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Is profit more important than customer service?

by
23rd Jul 2018
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Last week, business guru Mark Telford published an article provocatively suggesting that profit is more important than customer (why not client?) service.

It must be emphasised that Mr Telford was directing this at sole practitioners setting up for the first time, rather than the generality of accountants (or for that matter other traders) who may have long established businesses.

I can fully understand his proposition when it is applied to somebody desperately trying to get on the bottom rung of a very long ladder, where failure to bring in a decent cash flow could mean instant insolvency.

However, from long experience, the primary reasons that clients leave their trusted advisers are excessive fees (a strong indicator of putting profitability first) and poor client service (a strong indicator of putting profitability first). Unless they disagree with this generally accepted data, confirmed Telfordites might wish to rethink this business strategy.

As a newly established sole practitioner, your first goal will inevitably be to bring in enough clients to pay the bills and in the fullness of time fund a desirable lifestyle. Since you have no track record (at least in your current business) it will be tough to sell yourself on the back of superb client service, which can be no more than a promise. Instead, you may feel that there is little choice but to grab whatever is on offer and squeeze the clients until they start to protest. I can understand this and it is a natural reaction. However, at the first hint of a problem or an approach from a competitor those clients will be desperate to move on.

Looking at the opposite end of the scale, a typical Big Four business model is often perceived to be to lowball your way into a client and then find every excuse for getting back the under recoveries on the loss leader by charging through the nose for everything else. That is fine if you have a quasi-monopoly position as part of a very small cartel.

Most of us are not in that fortunate position. Therefore if we rip off clients, we must expect them to become ex-clients very quickly, even if we make a bit of a killing in the very short term.

However, for the most part, accountants do not go to the trouble of setting up practices for short-term gain. The way to get rich is to build practices by signing up growing businesses that may not prove too lucrative in the early years but deliver a fantastic payoff to trusted advisers who have supported them along the way when they prosper or sell out.

Another benefit of treating clients well is that your life will be much pleasanter. Arguing over fees with angry clients rather than having pleasant conversations with those that have practically become friends does not seem to me like the best way to enjoy the working day.

Briefly taking readers away from the world of accountancy (if they can bear it), I always try to buy things from John Lewis. That is because they provide exceptional customer service and are never knowingly undersold, where most of their rivals seem eager to treat me like dirt given any opportunity to do so.

Finally, never forget that you can build a bad reputation in minutes but it will then take years to recover.

Perhaps I am an exception to the rules that Mr Telford and the rest of the world subscribe to but if you want a long and satisfying career in the profession, take his advice for one to two years but then to a swift about turn.

Replies (19)

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Tornado
By Tornado
23rd Jul 2018 09:38

I agree with everything you say.

I was going to say something myself but there were a few jobs to deal with urgently and although I did a bit more work than I will get paid for, my client was delighted and that is important to retain them as a client.

I have clients who have been with this firm for over 60 years, through several generations, so I must be doing something right.

A Solicitor once moaned to to about how lucky Accountants are as the work comes back each year indefinitely whereas Solicitors generally get one-off work. This is correct to a certain extent, but those clients will only stay with you if you give them a good, reliable and reasonably priced service.

Thanks (3)
Teignmouth
By Paul Scholes
23rd Jul 2018 10:13

The worst thing about Mark's article was the awful title in that he went on to describe how you must get a balance between client service and the fees you charge, he says upfront:

"Yes, you should provide a good service, charge reasonable fees, be straightforward and honest when you speak to clients and they will refer work to you and stay with you for years to come."

He was warning against the risk of providing clients with the sort of attention you'll find difficult to maintain longer term. That was a risk I faced my whole career.

A better title would have been; Customer care and satisfaction is prime, but so is the need to make a living from it.

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Replying to Paul Scholes:
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By Maslins
24th Jul 2018 12:05

Paul Scholes wrote:

A better title would have been; Customer care and satisfaction is prime, but so is the need to make a living from it.

A more accurate title perhaps, but not a better one. It's clickbait. People are far more likely to click a link to read an article with an outrageous title.

Thanks (3)
Glenn Martin
By Glenn Martin
23rd Jul 2018 10:36

I don't think you have actually read the article fully if that's what you draw from it.

The biggest reason I get from new clients wanting to jump ship is not over charging but over promising.

They sign up a £100 pm fee and are promised everything including FD services then get delivered a basic compliance model, so end up disappointed.

What Marks article states is that all jobs should be profitable and good level of service should be expected.

As Paul sates over promising on jobs is a trap many new startups will fall into, whereas been paid fully for what you do, should be your aim.

There is a big leap from making a profit on each job to ripping people off as you suggest and that is certainly not the suggestion of the article.

Thanks (9)
Tornado
By Tornado
23rd Jul 2018 12:05

Look at this another way.

I work on the basis of overhead recovery rates in order to try and ensure that my annual profit is what I expect. I had assumed that all Accountants worked on this basis but perhaps they don't.

I work out my total known overhead & other costs for the year ahead which will include some general allowances such as a notional interest cost for carrying debt, depreciation and an additional 10% for unexpected costs where I think it prudent. This latter cost also covers the 'goodwill' type of work that is included in my services but not specifically charged for and means that I can chat to clients without worrying about making a charge to them for the time.

This gives me my costs whether I carry out any work or not.

I then work out the number of hours I can reasonably expect to charge to clients during the year for myself and employees. (In practice this works out to about 6 hours per day worked).

By dividing the total costs by the number of potential chargeable hours, we arrive at the overhead recovery rate. The amount to charge to make no profit.

The next step is to decide how much I want to earn from my business in a year. By dividing that by the number of chargeable hours available for the year will give me the rate per hour to charge for profit. Add this to the overhead recovery rate and I arrive at the amount per hour to charge clients.

I know that the modern way is to charge a fixed rate but this should still be based on estimates of the time to be spent on each client in the year and applying the hourly chargeable rate to that and then, of course, carefully monitor the hours actually being spent against those estimated for.

In theory, by completing and charging out all the budgeted hours, you will earn the figure you expected to, but the charges have built-in allowances for some uncharged time or unexpected costs, so no need to panic when you get bad debts or jobs that take longer than anticipated. There is no need, for example. to spend time upsetting slow paying clients as you know that the cost of carrying them is effectively spread across all other clients and, in my experience, they almost always pay in the end anyway.

The main variable here is the amount you want to earn in a year.

A start-up Accountant would need to choose a realistic amount at first and then try to achieve that by the means I have described. It is then just a matter of starting each year in the same way but adjust the figures/time to changing circumstances.

Thanks (1)
Replying to Tornado:
Teignmouth
By Paul Scholes
24th Jul 2018 11:14

Hi Tornado - mjshort's proposition may be droll but s/he's making a valid point that your methodology ignores the differing value of the work that you do and the market for that work and so, in my case, when I last used a time based approach, I had to complicate matters by using anything from £0 to £180 ph on my timesheet.

Then, with a load of staff as well all doing different types of work, and having different salaries, we ended up paying through the nose for formal time sheet and costing software. With no guarantee that the client wouldn't turn around and laugh at what the computer said.

mjshorts drollness also highlights the problem that if justifying your charges to a client, you may have to disclose that the rates are designed to pay for your lifestyle, including a £50K car, private education and 5 holidays a year, so yes, maybe £200K pa is OTT, but £100K may not be? For me, that would still create a daft blanket charge rate.

The problem with this spreadsheet approach to billing is that it ignores not only the market but also the most important features of service provision, the client.

You say:

"I know that the modern way is to charge a fixed rate but this should still be based on estimates of the time to be spent on each client in the year and applying the hourly chargeable rate to that and then, of course, carefully monitor the hours actually being spent against those estimated for."

For many firms it's no longer modern to have dumped time based billing and once I did it over 10 years ago, I never wondered about time again, so no estimates of time and no monitoring.

So I agree upfront every year the expected work for each client and the fee for that work and so my spreadsheet is:

Total fees agreed with the clients this year, less expected overheads = expected profit.

Which is the system that was used before the Americans tried to dehumanise it with time sheets in the middle of the last century.

Thanks (1)
Replying to Tornado:
Glenn Martin
By Glenn Martin
24th Jul 2018 14:38

Is that really how you put your budget/business plan together?

Do you not consider GRF and business you actually have on the books.

Thanks (1)
By mjshort
24th Jul 2018 09:13

Thanks Tornado-so putting figures to your theory:

I work out my total known overhead & other costs for the year £10,000

The number of hours 6hrs* 5 days * 40weeks= 1200

The amount to charge to make no profit £8.33 per hour

I want to earn 200,000 so 200k/1.2k= 166.66

So I charge 175 per hour.

Possibly a problem for Payroll and Basic Book-keeping?

Thanks (1)
Replying to mjshort:
Tornado
By Tornado
24th Jul 2018 09:36

Very droll.

Depending on the structure of your business, of course, the proportion of overhead recovery and target profit can be adjusted between the type of work being carried out which on your figures (for example) means that the charges could be £300 per hour for complex tax work and £50 per hour for book-keeping. Any competent Accountant should be able to handle these sort of calculations.

The main flaw in your argument, of course, is that few small practices could ever aspire to £200,000 profit per annum doing routine work.

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Replying to mjshort:
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By jonnybennett
24th Jul 2018 10:24

mjshort - that assumes you're doing all the work personally. As a wise man once said: "You don't get rich selling your time. You get rich selling other people's time."

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Replying to jonnybennett:
Tornado
By Tornado
24th Jul 2018 10:37

It does depend on the type of product/service you are selling, but I can agree with what you say.

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By bathcover
24th Jul 2018 10:17

Hear hear!

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By ColA
24th Jul 2018 10:29

My response last week mirrored this piece almost verbatim.
Trained in practice years ago but spent a lifetime in commerce and industry I can spot opportunism at two paces.

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Derek Collinson Portrait Image
By Findlay67
24th Jul 2018 10:59

Profit and customer service are closely linked. What is the point of always chasing profit when the outcome might be a drop in service that causes the loss of clients?

So profit is important but it must be at such a level that enables us to maintain the level of service that we are committed to delivering - no more, no less.

Thanks (2)
Runagood - the business growth AI software system for accountants
By Runagood
24th Jul 2018 11:29

Agree all that + AI can go a long way to having the best of both worlds by providing expert knowledge and smart processing to liberate quality time for promising 'unicorns'

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By AndrewV12
25th Jul 2018 09:04

Extract above
'Looking at the opposite end of the scale, a typical Big Four business model is often perceived to be to lowball your way into a client and then find every excuse for getting back the under recoveries on the loss leader by charging through the nose for everything else.'

It make you think..... lets all try it. it works for the big 4 with gigantic fees.

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Red Leader
By Red Leader
27th Jul 2018 17:09

"business guru Mark Telford". That made my day, thinking of his reaction to that. He must be on holiday because I think that noise I just heard was thunder rather than Mark.

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Replying to Red Leader:
Teignmouth
By Paul Scholes
27th Jul 2018 18:29

Red Leader wrote:

"business guru Mark Telford". That made my day, thinking of his reaction to that. He must be on holiday because I think that noise I just heard was thunder rather than Mark.

He can be my guru any time, all he has to do is whistle :)

Thanks (1)
Mark Telford Chartered Accountant
By Mark Telford
29th Jul 2018 13:08

Oh dear!

Sounds like you didn't get beyond the (I admit it) click bait title.

I suggest you actually read the article.

As for being a business guru...

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