Only a small percentage of accounting firms consistently do an 80/20 analysis of their own firm on a regular basis. There are many who have not done one at all.
This is surprising, especially since accountants perform far more complex analyses for their clients all the time. So what gives? My impression is that the 80/20 analysis reveals certain truths about where a firm stands, and some partners are not prepared to face that reality. Therefore, my hope is that by the time you finish reading this article, you will realize how doing an 80/20 analysis can positively impact your firm.
Context is Important
The first thing you should know is that doing an 80/20 analysis alone is not enough to get a clear picture on your firm’s performance. You need to combine your 80/20 analysis with a client classification and a product evaluation analysis to fully grasp which actions you need to take based on your 80/20 results. Having said that, make sure you come back here for subsequent posts to dive in deep into the steps of an effective client classification and product evaluation for your firm. When these two and your 80/20 analysis are used together, they provide a powerful overview of your firm’s status and where you should focus your efforts.
The purpose of an 80/20 analysis is to reveal what percentage of your total revenue is coming from which group of clients. The exercise itself is a simple one but what you do with the results could get a little tricky. I will explain more on what you should do with the results later but for now here are the simple steps of doing an 80/20 analysis, using the free excel sheet available at the bottom of the page:
Step 1: Complete the rows under each column based on your previous 12-month numbers:
Annual Fee Range – For each row, decide what annual fee-ranges you will group together. Start with the highest range and work your way down to the lowest. For example, for the top row you could begin with $25,001 + range and work your way down to not more than 7 to 10 rows with finishing your last row with the group range of < $200. Remember you can customize these ranges to your firm and the landscape of your overall fee thresholds.
Quantity of Clients (These are Client Groups or Relationships, not based on individual services) – Based on each fee range group you have selected from the previous step, enter the total number of client groups your firm services in each fee range.
Total Revenue – Enter the sum of all revenue collected from each fee range.
% Total Clients – Enter the percentage of your total client groups for each fee range.
% Total Revenue – Enter the percentage of your total revenue that is generated from each fee range.
Step 2: Find which row signifies the border where you meet the threshold of 80% of your total annual revenue.
Step 3: Analysis
You should see a pattern that will hopefully excite you more than scare you.
What most firms discover is that about 80% of their total annual revenue is generated from 20% of their total client groups.
Many business coaches may push you to get rid of the group of clients who only generate 20% of your annual revenue, but without fully understanding the context of the future value of those clients, you may be shooting yourself in the foot. This is why your 80/20 analysis alone is not adequate. You should reconcile the results of your 80/20 Analysis with the results of your client classification and product evaluation before you take any actions. As mentioned before, be sure to check our subsequent posts for instructions on how to do a proper client classification and product evaluation; and how to reconcile them with your 80/20 analysis. If you decide to subscribe to our blog, of course, you will be notified as soon as we post them.
The inevitable is that no matter how you slice it, you will realize there are clients you need to transition out of your firm. This could be done in a very dignified way if done properly. Creating more capacity by transitioning out those clients who drain your firm with a low ROI can be very rewarding if done properly. At FY USA we help accounting firms go through a Diagnostic Program which includes the 80/20 analysis, client classification and product evaluation; and their reconciliation. This is designed to gain a deep understanding of the necessary actions required to put your firm on the best growth trajectory.
Sia Kal has spent all his career developing business improvement methodologies for Accounting and Law firms. He has enabled hundreds of professional services firms, including former managers of the ‘Big 4’, to resolve issues that impeded their ability to achieve success beyond expectations. Sia’s passion is to instill morality and fair dealing in the business world to cultivate relationships. His key to success has been ‘putting people before profit,’ a strategy that has proven to be profitable.