Clive Rich, the author, barrister and founder of Lawbite, explains why you need to know who your best clients are, and how understanding the different types of client you work with helps you grow your law firm
Who are your best clients? Different lawyers may have different views - is it the clients that generate the largest fees, that bring you the most interesting work or that you personally enjoy working with?
Whatever your answer, identifying your best clients makes it easier to find more of them.
Segmenting your client base involves identifying different groups of clients that share common characteristics. You can target the particular segments that you are most interested in. And you can build your reputation for offering these clients in-depth expertise and outstanding service.
In a competitive legal market, with declining levels of client loyalty, targeting a smaller market niche is almost certainly your best bet. That doesn't necessarily mean unduly restricting the range of legal services you offer - for example, private client solicitors may want to offer a one-stop shop. But it does mean focusing on which clients you really want - for example, local high net worth individuals - and making sure you are the firm they choose.
Your best clients
Direct measures of client profitability start by focusing on the fees generated for each client. Against that you need to set the non-billable time and marketing costs associated with the client.
Assess which clients consistently provide repeat business, rather than just looking at profitability over the past year. Your aim is to identify the clients with the highest 'lifetime' value - total net income over the entire period that a client stays with the firm.
Look at which clients are delivering increasing volumes of work. If you can work out what characterises these high growth clients, you will be able to target other clients who offer similar potential.
In a traditional law firm it can be useful to analyse how much work is done directly by partners and how much by associates. The most profitable clients may be those that demand a high level of personal involvement from a partner. But work that can be delegated to associates offers greater scope for growth without needing to bring in additional partners and so dilute per partner equity returns. Modern law firms may not have a partnership structure. This means that in identifying the best clients they are not hampered by the need to keep returns for individual partners high on work which they are not doing.
"Don't over-emphasise recent billings. You want the clients with the best long-term potential"
Steve Billott, strategic consultant, Symphony Legal
Fees are far from the whole story.
- Some clients make an indirect contribution to profitability. Referrals and recommendations may be just as important as fees paid directly. A flagship client who raises your profile could make a vital contribution to growth.
- Clients who are difficult to deal with may be less valuable than they first seem. Hidden costs, like time spent chasing payment, reduce profitability. Delayed payment can also put pressure on the firm's cash flow position.
- Future potential can be particularly difficult to assess. For example, the key value in a business client might be your relationships with the individuals you deal with - and the new business you are able to win when they move on to other companies.
"The most profitable clients are often the easiest to work with as well. They value the relationship as much as you do"
Stephen Ward, managing director, Clerksroom
Basic segmentation data includes where clients are based. For private clients, you want to know demographic details such as age, gender, family status, occupation and income. For commercial clients, what industry they are in, turnover, number of employees and level of sophistication - for example, whether you are dealing with in-house lawyers or individuals without legal expertise.
Look at how clients behave when they buy legal services. Are you their only law firm, or are you part of a panel? Which legal services do they buy - from you and from other law firms? Do they put legal work out to tender? How price sensitive are they?
Internally, what differentiates clients? For example, which partner is their main contact? How did you acquire the client in the first place, and if it was by referral where did the lead come from?
The more detail you have, the better your chances of finding revealing patterns. Much of the data you want should be available from your client relationship management (CRM) and accounting systems, and from the partners and fee earners who deal with clients. If you don't know, ask.
Be aware of the sweeping changes related to the EU General Data Protection Regulation (GDPR), which comes into force on 25 May 2018.
Your analysis lets you define the market segments where you are currently strongest. Be specific about what characterises these segments. For example, your most profitable clients might be UK tech companies between 5 and 10 years old looking to move into a new stage of growth through acquisition.
At the same time, you should be looking at which market segments offer the best growth prospects. If much of your income comes from full-fee conveyancing, what will you do as margins get squeezed by low-cost competitors? If your most profitable clients are in the coal industry, do you need to diversify into other sectors?
Make use of published legal services market reports, and if necessary consultancy, to make sure you understand broader market trends. Which segments are growing? Where is competition from new entrants most intense?
Look to define segments that play to your strengths and suit your culture. If your core business relies on deep relationships with a small number of high value professional clients, you'll find it hard to target a market segment demanding commoditised legal services.
Reward - and risk
Understanding the profits and other value clients bring to the firm is only half the picture. You should also be taking into account risk.
All things being equal, clients that provide consistent fee income are the most attractive. Steady volumes of work make it easier to staff your law firm and manage cash flow.
Clients that provide high value work, but intermittently, are more challenging. Your risks increase if they also require risk-sharing fee arrangements, particularly if a single client represents a substantial percentage of the firm's total income.
You need to decide how focused you want to be. Mergers and acquisition specialists can thrive offering a boutique service to major corporates, but are at risk when the business cycle turns. How much volatility can your firm's finances cope with? Do you have a culture that will allow you to aggressively cut back on fee-earners if you need to?
If 20% of your clients provide 80% of your profits, your most profitable strategy may well be to focus your efforts on those clients and others in the same segment. But it's probably also the riskiest.
Your marketing plan
Keeping your most profitable clients is a priority. Key accounts deserve a high quality client service team. Go the extra mile on customer service.
Think about how you can attract new clients from the same segment. Your strong market presence and proven expertise will help. Tailor your marketing to focus on what interests this type of client, and the marketing tactics that have already proven successful.
Make sure you understand how your firm has acquired its most valuable clients. Should you be marketing directly to 5-10 year-old tech companies, or has your success come from winning business with younger clients who then grow with you? Is the intellectual property practice that attracts these younger businesses acting as a 'feeder' for later M&A services?
If some clients become more valuable, what about those that do not? What distinguishes the tech companies that turn into star clients from the rest? Is it something to do with the clients - and if so, what does this tell you about the segment you should be targeting? Or is it something to do with the way you approached developing them as clients or how competitive you are?
For less valuable clients outside your target market segments, what will your approach be? If they don't have the potential to become more valuable, your aim is probably to maintain the relationship at low cost.
"The internet is a spectacular opportunity to market your firm to a niche market"
Jon Davies, vice president, Travelers
Best clients top ten
- Assess which clients offer the highest long-term value
- Take into account added value from referrals and recommendations
- Watch out for the hidden costs of clients who are difficult to deal with
- Consistent fee income is more attractive than lumpy, irregular cash flow
- Build detailed profiles of your most valuable clients
- Keep up to date with broader market trends and segment growth prospects
- Identify promising segments that suit your strengths and the firm's culture
- Decide how focused you want to be; balance risk and reward
- Go the extra mile for your most valuable clients
- Develop a marketing plan for acquiring and developing the most promising clients