It's time to bank on your relationships with existing clients and referrers

As small firms consider their growth strategies for 2016, they should appreciate that building relationships with clients and referrers is still the key to success, writes Colin Ritchie.

Existing clients and referrers have always been important for small law firms. While these relationships are the key to a firm’s current value, Macquarie Bank’s 2015 Legal Benchmarking Report also reinforces the fact that these two sources are still overwhelmingly responsible for the majority of new work for smaller law firms.

The majority of the survey participants were smaller law firms (defined by Macquarie as having turnover of less than $4 million), so the report should not be ignored by the smaller players. It highlights that up to 68 per cent of  new work for higher-performance small firms is still expected to come from the traditional sources of repeat business from existing clients and external referrals. Website enquiries, although important, made up only 9 per cent of new clients for high-performance firms. However, even for firms that attract most of their work from existing clients and referrals, they should not ignore an online presence because, increasingly, prospective clients will do their homework on firms online before making contact.

The biggest external issue for small firms – fee pressure

In the survey, pricing of legal services is identified as the major external issue facing smaller firms, with 70 per cent being concerned about clients seeking more competitive prices. Not surprisingly, when considering emerging competitive threats, 51 per cent of smaller firm respondents were most concerned about increased competition from low-cost virtual law firms. The good news, though, is that if you have built a strong relationship with a client, the chances of that client leaving you for a low-cost virtual firm are significantly reduced.

These results complement other sector findings. In its ground-breaking customer service program, Towards Awesome Service, Results Accountants Systems analysed the reasons why clients left businesses. Interestingly, the price of legal services accounted for just 15 per cent of defections. The main reason (by far) that clients left a firm was because of ‘perceived indifference’. That is, the client felt that the firm simply did not care about them (even though the firm may have cared a lot).

A good example of perceived indifference is a firm that does not return telephone calls or emails, but there are many other examples. Once the client perceives any indifference, price may well become an issue as it starts to think: “I don’t deserve to get treated like this … I’m paying this firm $10,000 … maybe I should look elsewhere.” You may have gone through the same thought process yourself when you have experienced perceived indifference at another business. By building a true relationship with a client, however, the chances of the client perceiving indifference from your firm will be significantly reduced. Accordingly, the client is also much less likely to cut and run.

Major internal issues for small firms

When examining possible internal issues that firms felt would have an impact on performance in 2016, the big three issues for small firms in the Macquarie Bank survey were:

1. Maintaining and growing profit (61 per cent)

2. Attracting enough new target clients (52 per cent)

3. Spending too much time with lower-value clients (46 per cent).

Again, all three of these concerns can be effectively addressed through a focus on building quality relationships with existing clients and referral sources.

Maintaining and growing profit

A firm cannot grow profit directly, as profit is an equation of revenue less expenses. To increase profit, a firm must either increase revenue or cut expenses – or do both. In my experience, if there is a desire to increase profit at a firm, then the best use of time is to focus most of the available time on growing revenue.

The survey results demonstrated that about 70 per cent of firm revenue was expected to come from a combination of repeat work from existing clients and referrals. The effect on revenue of generating just 10 per cent more work from existing clients and encouraging referrers to refer just 10 per cent more new clients could well translate into a healthy 20 per cent lift in profits if the work can be done with the firm’s existing resources.

Attracting enough new target clients

The issue of new target clients can potentially be interpreted in two ways. The firm may be attracting enough new clients, but not enough of their ideal ones – or they may be attracting the right clients, but just not enough of them. To address both issues, I will concentrate on referrals as I believe they have the greatest potential to consistently provide the firm with its best source of ideal new clients. If the problem is that the referrals are sufficient in quantity, but not in quality, this is likely to be an education problem.

By examining the source of the non-ideal clients, it can be as simple as educating the referrer on exactly what sort of clients you are seeking. If that referrer is not able to supply the clients you are targeting, then it may be a matter of either ramping up the relationship with your other referrers, or finding some more referrers of your target clients.

That leads into the other part of the issue: not generating sufficient quantity of referrals. Many referrers can potentially refer a firm hundreds of clients over the years, but often they do not do so for varying reasons. The obvious way to address this issue is to give the referrer a reason to refer more clients – now. Let me explain how.

In cases where a firm is targeting a particular type of client, it is likely that the firm will be very familiar with the concerns of that client type or, as I call it their ‘pain, problems and challenges’. Given that knowledge, it is not hard to come up with some great solutions to some of these concerns. An education strategy with your referrers on your unique solution is likely to bear fruit in terms of giving your referrers a reason to refer more ideal clients now!

Spending too much time with low-value clients

A focus on existing clients and referrers can also address the issue of concentrating your firm’s efforts on low-value clients. The beauty with existing clients is that you already know about them and you already know which ones are the low-value ones. It is really up to you how much time you choose to spend with the low-value clients. If any of your referrers are referring too many low-value clients, it is up to you to retrain them. First, identify who is referring the low-value clients and reacquaint them with the types of clients you really desire.

Existing clients and referrers have always been important for small law firms and they will continue to be so in the future. By managing the relationships with them you will not only retain and attract more of the clients that you really want to act for, but you will avoid the challenges with which many smaller firms are concerned – and your firm will be more successful. That sounds like a recipe for an enjoyable practice to me.

Colin Ritchie is director of Ritchie Business Solutions, a consultancy which specialises in marketing and profitability issues for small law firms.

www.ritchiebusinesssolutions.com.au

To see the full Macquarie Bank 2015 Legal Benchmarking Report, click here.