Managing Client Relationships in Professional Services (adapted from Chapter 15 – Marketing Professional Services in Asia)

Customer relationship management (CRM) is a marketing buzz word that conjures up all sorts of images. Ask ten people about CRM and you will get ten different answers. Some will say CRM is a database, others will say CRM is about customer loyalty and programs that maintain it. Unfortunately, it is that kind of thinking that has led to CRM initiatives being some of the biggest failures in recent business history. Organizations spend millions on new software and hardware systems intent on capturing reams of customer information in order to make better decisions. You then receive streams of new promotions in the mail that claim to know what you want, but when you call the company for a specific enquiry, you are put on hold for 10 minutes, and end up speaking to someone so junior with little knowledge of your history that you realize you can never get back the last 30 minutes of your life you just wasted.

What these organizations fail to realize is that CRM is none of the things described above. It is a business philosophy, an entire way of thinking about yourself and your clients. It is about recognizing that your firm is a client satisfying organism that must live and breathe a marketing culture in order to benefit from any of the technicalities involved in building a systematic CRM program. According to Edmund Thompson of the Gartner Group, A CRM program is typically 45% dependent on the right leadership, 40% on project management implementation, and 15% on technology. I will go even further and replace that 15% technology with the same percentage but of the professional's mindset.

In order to benefit from relationship and retention strategies a PSF must be cognizant of a number of factors. One of these factors relates to client loyalty. Many firms believe that loyal clients are profitable clients and that retaining them is extremely important. There is certainly some truth to this supposition but research conducted by Werner Reinartz and V Kumar (2002) published in the Harvard Business Review showed that up to 40% of loyal client were barely profitable. Firms should be able to analyze and determine not only the current profitability of a client but also their potential lifetime value. Another factor is the idea that it costs substantially more to gain a new client than it does to keep existing clients. This extra cost is normally associated with pricing discounts, promotional efforts and other resources used to secure new business. Again, research supports this contention and hence a PSF should not only be thrilled by the chase of new business but by the gratification of making existing clients more loyal, assuming they provide a certain level of value to the firm.

Value is a notion that is varied and should not focus solely on monetary issues. Clients maybe valuable for a number of reasons:

• Strategically valuable – some clients can help you gain access to key markets or other firms business through referrals. The work they do may help you build competencies that are of benefit in the longer run and can enhance your competitive advantage.
• Loyal – some clients are valuable because they supply a steady stream of work even if it is not highly challenging. They are moderately profitable and easy to serve.
• Significant – some clients can help raise your profile and reputation which can be of real value in building the brand of your firm and lead to premium pricing down the road.
• Revenue generating – some clients generate large revenues for your firm. They pay quickly and reliably and help maintain a healthy cash flow even if they are not the most profitable clients.

 

For the PSF, it is crucial to have a good understanding of your existing client base and what initiatives you wish to undertake to solidify your relationship with valuable clients and what to do with clients that are not suitable for your firm (such as recommending them to another provider).

David Maister, in his book Managing the Professional Service Firm, identifies five reasons why he believes firms tend to neglect existing clients in favour of developing new clients.

1. Firms find it more fun to chase new business and clients than taking care of existing ones.
2. Firms tend to reward professionals for bringing in new business. Reward schemes are geared towards new client development as opposed to creating new business with existing clients.
3. Budgeting allocation allows for new client development but often times firms have little or no budget allocated for existing client business development. Non billable activities aimed at existing clients shows up as costs and this is viewed as a negative.
4. Marketing to new clients is more hands off and involves activities such as research, proposal writing, and presentations. Marketing to existing clients is more 'high touch' and requires some level of intimacy between the professional and client and many professionals feel uncomfortable with this type of activity.
5. Finally, marketing tends to be reactive in most firms. That is firms will respond to a proposal request or other external stimuli but are not well equipped to be pro active in developing business opportunities.

 

The implications for a PSF are fairly obvious, in order to emphasize marketing to existing clients and to benefit from a relationship management system, firms will have to review their current beliefs and operating systems so that creating new business with existing clients and the time spent getting to know them better is not viewed as non billable time but rather part of a firm wide effort to build more loyal and profitable clients. The results may not be immediate and hence it takes strong firm leadership to create a program that will make a true difference in the medium to long term.

I Client Satisfaction – but they still left!!

Satisfied clients will not automatically become repeat clients. Most client satisfaction ratings are measured on a scale of 1-5, where 1 = highly dissatisfied and 5 = highly satisfied. The significance of findings by the Rank Xerox Corporation that even customers who ranked a company 4 (that is satisfied) where still likely to change to another provider has made firms sit up and take notice that there is little room for complacency in retaining clients. Much research shows that over 50% of customers were satisfied prior to changing to another provider. For a client to become truly loyal, a firm must be able to push up its ranking to 5, whereby a client is highly satisfied with the firm's services and service quality. Of course, this takes considerable effort and resources and hence it is first crucial for the firm to be able identify its most valuable clients in order to use those resources effectively.

Aside from identifying the right clients, it has been mentioned in previous chapters that expectation and client satisfaction are closely linked. Since professionals play a large part in setting client expectations based on what they say they can do, it is absolutely crucial to set realistic expectations at all stages of the relationship as over promising and under delivering will only lead to client dissatisfaction. Even if the client rates your firm a 3 or 4, they are still in the zone of indifference and hence at risk for defection. When building a client relationship program that is targeted at existing clients initially, it is necessary to get some idea how clients view the firm, its services, and the professionals themselves. Although there are a number of methods available, a good starting point would be some sort of questionnaire that surveys client perceptions of your firm on a number of fronts.

These may include:

• Technical quality of work
• Service quality of work
• Firm staff attitude, skills, and EQ
• Knowledge of and interest in your business
• What the client knows about which services you offer and your capabilities
• What services and needs they have/will have
• Overall perceptions of the firm

 

According to C. Zorski in an article in the National Public Accountant (April, 1990), survey efforts are effective when they involve almost everyone and everything in the firm. If you leave only one unresolved problem it will be the one the client complains about. Remember that clients expect change, and if it does not happen, an angry client sooner or later will become a former client. She suggests that partner(s) in charge of the survey should follow the following procedures:

• Indicate the best and worst performance by employees and clients' name.
• Try to improve personnel policy by getting rid of the worst performers and set a time table for the average performers to improve their professional knowledge and responsiveness to client needs. Offer seminars and other means of gaining professional and sociological knowledge. Keep in mind that good staff attracts good clients.
• Provide a means to involve staff in improving the firm's effectiveness through monetary awards or other special recognitions. Induce mathematical correlation between achievement and the reward.
• Identify opportunity for new services and define a strategy on how to offer new services to clients.
• Set a time table to attain your ultimate goal.

It should be stated that surveys are not the be all and end all of measuring and attaining client satsifaction. These are only one small step in an ongoing progress that requires constant communication with clients that is part of an overall marketing process which is intent on taking action when necessary. Conducting a survey and then not acting on client feedback is a sure fire way to upset clients and create even greater dissatisfaction. Moreover, client satisfaction is not independent of staff satisfaction and hence ensuring the satisfaction of people within the firm is essential to creating and maintaing a service quality program in professional services. This is known as the service profit chain and means that internal marketing is just as important as external marketing.

II Building and Managing Relationships – an Asian perspective

Much has been written about relationship marketing in the Western context both for services and consumer goods. Unfortunately, very little work has been done in the professional services context and none in the Asian context. One must consider whether relationship strategies which are prevalent in the west are transferable to the Chinese or Asian context and if so to what degree. In their book, Marketing of Professional Services, Philip Kotler, Thomas Hayes and Paul Bloom suggest four building blocks to developing stronger client relationships. We will look at these building blocks and view from them from the perspective of what is known about relationship marketing and guanxi in the Chinese context.

Trust

Trust is certainly a key variable in building and maintaining relationships and has been the study of much empirical research. David Maister (in his book The Trusted Advisor) goes into some detail about the importance of trust. According to Kotler and colleagues, trust can be built by helping clients with contacts and referring business to them, sending articles of interest to them about their industry, providing free seminars etc. One can view these acts as types of favours and this fits well with the idea of trust and building reciprocity in Chinese society. Oliver Yau and colleagues (2000) in their paper, Relationship Marketing the Chinese Way, state that Chinese seek to determine whether another party can be trusted and if favours are received they are morally bound to return these favours. Such reciprocity may be long term and firms should not act in a manner that shows them to expect quick reciprocal acts but be patient in building social bonds.

Client Knowledge

According to Kotler and colleagues, client knowledge involves research to understand clients and their operating environments, developing an organizational memory through appropriate databases and procedures, and to then make use of that information it obtains. Certainly, as part of an overall CRM program these suggestions are excellent. In the Asian or Chinese context however we can extend these concepts. According to Yau and colleagues, empathy is must be developed in order to see situations from another perspective. Understanding clients and their business more deeply can help in developing empathy but in the Chinese context one must attempt to develop a relationship first before attempting to develop a transaction, which is often what occurs in the Western context. Informal discussions and not only business related discussions is key as a firm can more deeply understand the factual and inner feelings of clients. If one can reach this deeper level of relationship it may be beneficial in developing complex service strategies. Sharing information is also a common occurrence in the Chinese context and helps widen the network of firms. Sharing information is a sign of bonding and trust and not collusion as viewed from a Western perspective (Yau et al., 2000).

Client Access

This is the process of making the firm easy to do business with and involves giving clients every opportunity to communicate with members of the firm (Kotler et al., 2002). In the Chinese context we can extend this beyond traditional business meetings and client contacts. According to Yau and colleagues, social interactions can be a meaningful way of building bonds between business people and events such as attending a Chinese dinner can help extend a relationship from the social level to the business level. Building such relationships and networks should be seen as an investment and form of social capital. Aside from direct clients, it will be important to initiate access for other stakeholders. Building personal relationships with gatekeepers or administrators can help smooth business transactions and extend ones network, this can be highly beneficial since bonding in certain social bases can be transferable. Intermediaries which act as bridges between parties can also be a guarantor of trustworthiness (Yau et al., 2000).

Technology

Here, Kotler and colleagues talk about the importance of software and hardware that can be used to better understand, communicate, and serve clients. In the Asian context, the importance of technology in building client relationships is no less important but perhaps the information can be used in ways that reach beyond the traditional thinking of Western professionals. The ideas of bonding, reciprocity, trust, and empathy discussed in the previous sections can all be enhanced by collecting and utilizing information for acts such as gift giving or favours which may be used with a number of different stakeholders in order to build the network social capital that is of real use when doing business in Asian contexts.

Mutual benefit and building shared goals is an important element of doing business in Asian societies and hence fundamental to relationship marketing strategies for PSF's. The relationships identified in figure 15.1 provide a framework for developing marketing relationships in the Chinese context. The relationship building and maintenance variables are aimed at building dimensions such as trust and reciprocity and should not only be targeted at persons in charge but at a wider network of business associates in order to smooth the business process. It takes time to build trust levels that are bonding in nature and Western professionals should be patient in waiting for a return on relationship marketing activities. People in Asian societies do not distinguish between business and personal relationships as clearly as Westerners and are more likely to develop business from personal relationships.

Fig 15.1 Framework for Developing Marketing Relationships in China

(Adapted from: Oliver HM Yau, Jenny SY Lee, Raymond PM Chow, Leo YM Sin, and Alan CB Tse (2000) Relationship Marketing the Chinese Way. Business Horizons, Jan-Feb, 2000).

There is also an emphasis on the interaction with the firm's service strategy. Trust helps to reduce uncertainty and the purchase of complex professional services creates risk and uncertainty for the client. By building comprehensive relationships the firm is more likely to have opportunities for bidding on projects as well as having more flexibility in their pricing and other service strategies.

III Technical or Functional (Service) Quality?

Throughout this book there have been many references to the distinction between technical quality and service quality. That is, clients not only care that you do your job properly and that you are proficient at what you do, they also care how you deliver your services. It is reasonable to expect that in different professional service settings clients would give different weighting to the importance of service quality, at least in terms of their intention to continue doing business with a firm as well as whether they would recommend the firm to others. Satisfaction and client retention are strongly correlated and being able to identify the key variables that satisfy clients is worthwhile because a firm can then focus its efforts on those variables without wasting time on extraneous factors which are not so critical to the client.

Research conducted in the US by Angela Hausman (2003, Journal of Services Marketing, Vol 17, 3 pp.226-242) examined the relative importance of social aspects of the relationship with a professional service provider and the technical quality of work. The author looked at four types of services which were medicine, hairstyling, minister services, and social work. She found that in services such as medicine, social aspects of the relationship to be more important than technical quality in terms of the customer's intention to use the service again or recommend the doctor to others. The opposite was found to be true for hairstylists and social work. Although one may argue that hairstylists and social workers cannot be categorized as professionals the study highlights some key insights for other PSF's. Since the technical quality of some professionals is hard to judge due to the information asymmetry between provider and client (such as medicine, law, accountancy), clients are likely to look at service quality to judge the relationship with the service provider. In this case, it could be argued that in relationships were the client is less knowledgeable about the services being provided the PSF should stress the service quality and social aspects of the interaction in order to relay quality perceptions to the client. As clients become more familiar with professional services their expectations in terms of technical quality may increase and hence the firm should look to ways to communicate the technical quality of what it is doing. If a client is familiar with the technical jargon of professional speak then perhaps it isn't so bad to use technical language with the client.

Achieving service quality is not something that happens independently of the professionals within the firm and their attitude towards what they do. In his book Practice What You Preach, David Maister analyzed a number of professional firms and found that high standards and employee satisfaction had a direct impact on quality and client relationships. The attitudes that predicted these relationships were:

• I am highly satisfied with my job
• I get a great sense of accomplishment from my work
• The overwhelming majority of the work I am given is challenging rather than repetitive
• I am committed to this firm as a career opportunity

 

He also found that quality and client relationships had the largest impact on financial performance. This information supports the ideas of things such as the service profit chain (mentioned earlier) and hence aside from measuring client satisfaction, one must measure employee satisfaction in order to have a more comprehensive tool kit on which to take corrective action. Telling someone you must improve your client relation skills without providing them the support and tools to do so is like asking your kids to eat their greens without any reward. Maister also identified that appropriate compensation was one of the most important factors in predicting the best performing offices.

IV ROI on Relationship Marketing

Measuring the return on investment (ROI) on marketing activities has been an area of confusion and heated discussion both for marketers and academics for some time. If we take the view that marketing is the lifeblood of the firm and that a marketing culture should pervade the entire firm, marketing probably cannot and should not be measured. Anyone that believes all marketing can be measured by ROI is living in a fantasy world whereby the importance of marketing has been marginalized to discreet activities such as promotion and the role of the marketing people in the firm is artificially separated from the rest of the company. In this kind of firm, marketing will never be recognized as the glue that holds the firm together and the partners in such firms will only recognize marketing activities that can be explicitly tied to some sort of return. On the other hand, when marketing is accepted as a culture and as a set of discreet activities that can be measured then it is certainly worthwhile to consider the ROI on certain marketing investments in order to determine their impact on various dimensions of firm performance.

In 2002, the Marketing Science Institute in the US declared that 'Assessing Marketing Productivity and Marketing Metrics' to be the most important topic for study over the following two years. One of the problems is that many senior executives have found marketing investment hard to quantify and typically look at marketing as a cost rather than an investment. For example, research by the Marketing Leadership Council in the US found that 63% of their blue chip members were dissatisfied with their marketing performance measurement systems. Moreover, linking marketing efforts to performance is extremely difficult given the multitude of factors that can affect the failure or success of any initiative. It is within this context that marketers and organizations have expected and demanded accountability for marketing investment. The Chartered Institute of Marketing in the UK calls this Hard Edged Marketing.

The premise of marketing ROI is quite simple. Identify various marketing effort alternatives and fund those ones that meet a certain ROI threshold or criteria, sometimes known as the hurdle rate. It differs from traditional ROI calculation for capital expenditure due to the often small incremental investments that can be made and hence it tends to be flexible in nature. In practice, it tends to be much more complicated, for instance, the same research cited above also found that these firms believed they were wasting 26% of their marketing budget.

The Anatomy of Marketing ROI

According to Don Schultz, a renowned professor at Northwestern University in the US, marketing return is about meeting customer needs better whilst achieving improved ROI. It is this perspective that sets it apart from traditional measures of marketing performance because it also identifies which types of customers you should be investing in, as not all customers will have the same lifetime value to the organization or the same strategic value.

The formula for calculating marketing ROI in its most basic form is:

ROI = return/investment = gross margin – marketing investment/marketing investment

Although the precise methodology for determining ROI differs according to whom you speak to, there is a generally accepted framework of elements to consider.

• Segment the market and your customers first – it is crucial to know the differences in value of differing customers as well as their growth and response potential
• Net present value (and discount rate) which takes into account the time value of money
• Gross margin with costs fully and properly allocated
• Knowledge of Customer Lifetime Value
• Understanding of incremental revenues and costs

 

One can see that access to organizational information about its own cost structure and key data about customers is vital. Previously, the level of detail in such figures available to decision makers was flawed at best or just too much trouble to determine. With advances in technology applications such as Customer Relationship Management (CRM) this type of understanding and precision is much more readily available.

It is now possible to analyze in detail your customers and their worth to the company over their life time. It is also possible to identify which customers should be invested in and which are likely to remain loyal or leave. All in all, it is becoming increasingly feasible to identify at a fine level of granularity just how much to invest in certain marketing efforts and over what time period and with those customers who are most likely to respond.

According to Peter Doyle, in his book Value Based Marketing (2000), if a company can increase its retention rate from 90% to 95%, it can massively increase the company's growth rate. For example, if two firms are gaining new clients at 10% per year, only the firm with a 95% retention rate will experience any growth, in fact, over 15 years, the firm will double in size. He goes onto show that even in professional services such as advertising agencies or banking, customer lifetime value increase significantly with a 5% increase in loyalty, up to 95% for the ad agency and 85% for banking.

ROI Is Not the Final Solution

Whilst the concept of ROI applied to marketing spend is useful it is certainly no panacea. Firstly, most measures of marketing ROI deal with campaign level approaches and identify the best alternative between an advertising and direct mail campaign for example. This maybe fine but it hardly deals with marketing as a whole, in a broad sense. As Tim Ambler from the London Business School rightly points out, 'that would be like asking the ROI on eating, if you do not do it you die'. At the organization wide level, marketing is a business process and not something that can be turned on or off according to ROI measures which in themselves can mislead in any case.

Secondly, ROI and net return may not actually be equivalent and then one is left to either take the higher net return or the higher ROI. Of course, choosing the right time frame is also problematic. Additionally, some marketing investments may seem especially unattractive according to ROI measures but have potential that no one could have envisioned at the time. Good examples can be found in the excellent book The Innovators Dilemma by Clayton Christensen. Finally some investments have strategic value beyond pure ROI measures because of their impact on market access for example or other parts of the business.

V Conclusion

Client retention and satisfaction should be at the heart of a PSF's culture and as such, marketing must play a leading role. However, it is clear that a firm will not want to build long term relationships with all clients and hence it must first identify the clients that are valuable in order to instigate marketing efforts that will most benefit the firm over the medium to long term. Client satisfaction consists of the firm being able to deliver both technical and functional quality and requires those leading the firm to think proactively and be willing to invest in initiatives that do not necessarily show returns in the short term. CRM and other such initiatives are certainly useful but they are unlikely to be successful unless a firm has the culture and processes in place that are the foundation of true relationship marketing efforts. It is also worthwhile to create metrics that measure the impact of various relationship marketing efforts that consider the lifetime value of clients making sure not to fall into the trap that all marketing can be measured. A PSF operating in Asia should also realize that relationships in Asia are different than those in the West when put in the context of marketing and firms should be bale to adapt their relationship strategies accordingly.

 

 

 

 

Comments

[Fred Hathaway, Jr.]

Robert:

This has been an interesting read. I am, however, unable to read figure 15.1 in its entirety. Can you please send it to me via email? fred@hippollc.net. Thanks!