Strategic Clients - Strategic Practices
As we have argued in this article, the market segmentation described by Alan Hodgart is likely to lead many mid-market firms to follow one of two routes – growth via merger/acquisition, or increased specialisation and the divestment of services that do not align with the firm’s core expertise. One consequence of this – and this is something we have advocated for some time – is the need to be more strategic in the selection of clients with whom the firm chooses to do business. Know your 'ideal client' and focus on serving their needs.
The evidence presented by Hodgart suggests that “the more sophisticated clients increasingly see many firms as having real strength only in a few areas and not across a wide range of practices.” The result of this is that firms have practices and clients that underperform financially, and indeed at times we have seen examples of practices being cross-subsidised by more profitable areas of the firm.
Client Selection and the Bottom Line
This demonstrates that client selection is more than a matter of strategy and business development – it is a key determinant of profitability and overall financial performance. Many firms, especially those in the mid-tier, maintain relationships with clients who are neither profitable nor a strategic ‘fit’ for the firm’s core business, because they fear that if they cannot offer services across the board then this will lose them business (and therefore money).
In fact, the opposite is often true. Clients very often buy only in those areas in which they perceive the firm to be strong, and retaining underperforming practices can indeed dilute the firm’s brand. Moreover, time and resources are spent on non-core clients, consequently limiting partners’ opportunities to focus on their core clients and develop their practices.
We have written before about the value of categorising clients, and of effectively ending the relationship with those clients who are not profitable and can even be a drain on the firm’s resources. This is as much a matter of prudence as it is of strategy, but firms must increasingly be looking to be more strategic in the selection of clients – and this comes back to the services the firm offers and the practices it chooses to retain.
These are not easy choices, especially when divestment of practice areas inevitably means that some partners (and other fee earners) will have to leave the firm. However, in the medium-term the choice is likely to be one of growth or specialisation – and for those firms for whom growth is not a viable option, specialisation will inevitably mean losing non-core clients and, ultimately, losing non-core practices.
It will be better for firms to make the choices proactively rather than have the decision made for them by defecting clients and talent.