When a firm hits the
critical point of needing
talented employees but can’t afford to pay
the market rate to hire them, it is time
to look at reducing the client load.
Evaluating the client
list is a healthy process for
firms of all sizes and a necessary annual
exercise to implement strategy and vision.
This can help a firm measure its market
based on pricing, timing,
stress, risk level and overall
A firm is better
equipped to establish parameters for new
engagements after the current
client list has been evaluated. This
allows the firm to set a higher standard
and will improve its profitability, team
member compensation, and general
satisfaction for the work performed.
Mark Koziel, CPA, is the
senior technical manager of the AICPA’s
Private Companies Practice Section. He has
more than 15 years experience in public
accounting and industry. His e-mail
address is email@example.com.
An evaluation of your client list is a
healthy process for firms of all sizes. As firms
change structure, size and expertise, evaluating
the client list becomes a necessary annual
exercise to implement firm strategy and vision.
Some clients can’t keep up with the price
increases that come with firm growth and,
inevitably, a firm will outgrow some of its
clients. Or, a firm may choose to keep these
clients and avoid the price increases and lose
profitability. In either instance, firms need a
formal policy for reviewing the client list
annually and taking appropriate action.
Firms that sacrifice profitability to keep
clients will eventually need to add staff to grow
the firm but may be unable to offer market
salaries to qualified candidates. The solution may
not lie in hiring more staff, but rather in
reducing the client load or redistributing the
amount of time spent on each client’s work.
While visiting a variety of firms across the
country, I have observed a direct link between
staffing issues, salary issues and client
evaluation. As a former recruiter, I understand
the difficulties smaller firms encounter in
competing with larger firms in terms of salary.
The demand for the existing talent pool continues
to outpace supply. This leaves firms in the
difficult position of needing to fire clients that
do not fit the firm’s direction.
RANKING YOUR CLIENTS
firm must know and understand its clients to
determine if they are worth keeping and if the
firm is charging the market rate for its work. The
AICPA Private Companies Practice Section (PCPS)
offers a standard Excel template, available to
section members, that is easily adaptable for
evaluating a client based on pricing, timing,
stress, risk level and overall satisfaction.
Clients are ranked A, B, C and D. An A is the most
valuable client, and a D is the least valuable.
Ideally, a firm does not want D clients and the C
clients are borderline—not necessarily worth
letting go. Once the C’s and D’s are addressed,
the firm can focus on converting the B clients
into A’s. Practitioners should spend the most
quality time on the A clients, providing all the
work they possibly can for them.
template includes six key areas for rating each
Job Risk/Complexity. This
rates client risk and the potential liability a
client brings to the firm. Whether it is an audit
client in a high-risk industry, management
attitude or lack of controls, or a tax client that
constantly pushes the limit on deductions and
income reporting, some clients pose a higher risk
to the firm than others.
Rating Scale: 5 =
No Risk; 4 = Below-Average Risk; 3 = Average Risk;
2 = Above-Average Risk; 1 = High Risk.
Each firm must decide what recovery
percentage is acceptable. Many firms determine
profitability based on hours billed and amount of
effort put into a job. The PCPS has a recommended
recovery percentage in the scoring system. Firms
that look at client profitability based on other
key performance indicators (KPIs) can change the
criteria to reflect their own KPIs.
Scale: 5 = 100% or more; 4 = 90%–99%; 3 = 80%–89%;
2 = 75%–79%; 1 = 74% or less.
Referral Source/Client Tie-In.
This factor is important to the
firm’s overall profitability. Clients can be a
firm’s best referral source, and this source
should be used. Some jobs, such as those in the
not-for-profit sector, are the results of
relationships with other clients. It is important
to quantify the referred client in the client
evaluation process. A client that has been
referred by an A client can still be a D client.
If a referred client is a D, the firm should keep
the referring client in the loop as to why your
firm is unable to serve the D client. Very likely,
the A client will understand since it is a
business as well.
Rating Scale: 5 =
Excellent referrer/tied to an A client; 4 =
Occasional referrer/tied to another client; 3 =
Possible referrer if asked; 2 = Tied to another
client; 1 = No referral/no tie.
Additional Potential Services.
This criterion is highly valuable
and potentially profitable. The potential to
provide additional services for a client could
improve that client’s current rank if it is below
Rating Scale: 5 = Could be doing
more; 4 = Some additional opportunities; 3 = Full
now, but future potential; 2 = Reached full
potential; 1 = Does not value what we do now.
Timeliness of Payment. This
factor is highly quantifiable and like Job
Recovery, there are no exceptions to the ranking.
Rating Scale: 5 = 30 days or less; 4 = 31–60
days; 3 = 61–90 days; 2 = 90–120 days; 1 = more
than 120 days.
Client Satisfaction. This does
not refer to the client’s satisfaction, but rather
the firm’s. How much satisfaction and enjoyment is
there in working with the client? It is important
to know how client management and client teams
treat your employees.
Rating Scale: 5 =
Great to work with and our team enjoys them; 4 =
Good environment; 3 = OK job that we get through;
2 = Can be stressful at times; 1 = Client does not
respect us and treats our people poorly.
The template provides an automatic calculation
based on the overall score to determine if the
client ranks as an A, B, C or D. Three of the six
criteria are based on statistical evidence; one
can be considered engagement objective; and two
can be considered subjective. This puts some
science in the process since four of the six
criteria can be more difficult to argue, but can
still make the process negotiable within the firm.
the D clients can be extremely difficult and
emotional, especially for multi-partner firms
where partner compensation is often tied to the
wrong performance measures. Ultimately, the goal
is to reduce the number of D-rated clients to
improve the profitability of the practice and
allow firms to spend more time with their A
clients. August Aquila, co-author of
Compensation as a Strategic Asset: The New
Paradigm, notes that “many firm partner
compensation agreements call for compensation
based on partner revenue contribution to the firm,
and not to the profitability the partner generates
for the firm. You will never get a partner to give
up a D client if it is going to hit him or her in
If this is the case in your
firm, consider revising the partner compensation
to add performance measures beyond revenue
contribution (see sidebar “Compensation
Two factors that typically
make a D client not worth saving involve job risk
and client satisfaction. If the client has high
risk or treats the firm and/or its staff poorly,
the firm is better off without the client. For
these D clients, the determination is that, no
matter what, they have to go. Keep in mind that
some D clients are willing to work with the firm
to improve the relationship. These clients are
worth upgrading to C’s. The AICPA Management
of an Accounting Practice (MAP) Handbook
contains sample client termination letters.
Once the D clients are gone, the firm can focus on
moving the C clients up to B’s and the B clients
up to A’s.
Resist opposition to letting go of
clients by encouraging other compensation
measures in a firm.
As part of an
overall compensation survey, August Aquila
and Coral Rice, authors of
Compensation as a Strategic Asset:
The New Paradigm , asked
practitioners to consider the following 16
criteria for compensation. While the list
is not exhaustive, it does provide the
breadth of criteria that firms can
consider beyond revenue.
- Book of businesses
or book gross profitability
- Community involvement
- Firm management
- Mentoring and
- New business
- Ownership percentage
- Professional involvement
- Technical expertise
THE “D” CLIENT MEETING
D clients that require a face-to-face meeting, the
team member in charge of the engagement
relationship should set up the discussion. He or
she should be prepared for two possible outcomes:
first, the client will agree and your firm should
help the client find another CPA firm to work
with; or, second, the client will ask what it will
take to continue the business relationship. The
team member must have the new terms ready,
including new price, payment and workload. This
gives your firm the ability to control the
situation and to price the engagement accordingly.
The firm should require a double-digit price
increase if this situation occurs. I know of some
firms that ask for a 20% to 30% price increase
from their D clients and get it.
payment terms are an issue, the firm should
require the client to become up to date with any
outstanding payments due, ask for a deposit on any
future work, and establish a monthly payment
schedule for the client, explaining that the
monthly payment schedule will help the client’s
cash flow and budget.
satisfaction is low, firm management should
discuss this issue with its team members before
the client meeting and then establish new
expectations with the client. These expectations
may include when the work will be ready, what the
expected condition of the work will be, and how
the client will treat the team. The conversation
with the client will likely be similar to the
examples provided in the sample client termination
letter in Exhibit 204-30 of the AICPA MAP
Handbook . As difficult as the conversation
may be, it is necessary to help your practice
grow. Follow up with a letter to the client
confirming your discussion and detailing your
termination action, and send it via a delivery
method that will provide you with documentation
that the client received the letter on a specific
Small Firm Advocate
The Private Companies Practice Section
(PCPS) of the AICPA is a firm membership
with more than 6,000 member firms. The
PCPS helps member firms be more successful
through education and advocacy by
providing useful tools and resources for
firm practice management and being the
voice of the small firm for advocacy. To
join, visit http://pcps.aicpa.org.
IMPROVING THE RANKINGS
a firm commits to streamlining its client list,
the focus can shift to improving the rankings of
the remaining clients as described below.
Job Risk/Complexity. Some
clients who make “the cut” may still have high job
risk or high job complexity. If job complexity is
based on a difficult industry, your firm should
consider partnering with another firm that has
expertise in that industry. Conducting an
additional partner review for an extra level of
comfort on the risk and providing additional
training to team members on the complex areas of
the engagement may solve this issue.
Consider the current responsibility
flow of the engagement and begin the process of
pushing work down. Assigning a rising manager as
lead on the engagement to reduce partner
involvement at higher rates will increase
profitability. The firm should review engagement
parameters, meet with team members to educate them
on services included or not included in the
current arrangement, and follow up with the client
to reinforce the engagement parameters and alert
them to areas that are no longer included and need
to be priced separately. Team members must be
knowledgeable of pricing techniques to improve
client profitability and have the ability to price
additional services outside the scope of the
current engagement. Refer to “Additional Potential
Services” below to increase the number of services
priced more profitably than the current
Referral Source/Client Tie-In.
Firm management must use all clients
that scored a three in this category as the top
source of potential referrals and conduct a team
meeting to discuss ideas on asking for referrals.
If your firm provides a written client
satisfaction survey, add a line to ask for a
referral. The firm managers should meet regularly
with the client to discuss business and to ask, in
person, for a referral. Develop a referral reward
system to encourage referrals (the reward should
be non-monetary and low cost, but memorable).
Additional Potential Services.
The firm should hold a planning
meeting with every client that scored a four or
higher in this area to discuss the client’s
business. Your firm may be missing many
opportunities with that client simply because the
client didn’t know you could help in a specific
area. Don’t be afraid to ask, even if you don’t
provide all services. Firms that have set up a
referral service with other providers for services
they do not offer will ensure that their clients
call them first for any business service. This way
the firm can pick and choose the business services
they would like to provide to their clients.
Timeliness of Payment. The
firm should request a deposit from slower-paying
clients and offer a monthly payment option to
assist with cash flow and budgeting. Consider
accepting credit card payment (combined with the
monthly payment option you can negotiate an “until
further notice” acceptance which also helps with
Client Satisfaction. The firm
should conduct a meeting with team members to
discuss all clients that scored a three or less in
this area and meet with the client to report the
issues addressed by the team members. You must put
together a joint plan to improve the relationship.
Clients should be evaluated annually. Once
the current client list is evaluated, the firm can
establish parameters for accepting new
engagements. This process allows the firm to set
the bar higher and improve its profitability, team
member compensation, and general satisfaction in
the work performed.
Difficult Messages,” July 07, page
Practitioners Symposium, May 5—7,
Management of an
Accounting Practice (MAP) Handbook
Compensation as a
Strategic Asset: The New Paradigm ,
information or to register or make a
purchase, go to www.cpa2biz.com,
or call the Institute at 888-777-7077.
Visit the PCPS Resource Center at http://pcps.aicpa.org.
PCPS members can click on the “Firm
Practice Management” link under the
“Resource” tab for the sample client
evaluation form and instructions.