Future View: Sionic

Written by: Sionic Posted: 21/07/2020

Stuart Richford, Managing Partner at Sionic, asks: what are your clients costing you?

If you were asked to name the largest expenses in your business, you would probably come up with staff, compliance, premises and centralised IT, to name just a few. Undoubtedly, these are costs, and do receive the attention needed at board level. But the answer has some fundamental flaws and misses a wider truth.

The answer behind each and every one of the sources of expenditure in the finance industry is, simply, the client.  

Ultimately, the reason why the majority of us are employed is to serve clients well and profitably. It is with this in mind that incredible sums are spent on innovative digital marketing campaigns, staff recruitment and retention programmes, technology implementations and upholding ever more rigorous compliance standards.

There is a typical trend towards functionalising the business environment by hiring specialists to focus on their area of expertise.

This excellence in departmentalisation is sensible and can unlock considerable economies of scale. However, in doing so, many businesses have segregated the concept of revenue generation from cost generation, despite the intrinsic link to a single source – the client. 

Cause for concern?

Where there is a functional split between business units, most businesses have chosen to align reward structures in accordance with the primary focus of the unit.

If new business development is primarily a revenue-driven target, then without appropriate onboarding controls, a focus on short-term sales targets quickly becomes the norm – with limited regard to the long-term costs associated with providing the services the client now expects.

By contrast, managers within operational functions are often tasked solely with cost management. 

A company with few cost controls is unlikely to outperform a company with opposing targets, such as simultaneous growth and cost reduction, and runs the risk of restricting long-term growth through a distinct lack of innovation and slowly falling service standards as staff are whittled away over time. 

Compounding matters further, front and back office reporting lines often report to different group functions. As a result, some executives who are given the ‘autonomy’ to manage the business, in fact have limited control, given the remote, executive decision-making structure. 

When reviewing the operating model of a business that has a disconnect between its clients and its costs, the findings tend to include the following:
• The company is out of touch with its client base and preoccupied with its own internal agenda
• The company has lost sight of the interconnectedness between client/service/product lines
• Focus is on revenue and not profit, further compounded by poor onboarding control, poor management information and overly optimistic targets
• Extensive discounting and inconsistent pricing are present
• There are persistent delays in service optimisation
• Managers have little or no knowledge of the actual cost of relationship service 
• Managers have a limited decision-making remit to effect the changes needed.

Monitoring current value

Monitoring the financial amounts received by a company is typically a well established process for obvious reasons. However, revenue is not profit and therefore any activity undertaken without the consideration of cost is unlikely to be geared towards delivering the best possible value for the business.

When choosing to target a certain client segment or perform a given service, the company should understand the resources that are expected to be consumed and at what rate.

Moreover, analysis of the cost/income structure will help management determine whether to focus attention towards cost reduction, pricing increases or service improvements. 

The logical value to the business is measured in terms of the margin the client is willing to accept for a product or service rather than price.

By understanding the sources of revenue and the activities that generate costs, we can separate the clients and activities that contribute to the central overheads from those that do not. 

Future value 

When measuring the potential value of a client, current profitability is only the first consideration. Different client groups have different potentials for future income.

Some clients look profitable at first glance but are actually made unprofitable through heavy discounting, a lack of automation in service, or a simple lack of awareness in the costs associated with supporting the client.

With clients like this, simple changes can be made to make the client profitable, such as process improvements, behavioural changes or further negotiation with the client through relationship management. 

To gain a deeper understanding of value creation, we can use a simplified model (see diagram below), which will provide an insight into the differing challenges being experienced in the business and the areas requiring management attention. 

Long-term impact of decisions

Most financial services providers gauge success in terms of the current fiscal period, despite the espoused long-term value creation and growth desired by investors plus other stakeholders in a sustainable business.

At some stage, almost every senior manager has been called to a meeting expressly to discuss how they will hit the quarter-end targets by delaying a valuable service improvement, halting marketing expenditure or banning business travel.

While short-term targets may be met, the damage to the long-term future of the company caused by the adverse impact on interactions between staff and clients or delays to service improvements is typically a greater cost – albeit less visible. 

The impact of decisions on client trust is a complex issue in its own right and value creation is a challenging balancing act between current and future profits.  

Nonetheless, assessing and understanding the activities that a client demands, the impact they have on the business and the value they deliver in return are the first steps in understanding both the client’s value to you and the cost of the business decisions you make. 

Maintaing the competitive edge

Ultimately, any effective strategy requires clear decisions around the organisation’s objectives. A decision to expand capabilities to meet business needs is a significant one. Therefore, executive decision-makers should sensibly review and understand whether that action will improve the lifetime value of the business.

In contrast, the most important decision may be to decide what services you won’t provide, and even clients that you won’t serve. 

As business leaders, we must not fall into the trap of affording all clients equal attention. Instead, we must do all we can to focus our attention on the company’s most precious asset: its key clients.

Making all of their customers generally happy most of the time is a noble quest for politicians, doctors and teachers. However, for commercial business, such a pursuit is quite unsound. 

This isn’t democracy; this is capitalism.

Sionic diagramManagement priorities

Key clients: Typically small percentage of clients generating significant returns – the future of any business, they should be the focus of service improvements, resources and staff

Core clients: Clients that need a maintenance programme and tend to be unintended beneficiaries of service improvement

?: Often new clients that need nurturing or mature ‘large’ clients that are over-serviced and/or have extensive volume-based price discounts – a key focus area for short-term improvements

Ballast: Non-critical, small, slightly profitable clients who make up a significant proportion of the client base – long-term strategic viability requires periodic review

Exit: Clients that will not negotiate and therefore would be better serviced by an alternative provider


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