Letting Go: Evaluating and Firing Clients

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
Each 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. 

The template includes six key areas for rating each client:

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.

Job Recovery/Profitability. 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.

Rating 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 an A.

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.

PARTING WAYS
Dealing with 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 the pocket.”

If this is the case in your firm, consider revising the partner compensation to add performance measures beyond revenue contribution (see sidebar “Compensation Criteria”).

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.

THE “D” CLIENT MEETING
For 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.

If 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.

If client 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 date.

IMPROVING THE RANKINGS
Once 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.

Job Recovery/Profitability. 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 engagement.

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 retention).

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.

AICPA RESOURCES JofA article “Delivering Difficult Messages,” July 07, page 50 Conference Practitioners Symposium, May 5—7, Las Vegas Publications Management of an Accounting Practice (MAP) Handbook (#090407 and #MAP-XX, online version) Compensation as a Strategic Asset: The New Paradigm , 2007 (#090493) For more information or to register or make a purchase, go to www.cpa2biz.com, or call the Institute at 888-777-7077. Web site 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.