Clients are the canaries that can predict failing firms

Research conducted over the past 10 years has reached a surprising conclusion: The best predictor of trouble for professional service firms is the clients, who seem to sense problems well before the firm does

Research that has been undertaken over a 10 year period has reached a striking conclusion: Clients, like the canaries that were used in coal mines to detect lethal gas, are the best early predictors that a firm is in trouble.

In fact, they seem to sense that there are problems ahead well before the firm’s leaders or owners.

The research, by Beaton Research+Consulting (BR+C), has identified seven professional services firms where this has been the case.

In each of these firms, independent measures of client satisfaction started to fall steadily years before any effective action was taken to arrest the declining fortunes of the firm.

For six of the seven, it was a case of too little, too late, and the firms as we knew them are no longer with us.

In the seventh, a complete renovation, which included bringing in a new board, chief marketing officer and CEO from the outside, managed to turn the tide.

BR+C has not revealed details of the firms in order to protect their successors, their owners and staff, and clients at the time.
Executive chairman Dr George Beaton, who is also a partner at Beaton Capital, told NZ Lawyer that although the research was undertaken in Australia, the results are just as relevant for any law firm in New Zealand and indeed anywhere in the world.

Every year since 2003, BR+C has independently measured how large and representative samples of their clients rate the performance of some 130 professional services firms in Australia.

After seven of the firms hit trouble, the time series data of these "Beaton Benchmarks" was able to be used to establish some of the key indicators that occurred leading up to the problems.

The revelation is that the performance of the failing firms – which included four law firms, two accountancy firms and one consulting engineering firm - slid in the eyes of their clients during a time that the firms were all internally focused for a variety of reasons.

Beaton told NZ Lawyer that he was surprised that client reactions seem to provide the early warning signs of firm health, rather than the leaders or owners recognising them.

“I went back over all of the data and low and behold each and every one of [the firms] said ‘huh – we should have predicted that,” he says. “Clients start defecting or reducing the amount of work and sending it elsewhere... which sets off a negative spiral. The second side is that once firms get in the grip of their internal problems it’s extraordinarily hard to get out of them.”

While several of the firms tried appointing managers from the outside and one got into lateral hires to try and reverse the problems, only one of the seven managed to turn the fast-failing situation around.

Five of the firms have since been merged into others, while one now struggles under a new name.

The remaining successful firm made it work by bringing in a CEO from outside of the industry, appointing a completely new board and a new chief marketing officer, says Beaton.

“It’s beautiful to see in the last few years the client satisfaction just going up and up,” he says. “If you’ve got a refreshed firm with a new purpose and hope, the people of the firm get behind the leader.”

But what comes first, the chicken or the egg?

Beaton says he’s still unsure when it comes to the cause and effect of law firm performance and client satisfaction, but he suspects it’s an interplay between the two.

If a firm is struggling, little things that impact on the clients are allowed to slip. There doesn’t have to be huge errors or major disruption of client services for this to happen, he says: Rather it’s an accumulation of small problems that include firm representatives “seeming preoccupied” or “offhand”.

“It’s these little multiple touch points, and the clients know.”

If there is a lesson in this research, it is that law firms must pay very careful attention when listening to clients in order to pick up on early warning signs of a bigger problem. This attention has to come both quantitatively in terms of ensuring they have a period of measurement of client satisfaction; and qualitatively by having a culture where client complaints are shared as learning opportunities.

Importantly, there should be a culture of "no blame" at the firm, Beaton says.

“It starts at the top and it starts with how the firm compares with other firms. The leader of the firm sets the example…Good managers, happy staff, happy profits.”

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