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When you’re trying to improve your business it’s imperative that you are focused on the distinction between Hygiene vs Health
In David Maister’s book Managing The Professional Service Firm, he explains that most firms and their management reporting are focused on short-term profitability (hygiene), whilst failing to increase the fundamental profit potential of the organisation (health).
Maister goes on to say that “the list of quick-impact profitability improvement tactics is very different from your list of permanent-impact tactics… Some elements, predominantly short-run ‘hygiene’ issues, get over managed, and many long-run ‘health’ issues are undermanaged.”
Here’s his list of profitability improvement tactics in descending order of impact on profit health1:
1. Raise Prices
- Earn higher fees through specialisation, innovation, and adding more value
- Use marketing to get “better” work
- Speed up the skill-building process in your staff
- Invest in new (higher value) services
2. Lower Variable Costs (delivery cost for each engagement)
- Improve engagement management performance
- Increase leverage in the delivery of services (i.e. push work down as far as possible to cheaper and more junior staff)
- Make greater use of paraprofessionals
- Develop methodologies to avoid duplication of effort
3. Fix Underperformers
- Deal with underperformers (i.e improve poorly performing services or clients where possible)
- Drop unprofitable services
- Drop unprofitable clients
4. Increase Volume
- Increase utilization (billable hours per person)
5. Lower Overhead Costs
- Improve speed of billing
- Improve speed of collections
- Reduce space and equipment costs
- Reduce support staff costs
The first two categories are the key to good business health and the third category can also have a long-term health impact if managed correctly.
The last two categories are hygiene factors. That is, they are important for short-term performance but won’t have a significant impact on increasing the fundamental profit potential of your business.
When you start considering Maister’s list and really focus on the first three issues which can impact the health of your firm, there’s just so much scope for business improvement.
Let me pick one aspect from each of these first three categories.
Raise Prices:
There’s so much more you can do in this space than simply thinking to yourself “I should charge more”.
Maybe you should just charge more but look at the different ways that you might achieve this outcome.
You could start to focus and specialise in one or two specific target client groups which I’ve written about before in my blog How To Reach Your Maximum Audience. Or you could engage a marketing firm to raise your profile amongst this group and make you look better out in the world.
However, the one I want to focus on is speeding up the skill-building process in your staff.
Most firms talk a good game at developing their people, although in practice there’s not nearly enough coaching and supervision time put in to allow for successful delegation. That prevents you from increasing leverage and getting proper value out of all your staff, which you would achieve by pushing work down to a cheaper resource than you (or the other senior advisers in your business).
Owners and managers resist putting time into skill development because, on any one task or job, it’s always more expensive to get a junior team member involved. So although more coaching and supervised delegation are vital for the medium and long-term health of your business, it presents as an increased cost in the short term. Yet this is incredibly short-sighted and holds back your firm’s growth and development.
Lower Variable Costs
The aspect I want to focus on here is improving engagement management performance. In practice, this means getting better at converting new clients.
If you are only converting 25% – 30% of all new enquiries that you sit down with at a first meeting, it’s just too low. And a lot of advisers will have these sorts of conversion rates if they bother to measure this data accurately.
Good performance is a conversion rate of on-target leads that is 60% or more. And being able to do this is a skills issue that any adviser can learn to do better, regardless of how long they’ve been in the profession.
Fix Underperformers
The key issue here is to focus on “who you love to serve”. And importantly, are you serving clients that are appropriate for the skills base and cost base you have built in your business?
I think of good financial planners like surgeons in a hospital. Surgeons don’t treat people with the sniffles. If you’re a heart surgeon you only do heart surgery.
As a skilled and experienced financial planning firm, what level of client complexity should you focus on?
By answering these questions and then dealing with any subsequent tough choices, you can fix the underperformers in your business, become more profitable, have more fun, and improve the long-term health of your business asset.
Conclusion
Good personal hygiene is important on a day-to-day basis, but it won’t ensure you experience good health.
The same is true in your business.
What are you going to work on this year to improve the health of your business?
Let me know how you go.
Related: Five Themes That Will Be Critical to Advisors in 2023