth by sector.
The Client portfolio can then be evaluated and flexed according to the financial needs of the firm.
Client analysis
Ways of classifying Clients for focus
We will look at three classification methods here:
• Fee income level.
• Strategic.
• Opportunistic.
Fee income level
This is the most common method of classification. Many firms stratify their Clients by fee revenue, putting them into categories such as' Crown Jewels', Gold, Silver and Bronze; major, premier or key Clients, and so on. Others look at Client profitability at the gross margin level, and devise appropriate development strategies. Such approaches appear quite logical, however it is best not to distinguish between the level of care attributable to different sizes of Client - after all, in due time, a Bronze Client could become a Gold one! Of course, the resourcing of higher income level Clients is likely to be greater than lower income ones but should pay off in the longer term. Hence some firms decide on a 'premium' level of service for their top 50 Clients. The downside of this approach is that the smaller Clients may feel neglected.
Some firms use the concept of Client Lifetime Value (CLV) to assess the potential fee income level of a Client and the likelihood of a relationship continuing. This also allows better planning on investment in Client relationships and is considered a good basis for decisions about the content of a Client portfolio.
To calculate the gross CLV take the average annual fee earned from all Clients and multiply this by the expected duration (lifetime) of the Client relationship in years. To calculate the net CLV estimate the average annual cost of serving a Client and deduct this from the gross figure.
EXAMPLE CALCULATION OF CLIENT LIFETIME VALUE.
Let us suppose that your firm has 200 Clients generating an annual fee income of £ 10m. On examining your data you discover that the average Client engagement is 5 years and the servicing cost per Client is around 20 per cent of fees per year.
Average fee = £10,000,000 1200 = £50,000
Gross Lifetime Value = £50,000x5 = £250,000
Servicing cost = £50,000 x 20% x5 = £50,000
Net Lifetime Value per Client = £250,000 - £50,000 = £200.000
Some firms also factor in an annual Client churn rate, based on Client retention. This reduces the CLV.
Strategic
Another approach to distinguishing which Clients to service is to consider their 'fit' with the firm's strategy. Some firms choose to group their Clients by size. For example, if the firm aims to service large corporate entities, such Clients as blue-chip companies would be considered strategic. International Clients could also be considered as strategic.
If the firm has decided to focus on specific industrial sectors or geographical area, those Clients would be considered strategic. Having a strategic approach to markets enables the firm's marketing and BD teams to direct their activities and energies towards defined, targeted, potentially lucrative Clients. Some firms call these 'core' Clients and will do almost anything to retain them, aiming to achieve a minimum level of profitability. Strategic Clients are those that a firm will do almost anything for in order to retain their business.
Opportunistic
Occasionally, some Clients just contact the firm for advice 'out of the blue' and decide to engage them. These Clients can be quite lucrative and may provide single assignments or ongoing fee-earning possibilities. Many firms consider these Clients as opportunistic and will try to fit them into one of the other selection categories at some point in time, given that there is a strategic fit.
Of course, it is worth the time taken to investigate the source of the lead, as it could be through a referral.
