Cross-selling in management letters. (includes related article providing an example of a management letter cross-selling comment) (Management Advisory Services)by Stone, Peter F.
The market for auditing services is saturated. Audit firms can increase their practices only by winning audit clients from other firms, a difficult thing to do. That's the bad news. The good news is that auditors also perform consulting services and there is an unsatisfied demand for those consulting services.
Selling consulting services to your audit clients (cross-selling) is relatively easy because you face minimal direct competition. It's also defensive in that it reduces your clients' exposure to competitors who are selling consulting services and audits.
Selling audits to your consulting clients (also cross-selling) is more difficult because, usually, you are competing directly with another firm to win the client. This requires more aggressive marketing than selling consulting services to your audit clients.
Advantages of Cross-Selling to Your Clients
The advantages of selling consulting services to your audit and review clients are:
* The investment in the sales process is much less than is needed to win new clients;
* The client's knowledge of the firm lowers the client's sales resistance;
* The firm's knowledge of the client often permits the firm to provide consulting services more efficiently than competitors;
* The firm faces lower risk and liability exposure because the firm knows the client;
* Existing clients are isolated from competitors who are selling consulting services and audits;
Clients who benefit from consulting services have greater loyalty to the firm and are helpful referral sources; and
* Management letter comments provide a basic from which to sell.
Well-written, cost beneficial advisory commments in the audit management letter can leverage your cross-selling effort in several ways.
As auditor, you have direct access to decision-makers when you use a management letter to discuss the benefits of a consulting engagement. The CEO, the CFO, other officers and directors of the company read the management letter. You enjoy a competitive advantage in your access to these individuals through management letter comments.
The client usually feels obliged to respond to management letter comments. In some selling situations, the prospective buyer may delay responding to the proposal for an indefinite period. The client views management letter comments as important. In most cases, the client will promptly state his or her view of a suggested engagement.
When members of management preview management letter comments they provide input. As a result, they may "buy-in" to those comments. This is a unique opportunity for consultative selling whereby you can discuss the comments with management on an informal basis before presenting them in the management letter. If thoughtfully and carefully presented, you may develop support for the services from the management group.
Recommending consulting services in the management letter informs the client that those services are available. Audit firms have lost consulting business because clients did not know that their auditors offered such services.
Using Your Special Knowledge
As you gain experience with client management, you develop special knowledge of the way decision makers operate. You come to understand:
* Personal goals of decision makers;
* Individual management styles;
* Relationships within the company; and
* Management's business strengths and weaknesses.
There are certain kinds of engagements where this understanding is especially valuable. Examples are succession and estate planning, financial advice, and strategizing mergers and acquisitions. Usually, management appreciates your understanding of these matters. Managers know that to be effective, for some services, the consultant needs information that can only be gained through experience with the client.
Clients value their auditors' industry knowledge. In general, your comments should reflect that knowlimportant or have time to fester and grow painful. You'll create the kind of relationship with the greatest cross-selling potential.
Client Participation in Preparing the Management Letter Comments
Responsible members of management should preview all management letter comments in draft form. This step is especially important for a comment suggesting an engagement. Prior discussion of the comments has these advantages:
* Management suggestions can improve the management letter. The description of the problem will probably be more accurate, as a result.
* With management's input, you can assure that the suggested engagement supports company and management goals.
* Involving management in preparing the comment increases the chance for success. The resulting comment reflects management's view of the potential consulting service. Management is therefore more likely to request a proposal based on the comment. People support what they help to create.
An example of a selling advisory comment in a management letter is shown in the accompanying sidebar to this article.
Follow-up begins when the client has received and distributed the management letter. Talk to the person who makes the buying decision. Present any additional information about the problem or engagement. Also, describe any time constraints. Engagement results may have greater value before some deadline or report date. If the client declines to consider a proposal or rejects the proposal, continue to track the problem. You have already described the results if the problem were to remain unsolved. In time, events may confirm your predictions. In this case you have very persuasive evidence for a selling advisory comment in the next management letter.
If the client agrees to consider a proposal, then it is developed through needs identification and consultation with management. The usual steps in the selling process follow proposal development. These include proposal presentation, persuasive discussion, and closing through the engagement letter.
Limitations of Cross-Selling
Although cross-selling can be productive, it has a basic limitation in that management letter comments are usually prepared as a reaction to problems rather than as the result of systematic diagnosis. However, working with consultants, auditors can identify areas where help is needed and a consulting engagement could result. Also, a faulty or poorly handled consulting job for an audit client can put the audit engagement in jeopardy.
An Example of a Management Letter Cross-Selling Comment Improving Profitability
Viva's increase in sales from $230 million in 1983 to $282 million in 1988 is an outstanding achievement; The increase in sales continues a trend due, in part, to Viva's introduction of new products. in the last five years, Viva has expanded its product line of valves to include meters and hydraulic servo-mechanisms.
Recently, however, the benefit of the increased sales has been greatly decreased by rising production costs. The gross profit margin sales less cost of sales) has declined from 34% in 1983 to 18% in 1988. If the trend continues, there would be a decline in gross profit margin of 10% in 1989.
We have graphed the five-year relationship between sates and cost of sates, as follows.graph omitted
Viva's present accounting system provides some cost accounting information. But, that information is not sufficiently detailed or properly organized to guide management's decisions, Management needs analytical cost accounting data to improve profitability. Reports from an integrated comprehensive cost accounting system would provide th data.
Management can use cost accounting data to determine each product line's contribution to gross profit margin. This information is vital in pricing decisions. Management can use cost accounting data to control costs through continuous comparisons of actual costs to budgets and standard costs.
The major benefit of a cost accounting system would be to enable Viva to determine profitability by product lines. Then, Viva could focus resources to support those that are most profitable. Viva could also identify unprofitable product lines for remedial action or discontinuance. Both measures contribute to gross profit margin.
Actual improvement in gross profit margin would depend on study results, design and implementation of the cost accounting system and the actions taken in response to the new information gained. Designing the system requires a research and development effort and expertise in manufacturing cost accounting.
Our firm has expertise and experience in developing cost accounting systems for manufacturers. We welcome an opportunity to discuss such an engagement. We will be most pleased to prepare a proposal to develop a cost accounting system for you.
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