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March 1990

Working smarter, not harder. (certified public accountants) (Management of an Accounting Practice)

by Marsh, Winston

    Abstract- The Pareto principle stipulates that 80% of results are achieved from only 20% of the effort expended. Typically, this principle holds true for an accounting practice, where the majority of time is taken up satisfying the needs of clients who represent an insignificant portion of total of business. To counter this situation, an accounting practice may want to separate clients into three lists: the 'A' list of the the upper 20% of clients, and the 'B' and 'C' lists made up of the remaining 80% of clients. The latter two lists should differentiate between clients that have or do not have the potential to become major clients. Accountants should then maintain 'A' list clients, cultivate 'B' list clients, and disregard 'C' list clients.

If you are prepared to invest your time in activities that generate results from the most potent section of your client base, then the results you will generate will not be marginal but dramatic. The secret lies in the Pareto principle.

The Pareto principle is very simple. It states that 80% of the results achieved in business come from 20% of the efforts expended. Many people are familiar with this formula, but not many make it work for them.

In a typical accountancy practice, a mere handful of clients usually generates the lion's share of the practice income and therefore the profits. But who takes up most of the partners' time? Is it the small group of large billing clients, or is it the large group of clients who provide little by way of return except for constant demands for attention and complaints about fees? In my experience, it always has been the second group.

In the average supermarket, about 80% of the turnover, and consequently 80% of the profits, are produced by about 20% of the items on the shelves. The remaining items take up most of the shelf space, but generate only about 20% of the sales. Does the little group of sweetly selling products get the time and attention of the supermarket staff? No, they are forever spending their time organizing, displaying, discussing and chasing the large number of products that contribute so little to the supermarket's bottom line.

Examples of Pareto could go on forever because Pareto happens in all businesses everywhere. By the way, please don't take me to task for the odd percentage point or two. Maybe in some businesses it's 76% of the results in that are generated by 24% of the efforts.

And here's the rub. What would happen if people in business could devote their time and effort only to those activities which produce the results so instead they could spend 100% of their time on the really productive matters. In other words, what would happen if they multiplied their efforts by a factor of five?

While mathematics is not my strong point, it follows that if you multiply the effort side of the Pareto equation by five you would need to multiply the results side by the same number. Putting it simply, the results will go up to 400%--an astronomical increase by simply concentrating on the things that are important!

A useful activity for anybody in business then is to maintain a time log over a week or two. In this log you should note exactly what you do during your work time. Then you can correlate the use of your time with what it produces in terms of results and income. Once you know the activities that generate results and income, it's a simple matter to concentrate on those activities and soon see a better bottom line. Alternatively, if it's satisfaction you're after, do the same exercise but correlate the time invested with the amount of satisfaction generated.

Applying Pareto to Clients

The next step is to apply Pareto to your client base. The best way of doing this is to identify that relatively small group of clients who generate 80% of your results and divide them into two groups. In one group you will have the clients who generate 50% of your business; in the other group, the balance of clients who generae the other 30% (which adds up to Pareto's 80%). Call these "A class" and "B class" clients respectively. The rest of your clients (the 80% that produce 20% of your business) are called "C class" clients.

Now divide your "B class" clients further into two subgroups. As objectively as possible, decide which of these clients could grow if you could devote more time to them. The rest will be clients whose business you think will remain static. The clients with potential should then be elevated to your "A class" list.

You now have three distinct client classes: "A class", who provide around 50% of your business, and there will be a handful of these; "B class", who provide around 30% of your business, and there will be a greater number of these than there are "A class"; and "C class", of whom you will probably have multitudes and who are the people that usually take up a lot of your time but produce little result.

Having divided your clients into classes, consider the following strategies for dealing with each class.

Love them to Death

"A class" clients are the ones that need your personal care and attention. Your strategy should be to endeavour to "love them to death". It is, of course, impossible to love clients to death, but you should try. So far as is known to this writer no client has ever died of too much attention. On the other hand, many have withered away because of too little attention. "A class" clients should be loved regularly, fervently and individually.

The way to tacke this is to set yourself specific objectives to achieve in respect of each one of these clients during, say, the next 12 months. You can choose from a wide range of options. For example, it may be your objective to visit each one at his or her office or factory personally at least once every two months. Alternatively, you may want to take each one out to lunch at least once a quarter, or you could decide to provide them with a service or product which you don't currently have.

You will find that your objectives list will be varied because what you must do is carefully assess each client individually. Then, and only then, decide what you are going to aim to achieve in respect of that client.

You should have the same objective of "loving them to death" for your "Class B" clients, but on a grop rather than on an individual basis. "Class B" clients do not provide you with the same return for your time investment, and so you should limit the time you devote to each of them individually and proffer it to them in groups. This is how you multiply the value of your time--one hour invested in one client can give you only one hour's results; one hour invested simultaneously with 10 clients can give you 10 hours' results. So, for your "Class B" clients you should set specific objectives that can work well for groups of clients. Activities you should consider include seminars, briefings, guest speakers, luncheons and dinners.

Get Rid of Them

Now, let's look at the "C class" clients. These are the people--and there are many of them--that take up your time for little efffective result. Unfortunately, you must be cruel to them to be kind to yourself. You must either delegate them to someone else in your business, sell them to one of your competitors or lose them. One of these three options must apply.

I am sure that many of you will think that this is outrageous. Most people in business have been brought up to believe that every client they gather is important, no matter what the cost. This is just not true. Sometimes the effort necessary to retain a client is not worthwhile in terms of the result it produces. When this is the case you have to be ruthless and let them go even if it goes against all that you have been taught.

The best solution, however, is to delegate "Class C" clients to a junior member of your staff. This usually works very well. It motivates that person to perform well because of the responsibility with which you have entrusted him or her and, as a bonus, you'll find that some of these "Class C" clients grow because of the attention lavished on them.

Remember, too, that when delegating clients you should always pass them on with a ringing endorsement and recognition of your successor. Make sure you explain to the clients that they are going to be handled by somebody who has the skills and time to devote to them.

If you can't delegate, think about selling those clients off. No doubt some potential "As" and "Bs" will be among them, but your business will be going ahead in leaps and bounds if you concentrate on your good clients, so it won't matter too much. It doesn't hurt to see a competitor doing well either, and the money in the pocket would be nice, too.

If neither of these two strategies is for you, then you should simply let those clients know that you no longer have the resources to deal with them. Whatever you do, remember to let them know. Don't let them continue under the illusion that they are your clients if you are not prepared to maintain some level of service to them.

And what will be the result of your efforts? Very simply, you will have reduced the amount of time you normally expend in your business by around 80% by merely removing about 20% of your business. If you can devote the time you've saved to the "A" and "B" clients, you will see a huge increase in your business and your results. The time you free up by withdrawing your personal involvement with "C class" clients can now be invested in more productive areas.

Winton Marsh specializes in communication and marketing. He writes for and speaks to a wide range of audiences on these subjects, and is a consultant in the marketing of professional and financial services.

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