As we saw in the first blog on this subject, optimising efficiency is clearly a good starting point for achieving profitable growth but, as companies in many industries have very quickly learned, there is much more to achieving profitable growth than cutting costs.
Start by asking yourself this question – who are our most profitable customers? Law firms have always had their ‘Top’ lists – Top 20, Top 50 etc – but these are rarely based on revenue and profit. Whilst it should not be the only indicator, firms should know who their top revenue generating clients are – by volume and consistency – and also know at what stage of the client lifecycle they are. If they are in your Top 20 list but their revenues are down by 50% or more, then they are at risk and probably shouldn’t get the standard marketing email saying that everything is peachy!
There will always be the need for some subjective analysis of these ‘Top’ lists and some clients carry a ‘flagship’ type status that can be leveraged in order to win other clients from the same industry. But that doesn’t mean that they should be allowed to be unprofitable and every effort needs to be made to ensure that all the profit levers are pulled.
If you do a profitability analysis of your customers it will immediately tell you two things. First of all it’s more than likely that you’ll find the Pareto Principle applies. In other words 20% of your clients provide you with 80% of your profit. The number may be slightly less – 30%-70% for example – but the point is that there are a few customers you need to look after very carefully indeed, as losing them could be catastrophic.
The second thing a profitability analysis will tell you is why those customers are so profitable. Is it the volume of work they provide? Is it the type of matters they give you? Is it the industry they are in? Are they tapping into a particular aspect of your practice, either from an expertise or knowledge point of view? Armed with the answers to questions like these you can then move to the next stage – addressing the 80%.
Growing your business - profitably
Now you know who your most profitable customers are you can make some decisions about the remaining 80%. Is it possible to cross-sell or up-sell your most profitable services to them, elevating them into the top 20%? Should you refine how you can deliver services to them, for example using less time-consuming communication channels or automated responses – some firms have even looked at having an online process for their high volume work that takes clients through to closure, only involving a lawyer if one is required.
Or, if you want to be really ruthless, should you look at dropping these low volume/low consistency firms altogether, freeing resources to work with more lucrative clients?
As you start to profile your client base you will also be in a better position to target which companies you will go after for new business. By grouping firms in their industry sector you can analyse where the firm has cross-sold other services and endeavour to replicate that with other clients in that sector. Now your marketing efforts can be driven by a real understanding of not only where your competitive strengths are, but also the type of business you want to attract.
The result of taking the step-by-step approach shown in figure 1 is being able to devise a strategy for growing your business profitably. You may choose to address efficiency and client profitability at the same time or separately but, either way, they set the scene for the next stages of your profitable growth journey - developing new services and new markets. But that’s getting ahead of ourselves, as it’s the subject of the next blog.
Figure 1: The journey to profitable growth