10

Saving clients money

THE PRICING DILEMMA

When teaching pricing on Executive Education courses I will often present the participants with a classic pricing dilemma that they need to resolve as a group. This helps them gain an understanding of all of the options that might be available to them. I describe a scenario of a valuable long-standing client spending millions of pounds a year with their service firm. Mostly this has been Relationship Advice, although in the last year this client has also (through one of their expert partners, Pamela) started to instruct them on some Rocket Science.

I ask them to imagine that they developed a strong personal relationship with the key person in this client (let’s call her Debbie), and they consider her to be a friend as well as a client. In the scenario, I ask them to imagine that they are on a panel of firms sharing this client’s work – let’s say that the client uses 10 firms in total. Even though there is a substantial income from the client there is much more to go for in the future, and Debbie herself is high profile and well regarded in her sector. So far, so good.

One morning, they receive a call from Debbie. She sounds flustered. She starts the conversation by apologising and explains that, in view of the terrible financial results which have just been announced by her company, her CEO has told her that she has to lose two members of her own team and that she must immediately reduce external spend by 15%. She is extremely sorry, but she needs to confirm to her CEO by 4pm that day that her external advisers have agreed to cut their rates (or other method of pricing) by 15% or they must be fired from the panel. Debbie therefore needs confirmation by 4pm that day that this 15% reduction is agreed, failing which they have to be removed from the panel and their work passed to others.

What would you say if you were in this situation? You have a few hours to think about it, anyway. Take some time now and work out exactly what you want to say to Debbie when you phone her at just before 4pm. When presenting this dilemma on an Executive Education course, I want the participants to examine the pros and cons of different answers and to think about all of the options that they might have. I have set out a typical analysis below:

Let’s dispose of the ‘no’s’ first. There are some good points here, but Debbie may feel (her bluff having been called by their refusal) that she must carry out her threat to fire the firm from the panel for two reasons. First, because if the other service firms on her panel have reluctantly said yes to her demand for an immediate 15% reduction, it seems unfair that she exempts one firm (what if the others found out?). Secondly, is she willing to tell her CEO at the end of the day that she has been unable to achieve the task he or she set? Doesn’t that reflect badly on her own position, at a very difficult time for the company? Maybe the CEO would find the additional saving by firing Debbie. Although I think that the no’s are ‘right’ (and in particular may be right in excluding the Rocket Science work of Pamela, which even Debbie may concede should be best left where it is), let’s assume for now that ‘no’ is the wrong answer and turn to examine the ‘yes’ column.

Partners are generally more comfortable in this column. The doomsday threat has been removed, they know that Debbie’s company is going to stay as a client, but they may have some issues to deal with around profitability. Usually a consensus emerges in the yes camp that they should negotiate. While saying yes to 15% they should look for swaps in return. This is a classic negotiation technique (‘trade, don’t just concede’), and when I ran this exercise with a mixed group of service firms and their clients the result was that that all of those on the client side expected the firms to agree to the 15% discount but to negotiate on other terms (i.e. not one of them saw this type of ultimatum as ‘take it or leave it’, but rather as a robust start to a negotiation), which is itself interesting.

Let’s look at the type of swaps for which you could ask, while still agreeing to give 15% off, starting today:

• You could limit the period of the discount. If it is being given to help the company during a difficult period then you could limit it to one year (even better, to six months), and agree that you do not have to negotiate at the end of the period but that your rates will revert to normal (and normal at that time, not just frozen at today’s level).
• You can look for more work in existing areas (a higher percentage of the available spend) or to ask for an introduction to new areas of work.
• Debbie is an industry figure. It would not take much effort for her to introduce you to other potential clients, even to recommend you to them.
• You may be able to exclude Pamela. If she is handling a matter of extreme importance to the client then you may just draw the line and refuse any reduction.
• You might offer that Pamela is prepared to drop by 15%, provided that she is offered a success fee uplift of 30% if certain specified outcomes are achieved.
• You may start locking in alternative fees, annual retainer fees to cover specific areas of work, and a move to value-based fees in Relationship Advice.

In fact, once partners put effort into this they will find that there are some truly valuable swaps that could be obtained in return for the 15% concession.

The only problem is that they cannot have any of them. It’s just too late. Debbie has to conclude the exercise by 4pm, so it’s absolutely impossible for her to trade these concessions to all 10 service firms on her panel. That would be ridiculous. How can she agree that you will all receive more work when the purpose of the exercise is to make savings? How can she give you all valuable referrals – she would have to spend all her time working on that. Debbie might accept the concession being limited, but wouldn’t do so if the other firms on her panel hadn’t also insisted on that. Why should she just give that concession to one firm?

The purpose of this whole scenario is to show you what can happen if you decide to be reactive rather than proactive in terms of saving your clients money. Rerun this scenario, but this time six months before Debbie made this call and, conscious that you are supposed to have a strong relationship, you had visited her and sat down to discuss how you might go about saving her some money. Here you would have been much more in control. You could have had free run at all the possible swaps that you have created, plus no doubt some that you hadn’t even imagined. The prize goes to the first firm that is proactive and helpful.

A recent experience from a niche US firm with which I consult on pricing issues gives a great example of proactivity. That firm was advising a corporation that had become caught up in a highly publicised controversy and was featuring on the front pages, day after day. The niche US firm simply sent two of its senior team members to work alongside their client for free, and told them, ‘We understand that you must be struggling to cope at the moment, you must be exhausted, we are here to help’. That really is the meaning of ‘relationship’: his client was contacting me to say that their corporate client had been overjoyed by this reaction, and had already sent them extra work and insisted on paying for the support that had been offered so far.

There is an important lesson here. If you are working in the Relationship Advice space with a client then that includes being sensitive to their need to manage spend, to their changing needs, to be seen to create efficiencies for their organisation, and to help your client to show that part of the value that your client brings to their organisation is to reduce spend where that is possible, without damaging the necessary level of service.

KEY PERFORMANCE INDICATORS EXERCISE

As service providers, we can become so involved with organising the delivery by our team that we spend insufficient time gaining a deep understanding of the pressures on our clients, what they have to deliver to their organisation and how they will (personally) be measured when it comes to an annual performance review. Unpacking this allows to you to create some Key Performance Indicators (KPIs) that will align your interests and your client’s so that your performance is more tightly aligned with the client’s targets. In doing so you are creating a more valuable service for your client and increasing your differentiation from competitors, both of which allow for higher prices. Let’s look at some practical examples.

SPEND REDUCTION PROJECTS

This instinctively sounds like bad news. A project which helps the client to spend less will reduce your income. However, the reality for your client is that they are very likely to be under pressure to reduce costs, so it may be a question of whether you are going to help them develop a solution that works for both of you, or have one imposed upon you. Luckily you have some useful tools developed throughout Chapter 8 which enable you to look for ways that you can reduce the components part of your service in return for a lower price. That maintains the profit (per hour) but would lead to fewer hours being worked – a drop in your firm’s income (all other things being equal). So what can you get in return? There are a number of options that you can discuss with your client:

• You could be paid a percentage of the saving. For example, you reduce spend in an area of work from £100,000 to £80,000 and are paid 50% of the saving, leading to extra income of £10,000. Bear in mind that the saving does not need to come from you, or wholly from you. So you might use value engineering to reduce the work and cost in an area where you have one-third of the available work, but you are paid 50% of the saving made across all three service firms.
• You could be rewarded with a greater share of the work. For example, if you currently have one-third of the available work, increasing your share to 40% or 50% (while still keeping the other service firms) would probably be a great reward. Bear in mind that you have not reduced, by even a penny, the charge per hour. You have used value engineering to reduce the total work needed per matter (see below for the opposite situation – consolidation – and its dangers).
• You can ask the client for referrals to similar clients inside or outside that organisation. To be introduced as ‘This is the firm that has just saved me 10% on my annual spend, I wonder if they could do the same for you?’ is really powerful. Who wouldn’t want to investigate the possibility that you could save them money, when introduced by someone that they trust?

Clients will understand that you need to earn something in return for creating savings, and it is quite acceptable to ask them for their suggestions about how they might help your service business cover the costs of a spend reduction project. The important thing, in relationship terms, is that you have put effort into creating savings for the client and, as a result, will have differentiated yourself from your competitors – provided that you were the first one to do this. I cannot overemphasise this point. It is the most proactive service firm that reaps the reward and will often end up truly working jointly with the client across all of their service firm providers to create savings. In this way you will have much greater control and opportunity – or would you prefer that it was one of your closest competitors who launched this project with your client?

TARGETED REDUCTIONS

The starting point for most clients who want to make savings is to create a percentage target. So you might hear that there is a desire to reduce spend by 10% or to cut 25% off the relevant budget. The partner receiving this news tends to translate that into the equivalent drop in demand (and starts to reduce their forecasts for income that year), but it is worth pausing to think how those people who supply us would react if we were to declare such a target to them. Let’s see what it is like when the boot is on the other foot.

Let’s say that I sit down with my gas bill and decide that I am spending far too much on gas to heat my home. I am going to give myself a target to reduce my monthly spend by 15% so I contact my gas supplier with this demand. How do they react? Well, there will be talk about improving the insulation at my home (spend some extra money now to save money in the future); suggestions that I turn down the thermostat on my heating to a lower temperature; a look at whether I need a new boiler which is more efficient (spend now, save later); an offer to switch me to a tariff which locks in current prices for the next 12 months; or an offer to reduce costs by 1.5% if I buy both my gas and my electricity from them.

It is important that your own reaction to targeted reduction requests from your clients is along similar lines. It isn’t about supplying exactly the same as you did last year, but this time for 15% less money. My own first reaction to a client who has mandated a reduction in spend is to look at ways that demand can be reduced (the equivalent of turning down the room thermostat by a couple of degrees). With this logic in mind, it is worth running a workshop with the client that examines the causes of demand for your services and examines what could be done to reduce that demand. This sounds counterintuitive (‘I am going to help you to need me less in the future’), but it is really about creating a closer and more sustainable relationship and looking for the reward in terms of valuable swaps, as we did in the spend reduction projects above.

In one example, I recall working with a client on business disputes and we discovered that, of the eight regions involved, one region accounted for 12% of their business but for 47% of their disputes work. Something was wrong here. Our project became one of examining what was different in this region and correcting it. As a result, the necessary savings were achieved and not a single penny taken out of our prices.

In another case we looked at the division between the work that the client did in-house and that which was passed out to service firms like ours. We agreed that if the target for reductions was going to be achieved, the in-house team needed to take on more of the work themselves: we transferred a member of our staff to work full-time at the client and as a result, reduce their spend. What did we get in return? We signed a long-term contract guaranteeing us the remaining work for the next five years.

Other solutions included creating a level of self-service for the client so that standard advice could be automated (spend now, save later) and running process improvement workshops, where every stage in the work between us and the client was critically examined over a two-day event in order to find shortcuts and cut out work, and hence time and cost.

Given any realistic target, I would be surprised if the necessary savings could not be achieved using a combination of these techniques. If the target is too high, then it is part of your role to point that out and look at alternative solutions. For example, can you restrict your involvement to certain stages only, with other parts being given to much lower cost service firms, perhaps offshore?

CONSOLIDATION AND ITS DANGERS

Pretty much a first port of call when clients want to make savings is to swap savings for a greater share of the work. This is logical and natural: bigger clients expect better rates, and if a client is spreading the available work across too many firms then it may not be receiving the best available terms. So, a client who has a £400,000 spend across four firms equally may not want to move all work to one firm (there may be concerns that this stops inter-firm competition and increases risk) but it could move to two firms, offering each of them a higher share of spend in return for a discount. In addition, knowing that two firms are about to lose £100,000 of work will make all of the firms compete to offer the best deal and win the prize of becoming one of the two chosen firms.

Not only is the client thinking that consolidating the work into fewer suppliers will save money, but the service firms are thinking along the same lines. If the client wants to save 10% on spend, then that is acceptable in return for a substantial increase in the volume of work. The problem with this thinking is that it is actually much more beneficial for the client than for the ‘winning’ service firms.

In broad terms (for the moment ignoring any economies of scale), achieving a reasonable saving for the client may come at a very high price for the service firm. By way of example, a firm that currently has £100,000 of work at a profit of 30% will see that giving 10% discount in return for an increase to £200,000 has a surprising effect as shown in the table below:

The service firm is carrying out twice as much work after the deal, meaning it has to recruit, train and retain twice the number of people, will need twice the working capital and perhaps an investment in equipment and premises – so business risk is increased, in return for a small increase in cash profit and a drop in percentage profit (so that the firm now receives £40,000 profit on its increased income of £180,000 which is 22%).

Now, there will be some economies of scale in a typical service firm, but they may be much less than you think. Economies of scale, in the above example, means that the overheads will not double if you are carrying out twice as much work. If they become £135,000 rather than £140,000 then that £5,000 will fall to the profit line. I would caution that you work out actual economies of scale before offering discounts for volume.

Moreover, there is a better way, which was described in ‘Spend reduction projects’ above. It is quite different if you use a project to reduce the amount of work involved and create a corresponding reduction in price, and then use that as the basis for the client giving you a greater share of work. Compare those economics where, in return for reducing costs and price by 10%, doubles the work it gives to you, as shown in the following table:

In this second example we have earned extra turnover from this client by creating a 10% saving from efficiencies and maintained our profit at 30%, even assuming that there are zero economies of scale (and if there are some, then profit and percentage profit are increased).

CREATING AND SHARING SAVINGS

You may find yourself facing a client who has been mandated to achieve savings and who is clear that they will not ‘spend to save’ – for example by paying you to develop new services that are more efficient and cost less. In those cases it is possible to create money out of thin air by agreeing to work on such a project but to limit your fee to a percentage of actual savings achieved.

This creates a no-risk project for the client which is very clearly aimed at achieving their cost saving objective, but which can also pay you for the work involved. If a client is spending £250,000 a year with you and wants to reduce that to £200,000 (all other things being equal, i.e. for the same volume of work), then you might say that you will put a team to work on that project and will charge 50% of the actual savings achieved in the first year. This means that if the project actually costs you £25,000 or less to achieve the required savings, then you have been paid a proper amount for your work.

Of course, you cannot guarantee to create this type of efficiency saving, but it is a reasonable project. You should ask for a high percentage of the saving in year one, because the savings should be locked in (without any charge from you) for all subsequent years. Also although the result of the exercise is that you have lowered your total income (but should have preserved your overall profitability), you can look for other rewards from this client, such as a greater share of their spend or referrals to other potential clients.

If you find that you have a group of people in your service firm who are underutilised perhaps because of a sudden downturn in demand, then this is a good way of keeping them busy – for them to visit clients and potential clients and offer to run projects that only bill a percentage of actual savings achieved. Let’s look at that in more detail in terms of projects for the underutilised.

HIDDEN RESOURCES AND HOW TO USE THEM

It is a rare service firm that neatly runs at 100% utilisation every day in every type of work. If you have managed to pull off this trick then you are indeed fortunate and I expect you will be using some clever methods of capacity planning and resourcing.

For everyone else, there is a reality that any available time which was not billed is lost forever. It can’t be carried forward, and it represents waste. A great way of using that unused time is to invest in projects of the type explored in this chapter. This might be entirely internally focussed, where teams look at your existing processes and seek out more efficient ways of doing the work. That is standard practice in Routine Work, where the typical fixed fee means that all efficiencies fall to the profit line of the service firm – and this positions the firm for regular price conversations with clients who continually seek more for less. A good starting point for Relationship Advice is to look at those areas of work where there are regular write-offs of time: time that you cannot bill to a client because it was outside of the fee estimate for project-based costing, or where you allowed scope creep without obtaining permission for a higher fee. In those cases, efficiency gains are for your benefit in reducing write-offs.

If you have areas of your business that are quiet then it is a great use of the available time to have people sit at clients’ offices and look for ways of improving service and reducing costs. For example, if you have a team of five people who are 70% utilised then you could take one person out (increasing the utilisation of the others to over 85%), and have a ‘free’ person spend a month (or three) embedded with the client in order to look for efficiencies and savings. If you weren’t going to fire this person (to reduce overheads), then it is much better to have them working on relationship-enhancing projects onsite with the client than for them to be helping to further lower the utilisation levels in their team.

If you have read through the projects in this chapter but doubted your ability to put them into action, then using these hidden resources is a great way of actually seeing some results.

ROCKET SCIENCE

When a client needs a Rocket Scientist it is pretty rare for them to then tell the Rocket Scientist how to carry out the work. In fact there would be dangers in that. By definition, the client has called in a real specialist so they are likely to allow them to carry out their work in the way they think best. When going into a difficult operation in hospital, it would be strange to see a patient arguing with the surgeon about how many nurses or anaesthetists are going to be in theatre (in order to try to save some money), or what methods the surgeon should use.

However, there has been a trend in some areas of services for clients to expect some disaggregation: simply meaning that the Rocket Scientist will focus upon the most difficult parts of the task, but if there are relatively straightforward parts then they will be passed to less specialist (and less expensive) staff. They could be different staff within the main service firm, they could be passed out to a separate part of the firm (on- or offshore) that specialises in the more routine aspects of work, or outsourced to a specialist provider.

It can enhance the reputation of a Rocket Scientist that they clearly have such disaggregation services set up and in place, especially if their direct competitors have done so. However, other than that, I would not expect there to be much talk of saving money (other than in terms of achieving a great result for the client) in Rocket Science work.

ROUTINE WORK

At the other extreme, clients are very keen to hear that money can be saved on Routine Work and in fact may demand year-on-year reductions on the (usually fixed) price. Clients want to hear about clever use of technology, outsourced services and efficiency. The problem is that there must come a point where the price approaches zero (although never reaches it because of the exponential curve effect). For example, if a client expects to achieve savings of 10% at each two-yearly review of service firms, then across 10 years the price drops from £100 to £59. Factor in even modest inflation of 3% per year in overheads and 34% will have been added to them across the 10-year period. Given the typically low percentage returns on Routine Work, it takes little time for profit to disappear.

As a result, it is those who are involved day-to-day in delivering Routine Work that will have most experience in process improvement or the more radical business process re-engineering, which looks to take a fresh look at the whole process from start to finish, examine the outputs and see if there are very different ways of achieving those. This is in contrast to a more traditional process improvement approach which may seek, for example, to computerise existing manual processes. As I have explained, it is important for those involved in Routine Work to focus not just on the cost of delivering the service, but also upon the results achieved and to create data around that, or they will end up with a one-dimensional conversation around price. However, without doubt, the greatest experience in managing process and cost lies with those involved in Routine Work, and they can be very valuable in helping those in Relationship Advice to rethink how they deliver their service. If you don’t have such people within your own service firm, then it can be worth asking a client if you can borrow one of theirs, and to create a joint project with their Routine Work expert and your Relationship Advice people to see what they can learn. As any improvements are likely to feed through into that client’s bills they can be very willing to help out and, once again, achieving savings with one client is a great way to attract other clients.

WHEN TO SAY NO

What happens if a client needs you to reduce prices and cannot offer you any acceptable swaps? What if the client just needs a service that is cheaper than the one you can provide (even after you have stripped out as much as possible)? What if the client has found a very low-cost supplier and either wants you to match that price or accept that you are going to lose this work?

This is becoming an increasingly common situation and one which demands a strategic answer – do you really want to keep this client or not? Partners often seek to hold onto these clients, typically offering some price reductions and convincing themselves that they will, now, change the way the work is done in order to decrease its production cost. However, no one has time to make substantive changes to working practices so all that is achieved is the price drop.

The key question is whether you need to provide this (lower value) work to this client. If it is the only work that the client gives you then you have a straightforward decision. You could find ways of lowering your costs of production sufficiently that you can lower your price and still maintain an acceptable margin of profit. Is it worth it? Is this client part of a trend? Could you just let the client go? To keep the client may mean investing in nearshore or offshore teams, structured with higher leverage, and investing in technology. It can be much better for your business to accept that there is a bottom end to your current work which could be handled more cost-effectively by lower level competitors – perhaps firms which focus entirely on that work, or are much smaller than you or have developed systems, processes and economies of scale that you may find difficult to match.

Frequently, partners are faced with a client that delivers a range of work to their firm and the immediate threat is the loss of the bottom end of the work. The partner will typically aver that, if the lower end is lost, then it won’t be long before all of the work is lost. That might be true but you should ask the client if that is the case. If a low-cost competitor has come into your market and segmented the low-end work as its target market, it may not have the skills to take on the high-end work. It would be quite different if this was a mainstream competitor that covered the same range of services as you, but then those competitors are less likely to be able to (sustainably) undercut you.

So, bear in mind that a very good alternative where the work is at the bottom of your range is to let it go, and to focus your efforts on winning higher-end work where the margins will be higher as well. It is OK to say no if you have thought it through and made a considered decision.

CLIENTS WHO ALWAYS WANT TO SAVE MONEY

Pricing experts are quick to identify those clients that are always looking to save money. They are often called ‘price buyers’ because they have a habit of negotiating very hard over price in the area of Relationship Advice (whereas it would be expected in Routine Work). You need to beware of these clients, as it is often true that your lowest price client is your highest maintenance client. There can often be cultural issues here – the client may work in an organisation where savings have become the norm. If you have created your service business using the ‘Cost leadership strategy’ (we provide pretty much the same service as our competitors but at a lower cost), then your business will be structured to cope well with this type of client.

However, if you are the more typical service firm, pursuing a differentiated service strategy, these clients can be a real danger because they can tie up resources out of proportion to their worth. In Chapter 8 we looked at how you might cope with these clients by developing a minimum level of service, and that should be your first response. Lower price must mean lower level of service. If the client cannot be contained by service reductions then at some point you are going to need to say ‘no’ to them, so it is important that you develop a replacement strategy which puts real time and effort into winning new clients that are more focussed upon the value that you deliver. By gradually increasing these, you will have more confidence in your ability to say no to the problem client.

In fact, having identified these price buyers, it can be very satisfying to pass them on to your competitors. It means that you have stood your ground and maintained your pricing in the face of continued pressure, and have accepted that you cannot please all of the people, all of the time. In your service firm, you need to avoid being in a situation where you are totally reliant on these types of clients, or they will certainly take advantage of that fact to the detriment of your prices and your profit. Think back to our discussion of market positioning and how a hotel would accept that there is a segment of the market which they can serve, and others that they cannot. You don’t have a pricing strategy if it collapses in the face of a persistent price buyer.

FINALLY – WHEN DID YOU LAST SAVE A CLIENT MONEY?

Here’s my key lesson on this topic. I have found that, in practice, only one service firm gets close enough to the client to run the cost-saving exercises described above with them and to help the client to analyse its spend across all of its service providers. The investment of time by the client usually means that they can only realistically run this with one firm, and they then impose the results upon all firms.

Being proactive about helping clients to save money can therefore have a big payoff, and can result in you truly partnering with them to look at how they can be more efficient and how you can help. That help is often at the expense of competitor firms, and that is the incentive for you to be the one who opens up these conversations with clients – or would you rather that your closest competitor did this, so that they were the one making suggestions to the client about how they might save money in the future?

Let’s now move from the topic of saving money into our final chapter, which examines two topics. First, how you can manage pricing within a service firm so that there are sensible controls on the prices that can be agreed with individual clients. Secondly, how service firms can truly embrace pricing as a key capability of the organisation which is as important as finance or marketing, and is given the resources to make maximum impact on the success and profitability of the firm.