In my experience, the single most prevalent “culprit” in cutting into profit for a management company is the old friend. Actually, I am speaking of the old friend client or worse yet, clients. Most companies have at least one, and usually more than one. To further explain, I am speaking about that client that has been with you for twenty years, and with whom you have a great relationship. Yes, this client can be even more debilitating than that client who you have maintained a love/hate relationship with over the years, which comes in second place for this dubious honor. What is the issue with these two types of clients? Well, their fee for services often gets stuck in the mud, locked in place for years or even decades!
It is vital that you go back and reassess the pricing of clients that have been with you for a long, long time. This applies to both those love/hate clients (who always seem to be in hate mode with you at fee increase time), and with your “old friends.” Yes, I know what you are thinking “but these are the ones we use to lure in new business, as in addition to them being reliable clients, they are also reliable references.” Despite the great relationship, we must realize that the relationship is a business relationship, and in our industry of tight profits, we cannot afford to keep clients which are costing us money instead of making us money. Profit in this industry is generally within the range of 10% to 15%, and the annual rate of inflation is generally 3% to 5% (across the country and across the years). So if your company creates client contract prices to return a 12% profit and you don’t adjust the contracted price regularly, then it doesn’t take long for your profit to be eroded away. If inflation cuts away 4% of the value of the contract price every year (in real dollars), after four years you are paying your old friends to be your clients (i.e. you are likely losing money). I know there is a lot more to the profitability formula (including ancillary revenue that your clients bring), but it can usually be reduced down to something similar to this.
Our JCS Fee True-Up calculator is designed to identify the clients whose fees got stuck in the mud over the years. It simply calculates the delta between the fee set forth when you signed a contract with a client and the value of that fee in today’s dollars. Then it compares this outcome to the actual fee that the client is currently being charged. Through this process we identify the clients whose fees have been declining in real dollars.
I know what some of you may be thinking. Some of you are thinking, I DON’T WANT TO KNOW! But let me tell you that once you’ve identified such clients, the great thing is that if you insist upon a fee increase from them, one of two things can happen, 1) they fire you OR 2) they accept the increase. So, if they chose number one, you no longer lose money on the account. If they accept number two, you are now making money on the account. In my experience, most accept. Also, in the two cases where I have done this globally, across an entire company, the fee increases were more than the total fees of the lost accounts. So, that means that our management fee revenue went up while our workload went down. Now that, my friends, is a good thing in any business.
The last time I used this strategy was when I took over an operation which was losing money. By reviewing the management fee list and the length of each corresponding contract, I suspected that this was a pervasive problem across the company and a big reason that the company was losing money. So I developed a calculator to quickly assess which of the associations were in this category and to what degree. It also was a great selling point when approaching those “loser” accounts with our fee increase proposal. In fact, I prefer to call it a “fee adjustment” or “fee reconciliation” rather than an increase because with my calculator we could show them that it was still the original fee as contracted (in real dollars). All we were doing was bringing their fee back up to the corrected rate, with adjustment for past inflation. Not many balked, because we could show them! That is what our product does, allows you to quickly enter in the original contracted fee and the year the contract was signed and it adjusts the fee based on the inflation rate for your locale over the years. It then compares the old contract rate’s value in current dollars with the amount that you are currently charging that client. Oh, and our system is loaded up with 37 different data bases (national, US regions, local regions and individual metropolitan areas). Most of these data bases date back to 1980 (that’s a lot of data)! With your order, you will be able to select 3 different data bases, the ones most pertinent to your pricing regions. It is a beautiful thing!