the competitiveness of hong kong and asian accounting firms rev may 2012

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.

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

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.

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.

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

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:

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,

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

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

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

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.

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

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

http://marketingasia.typepad.com/marketing_asia/2012/05/leveraging-intellectual-capital-to-enhance-performance.html

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.

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

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

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

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

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

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).

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.

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.

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).

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

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, [email protected] Unit C, 21/F CNT Tower 338 Hennessy Road, Wanchai Hong Kong Tel: (852) 28921105 Fax: (852) 28928616 www.srchk.com

the competitiveness of hong kong and asian accounting firms rev may 2012

Documents