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Published 21 August 2013 11:08, Updated 22 August 2013 08:32
To hit real growth targets the metrics can’t be about corporate ego. Photo: James Davies
Profitable growth is the number one priority for professional services firms. Yet firms themselves and the media focus on the wrong metrics when measuring and reporting growth.
Annual league tables of revenue and profit are the wrong way to assess growth and success. These tables send inappropriate signals to owners and staff, competitors and clients. Recent commentaries on the legal profession and the professions generally in BRW bear witness to the follies of obsession with these tables.
The only growth that matters is growth that is profitable and client-led. In other words, where clients are rewarding a firm for getting better at serving them.
There are six strategic measures of growth. Each is relevant to clients. And each is related to the profitability of the firm.
The first is client retention. Every one knows the truism that a firm’s best prospects are its current clients. But how many are really good at managing key client relationships? Not all clients are great prospects, but those that deliver “Pareto” profits are: that is those 20 per cent of clients that deliver 80 per cent of a firm’s profit.
The second is related to the first: share of the client’s spend. In banking and telecommunications, share of spend is measured as the number of products purchased by each customer. In professional services firms, the relevant measures are what proportion of the client’s spend goes to a firm and how many service lines this represents.
The proportion of new income is derived from word of mouth, ie, recommendation, by contented clients and referrers is third. Often measured as net promoter score, recommendation is the sweetest way to earn new clients; the cost of acquisition is zero.
The firm’s addressable market is fourth. This is the market the firm’s brand could serve; that is, those clients giving the firm ‘permission’ to serve them because the firm is trusted and its services are valued. Some of the Big Four and some consulting engineering firms are successfully exploiting their brand permission. Law firms are not yet out of the starting blocks.
The remaining two metrics come straight out of the firms’ management reports: direct margin and organic growth. Margin is a reflection, at least in part, of the firm’s price-setting discretion and ability to charge above commodity rates. And organic growth shows the extent to the firm’s clients are recognising its value, not its predilection for mergers and acquisitions.
The right way to measure growth uses metrics that reflect clients’ buying behaviour, not firms’ egos.