PPT presentation of Marketing Professional Services In Asia Seminar at Cim HK...
The Competitiveness Of Hong Kong And Asian Accounting Firms Rev May 2012
1. The Competitiveness of
Hong Kong and Asian
Accounting Firms
WHITE PAPER
Revised May 2012
A free white paper provided by SRC Associates Ltd, Hong Kong.
By Robert C. Sawhney, managing director, SRC Associates Ltd.
2. Strategic Management and Strategic Marketing – time for understanding
There is wide scale confusion among firms in the accounting profession as to what
strategic management concepts have to do with their firm. For example, many accounting
firms still believe marketing to be about promotion and they don’t feel that promotion
such as advertising is very effective for building business. Accountants who feel like this
are absolutely right!
Marketing, in its truest sense, has nothing to do with promotion. Marketing is a mind set
and firm culture that recognizes client value and market focus is the key to success.
Research is unequivocal, professional service firms that outperform their peers are:
Client focused
Innovative
Understand their client industries
Systematically collecting information about the market and using it for decision
making
Demanding of their professionals and support staff in sharing information across
the firm
Communicating clear values and beliefs across the firm that are lived and
breathed by seniors and juniors
Aware of what their competitors are doing
Using knowledge to continually enhance the firms capabilities
Thinking about the medium to long term
Strategy is actually quite simple. Think about what markets to serve with what services,
and how to deliver value in those markets that won’t be easy for your competitors to
follow. Everything else is supposed to follow on from there: hiring the right people,
building client relationship management systems, creating plans that address the short,
medium and long term, and continually enhancing the firms skill set and capabilities to
serve your clients and stay ahead of the competition.
In reality, it is much more difficult than that. Implementation is more than half the battle
when it comes to strategy. When senior partners in the firm don’t recognize the value of a
marketing culture and dogmatically refuse to innovate then no amount of strategic
planning will help your firm. Changing the mind set of professionals so that marketing is
viewed as a strategic weapon that is the bed rock of firm performance is the only way that
a viable strategy can be implemented. Targeting new clients or industries with your
existing value systems and beliefs will lead to much frustration and wasted resources.
Think about it like this: what do clients really want?
Responsive firm
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3. Professionals that speak in simple terms and show empathy
Firms that understand their business and industry
Firms that add value to what they do
Firms that are reliable
Firms that are flexible
Firms that offer services which are of real benefit
Quality work and service
Firms that show interest in them without always looking for fees
Regular and unprompted communication
Whilst this list seems simple enough, indeed simply intuitive, achieving these outcomes
is not easy. There are certain natural occurrences in accountancy firms that stop them
providing real value to clients, these are:
Hourly billing that does not recognize value and creates conflict of interest
between client and firm
Focus on billable time and utilization rates
Associates trained in technical skills but not in management
Professionals with high IQ and little EQ
Firm structure that inhibits cross functional sharing of information
Professionals with little formal business training
Senior partners with high resistance to alternative ways of working
Fixation on practice areas as opposed to client problems
Focus on cross selling without understanding client needs
Lack of understanding of marketing techniques such as research, segmentation etc
What this points to is a need for culture change within the firm as a prerequisite to
achieving high performance. Firm leaders must recognize that a firm and the way it
works is often a reflection of themselves. Leaders who say one thing and do another are
living by the values they declare and this has a negative impact on firm performance.
Research in the professional services field shows a clear link between firm values, job
satisfaction, and financial performance. For this to be a reality in your firm, you must
align the internal structure, systems, and processes of the firm so they are all aimed at
achieving differentiation and client value.
We call this culture a market orientation (nothing to do with marketing as perceived by
99% of professionals). A market oriented firm is one that understands clients, markets
and itself in order to coordinate information sharing across the firm that leads to client
value that is very hard for other firms to copy. It is the soft systems of communication
and tacit knowledge will hold the key to success but that key cannot open any doors until
firm leaders are ready to adopt change seriously and on a firm wide basis.
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4. Globalization
As China becomes a more dominant player in the world market, the potential for
accounting firms to provide services on a transnational basis will continue to increase.
Emerging markets in Asia and elsewhere are proving attractive markets for organizations
from developed nations as well as those expanding in and out of emerging economies.
Certainly, the Big 4 dominate the audit market for multinational firms and other large
organizations but there is substantial scope for Asian accounting firms to provide services
to other organizations and in niche areas. This is not just a matter of getting new clients,
it is an imperative to keep existing ones. For example, SMEs in Asia dominate the private
sector in terms of firm numbers and employment and such organizations have continued
to expand their operations to overseas markets through exporting, licensing, and the
setting up of foreign operations. On a domestic level, many accounting firms are well
positioned to serve this market. On an international basis, they are not. Research by Arfah
Salleh and colleagues at the Graduate School of Management (University Putra, Malaysia)
examined the readiness of local Malaysian firms for the impact of globalizing trends and
clients. They found that only 28 member firms of the Malaysia Institute of Accountants
(MIA) had international affiliation, additionally, the authors found:
Having international affiliation better positions a firm to offer multi services
Offering new services and having international affiliation are significant factors in
investment in IT
The researchers concluded that firm size or age did not have an impact on these factors
and hence they would be just as important to small and mid sized firms as they would be
for larger firms. Innovation in services and service delivery has a significant impact on
firm performance. SME accounting firms need to take a strategic audit of their existing
clients and firm direction in order to ascertain whether some sort of international
expansion effort is warranted and how they should go about it (i.e. arms length
agreements, strategic alliances, firm mergers).
The Chinese Institute of Certified Public Accountants (CICPA) has been pushing its
member firms to keep abreast of Chinese firm internationalization and be ready to
provide services on an international basis to these organizations. The CICPA believes
that growth through mergers is one of the key ways Chinese accounting firms can
become more competitive. Certainly, accounting firms in Hong Kong are well positioned
to take advantage of such a trend since they have key advantages in terms of international
work quality exposure and more advanced management techniques compared to their
mainland counterparts. Other Asian accounting firms in developed nations would also be
able to benefit from the increased trade between China and the rest of the world.
ShineWing CPA (one of the larger CPA firms in China) has followed this direction and
merged with local firm Ho & Ho in 2005. Although not the only way to go, alliances can
provide an effective means to offering transnational services to clients.
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5. Strategic Alliances and Mergers
The fact that over 90% of Hong Kong accounting firms are SMEs it is common for these
firms to engage in some sort of collaboration to compete with some of the larger firms in
the market. Consolidation in places like China is not uncommon as the Big4 continue to
dominate the business landscape for audit and ancillary services. In February 2010, the
Committee to Develop the Accountancy Sector (CDAS) in Singapore stated that mergers
would be one of the key ways small and medium sized practices could boost
competitiveness. Whether this is correct remains to be seen as mergers are fraught with
difficulties.
Strategic alliances are cooperative agreements between firms that maybe formal or
informal, and may or may not involve equity. Alliances can be a relatively low cost and
flexible way for firms to enhance their competitiveness in a number of ways:
Increase geographic coverage for clients
Increase scope of services
Enhance reputation by being aligned with well known networks or firms
Enhance the learning and capabilities of the firm over time
Alliances should not be entered into lightly. Research suggests up to 50% of alliances fail.
In an article published in the MIT Sloan Management Review (2008), Bettina Buchel
highlights a number of minefields that can impair alliance performance. These include
unclear partner roles, unequal sharing of risks and benefits, not being prepared for the
inevitable crisis, and no formal exit mechanisms.
Similarly, Patricia Anslinger and Justin Jenk (consultants at Accenture) suggest six key
factors to enhancing alliance success chances:
(1) develop clear, common objectives and definition of success;
(2) ensure proper alliance form;
(3) determine appropriate governance model with clear decision-making;
(4) anticipate the most likely conflicts;
(5) plan for evolution; and
(6) establish clear metrics to track and measure success.
What these factors suggest, and indeed what research shows, is that a marketing mind set
is crucial to the outcome of an alliance. Being client and market focused must be part of
your thinking especially considering recent research that demonstrates social capital is
not a good indicator of firm performance from an internationalization perspective (that is,
following your clients as the main basis of your decision does not produce optimal
outcomes). Another factor that firms must consider is the impact of national culture on
the success of an alliance. Asian cultures tend to be collectivist and as such maintaining
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6. harmony and building relationships is center to the economic ideologies of such cultures.
Many Western nations exhibit cultural characteristics that are opposite to that of Asia.
For example, the US and UK are described as individualistic cultures and tend to
consider alliances from a transaction cost perspective. This type of difference can cause
fundamental conflicts between parties when one expects quick returns and the other is
intent on capability building.
If you assign people from either firm to regularly interact it might be worthwhile looking
at choosing people who are from similar national cultural backgrounds. If the
relationship is closer (joint venture, merger), then the firm leaders and their goals will
have a major impact on the outcomes, and hence finding partners with compatible goals
and beliefs becomes even more important.
Mergers
Mergers go beyond strategic alliances in that the two firms involved merge in all aspects
of finances, systems, and firm culture. This can be a real challenge and integrating two
firms of divergent backgrounds and culture is time consuming, with no guarantee of
success. Mergers and acquisitions differ technically in that mergers are the coming
together of two firms to create a new entity with a new name. An acquisition is where one
firm subsumes another. From a strategy perspective, we can consider them as identical.
The rationale for mergers includes:
Benefit from access to skills, knowledge, and clients
Expand geographic coverage
Economies of scale and scope (questionable)
Synergy in firms service’s and industries served
Speed of capability development
The driver of mergers tends to be the need for growth and the trends in the external
environment such as globalization. The CICPA in China has been making a strong case
for local CPA firms to consolidate to become more competitive in terms of facing the Big
4 as well as being attractive to the continued expansion of local Chinese organizations
throughout the rest of Asia and the world. Whilst there is little doubt that size can be a
strong indicator of service quality to clients in Asia whereby it is used as a proxy measure
of what value a firm can deliver, the success rates of mergers are fairly low, especially
when considering the initial strategic intent such as access to additional capabilities,
financial objectives, and economies of scale.
Before engaging the steps towards a merger, ask yourself these questions:
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7. 1. Is their strategic value in the merger, for example will we be able to access new
markets
2. Are we doing it primarily for cost saving, if so there maybe better ways
3. What plan do we have to successfully integrate the two firms
4. Are our firms compatible in terms of objectives, leadership, and culture
5. Will there be a win win outcome for both firms
6. Who in the firm will leave or lose out due to the merger, are they agreeable and is
that what we want
7. Are we ready for the change and how long it will take
8. Will this move benefit existing and new clients
Joel Sinkin and Terrence Putney published an article in the March 2009 issue of the
Journal of Accountancy that addressed the problems faced by accountancy firm mergers.
They highlight the ten biggest reasons mergers fail:
1. Ego. Normally this is manifested in unwillingness on the part of the partners in both firms to
adapt to the new way of doing things required to make a merger work. Even in the case of a much
smaller firm merging into a larger one, there should be some give on both sides to allow for the
formation of a cohesive and motivated team.
2. Firm name. The surviving name should be worked out before the merger is completed and a
strategy developed for how the name change will be communicated to the market, which is a
critical part of the process. There are many hybrid methods such as creating a bridge entity,
using the predecessor firm’s name as a byline in the letterhead, forming a new name combined
from both names, and adopting a generic name.
3. Culture. While the larger firm’s culture usually primarily survives, adopting features of both
firms’ cultures will normally lead to a better environment after the merger.
4. Change. Instituting change slowly wherever possible will lead to less impact on clients and
staff and can help maximize the retention of both types of constituents. Mergers without high
levels of staff and client retention often are not successful.
5. Inadequate capacity. In mergers where some partners may soon be leaving due to retirement
or succession, or where there is planned staff attrition, professionals need to be replaced soon
after the merger is effective. If the successor firm lacks the existing excess capacity to handle the
new requirements, and fails to execute on its plan to acquire new resources, in most cases the
deal will eventually fail.
6. Staff transition. Staff are accustomed to their roles, the expectations the firm has for them,
compensation level and methods, and perks and benefits. Maintaining the status quo for staff
wherever possible will reduce the stress that change places on them and lead to higher
acceptance and retention.
7. Technology. Normally, for a merged firm to start operating efficiently, technology platforms
have to be brought into conformity. However, a failure to invest adequate resources in upgrades,
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8. conversions and training can lead to poor execution of the technology transition, causing
frustration and, in the end, higher costs.
8. Poor transition planning. All aspects of the operational transition must be thought out in
advance. Otherwise, inadequate resources will be devoted to the execution, and the staging can
be off, causing additional stress on the staff and clients.
9. Impatience. Some changes need to be introduced immediately; some things can wait. For
example, the time and billing system is normally a core management tool and must be adopted
immediately whereas certain client service systems (such as write-up software or even tax prep
software) can be phased in, especially after seasonally busy times of the year. Not forcing change
for its own sake can lead to better acceptance and execution.
10. Communication. Management teams that fail to fully communicate to the combined team the
rationale for the transition plan, what is expected, and how to obtain help when it is needed may
find people not executing the plan and resentment building.
Aside from this are also certain value destructors in merger outcomes. Aside from deal
value, the major one would be costs of implementation. Issues related to cultural
integration, IT, human resources, and financial systems can have a major impact on the
effectiveness of the new entity. In particular, poorly thought out post integration activity
can have a major impact on employee morale and since job satisfaction and firm
performance are strongly correlated this can be extremely detrimental to the future
performance of the firm.
Value Pricing: the death of billable hours
The billable hour is the curse of the professional services industry. Charging by the hour
links pricing to time when value may have nothing to do with time. It also limits your
ability to earn more money since there is a limit to how much you can charge per hour,
utilization rates, and in the hours in the day! There are further problems with the billable
hour identified by associations such as the AICPA, MAP, and the ABA, these include:
Conflict of interest between client and firm
Negative effects on staff satisfaction
Nothing to do with value firm offers
Makes firm services into commodities
Limits the ability and incentive of firms to innovate
Effects work on non billable activities that raise profile of firm
Impacts culture and collegiality of firm
Fails to promote risk/benefit analysis
Creates itemized bills that do not reflect value
Does not encourage project planning
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9. Fails to discourage layering and duplication
Penalizes productive accountants
The list could go on but in the West, and to a lesser degree in Asia, firms are starting to
recognize the benefit of alternative billing methods based on value. In the main, it is
clients who are pushing these changes although the key challenge facing accountancy
firms in Hong Kong and Asia is the lack of knowledge of alternative billing on behalf of
both the accountant and the client.
Value pricing is nothing new and it has been applied in numerous business sectors. In
other words, instead of deciding price by calculating the number of hours needed to
complete a job or arbitrary hourly rates, one should base pricing on the value created and
delivered for the client. However, to do so means that the PSF must be able to deliver
value that is perceived by the client as both meaningful and differentiated from other
professional service providers. This comes back to the idea of realization rates and the
concomitant area of partner compensation. If one believes that their compensation is
based upon the old model of revenue, it is unlikely that you would spend time on non-
billable activities even though it is these times that are the lifeblood of creativity and
innovation.
One of the keys to value pricing is the understanding of what value means to clients.
There are in fact many types of value and clients in different situations will value
different things. For example, during turnaround and insolvency work, clients will be
more concerned about the speed of services and the outcomes. Such an example shows
the fundamental problem when pricing by the hour. In other situations, the client may ask
for auditing work across several offices and will be concerned about the accuracy and
attention to detail of the firm. Different types of value are depicted in the figure below.
Table 1 Value Criteria in B2B Professional Services
During After
Technical Quality Financial
Reliability (budget/schedule) Cost reductions
Information understandability Revenues
Information practicality Profitability
Technical expertise
Specialized expertise
Creativity
Functional Quality Strategic
Integrity Better decisions
Responsiveness More enlightened decisions
Professionalism
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10. Relational Variables
Partnership
Involvement
Confidence
Image
Reputation
Credibility
(Source: Adapted from Lapierre, J (1997) What Does Value Mean in Business to Business Professional
Services? International Journal of Service Industry Management, Vol. 8, No 5 pp.377-397)
Table 1 demonstrates two types of quality that exist in professional service firms. The
first type is the technical quality of the firms work. The second type is the relationship
quality, known as functional quality. One may view these on some level as IQ and EQ. as
the service provider, the accounting firm will need to recognize what are the key value
drivers of the clients it is dealing with and make sure it communicates clearly how the
firm can fulfill the client’s needs in those areas. There will be some situations where the
client and firm are not a good fit and it may be wise for the firm to let this client go and
focus its resources on clients it stands a better chance of serving more adequately.
Spending time on serving clients who are not a good fit can be wasteful since resources
tied up by serving those clients will prevent the firm building relationships with more
valuable clients. Additionally, clients which are not a good fit are less likely to be
satisfied and will easily switch between service providers.
There are a number of value based pricing methods that have been expounded by various
authors, these include:
• Fixed price agreements (FPA) – the bundling together of services say over a time
period or matter with unlimited access to service provider
• Change order – these are put in place when additional service needs arise that are
not covered in the original FPA and services rendered here are charged separately
• Service guarantees – perhaps worrying but some PSF are offering money back
guarantees based on client satisfaction at the discretion of the client
• Risk based – sharing in the savings/revenue generated for clients or the size of a
transaction
• Discounted rates for guaranteed volume of work
• Task based – set fee for each task such as filing a motion, deposition etc
• Discount rate plus kicker – agreed hourly rate plus performance based pay
• Annual retainers
• Buy in follow on – offering low prices on initial engagement for the promise of
future purchase of linked services or ancillary services
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11. In reality, these approaches can be summarized under 2 major headings identified by
Leonard Berry and Manjit Yadav in the Sloan Management Review (1996):
Pricing strategies to reduce uncertainty – these include service guarantees, benefit driven
pricing, and fixed price agreements. The idea is that where clients are unsure of the
service or situation facing them the service provider can reduce this anxiety by providing
up front fee schedules or sharing in the outcome success of a project.
Relationship pricing – such as discounted rates for large volumes of work or buy in
follow on approach. Building long term relationships with the right kinds of client can be
beneficial for both the client and the service provider.
The firm of the future will be one that recognizes this before its competitors and devises
ways to enhance its value offering to clients. Those firms that wait until either everyone
else has done it or clients absolutely demand it will be the ones facing a tunnel with little
light at the end. Value pricing is only a small part of the jigsaw, the whole picture
revolves around whether the practicing professional can understand and adopt a
marketing culture that will allow the firm to head on the road to such concepts as value
pricing.
Firm Culture and Governance
There have been a number of cases recently of well known accounting firms that seem to
value revenue generation over the quality and integrity of their service. Whilst accounting
firms must deliver value to their clients they have a duty to serve society as a whole and
maintain some degree of independence.
Firms that want to avoid the ignominy of such occurrences must ensure they have the
right culture in place. Much evidence points to the influence of the firm’s leaders and
partners as it is their actions that influence every ones behavior and dictates the focus on
revenue or quality. Changes in the regulatory environment will mean that accounting
firms will have to take issues of culture very seriously and indeed a marketing culture fits
very well with these ideas. One must be very careful in the accounting profession not to
become too overtly commercial as the independency of audit work as opposed to other
services puts a high onus on firms assuming a professional orientation. In the long run, a
professional orientation and a market orientation are well aligned because a market
orientation discounts short term revenue generating activities that could put the firm’s
long term reputation and image at risk. For example, research in the Western world has
shown that auditors are more likely to accept risky client assignments if they believe it
would lead to further work. This risk affects the independence of the audit function and
can be subject to punishment by various regulatory bodies.
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12. Culture has been described in various ways. Essentially it is a collective programming of
the mind that lies in the shared beliefs, values, and assumptions held by firm members.
These shared values are reflected in all aspects of people’s behavior in the firm such as in
the way seniors and juniors interact, they way people dress, and in the norms of
communication among firm members. Culture and firm performance are heavily
intertwined. For instance, firm values and individual values that are closely aligned have
an impact on job satisfaction and job satisfaction is strongly correlated to firm
performance. Additionally, research by David Maister in the professional services
industry (presented in his book, Practice What You Preach), showed that firms which
communicate strong values and live by them performed better financially then their peers.
Firms with strong cultural values should make significant efforts to acculturate new
employees to ensure that ethical and professional standards of behavior are followed.
Problems in acculturation can be exacerbated by the hiring of non professionals into
firms, mergers, as well as geographic expansion that brings into play the additional
variable of national culture and behavior. Non professionals such as ‘professional
managers’ can exert considerable influence on firms in terms of a profit focus and care
must be taken not to lose the professional orientation of the firm.
In a paper published in Behavioural Research in Accounting by Jenkins et al (2008), the
authors set out a number of areas whereby culture can impact a firm’s governance and the
role that seniors within the firm play through their behavior such as mentoring, client
interactions, communication, and social influence. They highlight a number of studies
and situations whereby firms have engaged in unethical actions (lowered audit quality)
due to the cultural conditions of the firm. The authors also go onto discuss a number of
actions that firms can take to limit this overtly risky behavior and ensure a higher level of
firm governance. Readers are referred to this paper for a substantial overview of the area.
How does a market orientation (MO) fit into this concept of firm culture and governance?
As mentioned previously, a market orientation is a culture and set of behaviours that
focuses on three issues and has been shown to have the most significant impact on firm
performance:
1. Competitor orientation
2. Client orientation
3. Inter-functional communication
Firms can measure their MO with the following inventory:
Competitor orientation
We regularly analyse our competitors’ marketing programs
We regularly share information within our firm concerning competitors’ strategies
We rapidly respond to competitors’ actions that threaten us
Top management regularly discusses competitors’ strategies
We target customers where we have an opportunity for competitive advantage
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13. We frequently collect information on our competitors to help direct our marketing plans
Inter-functional coordination
We coordinate goals and objectives across all functions
All functions are integrated in serving the needs of our target market
Market information is shared with all functions
Management understands how everyone in this organisation can contribute to create
customer value
We share resources with other practices and functions
Customer orientation
The organisation constantly monitors the level of employee commitment to serving
customers’ needs
Our strategies are driven by the need to create customer value
We believe that understanding customers need gives us a competitive advantage
The objectives of our organisation are driven by the need to achieve high customer
satisfaction
When looking at this inventory, there are a number of points to consider in terms of MO
relationship to firm culture and governance as well as a professional orientation.
Specifically, the inter functional coordination element highlights the need for
communication across all functions of the firm. Firm leaders can use this concept to
instill the ethical values the firm wishes to propagate. Additionally, the elements o
customer and competitor orientation ensure the firm is deploying its resources in the right
place and puts client value at the top of the agenda. The positive thing about MO is it
does not focus on short term revenue generating activities that could put the firm at risk
due to poor decision making. It is a strategic view of the firm’s value creating activities.
Firm leaders can use this to strategy tool to work towards a culture that balances the
commercial necessities of the business with the professional orientation that is demanded
by society and regulatory bodies.
Leveraging Intellectual Capital
Given the nature of the accounting firm product, which is essentially knowledge, it is
surprising to see the relative lack of care firms have for their intellectual capital and how
they can best utilize their knowledge for client value. Follow the below link for a
presentation I have given to various professional bodies around Asia on the link between
IC, marketing, knowledge, and performance.
Using Technology to Enhance Competitiveness and Leverage Intellectual Capital
Relationship Marketing and Service Quality in the Asian Context
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14. Relationship marketing is a relatively new domain of study within the services sector but
is growing increasingly important. Firms from every industry are attempting to build
closer, more collaborative relationships with clients to better understand their needs in
order to provide greater value and hence a greater share of wallet from the customers
spending.
In order to benefit from relationship and retention strategies firms must be cognizant of a
number of factors. One of these factors relates to client loyalty. Many firms believe that
loyal clients are profitable clients and that retaining them is extremely important. There is
certainly some truth to this supposition but research conducted by Werner Reinartz and V
Kumar [1] published in the Harvard Business Review showed that up to 40% of loyal
clients were barely profitable. Firms should be able to analyze and determine not only the
current profitability of a client but also their potential lifetime value. Another factor is the
idea that it costs substantially more to gain a new client than it does to keep existing
clients. This extra cost is normally associated with pricing discounts, promotional efforts
and other resources used to secure new business. Again, research supports this contention
and hence firms should not only be thrilled by the chase of new business but by the
gratification of making existing clients more loyal, assuming they provide a certain level
of value to the firm. Additionally, the ability to create satisfied clients adds to the
likelihood of referral work and positive word of mouth. In the Asian context (of which
most are collectivist societies), word of mouth is of particular importance because
Asian’s rely more heavily on finding information and providers through networks of
contacts than is common in the west. This is one of the reasons that firm advertising in
Asia tends to be less effective as collectivist societies do not tend to seek information
from such sources, or at least give less weighting to such promotional activities in the
business to business context.
Value is a notion that is varied and should not focus solely on monetary issues. Clients
maybe valuable for a number of reasons:
Strategically valuable – some clients can help you gain access to key markets or
other firms business through referrals. The work they do may help you build
competencies that are of benefit in the longer run and can enhance your
competitive advantage.
Loyal – some clients are valuable because they supply a steady stream of work
even if it is not highly challenging. They are moderately profitable and easy to
serve.
Significant – some clients can help raise your profile and reputation which can be
of real value in building the brand of your firm and lead to premium pricing down
the road.
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15. Revenue generating – some clients generate large revenues for your firm. They
pay quickly and reliably and help maintain a healthy cash flow even if they are
not the most profitable clients.
Relationship Marketing - An Asian View
Customer relationship management (CRM) is a marketing buzz word that conjures up all
sorts of images. Ask ten people about CRM and you will get ten different answers. Some
will say CRM is a database, others will say CRM is about customer loyalty and programs
that maintain it. Unfortunately, it is that kind of thinking that has led to CRM initiatives
being some of the biggest failures in recent business history. What these organizations
fail to realize is that CRM is none of the things described above. It is a business
philosophy, an entire way of thinking about yourself and your clients. It is about
recognizing that your firm is a client satisfying organism that must live and breathe a
marketing culture in order to benefit from any of the technicalities involved in building a
systematic CRM program. According to Edmund Thompson of the Gartner Group [2], A
CRM program is typically 45% dependent on the right leadership, 40% on project
management implementation, and 15% on technology. Perhaps one could go even further
and replace that 15% technology with the same percentage but of the professional’s
mindset.
Much has been written about relationship marketing in the Western context both for
services and consumer goods. Unfortunately, very little work has been done in the
professional services context and none in the Asian context. One must consider whether
relationship strategies which are prevalent in the west are transferable to the Chinese or
Asian context and if so to what degree. In their book, Marketing of Professional Services,
Philip Kotler, Thomas Hayes and Paul Bloom [3] suggest four building blocks to
developing stronger client relationships. We will look at these building blocks and view
from them from the perspective of what is known about relationship marketing and
guanxi in the Chinese context.
Trust
Trust is certainly a key variable in building and maintaining relationships and has been
the study of much empirical research. According to Kotler and colleagues, trust can be
built by helping clients with contacts and referring business to them, sending articles of
interest to them about their industry, providing free seminars etc. One can view these acts
as types of favours and this fits well with the idea of trust and building reciprocity in
Chinese society. Oliver Yau and colleagues in their paper, Relationship Marketing the
Chinese Way [4], state that Chinese seek to determine whether another party can be
trusted and if favours are received they are morally bound to return these favours. Such
reciprocity may be long term and firms should not act in a manner that shows them to
expect quick reciprocal acts but be patient in building social bonds. Trust can be built
through direct service experiences and through the recommendations of the others. In
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16. collectivist cultures like those in many Asian countries, building networks of contacts and
talking the time to develop trusted relationships can be very beneficial since buyers rely
so heavily on word of mouth and also tend to be more loyal once they are in satisfying
exchange relationships.
Client Knowledge
According to Kotler and colleagues, client knowledge involves research to understand
clients and their operating environments, developing an organizational memory through
appropriate databases and procedures, and to then make use of that information it obtains.
Certainly, as part of an overall CRM program these suggestions are excellent. In the
Asian or Chinese context however we can extend these concepts. According to Yau and
colleagues, empathy must be developed in order to see situations from another
perspective. Understanding clients and their business more deeply can help in developing
empathy but in the Chinese context one must attempt to develop a relationship first
before attempting to develop a transaction, which is often what occurs in the Western
context. Informal discussions and not only business related discussions is key as a firm
can more deeply understand the factual and inner feelings of clients. If one can reach this
deeper level of relationship it may be beneficial in developing complex service strategies.
Sharing information is also a common occurrence in the Chinese context and helps widen
the network of firms. Sharing information is a sign of bonding and trust and not collusion
as viewed from a Western perspective [4].
Client Access
This is the process of making the firm easy to do business with and involves giving
clients every opportunity to communicate with members of the firm [3]. In the Chinese
context we can extend this beyond traditional business meetings and client contacts.
According to Yau and colleagues, social interactions can be a meaningful way of building
bonds between business people and events such as attending a Chinese dinner can help
extend a relationship from the social level to the business level. Building such
relationships and networks should be seen as an investment and form of social capital.
Aside from direct clients, it will be important to initiate access for other stakeholders.
Building personal relationships with gatekeepers or administrators can help smooth
business transactions and extend ones network, this can be highly beneficial since
bonding in certain social bases can be transferable. Intermediaries, which act as bridges
between parties can also be a guarantor of trustworthiness [4].
Technology
Here, Kotler and colleagues talk about the importance of software and hardware that can
be used to better understand, communicate, and serve clients. In the Asian context, the
importance of technology in building client relationships is no less important but perhaps
the information can be used in ways that reach beyond the traditional thinking of Western
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17. professionals. The ideas of bonding, reciprocity, trust, and empathy discussed in the
previous sections can all be enhanced by collecting and utilizing information for acts
such as gift giving or favours which may be used with a number of different stakeholders
in order to build the network social capital that is of real use when doing business in
Asian contexts.
Mutual benefit and building shared goals is an important element of doing business in
Asian societies and hence fundamental to relationship marketing strategies for
professional service firms.
There are many aspects to the relationship marketing construct since one may be
interested in the ability to measure strengths of client relationships as well as different
aspects such as trust and communication. Additionally, there are many elements to
relationships between client and firm such as links with individual actors, the firm itself,
and the possible impact on external perceptions such as reputation or competitive
position.
Research by Ndubisi and Chan [5] identifies a number of possible factors that a firm
could use to measure different aspects of a relationship it has with clients. Examples of
these factors and possible measurement questions are listed below:
Trust
1. My firm is very concerned with security for my transactions
2. My firm fulfills its obligations to clients
Competence
1. My firm has knowledge about market trends
2. My firm makes adjustments to suit my needs
Commitment
1. My firm offers personalized services
2. My firm is flexible when services are changed
Communication
1. My firm provides timely and trustworthy information
2. My firm provides information if they have new services
Conflict handling
1. My firm try’s to solve manifest conflicts before they create problems
2. My firm has the ability to openly discuss solutions when problems arise
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18. Other research also identifies aspects such as minimal opportunism and satisfaction as
key aspects of relationship marketing. It is probably more accurate to assume that
relationship quality and client satisfaction are contingent upon a number of the factors
identified above.
Research in Hong Kong identifies the relationship between the antecedents of
relationship quality and its outcomes which was conducted by Chen and colleagues [6].
They studied this framework in the health care service sector in Hong Kong (a high
credence service similar to professional services) and found that among the four
antecedents, empathy, expertise, and communication effectiveness are positively
correlated to trust, and communication effectiveness, empathy, and likeability are found
to be significant predictors of customer satisfaction, while likeability and expertise of the
service provider are not significant in influencing trust and customer satisfaction,
respectively. It is interesting to note that expertise is a crucial indicator of trust but not
satisfaction. The authors posit that satisfaction is likely to be built after experiencing a
service whereas expertise is knowledge that customers attempt to ascertain prior to
purchase. This has important implications for law firms. Firstly, thought leadership is
becoming an increasingly powerful way to demonstrate expertise and to some extent is
indicative of the IQ of the firm. However, it is functional quality (service quality) which
is a significant predictor of satisfaction because in many cases clients find it hard to judge
the detailed technical quality of a law firm’s product and hence use functional quality as
an important indicator. To some degree, this is reflective of the firm’s EQ and has been
shown to be a key measure of relationship strength and client satisfaction. The findings in
this study are similar to many found in other contexts and strongly suggest that firms
need to focus on building relationships through a deeper understanding of client value
and needs.
Service (Functional) Quality
Clients not only care that you do your job properly and that you are proficient at what
you do, they also care how you deliver your services. It is reasonable to expect that in
different professional service settings clients would give different weighting to the
importance of service quality, at least in terms of their intention to continue doing
business with a firm as well as whether they would recommend the firm to others.
Satisfaction and client retention are strongly correlated and being able to identify the key
variables that satisfy clients is worthwhile because a firm can then focus its efforts on
those variables without wasting time on extraneous factors which are not so critical to the
client.
Since the technical quality of some professionals is hard to judge due to the information
asymmetry between provider and client (such as medicine, law, accountancy), clients are
likely to look at service quality to judge the relationship with the service provider. In this
case, it could be argued that in relationships were the client is less knowledgeable about
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19. the services being provided the law firm should stress the service quality and social
aspects of the interaction in order to relay quality perceptions to the client. As clients
become more familiar with professional services their expectations in terms of technical
quality may increase and hence the firm should look to ways to communicate the
technical quality of what it is doing. If a client is familiar with the technical jargon of
professional speak then perhaps it isn’t so bad to use technical language with the client.
Achieving service quality is not something that happens independently of the
professionals within the firm and their attitude towards what they do. In his book Practice
What You Preach [7], David Maister analyzed a number of professional firms and found
that high standards and employee satisfaction had a direct impact on quality and client
relationships. The attitudes that predicted these relationships were:
I am highly satisfied with my job
I get a great sense of accomplishment from my work
The overwhelming majority of the work I am given is challenging rather than
repetitive
I am committed to this firm as a career opportunity
He also found that quality and client relationships had the largest impact on financial
performance. Maister showed that quality and client relationships accounted for
significant variations in the financial performance of lower and higher performing
professional service firms, more than any other individual factor that he measured in his
research. Service quality can generally be thought of as the relationship between client
expectations and the perception of what was delivered (known as the perception gap).
Additionally, one may breakdown service into a process component and outcome
component. A client will judge the outcome of the service in terms of what was promised
but also the process and how well the client and service provider worked together. The
client may quite easily switch to another provider if he or was unhappy with the process
even though the outcome exceeded expectations.
Valerie Zeithaml and Mary Jo Bitner have come up with the most widely used and
accepted model of service quality for services. According to these authors, service quality
has 5 dimensions [8]:
1. Reliability – ability to provide the promised service dependably and accurately
2. Responsiveness – willingness to help customers and provide prompt service
3. Assurance – employees knowledge and courtesy, and their ability to inspire trust
and confidence
4. Empathy – caring individualized attention given to clients
5. Tangibles – appearance of physical facilities, personnel, and written materials
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20. Research into these dimensions has been carried out in a number of service settings
including professional services, and been found to relevant. The idea is that clients, when
attempting to analyze the service experience and quality, will consider these different
dimensions and perhaps even mentally, assign some sort of rating or evaluation. These
dimension ratings are likely to be built up over a number of encounters and over some
time. These encounters are often referred to as moments of truth, the instances of
interaction between the firm and client. It does not matter whether these moments of truth
occur in a face to face setting or otherwise, it is these interactions that will determine the
client perceptions of service quality. In reality, a firm can measure the level of client
satisfaction with what is known as the SERVQUAL scale. This is an instrument that uses
an inventory of questions related to the 5 dimensions that can be used to objectively
measure the level of service quality as perceived by the client. The difference between
client expectations and perceptions (perception gap) represents the deviation between
what should be and what is. It becomes clear then that having an understanding of client
expectations and ensuring that the firm and client perceptions match is very important.
Hence creating measurable performance indicators and setting expectation guidelines
prior to the start of a project can be highly valuable in improving client satisfaction.
Aside from the dimension of reliability, it is apparent that the dimensions focus on
process quality. This is of particular importance to professional services where the
outcome quality is often hard to judge.
Many professionals assume that just because a client has not complained and seems
generally satisfied with a service they will automatically remain loyal and give the firm
an opportunity to tender on new projects. This is a particularly dangerous assumption in
the Asian context due to the value concept know as man to nature orientation. This
suggests that Chinese customers are likely to attribute service failures to fate and hence
are less likely to complain. This suggests that pro active approaches to measuring client
satisfaction may be even more important in the Asian context if a firm is to handle client
issues effectively. Another example can be found in the difference between high context
(such as Japan) and low context (many European nations) cultures. For instance, Japanese
customers are likely to rate service experiences and satisfaction levels more poorly than
those from low context cultures. Conversely, if they do experience satisfaction, they are
less likely to give very poor ratings when compared to low context cultures. Ratings on a
survey may not adequately reflect the true attitudes of this group and hence
complimentary approaches to evaluating service quality could be beneficial. There is also
evidence that Asian customers perceive different aspects of service quality to be more
important than their counterparts in the west.
The SERVQUAL scale has been used in a number of studies and variations between
different cultures has been found. For example, customers in low power distance cultures,
which is a measure of the degree that people within a society accept the authority of
others (such as the UK and US) have been shown to have higher service quality
expectations than those in high power distance cultures (such as Hong Kong).
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21. Even though the SERVQUAL scale is the most widespread tool for analyzing service
quality its application in non western cultures and business to business markets has been
questioned. Some studies have found the five dimensions above to be poor predictors of
service quality in the Asian context. For instance, reliability is often considered to be one
of the most important predictors of service quality in the west but less so in Asia where
customers often have lower expectations of services. There are also additional
dimensions relevant to Asia (such as politeness) that are not covered in the SERVQUAL
scale. Aside from the cultural issues with the scale, there are also problems associated
with its applicability to the B2B market.
Gounaris proposes a model called INDSERV [9] which in his study of B2B services was
a better measure of service quality. The four dimensions combine to make up the
industrial customer's perception of service quality:
1. Potential quality. This relates to the search attributes that customers use in order
to evaluate the provider's ability to perform the service before the relationship has
actually begun. Potential quality is particularly important for business-to-business
services because of the increased complexity and degree of customization that
characterizes them, which results in a greater degree of uncertainty regarding the
performance of the service, even if the provider is selected from a list of existing
providers.
2. Hard quality. This pertains to what is being performed in the service process. It
refers to the service blueprint the provider uses, the accuracy with which the
service is delivered and so on.
3. Soft quality. This is concerned with how the service is performed during the
service process. It relates to the front-line personnel and the interaction they
develop with the client's employees. It captures how open the service provider is
to ideas and suggestions from the client, the service provider's benevolence and
communicated willingness to watch the customer's best interest. These qualities
help to develop a positive climate during the service encounter and facilitate the
process of aligning the provider's service with the customer's specific
requirements.
4. Output quality. This explains the customer's concern regarding the actual offering
delivered. It captures not only the results of the technical efforts to deliver the
service, but also the impact that the service delivered eventually produces for the
buying organization.
Firms which are serious about understanding their clients in Asia and developing
comprehensive relationship marketing strategies should be prepared to question the tools
they are currently using to measure client satisfaction since their applicability to the
professional services market in Asia is under question.
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22. Conclusion
Accounting firms in Hong Kong and Asia will continue to face unprecedented challenge.
As countries encourage free trade and professional service markets gradually lower
barriers to entry, the competitive context facing accounting firms in the region will
change. Demanding clients and foreign firms will elevate the bar for quality accounting
services to the point whereby local firms will have to adapt or perish. Short term cost
cutting is only that, a short term measure to save money. For firms to prosper over the
medium to long term, they will need to adopt a new mind set where strategy and
leadership sits atop the most pressing issues of the firm. It will be the most senior
partners and executives of these firms who must recognize this and lead the call to action.
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23. About the Author – Robert Sawhney
Robert is the managing director and senior partner at SRC Associates Ltd, a Hong Kong based
consulting firm that helps professional service firms improve their competitiveness by integrating
the key roles of strategy, marketing, leadership, and knowledge.
He is the author of ‘Marketing Professional Services in Asia’ (Lexis Nexis, 2009) which has been
called one of the most indigenous books on Asian marketing by Professor Oliver Yau, Chair
Professor at the City University of Hong Kong. His latest book, ‘Developing a Profitable Practice in
Asia’, was released by the Ark Group in late 2010.
Robert has consulted for dozens of professional services firms throughout Asia over the last
decade or so on their key strategy and marketing issues. His work tends to revolve around a
mixture of firm wide and individual partner issues whereby he advises clients on strategy,
marketing, planning, leadership, branding, internationalization, alliances, and enhancing overall
firm competitiveness.
Robert has also delivered many key note speeches and workshops in numerous countries
including Hong Kong, Singapore, Dubai, China, Vietnam, Indonesia, Malaysia, and India. A
frequent commentator on issues related to the competitiveness of professional service firms,
Robert has either been profiled or quoted in publications such as the South China Morning Post,
Lawyers Weekly (Aus), The Lawyer (UK), Asia Legal Business, and A Plus (the magazine of the
Hong Institute of Certified Public Accountants).
In addition to his consulting work, Robert has written numerous articles for preeminent publications
such as the Business Times (Singapore), Hong Kong Lawyer, Hong Kong Accountant, Managing
Partner Magazine (UK), Singapore Law Gazette, Law Dragon (US), The Australian Law
Management Journal (Aus), The Lawyer (UK), Hong Kong Economic Times, and the ACCA
Journal, among many others. He has also delivered training programmes accredited by both the
Hong Kong Law Society and the Hong Kong Institute of Certified Public Accountants.
Robert has a bachelors degree from Brunel University (London) and an MBA with distinction from
the University of Lincoln (UK).
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24. About SRC Associates Ltd
Based in Hong Kong and working throughout Asia, we specialize in enhancing the competitiveness
of professional service firms (and those in knowledge intensive industries) through the integration
of strategy, marketing, knowledge, and leadership.
Professional services firms (PSFs) are facing an increasingly challenging business environment.
Client demands, globalization, talent retention, and increased competition are key factors that are
driving such firms to improve their competitiveness. Since knowledge is the key asset of any
professional services firm, the ability to leverage knowledge is crucial. However, this only leads to
client value when integrated with other key processes in the firm such as strategy and marketing.
Clients are demanding greater industry knowledge and application than ever before and the ability
to build a truly client focused firm has never been more important.
Research is clear, the ability to integrate strategy, marketing, knowledge, and leadership are the
keys to ensuring the creation and delivery of superior client value. Those firms which can achieve
this unequivocally outperform the competition.
At SRC, we have worked with over 100 professional services firms of all sizes throughout Asia and
elsewhere on enhancing their competitiveness by taking an interdisciplinary approach that looks at
the core issues of strategy, marketing, knowledge, and leadership. We have worked with:
Law firms
Accountancy firms
Surveying firms
Architectural firms
Engineering firms
Design firms
Construction firms
Healthcare
Executive Recruitment
IT firms
Traditional strategic management and marketing methodologies do not fit well within these
organizations and hence require significant modification that suits the unique operating nature and
cultural context of such firms. We are one of the very few consultancies internationally that have
developed a deep understanding of the unique needs of professional services firms, and in Asia,
the only firm which takes a fully integrated approach to enhancing competitiveness by leveraging
the key factors that drive firm success: strategy, marketing, knowledge, and leadership.
We do this by partnering with our clients and building commitment from the key people within the
firm. Without such commitment, professionals will not be motivated to engage in any change
process, by integrating strategy, marketing, knowledge management, and leadership we make
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25. sure that execution is as important as the strategy itself. The outcome is a firm which is more
innovative, competitive, client centric, and profitable.
Contact:
Robert Sawhney – (852) 28921121, bob@srchk.com
Unit C, 21/F CNT Tower
338 Hennessy Road, Wanchai
Hong Kong
Tel: (852) 28921105
Fax: (852) 28928616
www.srchk.com
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